In early October I received a phone call from a well-known consultant/advisor within the domestic steel industry. He wanted to know if we were urging our readers to begin to hedge steel (meaning immediately hedge, as opposed to creating a hedging program).
My gut reaction to the question was to dodge it because I wanted to understand why he asked it. Our conversation went along the lines of this:
Him: Hi, Lisa. I heard you speak at the recent Steel Market Update event. I was just wondering if you were urging your readers to hedge steel.
MetalMiner Executive Editor Lisa Reisman
Me: Why do you ask?
Him: I think there is a lot more steel price upside risk than downside risk.
Me: I don’t disagree with you, in that prices are on the low end of the range relatively speaking, but in answer to your question, no, we are not telling our readers to hedge right now.
Him: Why not?
Me: Because we don’t see signs of a market bottom. Prices would have to stop falling and begin rising, crossing certain levels before we’d suggest companies hedge.
Him: So you don’t see upside risk?
Me: We don’t try and time the absolute lowest point of the market and then lock-in. We try to identify when the trend has shifted (from bear to bull) and take cover, then buy forward or hedge. Until we see evidence of a trend shift — and the market still looks negative to us —we don’t pay much attention to upside/downside risk, per se. It’s not relative in driving industrial buying behavior.
Source: Adobe Stock/Yury Zap
Is This Analyst Wrong?
That’s probably somewhat of an irrelevant question. He can be both right and wrong. Right in that, yes, there is likely more upside risk (e.g. steel can likely go a lot higher vs. a lot lower) but from an industrial metal buying perspective — I give it the big SO WHAT? Read more
Our forecast and research team spends the bulk of its time studying price activity as it relates to commodities in general, industrial metals in particular and the underlying price behavior of each metal.
The why behind the call appears in many of our writings both on the site and within our forecast reports.
Why should GOES Be Any Different?
Simply put, grain-oriented electrical steel (GOES) does not behave like the rest of the base metals, or steel products for that matter, because it operates under quite a different set of market conditions. Some of those conditions appear obvious and others less so.
The Regulatory Atmosphere
Besides looking more like an oligopoly vs. an open market with ample opportunity for price discovery, GOES markets have seen dramatic changes as a result of energy efficiency standards and regulations. These regulatory changes have single-handedly altered the GOES pricing landscape.
DuPont has an excellent information page on the regulatory changes enacted since 2007 and continuing through 2016 impacting this market. Suffice it to say, the 2016 regulations add additional energy efficiency requirements for 3-phase low-voltage, general-purpose (LVGP) and medium-voltage (MV) transformers. These regulations come on top of energy efficiency requirements for LVGP transformers and MV transformers.
The Bottom Line
To meet these new energy requirements, manufacturers needed to upgrade the materials used to make this type of equipment. Beginning in 2007, one could argue that the commoditization of the standard grades of GOES began as the materials leading to more core loss (and thus, poorer energy efficiency) entered a declining market as electrical power equipment manufacturers started sourcing more technically demanding grades. This bifurcation of the GOES market has now become much more extreme.
According to a recent TEX report, the European market landscape has changed dramatically. The report estimates Europe as a 300,000-metric-ton market for 2016. However, the market mix has shifted from approximately two-thirds of the market buying the commodity grade material and a third of the market buying the more value-added material, to nearly two-thirds now consuming high-grade materials (coming from producers in Japan and Korea) vs. one third of the demand purchasing the more traditional commodity grades.
MetalMiner has conducted a similar market sizing analysis here in the United States with demand pegged at 250,000/mt per year. MetalMiner has not sized the commodity grade market from the value-added grades, but one can assume a similar shift is also occurring.
What This Means For Prices
As domestic manufacturers enter into negotiations for contract orders commencing in January 2016, one might expect to see two different price trends – rising prices for the value-added grades (due to tight supply and strong demand) and continued pressure on the commodity grades. However, market participants have confirmed that domestic mills have sought higher prices for both non-oriented electrical steel and GOES, though foreign producers’ prices for the commodity grades have declined.
In addition, the Korean and Japanese producers have little to no material available, particularly in high-grade GOES. Buying organizations caught short on material would do well to identify Chinese sources of supply.
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With multiple trade cases filed in 2015, service centers reeling with higher than average months-on-hand inventory levels (at prices that exceed the current market), US producers operating at 71.3% capacity utilization, the last thing the industry needs to hear is China somehow ascending to the World Trade Organization with full “market economy” status.
China’s Protocol of Accession (to the WTO as a full member) requires that China and more specifically, its government, not meddle, “…its control over prices of key inputs to many manufactured products.”
MetalMiner has long reported on product developments within the metals industry. Years ago, (okay, we’re not that old, 7 years ago), my colleague Stuart Burns discussed several types of rare earth extraction processes that would enable rare earths recycling.
At the time, all 3 processes lacked commercial viability for several reasons – typically because of cost or not yielding pure metals on the back end or both.
Marion Emmert and her team at Worcester Polytechnic Institute have come up with a new way to extract rare earth elements for recycling. Source: WPI
Today, a team of researchers at Worcester Polytechnic Institute may have developed both a technically viable means for recycling rare earths – specifically neodymium, dysprosium and praseodymium from the drive units and motors of discarded electric and hybrid cars – as well as a commercially viable one. Read more
The GOES M3 price increased by 6.9% from last month but we don’t think it’s indicative of an upward price trend. The two-tier commodity/premium grade price differential remains in effect. Japanese mills continue to win price increases in the Middle East of between $100-200 per metric ton, according to a recent TEX Report.
Meanwhile, trade cases on GOES continue to make headlines. According to Eurofer, the European Steel Association, the European Commission found “evidence of severe dumping of GOES on the EU market,” up to 40% below the cost of production according to an October 5, press release.
Perhaps of greater interest is the calculation of a minimum import price (MIP) as a floor for the minimum price a buying organization would pay for GOES in Europe. Premium GOES grades, according to Eurofer, trade above the €2,300/mt level, which would allow buying organizations to import GOES duty-free.
Labor Issues to Cause Disruption?
Back in the US, many buying organizations remain concerned about the Allegheny Technologies, Inc. labor negotiations (multiple locations are currently in lockout) and in particular, whetherl the market see any tightening of supply without a near-term agreement. The consensus among service centers is that ATI may miss out on some stainless contracts for 2016 as other mills deemed more stable lock into agreements.
The scare had many pundits suggesting that quotas would cause rare earth metals price spikes. Guess what? It never happened. Instead, prices have plunged. They have plunged farther than any other group of metals we track.
What if the Ban Really Happens?
Going back to our criteria, could this impact one of the metals markets we track? Absolutely. How big is the order of magnitude impact? Well, without even being able to validate that China’s supposed new law banning unqualified petcoke was published, the fact that there is no clarity on what the Chinese authorities consider to be “unqualified” and that we haven’t even discussed the fact that there are likely dozens, if not tens of dozens, of refiners who would jump into this market if there was a supply squeeze, could we see rising aluminum prices?
We’re glad that got your attention. We’re just not convinced that it will happen. Yet, we received an industry alert to that effect. Allegedly, a new law in China (for which we can find no public reference) goes into effect January 1, 2016 banning “unqualified” petcoke.
So what? you might say. Well, petcoke is a necessary raw material in aluminum production.
Will this pile of petcoke set off a global aluminum shortage? Image courtesy of China Environment
But before we move to the point of hysteria our readers might find it helpful to understand the quick criteria we deploy in determining whether or not we’ll publish something forwarded to us:
Does the news item have the potential to impact one of the metal markets we cover?
What is the likely order of magnitude of said news item?
Do we think this will have any impact on the underlying metals price? And if so, in what direction?
A set of criteria that seems relatively straightforward to us right?
Why This Law Might Not Matter
Even ThomsonReuters’ Andy Home sounded the alarm bells on this issue. However, we here at MetalMiner remain more skeptical.
The email from an associate in China, who has extensive experience in that country’s aluminum industry sent an overview with the headline, “New law in China to hit global aluminum market.” Andy Home undoubtedly received the same information.
The basics of the situation include the following:
China [may have] implemented a new law starting January 1, 2016 that bans the import, sale or burning of “unqualified” petcoke.
Petcoke is an essential raw material used to make aluminum.
There is no clarity as to what will be considered “unqualified” petcoke. “Unqualified” pertains to the sulphur content. If a 3% sulfur (and up) standard is adopted, the thought is that there could be severe ramifications to the aluminum industry. If a 5% sulfur standard is considered “unqualified” then there will be a much smaller impact.
Is China Really Tackling Its Greenhouse Gases?
Without a doubt, petcoke yields more greenhouse gas emissions than its cousin coal. And China, for obvious reasons, wants to clean up its environment. Limits to the sale and usage of petcoke represent as logical an opportunity as any to help reduce harmful pollutants.
Time and again we’ve heard China say that they want to clean up their environment. And yet the country’s actions suggest otherwise.
MetalMiner’s September spot market GOES M3-grade price index held nearly steady from a month ago dropping by only 1%. However, in a closely watched transaction, buying power just got a lot stronger as the EU recently approved the acquisition of Alstom’s energy business by GE.
Although authorities rightfully focused on potential anti-trust issues, back over on the purchasing side, the combined entity makes GE a formidable power buyer, no pun intended.
The acquisition has been cleared for go, pending the sale of Alstom’s turbine business to Ansaldo, an Italian turbine manufacturer.
Powerful New Player
From a global sourcing perspective, we’d expect GE to become a price maker in terms of the company gaining significant European GOES buying power from Alstom as well as the ability to leverage opportunities for any/all global GOES contracts going forward.
The European GOES producers have a reprieve on imports due to the anti-dumping case. Whether or not they can achieve price hikes with a more powerful GE remains to be seen.
Another New GOES Market Player
Meanwhile, Big River Steel confirmed their intent to allocate $600 million in capital for a phase 2 silicon steel-finishing mill for GOES FP and NOES (non-oriented electrical steel) FP at a recent Steel Market Update conference. Allegheny Technologies, Inc. has entered its fourth week of a lockout for steel workers. Thus far, all plants impacted remain operational.
In future follow-up posts we will examine China as a market-based economy and, in particular, China’s role in GOES markets.
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We recently received a note from a reader with questions regarding the recent Chinese remninbi currency devaluation and how sourcing professionals ought to engage with their Chinese metals suppliers. The questions included:
Should I be approaching all of my Chinese suppliers for a 3.5% price reduction?
Should I expect to get it?
There are several ways to answer that question. So let’s start with the narrow answer and then expand into other aspects of China’s currency announcements.
What will the devalued yuan mean for your metal buying strategy?
First, if you pay your Chinese metal suppliers in RMB (yuan) then you ought to expect an automatic price reduction of 3.5% because the currency has depreciated. In other words, when you convert your dollars to RMB, you should see a 3.5% advantage (or whatever the newest/latest currency exchange rate is). Read more
Any outside observer (or inside observer for that matter) may struggle to keep up with the continuous stream of trade complaints filed by practically everyone involved in the global trade of grain-oriented electrical steel.
US producers AK Steel and Allegheny Technologies filed (and lost) a trade case against multiple producers from multiple geographies and in a stunning decision last year, the domestic producers were found not to have been “materially injured” by foreign imports of GOES produced by Japan, Germany and Poland.
Back in May, European GOES producers asked the European Commission to investigate dumping by producers from several countries including: Russia, USA, Japan, Korea and the People’s Republic of China.
Back to trade: If we go back in time, we’d see that electrical steel serves as one of the most popular metals involved in all metal trade-related cases.
If Only Free Markets Prevailed
One might think all of these trade cases actually helped producers, but we are coming to the conclusion that they are all likely an enormous waste of time and taxpayer dollars. Here in the US, GOES prices have largely traded sideways and certainly well off 2011 highs. Global transformer and power equipment producers shifted their transformer production to both Canada and Mexico in anticipation of a favorable trade ruling.
Moreover, the battle really centers on which producers can make the highest-performing grain-oriented electrical steels around a few parameters – high permeability, low core loss and low magnetostriction.
Here, the Japanese, Germans and South Koreans rule the day. For their capability in producing the higher-performing materials, they have earned handsome price increases for the second half of this year, according to TEX Reports (in the $700-$1,000/mt range).
The balance of the producers taking their case to the streets in the form of dumping cases do not have suitable high-end products to fill the “growth” portion of the market and have, instead, only received “lower” prices for their efforts.
Meanwhile, New Government Policies…
The US government has upped the ante by implementing a range of regulations and rules that require these transformer and power equipment producers to adhere to new more stringent efficiency standards. The new EPA Clean Power Plan final rule will also put pressure on power producers to make pollution cuts and become more efficient – driving more demand for transformers and power equipment using higher-performing raw materials.
If I were Big River Steel, I’d be seriously looking at how to create my GOES lines to compete head-on with the Japanese producers. In fact, it makes little sense that AK Steel and Allegheny Technologies haven’t done that already. It’s clear that playing at the low- and mid-ends of the markets yields poor price realization.
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The GOES MMI® collects and weights 1 global grain-oriented electrical steel price point to provide a unique view into price trends over a 30-day period. For more information on the GOES MMI®, how it’s calculated or how your company can use the index, please drop us a note at: info (at) agmetalminer (dot) com.
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