Author Archives: Lisa Reisman

Jennifer Diggins is the director of Government Affairs at Charlotte, N.C.-based Nucor Corp., the largest steelmaker in the U.S. and North America’s largest recycler of any material (Nucor recycled 16.9 million tons of scrap steel in 2015 at its 23 electric arc furnace mills). Diggins serves as the firm’s liaison to Washington, D.C. MetalMiner’s editorial staff recently had a chance to sit down with Jennifer for a MetalMiner Q&A to discuss recent issues in steel, including Chinese overproduction, the tariffs recently passed against some imports and the role of the international scrap market.

Free Download: The May 2016 MMI Report

MetalMiner: Recently, executives from the five leading steel companies in the U.S. told the Congressional Steel Caucus that unfair foreign trade practices have caused an increase in steel imports resulting in the loss of more than 13,000 jobs in the industry this year. How was that number arrived at? Could it be even worse than the 13,000 estimated?

jennifer_diggins_headshot_300_Nucor_052116Jennifer Diggins: There is the potential for the number to be much worse when you factor in job losses in industries that support steel.

People often fail to appreciate the broad impact the steel industry has on the rest of the economy. Every one job in the steel industry supports seven other jobs in the economy. These are jobs in businesses that supply steelmakers with raw materials, contractors who do maintenance work at steel mills, truck drivers who transport our products, just to name a few. When steel production decreases like it has, workers in these supporting industries also are impacted. Read more

US Steel plant in Granite City wide

The U.S. Steel Granite City Works captured by Google Street View in September, 2014 — a year and two months before the latest idling of the mill.

Dan Simmons has seen a lot during the 38 years he’s worked at U.S. Steel’s Granite City Works in Illinois, just outside St. Louis.

From starting out as a general laborer, to swinging hammers on the track gang, to “feeling like Mr. Haney from Green Acres” while trucking around the mill, Simmons took it all in. There were days “you were whistling when you came in, and whistling when you left,” he said.

But nothing compares to what he’s seeing now.

“I have grown men coming into my office, crying,” said Simmons. “You see the pain, the ‘what ifs,’ the blank stares…”

Simmons, who just turned 56, is now the president of the United Steelworkers Local 1899, and some of the grown men coming to him are pipefitters just like he had become during his long tenure, which began in 1978.

However, those men and women aren’t coming to him because they’ve been hurt on the job. They are coming to plead for help, because they have lost their jobs, and in many cases still don’t know when they’ll land their next one.

Cyclicality in steel production is nothing new, but it wasn’t until 2008 — when the global markets began crashing — that USS Granite City Works endured its first indefinite idling in its history.

“We had the unemployment office cycling 400 people through at a time,” Simmons told MetalMiner. “The biggest fear is not knowing. If I could have given them a definitive timeframe, they would’ve said, ‘OK, I can handle that.’ But after two to three months, people come to me and don’t know what to do with themselves.”

And now, after the mill went idle a second time in December 2015, some of those workers have been without a job for nearly half a year. Last December, 1,500 people were laid off — 75% of the mill’s total workforce. Across the country, a total of 13,500 steel workers have been laid off over the past year.

Simmons knows what it’s like to feel that fear firsthand. “I got a brother that works here, a brother-in-law that works here, so it’s personal. You worry about where your whole family will be.”

So what’s different today, compared to 2008?

For Simmons and scores of others in the country’s steel sector and other manufacturing industries, much of the pain can be traced back to one main source: China.

A History of Unfair Trade?

The world may have never encountered a more crucial Year of the Monkey than 2016.

That is, at least as far as global trade between China and the Western world is concerned. At the end of this year, China believes it ought to receive Market Economy Status (MES). This would allow China to enjoy the same market status as the U.S. and European Union when it comes to anti-dumping investigations before the World Trade Organization.

In its quest to grow its economy over the past two decades, China has become the leading producer — by far — of steel, aluminum, cement and other industrial materials. Read more

My colleagues over on Spend Matters recently penned a pair of articles on 5 Critical Supply Risk Mitigation Principles And Practices for Your Supply Chain Sourcing Process and How to Make Category Management Do Supply Chain Risk Management.

Two-Month Trial: Metal Buying Outlook

Given today’s metals markets, we thought we’d “make it real” by providing some examples and specific strategies and tactics buying organizations may wish to consider in this quickly evolving commodities market.

Supply_risk_chart

Source: Hackett Group Key Issues Study: 2016.

By way of background, we refer to the Krajlic Matrix which plots categories against supply impact and supply complexity. So let’s take a look at a couple of metals — specifically stainless steel and steel. Read more

The MetalMiner monthly GOES MMI reading dipped slightly from 202 to 195 against smaller import volumes. Market participants report to MetalMiner that grain-oriented electrical steel prices have fallen a bit in China, as well, though non-grain-oriented electrical steels have increased.

Two-Month Trial: Metal Buying Outlook

However, AK Steel did add a surcharge of $65 per metric ton effective with June orders, the first higher surcharge since January.

GOES_Chart_May_2016_FNL

According to recent comments made by Roger Newport, CEO of AK Steel, demand appears solid for high-efficiency electrical steel. He also pointed to stronger housing starts, though they remain below historical norms. In addition, Newport indicated the new transformer efficiency standards would help with overall demand. AK Steel also received a boost when ATI closed its Bagdad facility in Gilpin, Pa., driving approximately 35,000 tons of new business to AK Steel.

Steel Rising

In the meantime, the steel market price rise, in general, appears more supply-driven as opposed to demand-driven. Many have questioned whether any more new demand will appear during the second half of the year which means that for prices to stay supported, producers will need to remain vigilant about managing capacity. Some believe prices will flatten during the summer and then start slipping toward the end of the year.

Although GOES markets don’t closely correlate with underlying steel markets, some of the drivers of steel prices also apply to electrical steel. These drivers include: China’s ability to hold prices higher (we have started to see some cracks in that foundation). Unlike in the U.S., Chinese producers work together to set market prices, a recovery in products and materials used in the oil and gas industry on the basis of a rising oil price and, finally, the overall health of commodities markets and base metal prices.

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In a rising price steel market, every manufacturer feels the squeeze but perhaps none more than the small manufacturer sourcing semi-finished and finished components and assemblies from China.

Two-Month Trial: Metal Buying Outlook

The Chinese have recently taken to a number of tactics with smaller manufacturers. By sharing some of these tactics, buying organizations can begin adapting their sourcing strategies. Here are some of the tactics we have recently heard of:

  1. Mills have begun demanding immediate cash payment for all open orders in which buying organizations secured lower costs previously. If the buyer does not pony up an up-front payment, the customer loses the material and must pay the inflated market price.
  2. The small manufacturer must now pay a higher trade price.
  3. Scrap prices have risen in China and, in fact, Chinese manufacturers have begun stockpiling scrap materials until further notice because scrap prices are trading at a steep discount to what they had traded for a year ago. We will explore a possible “why” momentarily.

What do each of these tactics suggest to us? I had a brief exchange with MetalMiner Co-Founder Stuart Burns who offered plenty of insight.

In terms of payment up front for open orders, Stuart suggested mills want to limit distributors and end users from taking speculative advantage of rising prices. Although it appears extreme, Stuart tells us despite the practice not occurring in recent years, it is indeed a fairly common Chinese business practice to demand advance payment for open orders.

Scrap Fetching “Only” RMB 720/mt?

This is perhaps the most significant Chinese steel news event at the moment. On the one hand, much of Chinese steel production is done via basic oxygen furnace, with fewer scrap requirements vs. electric arc furnaces, but, still, scrap is needed for all steelmaking. Furthermore, iron ore, coking coal and steel prices have all risen within China. So, why hasn’t scrap? Certainly if all factories are under strict orders to stockpile scrap materials, we can anticipate a potential glut of material during the summer months.

Our best guess would tell us that perhaps the mills had previously stocked up on scrap and are simply de-stocking.

Finally, Chinese Construction Activity

One of the most significant macro-economic factors we look to in determining price direction involves China. And the recent Chinese stimulus programs suggest that lax lending and stimulus have, indeed, spurred a new infrastructure economic boom.

Again, Stuart believes that speculative building has started again and has sucked steel into the market largely contributing to the point mentioned above: prepayment on open orders.

JP Morgan Chase & Co. believes the demand uptick from the program will taper off by the second half of this year because China doesn’t want to create an additional property bubble. But we remain skeptical. China has shown that shot-in-the-arm stimulus programs often turn into prolonged addictive habits and, therefore, this demand uptick could last longer than many anticipate.

What This Means for Small Manufacturers?

As we say in tight supply markets, all manufacturers will do better by making themselves a desirable customer to their suppliers. The negotiation dynamics have changed. Surety of supply may become a more critical issue than cost savings. Regardless, small manufacturers will want to evaluate current global sourcing strategies, particularly for steel products coming from China.

An earlier version of this story referred to increased premiums paid by small manufacturers. In actuality, they were not premiums but rather an increase in price. We regret the error.

It has become difficult to ascertain if any party that sells it, or those that buy it, have received any benefit from the spate of trade cases involving grain-oriented electrical steel.

Free Sample Report: Our April Metal Buying Outlook

The most recent case involves the Chinese producers Wuhan Iron & Steel and Baoshan Iron & Steel who brought an anti-dumping action against Japanese and Korean producers of grain-oriented electrical steel. Provisional duties of 45.7% to Nippon Steel & Sumitomo Metal, 39% to JFE Steel and 14.5% to POSCO with final duties to be determined during Q3 of this year, according to a recent TEX Report.

High-Grade Materials

The industry knows, however, that only the three mills named in that case can provide the high-grade materials needed to produce transformers that meet higher efficiency standards imposed by governments the world over, including China.

GOES_Chart_April_2016_FNL

For sure, the domestic Chinese producers will likely reap a small bump in prices but their customers, the global transformer and power equipment producers, will make adjustments as required, as well. Read more

Despite the U.S. market operating with only one domestic grain-oriented electrical steel mill, prices fell slightly during February with the GOES MMI dropping to 185 from 192. Last month, we speculated that GOES prices might have found some semblance of a price floor due to the suspension of production at ATI’s Midland GOES operations.

Compare Prices With The February 2016 MMI Report

Whether we consider the drop a price floor or, more likely, price movement within a narrow trading range. The GOES M3 MMI has only moved within a 16-point band since November (with a low of 175 and a high of 192). This contrasts with 2014 price activity in which we saw moves of 15 or 20 points from month to month. Perhaps we have entered a period of less volatility for GOES.

China’s Next Moves

Meanwhile, China has filed an anti-dumping case against Japanese producers of GOES. A preliminary decision is expected within the month.

GOES_Chart_March_2016_FNL

With Japan as the primary supplier of high-grade GOES material, not only to China but also to the rest of the world, it remains to be seen how that will impact pricing. China likely does not have enough domestic supply of high-grade material to satisfy its own demand. Therefore, the outcome of the trade case in China could look eerily similar to the outcome from the trade case here in the U.S.

China will want to think it through carefully if it wants to export the production of wound and stacked cores to neighboring countries because a prohibitively high import duty on GOES will do just that.

That nuance between the commodity grade material and the high-grade material appears to have confounded trade case decision makers.

Broader Steel Markets

In general, steel products, with the exception of plate products, performed better than some of the other industrial metals this month, despite the overall Raw Steels MMI only holding its value from February. CRC, HDG and scrap prices all showed steady price increases. Though we remain long-term bearish on metals markets, the short- term trend looks a bit more positive and we would expect GOES prices to follow a similar trend.

Free Sample Report: Our March Metal Buying Outlook

Meanwhile, U.S. capacity utilization continues to notch up to 71.5% (although closed lines are removed from the calculation) further indicating some market stabilization. ATI also signed a union contract after a six-month lockout which should, in theory, make it simpler to bring back GOES production when market conditions improve.

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The classic “cost breakdown” gets a bad rap these days.

Free Download: The February 2016 MMI Report

It seems like an old school concept, but we’d argue it’s getting a new lease on life as procurement organizations seek more strategic supply market intelligence insight.

Cost breakdown analysis

Cost breakdown analysis can create a competitive advantage for your business. Source: Adobe Stock/Morchella.

In fact, in recent weeks we’ve fielded an increasing amount of phone calls about obtaining metal price data for both should-cost and total-cost models. These organizations range from the small manufacturer seeking to renegotiate supply contracts with Chinese suppliers to large retailers seeking to develop supplier should-cost models for negotiation purposes.

Recently, Bertrand Maltaverne of software provider Pool4Tool and formerly of Schneider Electric, led a webinar discussing the concept of TVO (total value of ownership) and walked the audience through several distinctions between TVO and its cousin, TCO (total cost of ownership).

For more specifics on how to model TVO for your organization, join us at the ISM/Spend Matters Global Procurement Tech Summit where I will be co-leading a workshop on Cost Breakdown Analysis with Pool4Tool Founder and CEO Thomas Dieringer.

As someone who has led many workshops and discussions on TCO, the distinction between TVO and TCO should compel all buying organizations to take a second look at this potential source of competitive advantage. Consider the following:

  • TCO considers the “cost basics” such as direct material costs, direct labor costs, direct operating and process costs, manufacturing overheads, research and development, selling general and administrative expenses, etc. plus profits.
  • It also considers entire life-cycle costs from the purchasing market, research costs, insurance, staff training, switching costs as well as ongoing operating costs such as consumables, spares, etc. to end-of-life disposal costs such as site cleanup, decommissioning costs, etc.
  • TVO, on other hand, considers other factors not traditionally incorporated into “should cost” models. These factors might include value drivers such as productivity gains, risk reduction such as CSR risk, financial, logistics and quality; it is expressly tailored to the specific objectives of the buying organization.

Two other elements make TVO unique — the first involves internal collaboration across functions in defining value and the second involves integration of those functions and subsequent processes into the procurement evaluation process.

Free Sample Report: Our February Metal Buying Outlook

These integrated processes become crucial in helping define category strategies, supplier evaluations and risk management practices. If this sounds theoretical, it is not. Consider how some organizations view sustainability, for example, as a key driver of shareholder value. And though we folks in procurement often focus on shareholder value in terms of COGS or reduced SG&A expense, TVO makes metal buying a whole lot more strategic.

Relative performance, not absolute performance, also drives value, according to Pool4Tool. Companies that develop index-based models reflecting real market prices (MetalMiner has long advocated them and, in the name of full disclosure, provides such data) and sophisticated cost models have a leg up over organizations that don’t use these tools.

Follow Lisa Reisman on Twitter @LReismanMM

A small 3% price bump in the monthly GOES M3 index doesn’t tell us a whole lot, however, it suggests that prices may have found a floor back in the November/December 2015 time frame.

Free Sample Report: Our February Metal Buying Outlook
Part of finding that floor may have come from good, old-fashioned supply and demand. Consider that the comments from Allegheny Technologies, Inc., Chairman, President and CEO Rich Harshman recently indicated that he would be taking “rightsizing actions” to return ATI’s flat products group to profitability as quickly as possible.

GOES_Chart_February_2016_FNL

Furthermore, speaking of two recent closures he said, “The future restart of the Midland and GOES operations respectively will depend on future business conditions and ATI’s ability to earn an acceptable return on invested capital on products produced at these operations.”

This type of action, particularly the shutdown of the ATI GOES line, helps to bring some additional balance to the market. The rest of the steel industry will need to follow suit to support HRC prices, but that’s another story.

Free Download: The January 2016 MMI Report

In addition, TEX Reports suggests that one of the big Chinese mills will suspend two of its commodity grain-oriented sheet lines. MetalMiner could not identify any corroborating source as of press time.

Meanwhile, the most recent import trade data shows a 19% decline in transformer part imports:

Source: Zepol

Source: Zepol

While wound cores held steady:

Source: Zepol.

Source: Zepol.

Actual GOES Prices and Trends

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Despite the market price gyrations of the M3 spot GOES market, the index rose by ten points in December, five trends underpin much of the dynamic impacting global GOES markets.

GOES_Chart_January_2016_FNL

Free Sample Report: Our January Metal Buying Outlook

Those trends appear as follows:

  1. Continued market tightness for non-commodity grades such as MOH or HI-B materials: These materials, not currently produced in the US remain in high demand both in Europe as well as the US due to more stringent transformer efficiency standards. With no domestic production of such materials, global transformer and power equipment producers will continue with their strategies of working and securing long-term agreements (LTA’s) with key overseas suppliers, particularly in Japan. In addition, they will continue to evaluate near-country sourcing options (Canada and Mexico) to bring in stacked cores where NAFTA sources can also easily access the non-commodity grades. In addition, because the [primarily] Japanese mills need to run thinner gauges to meet customer demand, their annual production quantities will necessarily decline, creating additional tightness.
  2. Standard grades, on the other hand, will see flat to falling prices until “fundamentals” take over. In other words, until/unless the Chinese, as did ATI, reduce capacity — too much supply is chasing too little demand. More capacity will need to come offline to better match demand. The impact of ATI’s recent announcement that it has idled production of GOES, may help set a floor for US domestic pricing.
  3. We expect to see continued industry consolidation among power transformer equipment manufacturers. The acquisition this past month of Kentucky Association by ERMCO will continue to help shore up buying power. In Europe we expect the Alstom/GE tie-up to provide substantial “leveraged” purchasing power.
  4. International trade issues will continue to dominate the global GOES marketplace. Not only will this market continue to see the ramifications of anti-dumping initiatives and decisions around the globe, but China’s ascendancy to the World Trade Organization as a full-fledged market economy participant (if approved by WTO member countries) will have profound ramifications on GOES cases, in particular, and many other metals including: steel (flat-rolled and pipe and tube), aluminum, and copper. In short, China perceives it will obtain full-fledged market economy status beginning in December of this year. By obtaining that status, countries arguing anti-dumping against China will not be able to compare China’s price with a similar or like country’s export price, but instead will have to determine if the export price of a product is below the domestic price. And as we can attest, based on our careful watch of Chinese metal prices, the domestic price is nearly always lower than the export price. In other words, it will be difficult for countries bringing anti-dumping claims against China to prove anti-dumping against this standard. One additional point on this issue: each trading block (and/or country) needs to decide the question of China being a full-fledged market economy independently. We could see some very divergent responses to the question of China’s ascendancy by country.
  5. Health of the global economy: Though GOES markets appear somewhat protected from the booms and busts of the economic cycle, energy initiatives are subject to federal projects and expenditures, new home and commercial construction etc. China’s slowdown and the health of the overall global economy will continue to impact all metals markets though to a lesser extent, GOES markets.

Compare Price Trends With The December MMI Report

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