Author Archives: Lisa Reisman

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

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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.

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Last week Allegheny Technologies, Inc. (ATI)  announced it intended to “rightsize and align” its flat-rolled products operations. The announcement included the idling of a standard stainless steel melt shop and sheet finishing operations out of its Midland, Pa., facility and the idling of its grain-oriented electrical steel (GOES) operations located in Bagdad, Pa.

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The operations will be idled in January and April, respectively.

Will ATI exiting the GOES market mean higher prices for transformer cores? Source: Adobe Stock/yuttana590623

Will ATI exiting the GOES market mean higher prices for transformer cores? Source: Adobe Stock/yuttana590623.

So what does this mean for capacity, production and prices? MetalMiner will assess the impact of these closures in two parts.

Grain-Oriented Electrical Steel Closure Caught Some By Surprise

According to MetalMiner’s industry sources, key customers — some of whom had recently negotiated LTAs (long-term agreements) with ATI — received only a couple of days’ notice that production would cease. These customers, however, will not have any difficulty in finding alternative imported supply or domestic supply from AK Steel.

The closure likely had more to do with ATI’s inability to secure more LTA business, as opposed to spot business. LTAs provide guaranteed demand and allow producers to better forecast production economics. In addition, both domestic producers sought higher prices for 2016 (i.e. higher than import prices) and we speculate that several bigger buying organizations simply refused to accept the higher prices. Without enough LTAs in hand to secure acceptable capacity utilization rates, ATI decided instead to shut down its line. Read more

AK Steel published a zero-dollar surcharge for December quotations. MetalMiner has never seen a zero-dollar surcharge from either of the domestic producers, going all the way back to February 2004, the start of the MetalMiner GOES price data tracking service.

Surcharges have not hit these levels since January of 2009 when AK published a surcharge of $10 per metric ton.

Surcharges reflect costs for raw materials and energy, both of which have fallen significantly this past year.

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Meanwhile, the M3 GOES index held steady at 176 as other drivers of the monthly index showed some strength.

Goes1215_1

Source: Zepol

Insiders suggest that the domestic mills have taken different stands to extract price increases from the domestic market during annual contract negotiations. AK has used Allegheny Technologies Inc.’s worker lockout as a reason to move business to AK. ATI, however, has countered with new temporary workers that they say will keep lines running efficiently. No matter the winner in that battle, we believe buying organizations have hedged their moves and have already shifted some 2016 spend to overseas suppliers.

Additional Developments

As a defensive measure against the two domestic mills, global transformer and power equipment producers forged ahead with sourcing both transformer parts and wound cores from producers outside the US.

GOES_Chart_December_2015_FNL

Though dollar values of imported transformer parts fell by 10% in October, wound core part imports jumped by 18% in October, according to data from Zepol.

GOES_121015_2

Source: Zepol

In an unrelated move, China announced some market economy reforms to create greater competition for electricity transmission.

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This comes undoubtedly as a result of China’s Protocol of Accession to the WTO and its desire to be considered a market economy. Currently, for trade cases including GOES, WTO members treat China as a non-market economy.

MetalMiner expects China’s Protocol of Accession to the WTO to become a heated debate.

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Please follow Lisa Reisman on Twitter @LReismanMM

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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).

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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.

lisa reisman

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

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.

For those that subscribe to our monthly forecast report or downloaded our annual report nearly all of the commentary and supporting data tell one story: metals markets remain bearish.

GOES_Chart_November_2015_FNLThe 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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Arguably, no issue has impacted the steel industry more than imports.

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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.

Nobody Thinks China Operates a Market Economy

According to a new report issued by trade specialist law firm Wiley Rein entitled, The Treatment of China as a Non-Market Economy Country After 2016 discusses what changes in market status China should expect to receive after 1 provision in the original negotiated WTO agreement expires on December 11, 2016.

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.”

Read more

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.

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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.

RE-MarianEmmert_550

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.

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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.

GOES_Chart_October_2015_FNLPerhaps 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.

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In addition, the lockout appears to have impacted stainless plate mills with a delay of a few weeks but we are not hearing of any issues with GOES.

Stacked Core and Transformer Part Imports

Imports of stacked cores rose by 15% from July to August growing to $1.44 million in import volume. Meanwhile, transformer part imports grew by 8% to $16.7 million according to data provided by Zepol.

1015Zeepolgoeschart

Source: Zepol

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This is part 2 of a blog on a possible ban of “unqualified” Chinese petcoke and how it relates to global aluminum prices. Check out part 1 if you missed it.

Let’s just examine prior history… prior Chinese history….prior Chinese history involving reducing pollution and emissions.

We have to look no further than the rare earths market – one in which China controls a lot more of the global supply than it does aluminum.

AluminumSmelter_565

Can an “unqualified” Chinese petcoke ban cause the cost of smelting to go up? Is the ban even real?

For several years China implemented controls to help “clean up” the rare earths processing industry.

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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?

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Sure, but there are many other reasons we may see rising aluminum prices in the coming years. It might be hard to ascertain the causal factor.

Therefore, unless/until we see evidence of enforcement, this “petcoke” supply shortage will stay firmly in the “low impact” category to metal buying organizations.

Carry on with business as usual.

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.

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So what? you might say. Well, petcoke is a necessary raw material in aluminum production.

china_petcoke_565

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.

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Therefore, we fail to understand how one could draw the conclusion that the aluminum market would actually be harmed and some sort of supply shortage might ensue.

This is part 1 of a 2-part series on Chinese petcoke and what a potential ban might mean. Check in tomorrow for part 2!