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.
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.
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.
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.
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.
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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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 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.
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.
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.
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.
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:
While wound cores held steady:
Actual GOES Prices and Trends
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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.
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.
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.
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.
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.
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.
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.
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.
Meanwhile, the M3 GOES index held steady at 176 as other drivers of the monthly index showed some strength.
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.
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.
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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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.”