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:
- 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.
- The small manufacturer must now pay a large premium to the in-country trade price (e.g. our MetalMiner IndX HDG price). By way of example, if HDG trades at RMB 3,990/metric ton and a small manufacturer historically paid a RMB 350-500 premium to the in-country price, today that same buying organization may be paying a 1,500-1,800 RMB premium.
- Oddly enough, scrap prices have not 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.
And the large Chinese price premiums for hot-dipped galvanized prices? This should not come as a surprise to anyone, either. Mills want to command a substantial premium for undertaking smaller volume orders, otherwise producers would rather run flat out making standard commodity product in standard sizes and volumes.
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, without a corresponding price increase, 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 first two points mentioned above: prepayment on open orders and a larger premium to the traded price because of this construction boom.
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.