Ferro Alloys

We have often noted the funny ways metals are marketed in the overall media here at MetalMiner. Whether it’s steel being touted for its strength, while alloyed with titanium, or zinc being used to galvanize rods in environments where galvanizing won’t help, the the images of strength, resiliency and luxury certain metals hold benefit the sector as a whole.

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One may think that China’s steel industry could hardly be in a worse place.

Half the industry is losing money in spite of falling iron ore and coking coal costs and a reduction in domestic power costs all aiding steel producers on the supply side. Even among those that did not lose money in the first half, margins are said to be razor thin and banks are reported to be cutting credit lines and presenting difficulties in rolling over loans according to China Iron and Steel Association (CISA) comments posted by Reuters.

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A major miner announced more layoffs and steel imports were down this month, according to preliminary data.

Anglo-American Layoffs

Global mining company Anglo-American PLC said on Friday it will shed thousands of jobs in the next couple of years and might put up more assets for sale as it battles an accelerating slump in metals prices that has dragged its shares down to a 13-year low.

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The company posted a steep fall in first-half profit after a rout in prices of metals from platinum to iron ore, and said the next six months could be even worse. Anglo-American is the fifth-biggest diversified global mining group by stock market capitalization. The statement said it would cut about 6,000 of its almost 13,000 office-based and other non-production roles globally, 2,000 of which will be transferred through the sale of some assets.

Steel Imports Starting to Fall

Based on preliminary Census Bureau data, the American Iron and Steel Institute (AISI) reported recently that the US imported a total of 3,049,000 net tons (NT) of steel in June 2015, including 2,458,000 NT of finished steel (down 10.3% and 10.7%, respectively, vs. May final data). Year-to-date total and finished steel imports are 21,670,000 and 17,833,000 NT, respectively, up 3% and 14% respectively, vs. the same period in 2014.

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Normally, when a project of this size is called off, it sends ripples throughout the entire steel sector, and even negatively affects the stock market.

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Yet, when a few days ago, South Korean steelmaker POSCO let it be known that it had decided to put its much-vexed $12 billion project to build a steel plant in India’s iron ore-rich state Odisha on hold, the reaction in India as well as globally was muted. Almost as if it was anticipated.

Regulatory and Approval Delays

The subdued response can best be attributed to the extraordinary delay – a decade – in trying to get the project off the ground. Holdups in receiving permissions for land use and environmental clearances from the local and Indian governments, long legal battles, protests against the project by residents, red tapism, even the kidnapping of company executives in 2007 for a day by protesting activists, all ensured that the project remained a paper tiger all this while. It’s been a veritable ten years of legal and public relations battles for the former Pohang Iron and Steel Company.

For much of this period, we at MetalMiner, faithfully reported and analyzed the developments on the “POSCO India story,” from the sidelines.

It’s not clear yet, though, whether the Korean giant has finally thrown in the towel in sheer disgust at the inordinate delay, or whether it’s really a strategic decision that was part of the company’s overall cut in overseas business. Given the fact that steel industry across the globe is hemorrhaging cash, it could very well be the latter.

Blame the Steel Market

Officially, unnamed POSCO officials were quoted in the Indian media saying – it’s all part of the restructuring. The exercise is expected to reduce by about a third, POSCO’s overseas businesses. The company has been struggling with sagging profits for some time now, and cutting costs seems like the best way out for now. No doubt, if the Odisha project had gotten off the ground, it would have had provided some financial succor for POSCO in today’s troubled times.

However, a Press Trust of India report quoted by website FirstPost said POSCO put the project on hold due to the aforementioned delays in regulatory approvals.

As far back as early 2014, we predicted that the POSCO India project was on its deathbed, and that no amount of posturing by either the new Indian government sworn in last year or even by POSCO could save it.

A Reuters report said the South Korean steelmaker scrapped its plans after a new law made it costlier to source iron ore for the plant. This was the entire attraction of Odisha in the first place, access to cheap and readily available iron ore.

POSCO Swears The Project’s Not Dead… Yet

The steel major, however, would like everyone to believe that the epitaph of this “Indian steel tragedy” has yet to be written. Steel analysts here feel that POSCO, the world’s sixth-largest steelmaker by revenue, was likely to continue in India even if it ultimately decided to scrap the Odisha project altogether. That’s because the company had no choice but to be in a country where steel consumption was growing at a steady pace, a global rarity.

There are also conflicting reports that POSCO was thinking of taking the steel project somewhere else in India – perhaps to the western state of Maharashtra where it already has a downstream steel project. But this was all officially denied by POSCO.

The company has, so far, acquired only around 600 acres out of more than 4,000 acres needed for the 12-million-metric-tons-per-annum steel plant.

And what would have been an otherwise humorous episode in the rather serious steel business was the fact that barely a couple of days after POSCO’s announcement that it would abandon the project, local tribal residents were reported to have forcibly reoccupied the land they had given up for the project. Almost 500 of the 600 acres of land have been taken over as of this writing. That, more than anything else, was the real pointer to this project’s final status – “a lost cause.”

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The author, Sohrab Darabshaw, contributes an Indian perspective on industrial metals markets to MetalMiner.

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Gold miners saw their stock values plummet with the price of the yellow metal on Monday. BHP Billiton is investing $240 million in its Western Australia iron ore tug boat and port business.

Gold Sell-Off Hits Miners Hard

The steep sell-off in shares of gold miners, tracking a plunge in the metal’s price, wiped out more than $8 billion from their combined market value on Monday and pushed a global index of gold stocks to a six-and-a-half-year-year low.

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The Thomson Reuters Global Gold index slumped 8.5% to its lowest since late 2008, the biggest one-day percentage drop in two years, after gold prices sank.

BHP Investing in Infrastructure

BHP Billiton said today it will spend $240 million upgrading its marine iron ore facilities in Western Australia. The funds will be used to purchase six tug boats and build a new tug harbor in Port Hedland’s inner harbor, with construction due to be completed in September 2016.

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Second quarter results will be coming out later this month for North American producers of flat-rolled stainless steel. The burning question remains will US mills will file anti-dumping lawsuits about flat-rolled stainless steel?

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If anti-dumping lawsuits are filed, what will the impact be on manufacturers and buying organizations?

Why Are Imports Up?

Let’s remember the reason imports began increasing in mid-2014: domestic mills had four-month lead times. Service centers as well as large manufacturers had to source imported cold-rolled stainless to stay in business.

Steel Background Texture

A surplus of both domestic and imported cold-rolled stainless has led to low prices.

Manufacturers also relied on imports to make up for the loss of production at Outokumpu’s Calvert, Ala., plant caused by technical issues with its cold-rolling mills. In addition to long lead times, the strengthening US dollar kept imports flowing to the US.

Right now there is a glut of both domestic and imported cold-rolled stainless steel. Service centers still have higher than desirable inventories.

Base price or Nickel Surcharge?

Is it really the base price that is hurting the domestic stainless mills, or is it the nickel surcharge that has declined by nearly 25% since the beginning of the year devaluing inventories, domestic and import alike?

That question may be tough to answer, so, instead, we’ll look at the likely impact on buying organizations of anti-dumping suits:

  1. Bright Annealed Coil: Allegheny Ludlum is the only US producer of 48-inch-wide, bright annealed coil. AK Steel is the only producer of 36-inch wide. Outokumpu’s Mexinox facility produces 48-inch wide, but is in Mexico and could be subject to anti-dumping duties as it was in 1998. The bright-annealed demand in the US exceeds the domestic supply making imports a necessity. The bright annealed finish can vary greatly from producer to producer, so once reliable and consistent quality is established, buying organizations will want to stick with that source. Some of the best producers of bright annealed coil are in Taiwan, China and Japan as well as France and Germany.
  2. Light Gauge Coil (.030” and thinner): Once the mills get busy again, the light gauges are going to become constrained. The thinner the thickness, the longer it takes to roll on a cold-rolling mill. If anti-dumping lawsuits are filed, then light gauge from domestic mills could become more expensive, thus increasing the cost to the manufacturer.
  3. Proprietary Stainless Grades: Although the US stainless cold-rolled market is dominated by 304, 316L, 301, 201 and 430, there could be alloys strictly made on an import basis that would be part of anti-dumping cases.

The domestic mills need to look at their strengths and capitalize on them. Anti-dumping lawsuits are a crutch, not a cure for domestic producers. In the end, stainless coil anti-dumping suits hurt the manufacturer because it limits options and artificially increases prices to source stainless steel coil.

As seen in 2014, imports were a necessity for the US market and have always supplemented it. The domestic mills have already regained short lead times. They are back to delivering many products in under four weeks. The option to import cold-rolled stainless steel needs to be left open in the event that domestic mills cannot fulfill US demand.

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Gold hit a fresh five-year low today and China’s top steel-producing city is getting serious about enforcing pollution standards.

Gold Keeps Falling

Gold stretched its losing skid to six sessions and made a fresh five-year low in early trading Monday. At its low point Monday, an ounce of gold dipped below $1,100 to $1,080 — its lowest level since February 2010 — and was down 4.6% before recouping some of its steep losses.

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About 8:30 a.m. ET, an ounce of gold was down $18.80, or 1.7%, to $1113.10. Last week, gold tumbled more than 2%.

Our Lead Forecasting Analyst, Raul De Frutos predicted the yellow metal had further to fall last week.

Tangshen to Crack Down on Pollution

China’s top steel producing city of Tangshan will punish steel companies if they fail to meet tough new pollution standards over the next three months, according to new industry guidelines. This could force closures and help ease a severe capacity glut. China is using tougher environmental rules to help tackle a severe glut of steel capacity that has depressed prices.

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MM-IndX_TRENDS_Chart_July-2015_FNL

There’s no reprieve from the bearish metals environment in this month’s MMI Report.

More Analysis: The July Metal Price Forecast

With the exception of the very specialized grain-oriented electrical steel (GOES) market and the Renewables MMI®, all of our indexes lost ground in June and could not gain traction amid falling commodity prices and a strong US dollar.

The one index that was steady from last month, which tracks raw material inputs of the renewable energy sector, has been stagnant for two years and, until trends show otherwise, its steadiness is more a measure of a lack of market activity than anything close to a turnaround or a new trend toward increasing prices.

The Stainless MMI is flirting with two-year lows and our Raw Steels index is up against lows not seen in years as well. Weakness in the Chinese stock market has put additional pressure on metals that were already reeling from the effect of the strong dollar. This is bad news for steelmakers, miners, refiners and smelters by itself, but coupled with increased supply in most of the metals we track, it’s become a real deterrent to profitability.

Moreover, both Europe and the US have higher-than-normal inventories of semi-finished products at service centers. Mill lead times remain short suggesting weak demand. Weak demand will continue to place downward pressure on prices.















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July 2015 Monthly Metal Buying Outlook copy

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Among the top three aerospace engine manufacturers in the world, ahead of Pratt & Witney but behind General Electric, Rolls Royce is the only viable major alternative to American dominance in the space.

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Aircraft builders such as Boeing and Airbus, not to mention a number of smaller firms specify one of the three for all their large aircraft and many smaller models. The aircraft industry has been on a roll for years, driven by rapidly expanding global trade in Asia and the Middle East and high oil prices causing considerable pain for airlines in fuel costs.

Trent 7000 infographic.indd

Rolls Royce is counting on sales of engines such as the Trent 7000 to move its business from maintenance-focused to new sales-focused. Infographic: Rolls Royce

Aircraft makers have enjoyed bumper order books stretching out into the next decade. As a result, one would think all is well with the engine manufacturers. Every plane needs engines, right?

Production vs. Maintenance

Well, yes and no. Yes they all need engines and firms like Rolls make as much from service and maintenance as they do from selling new engines. Even more, probably. Yet timing is everything even in this business and Rolls has hit turbulence that has resulted in a fall in its share price and a third profit warning in 18 months.

Although Rolls is still predominantly an aircraft engine maker, the company makes about 70% of revenue and profit from the civilian and defense aerospace market, it also makes marine engines for supply vessels and power systems for oil rigs – a market that has tanked since the oil price collapsed and capital expenditures have been slashed.

Rolls’ main woes, though, have come from the aerospace side. According to the London Telegraph, the civil aviation industry is moving from fleets of smaller planes with less efficient engines (servicing and maintenance of which is highly cash-generative business for Rolls) to a new generation of larger planes with more efficient engines.

It has been estimated by analysts that cash and profits from engine contracts on the 747, 757 and 777 generation of jets will fall during the next two years. At the same time, the Telegraph says, the transition to new cash-flows from the delivery of the Trent 700 engine on the A330 are now lower than expected, as customers wait for the improved Trent 7000 engine to be fitted to the more fuel efficient A330neo, still a year or two away from production.

Counting on New Orders

The company is also waiting for a ramp-up of the Trent XWB engines for the new A380 and A350 programs, both of which are behind schedule.

Rolls isn’t going to go bust by any means, but the firm’s cancellation of its share buyback program and its third profit warning has supported calls for the marine and aerospace sectors to be split. Or for the marine business to be sold off with some suggesting that would see up to a 20% increase in its share price in the event of a split or raise up to $6 billion if marine was sold, which short-term investors are hoping could be returned to shareholders.

A Common Aviation Problem

Rolls’ problems probably mirror the rest of the engine makers. A full order book is not, in itself, a guarantee of consistently strong returns. Projects wax and wain, and if external pressures such as oil prices hasten the end of one contract before the next is ready to take off, suppliers suffer.

There will likely be something of a knock-on effect for material suppliers. Tier ones, of course, usually have good visibility into their principals’ programs. Those further down the food chain are sometimes not so lucky.

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