This month, What appeared to be a rally led by anti-dumping actions involving several different steel products turned into something bigger as China implemented stimulus measures, boosting demand growth not only for steel, but also for the rest of the base metal complex.
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Allegheny Technologies, Inc., hosted its first quarter earnings call yesterday morning and reported higher earnings for many of the specialty metal markets it serves, while admitting it has not yet “right-sized” its flat-rolled products business. ATI booked a net loss of $101 million ($0.94 cents per share), a loss that was less than most analysts anticipated.
Revenue for the first quarter fell 33% year-over.year to $758 million.
ATI executives noted during yesterday’s conference call and webcast the company’s Brackenridge production facility is only open three days, with three shifts each day. ATI would like to increase production there. Source: ATI
“Our High Performance Materials and Components segment is well positioned for profitable growth over the next five years, driven primarily by strong and growing demand from commercial aerospace,” ATI CEO Richard Harshman said. “We are committed to making the tough decisions to return our flat-rolled products segment to sustained profitability. This requires the business to be repositioned and restructured and to be more focused on differentiated products that have higher technical barriers to entry and serve markets that are global with attractive long-term growth prospects.”
Harshman and ATI’s executive team reported that the commercial aerospace market, which ATI has pursued as a growth market for the last two years, was starting to show dividends.
“ATI sales to the aerospace and defense markets grew 12% in the first quarter of 2016, compared to the fourth quarter 2015,” Harshman said. “Breaking that growth rate down by specific end markets, sales to the commercial aerospace market grew approximately 20%, with jet engine sales growth of nearly 15% and airframe sales growth of nearly 30%.”
The overall sales total of $758 million was up 3% over the fourth quarter of 2015, even though it was down year-over-year. High-performance materials and components sales were $493 million, up 8% over Q4 2015. Flat-rolled product sales, though, totaled $265 million, down 6% over Q4 2015. Harshman and the other ATI executives blamed the long work stoppage that ATI weathered for more than 8 months and said that production would increase with United Steelworkers personnel back on the job. ATI attributed $26 million of pre-tax costs to the work stoppage and labor contract return-to-work provisions.
Once the fastest-growing U.S. renewable energy developer, SunEdison embarked on an aggressive acquisition strategy that left it struggling with $12 billion in debt.
In its bankruptcy filing, the company said it had assets of $20.7 billion and liabilities of $16.1 billion as of Sept. 30.
China’s Zombie Mills Fire Up Production
The rest of the world’s steel producers may be pressuring Beijing to slash output and help reduce a global glut that is causing losses and costing jobs, but the opposite is happening in the steel towns of China.
While the Chinese government points to reductions in steel making capacity it has engineered, a rapid rise in local prices this year has seen mills ramp up output. Even “zombie” mills, which stopped production but were not closed down, have been resurrected.
With eight of our 10 monthly MMI sub-indexes gaining, and even the other two holding their value, April was the most positive month we’ve seen since 2014.
We felt a bit like Oprah reporting this month’s prices. You get an increase, copper! You get an increase, aluminum! EVERYONE gets a price increase! Except you, of course, rare earths and stainless, but at least you held your value, eh? That’s progress in your markets. Especially for you, stainless.
The standout performer (our “Biggest Winner”) was our Raw Steels MMI®, which posted an impressive 8.5% increase, egged on — at least in the U.S. — by anti-dumping measures that have in large part spurred demand for domestic rebar, cold-rolled and hot-rolled coil and even specialty steel. Specifically, the Korean and U.S. shredded scrap prices tracked by this sub-index bumped up significantly, with Chinese and U.S. finished prices also rising for the month.
Our Global Precious Metals MMI® also posted a healthy 1.2% increase on top of its 10% jump in March for an 11% increase over the last two months. This is no thanks to gold, which acted as a drag on the basket – instead, silver and the platinum group metals drove the increase. Global precious is our biggest winner, leading all of the other sub-indexes at 78.
The Rare Earths MMI® is still lagging behind the rally at a lowly 16, making it our “Biggest Loser” this month, but just reporting a month with no price declines is a moral victory after the losses of 2015. Check out the entire report for a more in-depth at all 10 metal categories tracked in the monthly MMI.
This is likely not related to the broader rally in metals prices as renewables are fairly niche and this sub-index is still trading well within the low range we’ve seen it inhabit for most of the last year. Many renewables aren’t even publicly traded and we have long lamented the effect government incentives have on hiding and keeping prices low for metals and end products subsidized at several points in the supply chain such as silicon.
So, to get a real feel of what’s going on out there it’s sometimes necessary to look at other metals used in the end products. For solar panels, that’s our precious/industrial friend, silver.
The average solar panel actually uses about two-thirds of an ounce of silver. That might not sound like a lot, but at around $15 an ounce on the MetalMiner IndX, U.S. silver contributes more to the cost of a crystalline photovoltaic silicon solar panel than it does to most other industrial products that use silver. Laptop computers use way less than half-an-ounce of silver while a cell phone contains a minute 200-300 milligrams of the shiny metal.
Silver Breaks Out
Silver has broken out from the lows of 2015 and has joined its precious cousin gold in seeing its value increase exponentially this year. Unlike gold, though, silver has a ton of renewable applications. The solar industry uses about 5% of the world’s annual silver supply, or an estimated 52.4 million ounces.
Some might say an increase in the price of silver doesn’t have any direct correlation to the rise in silicon prices or any real connection to solar adoption, either. While this has a grain of truth to it, such a healthy increase in a related component metal can’t entirely be discounted. Silver is actually the primary ingredient in PV cells, and 90% of crystalline silicon PV cells use a silver paste. As a regularly tracked commodity, silver’s demand is relevant. Not just in the U.S. but in massive solar adopters China and India, as well.
That being said, a big price spike in silver could keep adoption of the technology low, too, but that spike would still be a better indicator of loss of demand than some of the prices of subsidized metals. That and, of course, the undeniable rally in steel products being used in all of those wind turbines and solar panels.
New technologies can revolutionize the demand landscape for materials, just witness the demands created on lithium supply by the relentless growth of lithium-ion batteries, a trend that many believe has only just begun with the imminent advent of the mainstream electric car.
New technological developments can also dramatically affect the demand picture for already well-established metals such as the impact automotive lightweighting has had on aluminum demand, spurring massive investment in new rolling mills and lifting annual demand by significant percentage points.
New Demand vs. Established Supply
The impact on market balance is most acute in those markets where the supply side is already constrained, so a recent presentation by the ITRI about the effect on tin demand that developments in energy-related research and development makes interesting reading, as it is widely held that tin’s recent performance has much to say about its constrained supply position. This graph from ITRI illustrates the upturn in price coupled with the dwindling stock levels.
Source: the International Tin Research Institute
Tin supply from traditional producing areas is declining, in part due to self-induced restrictions imposed as part of a wider policy to encourage more domestic refining and better environmental practices in longtime major exporter Indonesia. Also in part due to low prices that have forced miners to halt much exploration and development until such time as prices rise. Read more
Apparently, a rising tide does not always lift all boats as Rare Earths bucked a price increase trend that touched all the metals we track this month. Stable supply from China ever since export quotas were lifted could either be blamed or thanked for the price stability, depending on which side of the buying fence you’re on. Substitution is also a factor, as less-tracked REs such as scandium are being used in alloys by more multinationals such as Airbus.
No major supply disruptions have materialized in the last few years and elements such as niobium and neodymium have appeared to be more price stable than their publicly traded, base-metal cousins. The only thing that could be construed as affecting rare earths this month was the announcement that the Indian government, quite cautiously, might open up a few RE mining blocks to companies sometime later this year.
According to a senior official in the Mines Ministry, the Indian government is looking at at least one rare-earth deposit in the central Indian desert province of Rajasthan to be put on the block, on an experimental basis, to widen the number of rare-earth miners in the country and ramp up production to pose a challenge to China, the undisputed top global supplier of REs.
State-owned Indian Rare Earths Limited is currently the sole miner and producer of REs in India, and it has joint ventures with Toyota Tsusho for production of mixed rare earth chloride.
The new supply would be welcome, if not entirely necessary right now, to companies that produce motors, magnets, light-but-strong structural steel and other RE end uses. Prices are so low right now that even Japan, which famously dealt with a de facto Chinese RE embargo in 2010 and 2011, is seeing its leading domestic RE producers pull back or abandon production entirely.
In February, Showa Denko President Hideo Ichikawa hinted at a further overhaul of its RE metals business, raising the prospect of either merging with another company or just getting out of REs entirely.
OSHA says the rule will help prevent lung cancer, silicosis, chronic obstructive pulmonary disease, and kidney disease in workers by limiting their exposure to crystalline silica, which can cause all of the above diseases and disorders when inhaled. The final rule is written as two standards, one for construction and one for general industry and maritime.
This pile of white silica sand is now being more tightly regulated by OSHA. Source: Adobe Stock/Coprid.
Construction companies have until June 23, 2017 to comply with most of the new requirements, such as:
Reducing the permissible exposure limit for crystalline silica to 50 micrograms per cubic meter of air, averaged over an eight-hour shift.
Mandating employers to use engineering controls (such as water or ventilation) and provide respiratory protection when controls are not able to limit exposures to the permissible level.
Limiting access to high exposure areas . Training workers to recognize exposures.
Provide medical exams to highly exposed workers.
OSHA says the new regulations, which replace ones established in 1971, provide greater certainty and ease of compliance to construction employers — including many small employers — by including a table of specified controls they can follow to be in compliance without having to monitor exposures.
As we’ve mentioned before, the new rules are the culmination of 45 years of debate and consideration of a new silica rule. Regulators have sought to strengthen the 1971 since its inception as silica, in its natural sand state, is pretty much everywhere on construction sites.
Our MetalMiner IndX saw positive growth last month in the Aluminum, Copper and Construction sub-indexes and the Global Precious MMI saw a 10% increase. Even the metals that have price increases held their value from February.
While the underlying factors boosting the MMI — Chinese steel production cuts and renewed demand for iron ore and other raw materials — may help the supply/demand picture, we’d still like to wait for more evidence of a sustained turnaround before calling this a bull market.
The oil price recovery was also a big factor in February. Saudi Arabia and other powerful OPEC members are reportedly discussing how to boost oil prices to $50 per barrel.
Despite reports of a Russia and Saudi Arabia-approved production freeze, however, other non-OPEC nations such as Iraq still have not committed to cutting their own oil production. New production from Iran has entered the market at a much lower pace than most expected, but there is also good reason to believe Iran will ramp up production gradually as it deals with the nuances of re-entering global oil trading.
Remember back in 2010 and 2011 when the federal government lamented that China controls nearly 100% of rare earths production in the world and said the US needs to develop its own rare earths production?
Back then it was now-bankrupt Molycorp, Inc., that the feds were trying to prop up.
Well, dust off your Ke$ha “Tik Tok” single because 2010 is back in the Rare Earths MMI! Just last month the Government Accountability Officescolded the Pentagon in a wide-ranging report to Congress that both faulted the Defense Department for not coming up with a better approach to RE supply chains and lamented that we’re still dependent on China and others for the critical minerals used in defense applications.
Take That, DoD!
The GAO even dispensed with bureaucrat-ese and got all snippy with DoD, saying the Pentagon had been “generally directed by law since at least 2011 to take actions concerning supply chain vulnerabilities for materials, such as rare earths” and faulting it for, well, not doing anything.
Returning fire, a Pentagon spokesman told Breaking Defense “DoD disagrees with the GAO characterization that DoD has no department-wide approach for critical materials, but in the spirit of continuous improvement, the Department agrees with the recommendations in the GAO report.”
The GAO even said that it had to take it upon itself to define what “critical minerals” are since DoD hadn’t yet done so.
It’s hard to fault DoD, though, for dragging its feet on Rare Earths as the market remains oversupplied and even the most in-demand elements are cruising along with low prices. The Rare Earths MMI fell from a 17 in February to a 16 this month, par for the course for its low price range since 2011.
Why a New Sourcing Strategy?
It’s hard to see GAO’s complaints as anything more than bureaucratic infighting unless, of course, supply becomes seriously disrupted and identified critical elements such as scandium are no longer available for bombers, radar shielding and other military uses.
The candidates who would reap a windfall from new Pentagon supply chains include Texas Rare Earths and other domestic companies that have both supply and a process to extract the tricky minerals. There’d also likely be government funding available for further research into extracting REs from existing coal mines used for energy production. Penn State researchers have said they’ve perfected a process to get dysprosium and other elements out of coal.
But, with REs still in abundant supply out of China and prices low, don’t expect any of these initiatives to take off and ramp up demand with them. REs, it seems, are still waiting for that perfect crisis moment to spur necessity and, eventually, invention and innovation. Right now prices are just too comfortable to get DoD, or other users, to make a new sourcing strategy a priority.
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