Supply & Demand

It may be the world’s largest steel producer, but Lakshmi Mittal-led ArcelorMittal saw a decline in its businesses in India in 2014 for two main reasons: weak demand and cheap imports.

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The firm’s recently released annual report said ArcelorMittal and its subsidiaries rang in sales of $225 million from India. Once upon a time, in fact in 2010, ArcelorMittal’s Indian operations had netted $873 million, so that will give readers some perspective of the depth to which sales have plummeted.

It would not be an exaggeration to state that almost all of India’s major steel companies have stories similar to that of ArcelorMittal. Even the government-owned Steel Authority of India Ltd. (SAIL), which had posted a net profit for the October-December quarter 8.6% higher than the same period last year, had a similar lament.

In its Q2 results statement, the company said the turnover was impacted due to “challenging market conditions” and high imports, among other reasons.

Rough SAILing

SAIL chairman C.S. Verma told the media here that the only way his company had circumvented these challenges was by bringing in initiatives to reduce energy consumption and optimize raw material utilization, as well as adopt state-of-the-art technologies.

It looks like these measures were not enough to save SAIL from Fitch Ratings. Fitch recently lowered the outlook for SAIL’s long-term foreign currency issuer default rating to negative. The crux of the matter lay in its commentary, where Fitch said continued weak steel demand growth in India, high steel imports or a further softening in global steel prices could derail SAIL’s efforts to modernize.

Same Story at Tata Steel

Another Indian steel behemoth, Tata Steel Ltd.’s Indian steel operations had a rough quarter again for almost the same reasons — sluggish demand, cheaper imports and higher raw material costs on account of mining stoppages. In the December quarter, Tata Steel’s consolidated sales declined over the preceding quarter by 6.1% on the back of a 3.1% decline in steel volume and weak steel price realizations. The only redeeming factor here was Tata’s European operations which turned in a substantial jump in profitability.

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Although stainless steel demand is expected to grow moderately this year, service centers are flush with inventory which is putting pressure on US mills.

Why Manufacturers Need to Ditch Purchase Price Variance

Combined with successive months of declines in nickel prices, service centers are only purchasing what is absolutely necessary. Both domestic mills and Asian mills have robust North American inventories, a stark contrast from a year ago when lead times went beyond the standard 6-8 weeks, causing service centers to seek alternative sources.

Technical Issues Hurting Mills

Another exacerbating factor in last year’s supply was Outokumpu’s technical issues with its cold-rolling mills and a lack of alternative domestic supply led service centers to seek other sources. With lead times extended, the domestic mills were able to pass through several base price increases in 2014.

With higher US base prices and the strength of the US dollar, Asian imports did not subside. Asian producers need other markets for their surplus material as Chinese demand is weak and both Europe and India have taken anti-dumping actions against China.

End market demand is strong for automotive,​ residential​ appliance and food service/food processing equipment. The only market that appears to be suffering is energy which is due to the low price of oil. Stainless demand is decent according to many sources and stainless base prices will remain under pressure.

Inventory Backlog

The North American market​ ​is ​saturated with inventory​ ​so​ lowering the base price will not spur on demand. Until service centers reduce their inventory backlogs and nickel prices start to improve, service centers will not buy, regardless of price. Service centers need to focus on getting their inventories in check before they resume anything resembling regular buying patterns. ​​Unfortunately, the mills are under pressure to book capacity which oftentimes leads to acts of desperation.

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Several news articles this week have led with comments made by UC Rusal executives regarding the price of aluminum. The FT led with Rusal battles with LME on aluminum price and Reuters added Rusal plays down concerns of Chinese aluminum flooding market.

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All of which says to me, Rusal is worried sick that a combination of falling physical delivery premiums and rising Chinese product exports are going to depress aluminum prices this year and into the medium term. The fact is, there is no shortage of aluminum and, although demand continues to grow robustly, supply is growing faster.

Primary Producers Opening New Capacity

Mills such as Rusal’s and Alcoa, Inc.‘s have manfully responded by closing older, less-efficient, higher-cost capacity but even so both they, and other primary producers, are investing in new capacity at the same time. Production outside of China has been creeping higher over the last five months.

Reuters’ Andy Home tells us it’s creeping up to the tune of an annualized 650,000 metric tons. Part of this is older European plants being purchased and restarted by smaller players. Part is new capacity such as Alcoa’s Ma’aden joint venture plant in Saudi Arabia. Likewise, while Rusal has closed older, higher-cost plants it is now talking about a ramp up of it’s 600,000-mt per year Boguchansk plant in Siberia, although, admittedly, only the first 150,000 mt phase for next year.

Semi-Finished, Completely Sold and Shipped

Meanwhile, China exported 1.07 million mt of mostly semi-finished products in the first quarter of this year, representing a year-on-year increase of 353,000 mt. Although December’s almost 500,000 mt was an outlier, the removal of a 13% export tax on May 1st and the consideration of further tariff reductions signals that Beijing has no intention of reining in this overcapacity, but rather is setting course to support domestic producers as domestic demand slows.

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Construction spending falling again was the big news in today’s MetalCrawler report. The race for world’s largest steelmaker by market value heated up, too.

Construction Spending Falls

Outlays for US construction projects fell 0.6% in March to a seasonally adjusted annual rate of $967 billion, the Commerce Department reported Friday.

Why Manufacturers Need to Ditch Purchase Price Variance

Economists polled by MarketWatch expected a drop of 0.5%, compared with an originally reported decrease of 0.1% in February. On Friday, the government revised February’s result to show almost no change. Looking at private outlays in March, spending fell 1.6% for residential projects, and rose 1% for nonresidential projects. For overall public construction projects, spending fell 1.5%.

Baosteel Keeps Growing

Baoshan Iron & Steel Co., spurred by China’s stock-market rally and growing car market, is poised to overtake Japan’s Nippon Steel & Sumitomo Metal Corp. as the world’s largest steelmaker by market value.

Baosteel, supplier of half of China’s automotive steel, had a market capitalization of $23.8 billion to Nippon Steel’s $25 billion on Thursday. The spread on Tuesday was only $52 million. Also tracked in the attached chart is South Korea’s Posco, which wrestled with the Japanese steelmaker for the crown from 2013 until last year.

Shares of Shanghai-based Baosteel more than doubled in local-currency terms since Oct. 30 as the benchmark Shanghai Composite Index rallied 86% Nippon Steel’s stock rose 14% and Posco fell 18% in the same period.

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The Wall Street Journal reported that a key component of the Apple Watch made by one of two suppliers was found to be defective, prompting Apple Inc. to limit the availability of the highly anticipated new product, according to people familiar with the matter.

Why Manufacturers Need to Ditch Purchase Price Variance

The part is the watch’s “taptic engine,” designed by Apple to produce the sensation of being tapped on the wrist. After mass production began in February, reliability tests revealed that some taptic engines supplied by AAC Technologies Holdings Inc., of Shenzhen, China, started to break down over time, the people familiar with the matter told the WSJ.

No Recall

Apple does not plan a recall, as there is no indication that any defective watches shipped to customers.

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This is a third post on a series of posts on exponential technologies (see part 1 and part 2).

Why Manufacturers Need to Ditch Purchase Price Variance

Cloud computing is not only an exponential technology but also one that will act as a platform for information sharing and collaboration, allowing other exponential technologies to grow thanks to its connectivity.

Does Anyone Know What The Cloud is?

Understanding what this technology is might seem complex, but cloud computing is simply the union of billions of computers into a network that can be accessed remotely.

Cloud computing is a model for enabling ubiquitous, convenient, on-demand network access to a shared pool of configurable computing resources (e.g., networks, servers, storage, applications, and services) that can be rapidly provisioned and released with minimal management effort or service provider interaction.

In other words, cloud computing is allowing machines to be infinitely faster; store and share data; work remotely; be scalable and react smarter.

Simultaneous Use of Unlimited Resources

Cloud computing can also provide the ability to run a program on many connected computers at the same time. Have you ever used gmail or some other webmail program? You’re, essentially, using cloud computing when accessing your mail from Google’s, Yahoo’s or Microsoft’s servers via their webmail programs.

Adobe moved its entire creative suite of software products to its Creative Cloud delivery system in 2013 and gave up selling boxed software thanks to the new platform.

Ongoing computing progress has allowed cloud delivery to go from expensive to common and scaled and priced toward more users and, in some cases, free.

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We have a problem, by we I don’t mean we in the metals markets specifically, nor we in the US or UK, nor even we in the western world.

Why Manufacturers Need to Ditch Purchase Price Variance

I mean we all have a problem: too much debt.

The International Debt Pile

“Whoa!” you say. Hold on, wasn’t the last financial crisis all about too much debt? Haven’t we learned our lessons – corporations are awash with cash, dividends and share buy-backs are at record highs, austerity measures are curbing government spending around the world, household debt — after years of recession — are under control again, what are you talking about?

Quantitative Easing (QE), started in the US by the Federal Reserve, was taken up by the Bank of England, followed by the Bank of Japan, the latest is the European Central Bank at €60 billion-a-month and even the Bank of China is talking about some form of unconventional monetary support, which we can read as QE to support flagging growth.

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While India leads the world in Direct-Reduced Iron production, the domestic industry has been facing an uphill production battle for the last four years.

Why Manufacturers Need to Ditch Purchase Price Variance

India’s DRI sector is hoping for help from the government and clarity in the overall steel policy to see it through, what many have dubbed, its most critical phase ever.

Demand DRIs Up

What is worrisome is that the falling demand for steel, especially construction steel globally, could further, negatively impact the sector. Some are quick to note that India’s DRI units need not worry much on this front as the market in India has remained insulated from global trends owing to steadily increasing domestic steel consumption.

Two other risks facing the sector are imported scrap being used by steel companies in India, DRI is an excellent substitute for scrap in electric arc furnaces, and the reliance by medium-sized DRI producers on inferior technology. That means technological limitations stop the producers from exploiting inferior grades of iron ore and coal.

Further, the limited availability of coking coal only motivates steel production in the country through a combination of DRI and blast furnace. What has added to the misery is the recent round of coal auctions held by the federal government.

Unable to Bid in Coal Auction

DRI companies were unable to participate in the auction, and a hitherto discounted source of fuel was lost, pushing the cost of DRI production by an estimated 40%, some have said. The DRI segment has brought this to the government’s attention.

While many steel companies prefer to use DRI instead of scrap, the slowdown in the global steel industry has seen some amount of the steel melting scrap being imported into India because of lower import duties. What makes steel plants happy in such cases, besides the cheap duty, is the fact that the imported scrap percentage works out to be higher, which eventually negates the cost of imported scrap.

To many analysts, the DRI sector in India is poised on the cusp of a turnaround, but only if there is adequate government backing as well as support from domestic steel companies. Even then, it could easily take four years for the industry to come back to an even keel and ramp up production.

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Exponential technologies are those that follow Moore’s Law, e.g. technologies that double in performance relative to price every year or two.

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The early growth of these technologies is always imperceptible. When you double 0.001 to 0.002 to 0.004, on a graph all these dots look like zero, which is why no one notices these technologies in their early stages. However, when these technologies reach a certain level of growth, the start to explode.

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It’s first quarter earnings day here at MetalCrawler, with major producers mostly taking a hit due to foreign steel exports and low prices.

Nucor’s Big Hit

Nucor Corp., the No. 1 US steelmaker by market value, reported a 39% drop in quarterly profit, hurt by lower selling prices. Net income attributable to Nucor fell to $67.8 million, or 21 cents per share, in the first quarter ended April 4, from $111.0 million, or 35 cents per share, a year earlier.

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Net sales fell nearly 14% to $4.40 billion.

ATI, Too

Allegheny Technologies, Inc., issued its quarterly earnings data on Tuesday. The company reported $0.09 earnings per share for the quarter, missing the consensus estimate of $0.10 by $0.01, AnalystRatings.Net reported. The company had revenue of $1.13 billion for the quarter, compared to the consensus estimate of $1.07 billion. During the same quarter in the previous year, the company posted ($0.17) earnings per share. The company’s revenue for the quarter was up 14% on a year-over-year basis even though first quarter profit was down.

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