European Union

The initial thaw in the European market has Indian steel companies smiling. In fact, the country’s largest private steel company Tata Steel Ltd.  recently posted better than expected first quarter results, attributed to a “phase of solid economic growth in Europe supporting the recovery in steel demand in its main market.”

FREE Download: The Monthly MMI® Report – covering Steel/Iron Ore markets.

The world’s biggest steelmaker ArcelorMittal had posted Q1 results last week and said that prospects for Europe and North America were encouraging.

For Tata, the strong showing in Europe comes as a relief. Staring in the face of a global downturn for years, the company had somehow managed to remain in the black in the last four quarters with intensified measures such as cost cutting and pushing high-end product.

Incidentally, Tata Steel’s European sojourn started in 2007-08 through its $13 billion acquisition of Britain’s Corus in 2007. Today, more than half of its earnings comes from outside India. Reuters reported the steel major as declaring a net income of approximately  $173 million (Rs 10.36 billion) for the quarter, helped by higher sales volumes and better business in Europe and India.

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All in all, Europe is too deeply engaged economically in Russia, and Russia in Europe, for either side to let this get out of hand. (We delved into the numbers of the economic relationship between Russia and the EU in Part One here.) Sanctions against individuals are one thing, and for sure, vested interests in…

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Anyone trading extensively (or even in a limited fashion but for key components) with Russia is no doubt anxiously watching developments in Ukraine and the almost-daily ramping up of tensions on both sides, with threats of sanctions countering military posturing.

Reuters reports that both the ruble and Russian stocks are down sharply on Thursday and Friday of the week before last, respectively. This was largely as a result of comments by US President Barack Obama that Washington was considering sanctions against key economic sectors in Russia, including financial services, oil and gas, metals and mining and the defense industry, if Russia made military moves into eastern and southern Ukraine.

FREE Download: The Monthly MMI® Report – price trends for 10 metal markets.

Trade in goods between the two countries was worth $38.12 billion in 2013 and US firms have $14 billion in direct investment in the country. Firms from Boeing down to mom and pops regularly import metals and metal products from what is one of the world’s largest commodity exporters.

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Last week, the European Union proposed conflict minerals legislation wildly different than what US manufacturers must currently comply with, calling for voluntary participation from importers only.

And yet the proposed EU legislation sees the pinch-point where it exists – at the smelter level.

“Focusing efforts at the root of the issue – material going into smelters and refiners – is a more efficient approach than the SEC’s ‘push from the top’ mandate,” said Lawrence Heim, Director of the Elm Consulting Group International, LLC and frequent contributor to MetalMiner.

The proposed European legislation incorporates the widely publicized and often discussed OECD conflict minerals framework. In some respects, the proposed legislation goes further than the SEC rules as the European legislation “applies to minerals sourced from conflict-affected and high-risk areas worldwide.”

In other words, the European legislation would go beyond the geographic boundaries of the SEC requirements or just the DRC region, according to Michael Littenberg of Schulte Roth and Zabel, who was also a recent speaker at MetalMiner’s Conflict Minerals EDGE conference held back in May 2013.

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Don’t faint, but the European steel sector is finally on the up.

Now let’s not go crazy – we don’t mean “on the up” in a Chinese or even a US sense. We are not talking +10% growth or even +4% growth, as in the US, but more like +2%. Even still, it’s a welcome reversal after years of decline.

According to the NY Times, European businesses have been buying about 30% less steel than during the peak in 2007, and steel industry employment has shrunk by about 16% since the downturn began, to around 350,000 jobs.

Wolfgang Eder of Voestalpine, Europe’s third-largest steelmaker, recently estimated that while the European steel industry had permanently shuttered 10 million metric tons of crude steel capacity since the financial crisis, it still needed to remove an additional 25 million tons of capacity to prevent downward price pressure.

FREE Download: The Monthly MMI® Report – covering Steel/Iron Ore markets.

The fact remains that while the automotive sector is beginning to do relatively well and some growth is coming back into consumer goods, major consuming sectors like construction are still deeply depressed. Construction accounts for about 35% of European steel consumption, more pre-2008, and yet infrastructure spend is unlikely to be a priority in deficit reduction-focused Europe anytime soon.

Still, ArcelorMittal, Europe’s largest steelmaker with about 25% of the market, is hiring staff and, following rationalization, running some facilities at capacity. The main European business lost $933 million on revenues of $27 billion last year. The company’s comparable business in the Americas made a profit of $852 million by comparison.

But the firm is also investing again – primarily to improve efficiency rather than expand output – but the commitment is a good sign that producers are seeing a more positive year ahead.

Contraction has stopped in southern European states and has slowed in France, with economies continuing to expand in northern Europe; taken as a whole, with the signs of an upturn in Spain, modest growth this year is not expected to falter as previous green shoots have done. Most folks, though, are looking to 2015 before there is a significant recovery.

For now, though, steelmakers will readily settle for 2% growth, even if they are struggling to get any improvement in prices.

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A recent article in the Economist explores the issue of commodity price benchmarks, those oft-quoted numbers that we take as gospel and, indeed, trillions of dollars of derivatives and contracts are priced against every year.

Numbers such as Dated Brent and Light Louisiana Sweet in the oil industry are matched by dozens of others in the metals markets. The Economist explains that rather than hard numbers, these are often the best estimation of price-reporting agencies (PRAs), businesses that make money by gathering market information and selling it to subscribers.

These are often not the standardized commodity contracts that trade transparently on busy exchanges such as Comex or the LME, exchanges that do not always cater to the many different specifications required by industry, the magazine explains. So PRAs, of which Platts is the largest, essentially estimate what the market price is based on information fed to them by buyers, sellers and brokers in the market.

FREE Download: The Monthly MMI® Report – price trends for 10 metal markets.

For most people, most of the time, this seems to work well enough, but the point of the article is that the European Union fears such unregulated benchmarking is open to abuse and needs more oversight.

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Photo credit: Emily Berezowsky

The crisis in Ukraine’s capital, Kyiv, stemming from President Viktor Yanukovych’s refusal to continue talks with the European Union on a trade deal late last year, and escalating due to his administration’s draconian measures against protesters in last few weeks, has unquestionably rippled through commodities markets.

A Little Background

Upon the USSR’s dissolution in 1991, Ukraine’s political leadership took a page out of the ol’ Soviet playbook and has never looked back – the country is notorious for its ludicrous levels of corruption, cronyism and oligarchical influence. As the ancestral homeland of both my and my editor’s families, Ukraine (especially the country’s leadership) has done its best to avoid efficiency, effectiveness and transparency.

The domestic Ukrainian economy has never been able to get on its own two feet, and instead of making strides to join the EU, its political leadership has continually brought it closer to Putin’s Russia.

Now, with opposition factions ousting President Yanukovych, the challenge is to get the country back on the bus. But what have the protests, ensuing bloodshed and coup d’etat (in Yanukovich’s words) done to the markets?

FREE Download: The Monthly MMI® Report – price trends for 10 metal markets.

Steel Exports Hit

Ukraine is roughly the seventh-largest steel producer in the world, and its recent production and exports numbers have been dramatically affected since the protests began on Nov. 29, 2013.

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Europe’s carmakers are, on the whole, having a torrid time.

Car sales in the EU stood at 13.1 million in 2012, down from 16 million in 2008, and are on track to fall by around 7% this year, says the FT, to just over 12 million vehicles. EU factories have the installed capacity to build a little over 19.1 million cars per year.

The financial impact, says the paper, is that six out of 10 car factories are losing money as sales levels continue to slide and manufacturers sit on about 7 million cars per year of unused capacity.

Read why MetalMiner’s Automotive MMI® is a leading indicator for auto markets.

Naturally, there are winners and losers.

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This is Part One of a Two Part Series.

Platts’ Steel Business Briefing reported the essentials of the European Commission’s recent “action plan” designed to address the challenges facing the European steel industry. Steel demand in Europe today remains 30% below pre-crisis levels. At the same time, the European steel industry continues to face the repercussions of low demand and overcapacity.

Employment in the sector also fell by 10% from 2007 to 2011. Nevertheless, the EU taken as a whole remains the second largest producer of steel in the world, with an output of more than 177 million metric tons of steel a year. This accounts for 11% of global output while the industry employs more than 360,000 people, according to a 4-traders article. Global steel demand is expected to increase to 2.3bn tons by 2025, and the European Commission wants to help the European steel industry maintain its share of that global growth target.

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A debate is going on among Europe’s steel producers about how best to save the industry.

All of them agree that with demand down some 30 percent below pre-crisis levels and no sign of an imminent recovery, excess capacity needs to be closed. Yet politicians and labor unions are fighting closures at every turn while the more socialist-minded are calling for public funds to be made available to soften the impact of plant cutbacks or closures, particularly to meet social costs.

Some steel producers like ArcelorMittal are calling for outright protectionist measures to block cheap imports to the region from countries like China, while others such as Tata Steel, the second-largest producer in Europe, support regional aid to meet closure costs.

But here the industry is divided.

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