Ferrous Metals

The Raw Steels MMI held steady at 47 this month. Although international steel prices remained depressed in January, domestic prices drew a different picture.

US Mills Increase Prices

US steel mills began raising prices in December, leading to higher domestic prices in January. Domestic supply had declined significantly in 2015, with capacity utilization close to 60%.

Raw-Steels_Chart_February-2016_FNL

At the same time, with the uncertainty regarding anti-dumping actions, finished steel imports have slowed.

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Finally, steel companies’ shipments were impacted over the past few months as service centers focused on destocking and now that inventory has finally come down, service centers will finally need to start restocking activity. This combination of factors left US mills in a sweet spot in 2016 to increase prices.

Sustainable Increase?

Domestic prices might continue to rise in the coming weeks. After the huge price slump in 2016, domestic prices deserve a bounce in Q1. However, mills won’t likely succeed in raising prices for too long.

The world remains oversupplied and demand is weak. Due to the political backlash from job losses spurred by mill closures, China wants to keep its mills running. With the ongoing Chinese yuan devaluation, Beijing has made its intention clear. China wants its exports even more competitive in global markets, especially in the steel industry as China continues to seek a home for its excess steel.

Compare With The January 2016 MMI Report

If domestic prices stayed higher, that would attract more imports, resulting in more material coming into the US and depressing prices as a result. In addition, it’s hard to imagine steel prices bucking the falling trend across the industrial metal sector. It will be hard for US mills to convince buyers to pay higher prices while commodities nearly universally fall.

Falling Raw Material Costs

Another important factor that will keep a lid on steel prices is the slump in input costs. In January, oil prices fell below $30/barrel. Falling energy prices will cause companies in the energy sector to reserve capital to keep on their balance sheets, rather than spending money on new exploration. This will continue to hurt steel demand from the energy sector. At the same time, while raw material prices keep falling, it will be difficult for US steel mills to justify their price increases for long.

Actual Raw Steel Prices

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By next week, Iran is likely to declare its “Implementation Day.”

With so much else grabbing the headlines, it could pass largely unnoticed but that would be a mistake. The day is meant to signify when Iran is deemed to have complied with all its obligations in dismantling those parts of its nuclear program intended to produce a nuclear bomb. As The Economist explains, all nuclear-related sanctions, including the freezing of $100 billion of Iranian assets, will be lifted, assuming full ratification by the Iranian parliament of safeguard agreements given to the International Atomic Energy Agency.

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One obvious benefit will be the release of Iranian oil exports, expected to gradually ramp up from current levels of about 1.1 million barrels per day by an additional 500,000 bpd within months. But the wider economy, particularly the metals and mining sector could be a major beneficiary in the medium term.

Economic Potential

As the Economist reminds us, the prospects in a post-deal Iran are vast. It is the world’s 18th-largest economy. The population of 80 million is well-educated. The country’s oil and gas reserves are huge. The Tehran stock exchange is the second-biggest in the Middle East — with a capitalization of about $150 billion — but at the end of 2014 foreigners owned only 0.1% of listed companies’ shares, compared with 50% on Turkey’s main exchange in Istanbul.

red-hot molten steel in a iron and steel enterprise production scene

Iran could be a major steel exporter once sanctions are removed. Source: Adobe Stock/Inzyx.

In the metals sector, the state owns 90% of all mines and related large industries but the country desperately needs foreign investment and know how. Iran is already a relatively large producer of iron ore, but a combination of rising domestic demand and low global iron ore prices have severely curtailed exports.

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Both the USA and India’s steel mills are running at less than capacity thanks to the worldwide steel surplus. US steel mills continue to be buffeted by cheap, mostly Chinese imports and lukewarm demand and no one is willing to bet on when, or if, they will ever come back to full production.

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On the other hand, the future of India’s steel industry is tied to the percentage of expenditures on infrastructure that the government is expected to provide. The difference between the two is that India’s economy is merely in revival mode, while the US economy is growing at a rapid pace.

Rating Agencies Weigh In

A recently released report by Fitch Ratings titled, “2016 Outlook: Indian Steel Sector,” says that increased spending on infrastructure projects, such as housing and smart cities is the key to the revival of India’s steel industry.

Welded carbon steel pipe

Indian and US steelmakers both face a glut of imports and low prices in their struggles to get back into the black. Adobe Stock/Sasint

Indian steelmakers, however, have to face the onslaught of cheap imports just as their counterparts in the US do, especially imports from China. The difference is, the imports work, to an extent, in Indian producers’ favor, as opposed to how badly they harm US steelmakers.

In India, abundant steel only increases domestic demand in India as low prices and more supply are likely to spur government action as costly infrastructure investments are more likely to be seen as relative bargains.

“Spending by the Indian government on infrastructure will be the catalyst for any meaningful improvement in domestic steel demand. The agency expects India’s steel consumption to improve modestly by 7-8% in 2016,” according to the Fitch report.

No doubt, high imports and soft steel prices globally in 2016 might bring up sales in India, but that will still eventually result in far lower prices, meaning less profit for Indian steel producers despite more sales. Steel companies’ margins are likely to be lower in 2016 but could improve, incrementally, in 2017, supported by “(an) improving domestic demand and the imposition of safeguard duty on imports on certain steel products for 200 days,” according to the Fitch report.

The Effect of Tariffs and Duties

As with steelmakers worldwide, the prices of Indian steel dropped almost a quarter year-on-year as of the end of September. The imposition of a 20% duty on certain steel product imports, effective September 14, has saved the day for some Indian steel companies.

In a similar vein, another global ratings agency, Moody’s Investors Service, cautioned that failure to implement reforms in India could hamper investment amid weak global growth.

According to Vikas Halan, a Moody’s vice president and senior credit officer, a healthy 7.5% GDP growth for India for the fiscal year that will end in March 2017 (FY2017) and a pick-up in manufacturing activity will broadly support business growth.

The ratings agency expects upstream oil and gas companies to benefit from lower fuel subsidy burdens, although low crude and domestic natural gas prices will continue to hurt profitability.

Another Negative Outlook

The agency’s negative outlook for the steel industry reflects elevated leverage and an extended period of low prices due to continuing low steel import prices, while the negative outlook for metals and mining companies reflected bleak global commodity prices.

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While India’s steelmakers are banking on growth to see them through these difficult times, one of the biggest challenges that the US industry faces is the growth of steel imports. Its best bet is to reduce  imports and pray that the domestic market will swing back to buying for US mills.

Earlier this year, steel companies including AK Steel, Nucor and U.S. Steel filed trade cases to stem the flow of steel products entering the US. The only silver lining was that steel imports into the US have started to come down on a year-over-year basis for the last five months.

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

 

The biggest monthly gain in petroleum prices in more than 3 years caused construction materials prices to increase 0.4% in February, ending a six-month streak of falling prices, according to the March 13 producer price index release by the Bureau of Labor Statistics analyzed by the Associated Builders and Contractors of America.

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Year-over-year construction input prices fell 3.9%. Nonresidential construction input prices also rose 0.4% on a monthly basis and were down 4.9% on a yearly basis.

PPI_Feb2015

Graph courtesy of Associated Builders & Contractors based on BLS data.

“While conventional wisdom suggests that oil and natural gas prices will eventually rise, the adjustment period could be a lengthy one, and although crude petroleum prices were up 12.3% on a monthly basis, this is likely a function of an abnormally cold February,” said Associated Builders and Contractors Chief Economist Anirban Basu. “This rise is the first monthly gain since April 2014 and the eighth consecutive month in which petroleum prices were down on a year-over-year basis.”

Materials Prices That Increased in February:

  • Non-ferrous wire and cable prices grew 0.8% on a monthly basis but fell 4.4% compared to last year.
  • Crude petroleum prices gained 12.3% in February but are down 53.4% from the same time last year.
  • Crude energy materials prices expanded 0.9% in February but are 45 percent lower year-over-year.
  • Concrete products prices expanded 0.2% in February and are up 4.3% on a yearly basis.

Materials Prices That Decreased in February:

  • Prices for plumbing fixtures fell 0.1% percent in February but are up 3% against last year.
  • Fabricated structural metal product prices remained flat for the month and have expanded 1% on a year-over-year basis.
  • Prices for prepared asphalt, tar roofing and siding fell 1.4% for the month but are up 1.7% on a year-ago basis.
  • Iron and steel prices fell 5.4% in February and are down 10.6% from the same time last year.
  • Steel mill products prices fell 1.8% for the month and are 3.6% lower than one year ago.
  • Natural gas prices fell 11.2% in February and are down 51.8% from one year ago.

Last week, my colleague Stuart wrote a piece on the relationship between iron ore prices and Chinese steel production. In his piece he said, “The FT suggests the iron ore market is supported by the marginal cost of production in China (said to be around $130 per metric ton) but that doesn’t explain the strength of prices or the stockpiling. For that we have to look at steel production, particularly in China, which has been running at record levels, rising 2.5 percent in May to 61.2 million tons.”  Stuart probably didn’t catch a research brief published by intelligence experts Stratfor dated June 20 suggesting, “Since 2011, Beijing’s enforced slowdown in real estate and infrastructure investment — combined with dwindling external demand — has aggravated the severe imbalance between steel supply and slowing domestic demand, “ and more to the point, the imbalance has come by way of local governments’ need and desire to grow steel production to provide employment.

And steel prices will….

As Stuart concludes, “that Chinese steel production, and by extension iron ore consumption, must slow in the second half with a corresponding fall in prices; the longer the current situation prevails, the greater the likely reaction will be and steeper the price falls,” but in the meantime, domestic steel buyers shouldn’t look at the recent scrap price fall (now prices have moved slightly up) as a sign that prices will necessarily drop within the US market.

According to Peter Wright of Gerdau Market Update in an interview with MetalMiner, “the recent scrap price drop is really an ‘in-line’ kind of drop because scrap prices had been building up for quite awhile and the market adjusted,” he said. But the driver of scrap pricing could change in the next four to six weeks according to Wright because, “domestic demand will be down in June and July which could cause another drop. There has been some talk already of a July scrap price drop.”

And though many of the underlying drivers at least of the steel long products market remain quite positive (Wright points to a surprising uptick in durable goods orders from April to May up 1.1%, 13 quarters of growing corporate profits and 4 out of 5 steel long products indicators moving from red to green last week) several gray clouds still appear. These include a stronger dollar that would make US exports less attractive as a result of the Euro crisis, which Wright suggested, “could get very ugly,” particularly the combination of a strong dollar and feeble European economic growth.

US steel prices peaked for HRC and CRC the week of February 6, 2012 after climbing from a low point in the week of November 18, 2011. Prices have only dropped below the November 18 peak last week. We suspect steel prices will begin to stabilize.

The MetalMiner Monthly MMI® which includes several steel indexes, including the Raw Steels MMI®, Automotive MMI®, Construction MMI® among others will first appear on MetalMiner IndX, Monday July 2. Additional releases will appear on July 3, July 5 and July 6.

The week’s biggest mover on the weekly Automotive MMI® was US palladium bar, which saw a 6.9 percent decline to $571.00 per ounce. For the third week in a row, the price of US platinum bar dropped, falling 4.1 percent to $1,392 per ounce.

The price of US HDG fell 2.2 percent over the past week as well. This was the third week in a row of declining prices despite a still-growing aluminum sector when compared to last year.

The copper 3-month price fell 2.9 percent on the LME to $7,335 per metric ton after rising 1.9 percent the week before. Following a 2.3 percent increase in the week prior, the primary copper cash price fell 2.8 percent on the LME last week to $7,353 per metric ton. The Chinese lead price closed down last week with a 2.5 percent drop. Korean 5052 coil premium over 1050 sheet remained essentially flat from the previous week.

Note: The MetalMiner monthly MMI series will be first released on July 2, via MetalMiner IndX and subsequently over the course of the week of July 2.

The Automotive MMI® collects and weights 7 metal price points used in automotive production to provide a unique view into automotive metal trends. For more information on the Automotive MMI®, how it’s calculated or how your company can use the index, please drop us a note at: info (at) agmetalminer (dot) com.

India’s steel sector seems set to see some good times ahead though the news may not be so cheerful for steel consumers.

A slew of upcoming investments in India, many of which will require large quantities of steel, is one of the main reasons for the country’s steel industry positive outlook in the latter half of this fiscal year. About 74 investments worth a total Rs 508 billion (approx US $ 8.84 billion) have been identified, many of which will require a steady supply of steel. The largest in the 74 investments is incidentally a Rs 300 billion (approx US $5.30 billion) steel manufacturing plant in the Indian State of Karnataka by Tata Steel, clearly underlining the bullish behavior in this sector. The plant will eventually produce up to 6 million tons of steel.

The demand for steel in the next half of this fiscal year is expected to be led by automobile companies. Two-wheeler company, Hero Motocorp plans to invest Rs.5 billion in its existing plants in Dharuhera, Gurgaon in Haryana and Hardwar in Uttarakhand for renovation and modernization. All of which means a boost to the steel sector despite possibilities of a slowdown in the international markets.

A report by one of India’s leading private economy thinks tanks, the Centre for Monitoring Indian Economy (CMIE), released over the weekend said steel production in India was likely to grow by about 10.4 per cent this fiscal year due to growth in demand.

In terms of supply, Indian steel producers continue to rely to a large extent on imported steel. According to a study by the Joint Plant Committee, a body empowered by the Steel Ministry of the Govt. of India to collect data from the iron and steel sectors, India’s steel imports had jumped by 69% to 1.528 million tons in the first two months of this year due to the firm demand from the automobile, consumer durables and manufacturing sectors. India’s steel imports during the April-May period of the last fiscal year were at 0.907 million tons.

Over the weekend, Indian newspapers also carried reports quoting excerpts from this report. One of them said despite the slowdown in domestic conditions in some of the end-use markets, demand remained firm from sectors like motor vehicles, transport equipment, basic goods, consumer durables and manufacturing.

Of the total imports during April-May this year, flats made up 1.329 million tons with non-flat products making up the balance.  Consumer durables uses the former while the construction industry larges uses non-flat varieties.

Experts though warned that the weak rupee in the international currency markets as well as the fluctuating US dollar/rupee exchange rate, largely in favor of the dollar could underlie the high imports.

End-consumers may see some bad news. Prices may not remain flat due to healthy demand. A rise in raw materials costs coupled with a hike in excise duties could eventually see steel prices increase by about 5.7% this fiscal as compared to the previous one, if one believes the CMIE report.

In its monthly report, the agency said it expected steel companies to undertake a further round of price hikes in the coming months of 2012-13. Not long ago, in fact just this past April many of India’s steel companies increased prices in the range of US $125 – $250 per ton, following a provisional change in prices indicated by state-run iron ore producer, NMDC, and the freight hike by Indian Railways.

Nickel 3-month prices saw the biggest upwards shift for the day, rising three percent on the LME to close at $18,065 per metric ton on April 27, 2012. Also on the LME, the price of primary nickel rose 2.7 percent to $17,965 per metric ton.

Chinese stainless steel prices were mixed for the day. The price of Chinese 316 stainless coil remained steady, holding above $5,000 per metric ton. The price of Chinese 304 stainless coil continues hovering under $3,000 per metric ton for the fifth day in a row. The price of Chinese 316 stainless steel scrap remained essentially flat, also under $3,000 per metric ton. For the fifth consecutive day, the price of Chinese 304 stainless steel scrap held flat at above $2,900 per metric ton.

For the fifth day in a row, the prices of Chinese ferro-chrome and ferro-moly saw no notable movement. The price of Chinese primary nickel gained 1.1 percent to finish at CNY 133,000 ($21,147) per metric ton.

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I recently came across a newsletter article with great relevance to MetalMiner readers — How to Fix Index Based Pricing — that offered up three suggestions for individuals seeking to develop a price indexing schema for purchases.

The author states a hypothesis often not articulated by the purchasing organization – having a “fixed, predictable price is just as important, or even more important than having the lowest possible price.” We’d concur with this hypothesis, based on our own experience with the statement that buying organizations have tended to ask suppliers to hold firm, for longer periods of time, the quoted price paying less attention to whether the price has reached rock bottom or not.

The author of the linked piece above goes into the case for longer fixed prices that we won’t dive into here. He also suggests three factors to consider when using indexes – choosing the right index, adding a cap (or collar, as we would say) and picking the right timing for price adjustments (the author suggests the longer the better).

Here we might consider an alternative point of view. Certainly if holding prices fixed remains paramount to all other considerations, then in our world of metals, quarterly price adjustments might indeed make perfect sense. However, we’d add a caveat to that based on market conditions.

Pricing Dynamics

We’d suggest that the index strategy should also take into consideration the pricing dynamics of the underlying commodity. For example, the index strategy, so to speak, may change based on whether the underlying commodity’s price has upward price momentum, downward price momentum or basically holds steady.

In a rising cost market, using an index as the author suggests makes perfect sense – “tak[ing] as much off the table as possible” can help the buying organization hold prices firm for longer. But if the underlying commodity faces downward price momentum, a longer fixed contract makes less sense even if one desires price stability.

Instead, buyers may wish to hold off on buying decisions until the last minute, taking advantage of lower prices as they drop, minimizing the risk of purchasing inventory at a higher cost. In flat markets, buying organizations can follow the practices of a rising market – taking as much off the table as possible and holding prices firm, actually modeling market conditions.

In a follow-up piece, we’ll explore how the new CME aluminum swaps contract will allow buying organizations to do just this – hold prices fixed firm for longer time periods.

 

We at MetalMiner are always on the lookout for sourcing efficiencies in the industrial metals supply chain — and those who make said efficiencies their business. That’s one of the main reasons we chose the sponsors that we did for our recent MetalMiner and Spend Matters conference, Commodity EDGE; they are all at the top of their game in their respective industries.

One of those sponsors, Triple Point Technology (TPT), operates in the commodity-supply-chain and risk management world. In a recent case study outlined in a Spend Matters Perspectives research paper, after hiring TPT, a global consumer packaged goods (CPG) company reaped numerous benefits, including “the ability to better manage overall margins due to complete pricing visibility across the marketing and sales functions.”

This clearly has implications in the metals sourcing world, and from a raw materials standpoint, Triple Point has made inroads into the coal and minerals supply chain specifically by acquiring QMASTOR, whose “Pit to Port is the most complete end-to-end mining software solution.”

How Exactly Does Pit To Port Work?

Basically, QMASTOR’s Pit to Port software is used to “plan, record, track, optimize, account, reconcile and report the tonnage, quality and value of bulk materials from mine to point of export or consumption,” according to TPT’s site.

Any management team, it goes without saying, needs the wherewithal to keep track of the millions of tons of coal and other raw materials and minerals — otherwise, inefficiencies would erode margins very quickly. In fact, according to QMASTOR, they are contracted out to manage 1 billion tons of “bulk commodity movements” per year in coal, iron ore, copper, nickel, bauxite, lead, molybdenum, silver, and gold.

“The system synchronizes operations, logistics, marketing and commercial functions,” which streamlines the view of the entire supply chain. QMASTOR’s software plays in some pretty big mining companies’ systems — BHP Billiton, Rio Tinto, Vale, Anglo American, and Xstrata, to name just a few.

Of course, if your manufacturing or distribution company is not a huge behemoth like the Rios and BHPs of the world, you may not be tracking billions of tons of materials. However, for midsize and larger manufacturers, understanding the basis of commodity management tools such as these can help retain — and even increase — profits.

Check back in for a follow-up on this post, in which MetalMiner plans to share insights from TPT/QMASTOR (and another recent acquisition, Algosys) on what lessons manufacturers can learn from the operation of these systems.

Image source: Triple Point Technology