Given today’s metals markets, we thought we’d “make it real” by providing some examples and specific strategies and tactics buying organizations may wish to consider in this quickly evolving commodities market.
Source: Hackett Group Key Issues Study: 2016.
By way of background, we refer to the Krajlic Matrix which plots categories against supply impact and supply complexity. So let’s take a look at a couple of metals — specifically stainless steel and steel. Read more
Nickel’s price fall last year caused some miners to curb production. Some of these production cuts went into effect in 2015, helping prices to find a floor this year. However, the cuts haven’t been enough for the markets to really make a bull run. Global nickel supply is still running strong as the supply side has proved quite inelastic to low prices with most producers hanging on while they hope Chinese pig-iron producers will close down first.
Recently, Russia’s Norilsk Nickel, the world’s largest nickel miner, said that in order for a sustained recovery to happen, more cuts will have to materialize. According to the company, over 20% of the global nickel supply needs to be cut if we want to see a sustained recovery in prices. However, we have yet to see anything close to that since, so far this year, there haven’t been any supply cut announcements. The latest significant production cut was announced late in 2015. Read more
I began my career at Mexico’s only stainless steel mill, Mexinox (now part of the Finnish company Outokumpu), which supplied tequila distilleries with the stainless steel used for fermentation and storage tanks. Tequila is a quintessential Mexican drink and was enjoyed by many a customer visiting the Mexinox plant (off-site, of course).
Source: Katie Benchina Olsen/MetalMiner.
After a tour of the plant, it was only appropriate that we gave our customers commemorative bottles of Mexinox-branded El Gran Viejo Tequila to bring back home to the States. I thought it would be interesting to examine just how stainless is used in tequila production.
Why is stainless steel in tequila production? Of course, stainless vats are a sanitary choice; however, stainless does not impart any additional flavors into the mixture of blue agave juice and the distinctive water called the mosto.
Tequila is distilled twice in accordance with Mexican law. Because no leeching occurs in either the fermentation or distillation process when stainless is used, the resulting tequila “blanco” is clear in color and solely the result of the fermentation of the agave juice and spring water.
The addition of proprietary yeast — and classical music in some cases, finishes out the blend.
A former colleague of mine shared that Cazadores plays classical music in the fermentation room because the sound waves create a soft stirring in the tanks that aides in the fermentation process. Many people describe the resulting tequila after two distillation processes as being light with citrus or aloe vera notes. Blanco tequila is aged less than two months in stainless barrels and then bottled. The darker colored tequilas are those that have been aged in oak barrels which means the tequila takes on the flavors of the wood and the harshness of the alcohol mellows.
Anejo or Reposado?
Reposado is aged two months to under a year, and anejo is aged from one to three years. Once the aging is complete, the tequila can then be stored in stainless tanks again until it is bottled.
Stainless steel is a neutral container that allows the natural elements of the blue agave to be fully experienced. The soil and climate have an impact on the taste of the blue agave hearts.
Tequila from the lowland blue agaves is described to have an earthy flavor whereas the highland blue agaves yield sweeter and fruitier flavors. The other factor in the taste of the finished product is the water which is combined with the blue agave juice.
Just as bourbon has a unique taste because of the limestone in the Kentucky water, tequila has a special taste because the regional water is high in mineral content. Stainless steel allows all of these factors of Mother Nature to mix together to create a unique tequila without adding any of its own character. By the way, Mother Nature had a way of bringing tequila to us, supposedly, by a farmer’s wife seeing a rabbit gnawing on a fermented agave plant, according to the Suerte website. I suppose it was luck “suerte” that brought tequila to civilization.
Allegheny Technologies, Inc., reported in its first quarter earnings call this week that its high-performance materials and components segment sales were up. Sales were $493 million in the first quarter, up approximately 8% compared to the fourth quarter of 2015. 73% of segment sales were to the aerospace and defense market.
Operating profit increased by nearly 40%, compared to the fourth-quarter 2015. Segment operating profit was 5.9% of sales.
New Generation of Jet Engine Parts
ATI’s product mix improved through increased sales of next-generation jet engine advanced materials. Sales of nickel-based alloys and specialty alloys increased by 8%, and sales of titanium and titanium alloys increased by 17%. Sales of ATI’s precision forgings increased 15%, driven nearly exclusively by growing demand for jet engine components and airframe forgings.
ATI is very pleased with its sales of airframe and jet engine materials.
“Our differentiated products here include proprietary and unique alloys, as well as products that few others can make,” ATI CEO and President Richard Harshman said, “such as ATI 718+ alloy, Rene 65 alloy, ATI 720 alloy large billets, plasma arc-melted titanium alloys, powder metals, titanium aluminides, as well as hot-die forgings, isothermal forgings and titanium investment castings.”
ATI is currently the only qualified plasma arc melt producer of titanium alloys used for jet engine rotating parts.
PAM is the preferred process for titanium alloys used in jet engine rotating parts for much of the industry.
“ATI has the most powerful open-die press forge in the industry, which enables fine-grained structure in complex nickel-based super alloy billet and the billetizing of powder alloys,” Harshman said. “ATI is one of only two independent and integrated qualified producers of nickel super-alloy powders and isothermal forged parts.”
Our Stainless MMI didn’t move for the third-consecutive month. Despite a momentary recovery in commodity markets (thanks in part to the recent rally in oil prices), nickel prices were unable to move up.
Although some industrial metals, such as steel and tin, moved up in Q1, important metals such as aluminum, copper and nickel are all lagging badly in this base metals rally. That gives the rally less credibility and makes us think that markets could pullback as soon as momentum vanishes.
The biggest headline in the U.S. involves Chinese stainless, cold-rolled-anti-dumping and countervailing duty investigations. The U.S. International Trade Commission made a unanimous preliminary determination on March 25 that unfairly-traded imports of stainless steel sheet and strip are causing injury to U.S. stainless producers. The petitioners were AK Steel, ATI’s Flat Rolled Products Division, North American Stainless and Outokumpu Coil Americas.
With the threat of anti-dumping petitions looming, Chinese mills have been canceling open orders with U.S. customers, pushing domestic lead times for cold-rolled stainless steel beyond 8-12 weeks. For Q2, steel mills are in “controlled order entry” mode, trying to ensure volume for their key customers. With higher lead times and while China is under investigation, domestic mills are seeing the opportunity to increase stainless base prices. That could help support prices short-term, particularly if strength in the metal complex continues, which remains questionable.
Longer-term, U.S mills need to be mindful of any price increases as long as international prices remain low. Global nickel supply is still running strong as the supply side has proved quite inelastic to low prices with most producers hanging on while they hope Chinese pig iron producers will close first. Moreover, demand is not improving and stocks remain at elevated levels, which could prevent any market deficit and translate into tangible tightness.
Stainless domestic mills have the natural advantage of short lead times due to proximity but when domestic lead times rise, metal buyers might prefer importing and if they do so successfully, domestic mills might have a hard time winning that business back.
Russia’s Norilsk Nickel’s Earnings Sink
Another headline in March was when Russia’s Norilsk Nickel, the world’s second-largest nickel producer, reported a 24% decline in 2015 core earnings (in spite of a weaker dollar offsetting losses) and forecasted global primary nickel consumption to remain flat this year.
The U.S. International Trade Commission made a unanimous preliminary determination on March 25 that unfairly-traded imports of stainless steel sheet and strip are causing injury to U.S. stainless producers. The petitioners were AK Steel, ATI’s Flat Rolled Products Division, North American Stainless and Outokumpu Coil Americas.
The ruling was no surprise as the cold-rolled stainless steel anti-dumping and countervailing duties petition is one of many petitions being filed against Chinese products in recent months. What is surprising is that cut sheet has been included in the petition. The last cold-rolled stainless anti-dumping action filed in 1998 included only products in coil form.
The petitioners need to supply at least 25% of the U.S. market to claim injury. Only NAS and Outokumpu have cut-to-length lines, so it is impossible for the mills to have significant market share in cut sheets. Service centers process the lion’s share of cut sheets for the U.S. market. Unless the service centers are willing to be a party to the petition, I think cut sheets should be removed from it.
Non-coil stainless is included in a new anti-dumping petition. Source Adobe Stock/Jovanning.
Since the cold-rolled stainless petition was filed earlier this year, Chinese mills have been canceling open orders with U.S. customers. No new offers are being made to the U.S. market. Domestic lead times for cold-rolled stainless steel are now well beyond eight weeks, with some products at over 12 weeks. Steel mills are in “controlled order entry” mode for Q2 in order to ensure volume for their key customers. Read more
The new policy took effect for shipments beginning March 15th.
Will Outokumpo Coil Americas’ new freight policy help it sell more stainless steel? Source: Adobe Stock/Oleksiy Mark.
In the world of flat-rolled stainless, most prices are quoted with equalized freight rates broken out as a separate line item. Outokumpu’s announcement is important because the point of equalization has changed for several of its niche products.This change is necessary in a market in which base prices have declined to unsustainably low levels. The realignment of the freight rates was long overdue, but how will this announcement impact the metal buyer? Read more
Using Chicago as an example, the change in freight equalization rates means that service centers and large end users will be paying for the freight for 72-inch wide on Outokumpu Coil Americas‘ Calvert, Ala., mill’s almost 900 miles compared to around 300 miles from Ghent, Ky., where North American Stainless is located. For the metal buyer, the only other options for 72-inch-wide continuous mill plate and cold-rolled stainless are TISCO, Aperam and Outokumpu’s European facilities.
TISCO will not be a factor in cold-rolled 72-inch-wide due to the anti-dumping and countervailing duty actions that the U.S. mills filed earlier this year. Unless you buy for facilities on the East Coast near a port, this new freight policy should remain intact. On another note, Outokumpu should consider its premium on 72-inch-wide. I wrote in a previous posting that the U.S. domestic market for 72-inch-wide wide could grow if the premium over 60-inch-wide was dropped. Perhaps Outokumpu should consider optimizing its 72-inch cold-rolling mill by increasing the production of 72-inch-wide.
Bright-annealed, 48-inch-wide products now are equalized based on an 1,800 mile trip from San Luis Potosi as opposed to the 400 miles of Allegheny Technologies’ Louisville, Ohio, facility where ATI produces its bright-annealed. Read more
Few metals have confounded investors and market analysts more than nickel. Indonesia’s ban and a perceived high cost base to China’s nickel pig-iron market have, for some years, led many to believe a rise in prices was only just around the corner.
But Nickel prices have remained hugely depressed and stocks of refined metal have continued to rise. Nickel prices slumped to a 13-year low last month and still remain below levels last seen in 2008-09, according to the Wall Street Journal. In spite of prices being so low that virtually no producers are believed to be making money, capacity isn’t being closed fast enough to have any impact. At the heart of the problem is slowing demand in China as the below graph from the WSJ shows
According to the WSJ, stainless steel production in China is projected to show no growth until 2020, and, indeed, has been more or less flat, fluctuating either side of a line, for a number of years.
Part of the rationale for higher prices was lack of ore when Indonesia significantly reduced exports of unrefined metal, but China had been stockpiling ore for some time and when the crunch came simply switched to the Philippines for ore supply. Since then, refined imports have been substantial but Citi Corp. is quoted as saying “We believe a significant proportion of the 258,125 metric tons of refined nickel imported into China over the first 11 months of last year was used for collateral financing rather than real demand,” The Shanghai Futures Exchange’s rising stock levels support this, underlining the lack of end users, which an be easily read as stainless steel production demand.
China’s NPI producers have responded to both low nickel prices and soft demand from the domestic stainless steel market as imports of nickel ore contracted by 26.3% in 2015 and are down by around 9.6% year-over-year in 2016 so far. Read more
Our Stainless MMI remained steady at 51 points. However, we currently see some factors that could lift prices in the short term.
Stainless Anti-dumping Case
On March 4, the U.S. Commerce Department launched an anti-dumping and countervailing duty investigation into Chinese imports of stainless steel sheet and strip, for possible illegal subsidies and selling prices at below cost to illegally gain market share. A preliminary determination of injury to U.S producers is scheduled by March 28.
China’s Ministry of Commerce didn’t respond well to the this new case, arguing that simply restoring prices via protectionist means is not the solution. Chinese steel firms have already been impacted by trade cases. Recently the Commerce Department had imposed 266% preliminary duties on imports of cold-rolled steel from China, punishing Chinese steel makers for dumping or selling below cost. In December, China received a dumping margin of 266% on corrosion-resistant steel products.
These tariffs have helped U.S. imports come down this year. That led to lower inventory levels here and have given U.S. mills the ability to rise prices. Steel prices climbed over the past few weeks, and stainless prices could follow. With the threat of anti-dumping lawsuits looming, the volume of imported stainless sheet and strip had already been diminishing, which should be seen in the upcoming months. The lack of imports has already pushed out domestic lead times and could create a supply shortage once service center restocking starts. However, it’s still questionable whether prices will hold just on import tariffs alone. Low international prices will add downside pressure if stainless domestic prices rise, especially since China is the only named party.
Back in 2014 when the ban was implemented, nickel was trading above $15,000 per metric ton. However, Indonesian companies didn’t expected that nickel would be trading today at half that price.
Indonesia Might Ease Export Ban
Because of falling nickel prices, many of the smelters that miners intended to develop have not materialized. Now, the government is going to review its export ban policy as miners struggle and Indonesia´s smelting capacity will not be sufficient by next year amid miners’ unwillingness to develop those costly smelting operations.
The removal of the export ban would add more nickel supply to international markets, possibly driving prices down while demand is weak, especially in the energy sector.
What This Means For Metal Buyers
Stainless prices could experience a short-term bounce on new import tariffs and overall strength across the base metal complex. However, prices will likely struggle to rise longer term while demand remains weak and producers don’t cut production in a big way.
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