Despite falling raw material costs, figures posted by U.S. Steel underline the damage imports are having on the US steel industry.

Three Best Practices for Buying Commodities

The WSJ reported U.S. Steel posted a 34% decline in revenue and a $261 million loss in the latest quarter, up from a $18 million loss for the same time last year.

Falling Prices, Rising Surpluses

Steel prices have continued to fall, just as my colleague Lisa Reisman has been predicting for the last year. As demand has suffered, cutbacks in the energy sector, particularly for drill pipe, and imports have risen with a stronger dollar and growing surplus in the global steel market. Capacity utilization in the US market is down to 72.5% according to the American Iron and Steel Institute, a sharp fall from the same period last year, with even that number looking optimistic compared to reports in Bloomberg which suggest it could now be below 70%.

Steel Coil

Expect shipments of steel into the US to stay high so long as the dollar retains its strength against other currencies.

As Bloomberg reported last week, the amount of imported steel used in the US market has swelled from 28 to 33% since last year as the economies of major producing countries like China, Russia and Brazil have slowed and producers have sought more exports. Nucor Corp., the US’s largest and most efficient producer, warned as far back as March that its first quarter profit would be as much as 71% lower due to the exceptionally high levels of imports flooding into the market. Read more

The US market is leading GDP growth among developed nations and, in the process, diverging from the global steel market to the benefit of steelmakers – but to the detriment of consumers. First, what’s happening overseas?

In Asia, both iron ore and coking coal prices have been falling – indeed, the forward curve for iron ore on Singapore’s SGX dipped under US$130/dry metric ton for the January contract for the first time on Thursday, Jan. 9 and currently trends downwards along the curve to under US$120/dmt by May this year, the Steel Index reports.

Iron ore, as measured by TSI’s 62% Fe benchmark price for Chinese imports, has traded in a remarkably stable band of $130-140/dry metric ton since Aug. 16, 2013. An almost unprecedented period of stability for recent years, but a combination of issues has impacted demand, leading to a fall in prices even as bad weather has hampered supply, an issue that would normally have supported prices.

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

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According to data from the U.S. Energy Information Administration, U.S. crude oil inventories rose by 5.2 million barrels last week, the fifth largest build of the year, with stocks at the Cushing hub rising for the second week in a row. Over the past four weeks, inventories have risen by 22 million barrels, marking the biggest four-week build since April 2012 and the second largest since February 2009.

The crude oil stored at Cushing, the delivery point for the U.S. futures benchmark contract, amounted to 33.34 million barrels in the week that ended Oct. 18, an increase of 358,000 barrels. As noted in an article in the FT, certainly flows of shale oil have been surging from areas such as Bakken, North Dakota and Eagle Ford, Texas, where output has reached 1 million barrels a day.

FREE Download: The Monthly MMI® Report – covering the Rare Earths markets.

As a result, prices have fallen to their lowest level since July. On Wednesday, NYMEX West Texas Intermediate dropped more than $2 to a low of $96.16 a barrel, before recovering slightly. The decline saw the price differential between WTI and global benchmark Brent increase to more than $13 – the widest since April – before narrowing. ICE Brent for December delivery was down $1.75, to $108.21 a barrel.

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Articles such as ABC News’ coverage of recent USGA research reporting that the US has untapped and vast potential resources of rare earth elements waiting to replace Chinese supplies are missing the point.

The USGA has correctly identified that even better than a deeply buried lode of rare earth minerals, there are extensive mine tailings left from as far back as the days of the gold rush, dug up and sitting on the surface ready to be processed. Some have already been re-worked once for gold, silver and other metals, and so have been mechanically crushed to conveniently small physical sizes, and to the extent that some other minerals have been removed, concentrated to just the rare earths and substrate gangue.

The USGA has also identified locations in Idaho, Montana, Alaska and Colorado as being economically viable – but therein lies the problem.

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The lovely graph below is similar to graphs often rolled out by supporters of the US manufacturing sector when raising fears about the decline of industry’s role in the economy – and America’s role in the world as a manufacturing nation:

Taken at face value, the decline appears inexorable, but when tracked as this one is, i.e. against world manufacturing, it can be seen that the US really only matches the mature world economies’ rise in the service sector as a proportion of GDP.

Even more encouraging is this next graph of US manufacturing, which shows that, far from decline, US manufacturing has grown over the decades even if its rise has not kept pace with the increasing role of the services sector:

So before we all slit our wrists in the manufacturing sector, let’s take some comfort in the fact that US industry has held its own in an increasingly global environment and has plenty of scope to continue to expand in the future.

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We have written before about the benefits the shale gas revolution is bringing to the US economy (particularly US manufacturing).

Also, we’ve looked at the potential threat that this competitive advantage could be jeopardized by widespread exports of that same low-priced natural gas, depleting the very excess that has caused prices to plunge below world levels.

Cold winter weather has already stimulated a sharp natural gas prices rise to over $4 per million British Thermal Units (BTUs), a 71% increase over a year ago, according to Gas Investing News.

Producers had already started pulling back on production after being deterred by the low prices, such that inventory was falling and some were beginning to doubt if the competitive advantage of low prices would continue for much longer.

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President Obama made big play of the boon that is low natural gas prices and what it would bring the US.

However, while there has been much excitement, evidence of the boost to industry is only now emerging.

Few examples, though, could be more telling than that of the world’s second-largest chemical producer by revenue, Dow Chemical.

As margins have narrowed in Europe and Asia – where feedstock is based on more expensive oil-based Naptha – Dow, along with other chemicals firms, is investing heavily in converting plants to run on shale gas-based ethane feedstock.

Natural gas prices are currently $3.85 per mmBtu in the U.S., well below Asian spot liquid natural gas prices of $16.15 per mmBtu, according to Reuters.

As a clear vote in the long-term cost advantages that shale gas will bring, Dow is building several new specialty production plants on the US Gulf Coast as it seeks to produce lower-priced plastics onshore for use in the transportation and telecommunications markets, according to the International Business Times.

Illustrating how such investments spin off into the wider economy, Dow Chemical advised that up to 5,000 jobs would be created in the construction phase, and that investment by one firm can stimulate activity in others. The article quoted Nikkei Business Daily reports stating that two Japanese chemical companies – oil refiner Idemitsu Kosan and trading company Mitsui & Co. – plan to partner with Dow to build a 100 billion yen ($1.05 billion) petrochemical plant in Texas to be online as early as 2017 and use Dow-supplied ethylene.

The new plant will be right next to Dow’s planned plant. A Houston Business Journal article quotes Dow as saying the investments will boost Dow’s support for up to 35,000 jobs in the wider US economy following these Gulf Coast expansions.

The investments are said to be in the order of US$4 billion and will include both the production of ethylene, some of which will go as a feedstock to the JV operation with the Japanese firms and then take back alpha olefins from the JV for use in Dow’s performance plastics division.

Dow Chemical’s investment is only one of many flooding into the Texas Gulf Coast area. Chevron Phillips is investing billions in an ethane cracker and polyethylene plant, while ExxonMobil is considering plans to build a multibillion-dollar chemical plant at its existing Baytown complex. The plant is expected to produce 1.5 million tons of ethylene per year.

Estimates of the boost to US GDP vary, and are at best speculative, but investments by the chemical industry are a clear sign from just one section of manufacturing of what a profound impact low natural gas prices will have over the next decade.

Steel production, power generation, cement manufacture…the list goes on of industries that could derive very significant global advantages from being based in the US.

Unlike oil, natural gas prices are geographically sticky, meaning low prices in the US do not translate into low prices in Europe or Asia – and keeping the benefits close to home.

oil pump Some people herald it as the start of a new dawn, and others condemn it as a potential environmental disaster.

I am talking of course about shale gas and shale oil, produced by hydraulic fracturing — known by its shorthand as “fracking.” With every new technology there are winners and losers, benefits and costs.

But hydrocarbons from shale deposits are shaping up to cause as big a stir to the energy markets as nuclear power did back in the seventies. Maybe more so, as oil and gas are consumed across a wider range of applications than just the electricity produced by nuclear.

This isn’t the place to delve into the environmental implications — there are dozens of sources that lay out their stall in rightly protecting the environment — but it should be said that the biggest threat to the future of shale resources will be environmental.

MetalMiner Video: Interview with Andrew Browning of the Consumers Energy Alliance on fracking.

If widespread contamination of ground water, for example, began to be linked to fracking, the industry could yet be stopped in its tracks. So far (although there have undoubtedly been instances), cases of contamination have been sufficiently isolated that the industry still has full government approval, fueled by excitement of what the future could hold.

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Well, now that we’ve got the presidential election out of the way, time for the serious stuff of fiscal legislation.

Any problem large enough to worry the markets to the same extent as Europe’s debt crisis has to be some sort of problem, and by far the biggest one facing not just the US but the world is America’s “fiscal cliff” — just yesterday, Congress came back together to confront the US deficit.

We are probably tired of hearing the phrase already, but to better understand exactly what is involved and, from that, begin to draw some ideas as to what impact it will have on our businesses, it helps to break down the measures into their constituent parts as ex-Goldman Sachs head of global economics and former adviser to the British Treasury Gavyn Davies does on his blog in the FT.

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Taking a rather alarmist title to grab your attention is standard media fare, so maybe we can excuse the Telegraph for suggesting that the rest of the world should beware of the threat of a US recovery. (Update: for the month of September, the ISM PMI registered 51.5 percent, an increase of 1.9 percentage points from August’s reading of 49.6 percent, indicating a return to expansion after contracting for three consecutive months, according to the ISM’s release.)

But the essential thrust of the article is an interesting one, even more so because it is based on a new study by the well-regarded Boston Consulting Group (BCG), examining the future of US manufacturing.

Driven by strong fundamental improvements in competitiveness, the report argues that within a few years the US will become a global manufacturing hub. In other words, the world’s multinationals will establish factories and assembly plants in the US for the sole purpose of exporting goods to Europe, the UK and Asia.

Rather than building on the spotty trend of nearshoring or reports of strains in global supply chains, the report argues that two other major trends are supporting the BCG’s case.

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