Last month we reported that in March, U.S. domestic steel prices generally rose while the GOES M3 price fell. This month, we can safely report the exact opposite price change. U.S. domestic steel prices fell while GOES prices rose in April.
In our April update, MetalMiner indicated that GOES prices might find a price floor on the back of a large 20,000/mt tender from Bharat Heavy Electricals. That indeed appears to have happened. Moreover, according to a recent TEX Report, GOES prices have continued to climb in China as Baoshan Iron & Steel needs to service the domestic market due to anti-dumping cases preventing Japanese and Korean imports to that market.
The TEX Report also suggests that global inventories remain low and that many countries have come into the market all at the same time, requiring material. This could lead to higher prices, particularly from the Japanese mills for contracts awarded during the second half of the year.
The Gorilla in the Room
The real challenge for domestic GOES prices, however, rests on the results of the Section 232 steel product investigation launched by the Trump administration in late April. The results will likely not come much before January 22, 2018, assuming the Secretary of Commerce takes the allowable 270 days to present findings to the President. At its core, the investigation seeks to address the issue of
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International trade hasn’t been this contentious since before the Great Depression, and it is causing free traders much concern. We’ve seen a number of trade cases affect some U.S. imports such that the U.S. steel industry effectively implemented a full ground stop on many steel products (though that ground stop has been short-lived). Some political appointments have caused a backlash amongst some free-trade Republicans, importers, traders and manufacturers.
This administration’s stance on trade has helped galvanize both the case for and against trade. These arguments are centered on several themes related to the notion that China’s loss is U.S. value-added manufacturers’ gain — if China chooses to “dump” its products at a loss, then shouldn’t value-added manufacturers take the opportunity to purchase [steel and/or other commodities] to increase their overall cost competitiveness on finished goods?
We recently launched MetalMiner Benchmark. Source: MetalMiner.
One question we often field from readers is this one: “how are other companies buying their X and how well are we buying X?” We have previously written that many buying organizations fall into one of several different “buy” scenarios that include the following:
The pure spot buyer (e.g. otherwise known as 3 bids in a box): Here, the buying organization goes out to market with a specific requirement, obtains three bids and typically places the award with the most competitive supplier who can meet delivery and quality requirements.
The contract buyer: Prefers nearly the opposite type arrangement. He or she likes to “lock in” all or close to all known requirements or use some formula based on 80% of last year’s demand. The contract buyer often uses a price contracting mechanism known as an index whereby the price adjusts quarterly or monthly to the index depending on the agreed-upon arrangement.
The hybrid buyer: This buyer is more strategic in that he/she buys both on the spot market and also contracts for forward buys or hedges when prices warrant that action.
Pros and cons exist for each scenario. Often times, the contract buyer in scenario two actually looks more like the spot buyer in scenario one because when a buying organization uses an index like CRU Group‘s, they do, in fact, pay the market price. They don’t actually pay less than the market or avoid a cost run-up if prices rise. In that sense, the scenario two buyer is actually a spot buyer — ultimately paying the market price.
We’d argue there are tools today that allow the buying organization to take their metals purchasing to the next level. Innovative practices such as benchmarking can actually allow the buying organization to reduce its average or budgeted purchase price. Let’s see how.
There are a number of ways to this. We have identified a few below:
By benchmarking your company’s current monthly metal spend, and by doing so regularly, buying organizations can walk into a supplier negotiation armed with current market price data and knowledge of how well the company buys vis-à-vis the market. Access to superior metal price intelligence gives the buying organization a leg up in negotiations and the ability to lower costs.
By pairing the benchmark report with forecasting, buying organizations can better time contract purchases both to avoid significant price increases as well as to “float” when prices are dropping. In this way, the buying organization can apply a more strategic hybrid approach to metals purchasing thereby lowering average costs.
Think of benchmarking as laser surgery. Buying organizations now have the means of pinpointing specific SKU-level opportunity areas while leaving other areas untouched.
Stop wasting time on metal sourcing projects that have little to no ROI. Conversely, identify high-ROI metal sourcing projects. Educate your executive team with where and how the procurement organization plans on creating value within some of the largest metals purchase areas.
Conduct alternative supplier identification on the fly by seeing alternative suppliers within your geography for the form/alloy/grade/size you buy. By conducting these types of analyses quickly and efficiently the long cycle time of implementing savings can be streamlined and shortened.
Bonus benefit: improve your ISO certification scores by using benchmarking, which enables a fact-based approach to decision-making, a key requirement of certification.
The most innovative metal buying organizations will become the early adopters of this type of benchmarking capability. Just as Progressive Insurance and Kelley Blue Bookcreated market access to greater pricing visibility, metal price transparency appears within reach. This innovation should significantly improve metal buying strategies.
This is the second of a three-part series on MetalMiner Benchmark. Here’s part one if you missed it.
If data is the new natural resource in business, then when examining the landscape of third-party metal price tools, indexes and services, it’s safe to say that most of them fall into one of three categories:
They report out the exchange-traded metal (meaning the metal that is traded on a formal exchange, typically a raw material form of the metal)
Some report alloying elements and minor metals — important for mills and producers but less relevant to OEMs and most metal buying organizations
They report out only a parameter or two such as alloy and form, e.g. cold-rolled coil (and typically a geography) but don’t get more specific than that
Our own MetalMiner IndX(SM), which we are no longer actively marketing, reports out most of the above and in some cases, by multiple geographies. Helpful? Sure, but limited in a number of key respects.
Limitations of Current Metal Price Indexes
Based on our own analysis and analyses conducted by our readers and shared with us, the three primary limitations of current metal price indexes (including our own) are as follows:
They aren’t correlated enough with the metal prices buying organizations actually pay. The London Metal Exchange three-month aluminum price plus the Midwest premium certainly goes a long way in helping buying organizations understand the general aluminum price trend, but that still leaves some portion of the price a company actually pays out of the equation.
For example, the 3003 H14 .020 x 48” x 120” sheet that a company actually buys from a service center includes more than what current indexes supply:
LME three-month aluminum price + MW premium + Conversion Premium + margin + delivery to the customer.
CRU Group publishes a weekly CRC, HRC, HDG and Plate price for several geographies in the midwest but that CRC price is still not the same price as the price for 100,000 pounds of 1011 12 gauge x 48” coil.
In some cases, other metal price indexes have the form, alloy and grade-level data (see stainless prices from MetalBulletin). American Metal Market also publishes form/alloy/grade data but it may not include specific sizes, quantity breaks or price differences based on those parameters. In addition, some of these may only be updated monthly.
Current price indexes are all one-sided — They go from the publication out to the reader/user. There is no two-way method of giving your data and getting something back that allows you to compare your purchase price against others in your industry.
By providing a means to identify the market price at the granular level of form/alloy/grade/size, buying organizations can now effectively compare the actual industrial prices paid against peers as well as the market as a whole. This capability also allows buying organizations to identify alternative suppliers, pinpoint specific SKUs and areas of opportunity, and strengthen existing supplier relationships.
It’s clear that, indeed, “data is the “new” natural resource in business. In our next post we’ll cover how buying organizations can use these types of resources to lower their average cost.
Click here to see a sample enterprise benchmark report.
Global steel prices tend to find a floor based on the price of Chinese steel. If Chinese prices fall, domestic U.S. prices also tend to fall. However, grain-oriented electrical steel continues to beat to its own drum, often not aligned with underlying steel prices.
Although U.S. domestic steel prices continued to rise in March, the GOES M3 price fell and fell rather significantly dropping by nearly 7%.
Meanwhile, according to a couple of recent TEX Reports, GOES prices from Baosteel increased by $38/metric ton in April after increases of $168/mt from January through March. Baosteel acts as the price leader and according to a recent report, and will likely stand pat until or unless others also increase their prices. Those “others” may have a near-term opportunity to do so as a large tender from Bharat Heavy Electricals for 20,000 mt will bring in the global GOES producer community. As China tends to set the “market floor” for global steel prices, the TEX Report suggests that this tender will serve as the global price floor for GOES for the balance of 2017.
Supporting the rising price theory, TEX Report also suggests that prices have risen by $200-300 per mt in the Middle East and India.
Ironically, prices for steel rebar on the Shanghai Futures Exchange have declined by 5% according to a recent MetalMiner story on the back of declining coking coal (4%) and declining coke prices (5%), as well as falling iron ore futures. Some, including MetalMiner, believe the price declines are due to speculators unwinding bullish bets.
Source: MetalMiner Forecasting
Regardless, Chinese prices for hot-rolled coil are falling and though GOES prices often diverge from underlying steel market trends, upward price movements may be elusive.
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If “imitation is the sincerest form of flattery, then perhaps being labeled a “disruptor” and compared to the likes of Amazon by an industry luminary isn’t such a bad thing either. Referring to the recent launch of MetalMiner (SM) Benchmark, Denny Oates, CEO and President of Universal Stainless named MetalMiner as a potential “threat” to the industry [stainless] at the recent Specialty Metals Conference hosted by MSCI in March.
I guess it all depends on your perspective. When it comes to the inevitable arrival of price transparency in metals markets you can see the proverbial glass as half empty or as half full. We (and a growing number of other industry leaders) view it in a far more positive light. It’s simple really — when it comes to consumer demand for transparency, the choice is pretty clear — get on the train or get run over by it. As former Chief of Staff of the U. S. Army, General Eric Shinseki, put it less delicately: “If you don’t like change, you’ll like irrelevance even less.”
It’s natural to view any change to the status quo as potentially threatening but that most basic of human instincts — to fear something new — can often prevent you from seeing the opportunities that change brings. This, the first of a multi-part series on MetalMiner (SM) Benchmark, will attempt to shed light on this crowd-sourced application and show metal buying organizations as well as service centers and producers how this new capability can serve as an enabler creating trust between buyers and sellers, accentuating often overlooked value added capability, quality and on time delivery. It also reduces uncertainty, speculation, and risk for all parties.
First, let’s set aside emotion and take a look at the facts — what has price transparency really meant in other industries? Let’s begin with the problem because most new solutions and innovations come from addressing an actual problem. In this case, the number one problem we hear from our audience always involves a version of “where can I get the price of (fill in the blank)?” And that “fill in the blank” typically covers aluminum, steel, stainless steel, copper, tinplate and GOES (grain-oriented electrical steel). In our world, if a customer wants something, figuring out how to give it to them is a good thing.
We’d argue that buying organizations constantly want to know:
the price of the specific metal they are buying (form/alloy/grade/thickness)
the forecast for that specific metal they are buying
the historical price for that specific metal they are buying
what other people are paying for that specific metal they are buying
what the drivers are for the specific metals that they are buying
In that same presentation by Denny Oates, he argues wisely (below) the different strategies industry players, both mills and service centers will have to take in order to succeed.
The role of the “trusted advisor” appears prescient, except that we’d argue that being transparent with customers on what constitutes a “fair and reasonable market price” is something service centers need to embrace not fear. Trust between supplier and buyer is the currency of business in the new, high information, digital world in which we live. A case in point: An Accenture study of B2B sales suggests that 94% of B2B buyers say they conduct some form of online research before purchasing a business product. For large corporate purchases of more than $5,000, 34% spend over three hours researching products. Metals price benchmarking does not change buyer behavior, it simply makes it easier. What’s interesting, though, is what happens when sellers embrace transparency and use it to endear customers to them. Read more
Though U.S. prices dipped slightly, China’s Baosteel announced a price hike for GOES close to $40 per metric ton, according to a recent TEX Report. Although the Chinese have led recent GOES and other steel product price hikes, others have not necessarily followed. Nevertheless, Chinese steel prices set the floor for global steel prices.
Now that the Trump administration has begun to settle in, market observers have paid close attention to trade actions within the metals industry, particularly the cold-rolled coil circumvention case and most recently a case filed by the Aluminum Association against China involving aluminum foil. Both the domestic steel and aluminum industries have pursued trade cases to address overcapacity concerns.
GOES Prices and NAFTA
GOES markets follow some of these same patterns. Back in 2013, GOES from China accounted for about 10% of total U.S. GOES imports (by tonnage). Clearly, the trade cases filed by the domestic producers at the time limited Chinese imports, but that trade case sought to stop other countries’ imports as much as China’s.
Herein lies a big difference between the GOES case and the aluminum case as well as the prior flat-rolled product steel cases. The GOES trade case did not result in any finding of injury, so no anti-dumping and countervailing duties were assessed. Instead, domestic power equipment manufacturers shifted their global supply chains to source GOES globally and purchase transformer parts and wound cores from NAFTA countries.
Some have speculated that two years ago, the addition of two new harmonized tariff codes for both transformer parts (8504.90.9546) and wound cores (8504.90.9542) would set the stage for future trade cases brought by the lone domestic GOES producer. We think this looks like a “stretch” and, legally, we’re not even sure there is a case to be had as AK Steel currently does not manufacture transformer parts or wound cores.
Import volumes for wound cores have modestly increased, but imports for transformer parts have actually declined:
GOES imports from 2015 to today. Source: Lisa Reisman/MetalMiner.
The GOES M3 MMI took another jump this past month moving from 192 to 200 for a 4+% increase. Last month the index made a 5% gain.
Last month, MetalMiner examined the Trump administration’s stance on trade policy and likely impact on GOES markets (and concluded that GOES prices would not see too much of an impact since most of the imported GOES material comes from Japan, Russia and the U.K.) In other words, even in a trade war with China, we don’t expect that to drive GOES price momentum.
However, and as one of our readers pointed out, our story failed to address “Buy America” requirements which, indeed, could impact GOES markets.
We know President Trump implemented Buy America requirements for the Keystone XL and Dakota Access pipelines including all new pipelines and retrofits (even slab imports are disqualified for domestic producers with only rolling operations here in the U.S.) Could Trump implement Buy America requirements for transformers? The answer to that question: absolutely! It’s clear that Trump will act aggressively to promote Buy America requirements. These requirements will serve as a bullish indicator for GOES prices.
In the aftermath of the GOES domestic anti-dumping case, many large equipment manufacturers moved production of stacked and wound cores as well as laminations to suppliers in Mexico and Canada in anticipation of significant duties being placed on GOES imports here in the U.S. Those duties did not materialize. Nevertheless, production moved to NAFTA countries anyway.
Which brings us to NAFTA. President Trump has promised to renegotiate NAFTA. But in truth, NAFTA has not been bad for the domestic steel industry. It remains unclear what specific changes the President will attempt to renegotiate. Furthermore, AK Steel could find itself in a bit of a pickle. On the one hand, from an overall perspective, AK Steel has probably benefited from NAFTA as the agreement currently stands, though its GOES business, in particular, may have suffered as AK customers moved operations to Canada and Mexico. As the sole remaining domestic GOES producer, AK Steel may need to walk a fine line between what it lobbies for in terms of Buy America and what it has gained with NAFTA.
Meanwhile, the industry should pay close attention to Big River Steel which reported record first-month production for a flat-rolled mini mill. BRS has publicly stated that they will add GOES capacity at a later stage. Aperam South America has started a GOES line out of Brazil. Imports from South America could increase just as BRS is starting its GOES line.
Meanwhile, what’s driving GOES price momentum right now?
According to a recent TEX report, orders that are typically placed during the summer months did not get placed which created a surplus. Since January, buying organizations have come back into the market including: Chinese, Korean and U.S. customers. In addition, a large tender for the Middle East will soak up some extra capacity which has caused market entrants to secure material before that tender is released. This has likely caused some price momentum as Baosteel raised prices for February shipments.
U.S. import levels have also increased during January supporting the notion that demand has increased.
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Average grain-oriented electrical steel surcharges fell for the third year in a row. 2016 average surcharges took the biggest hit because Allegheny Technologies stopped production of GOES. AK Steel did not implement a surcharge until July 2016.
Our own GOES M3 MMI showed only small price movements from month to month. The index hit a low of 181 back in July and today shows a modest recovery to 192, a 5% gain.
GOES follows its own fundamentals (e.g. supply and demand) and does not always follow the price arc of other more common forms of steel such as cold-rolled coil or hot-rolled coil. In fact, some of the wider trade dynamics for those forms of steel had little to no impact on GOES.
Which brings us to a larger issue. Will President-elect Trump, who is arguably pro-steel and who has gone on record against China’s trade practices, implement any policies that will likely impact GOES markets?
To begin, the nature of trade between the two countries, the U.S. and China, appears more complicated than what can be seen by the naked eye. Raw material/commodity-like supply chains lack the complexities of supply chains found in industries such as electronics. Blanket tariffs are easy to issue and calculate for commodities that move from point A to point B. But electronics industry supply chains involve components, parts, sub-assemblies, final assembly, etc. across multiple countries and locations. A blanket tariff on electronics will harm China much more than other countries as the tariff would apply to the “final point of assembly.” This could create all sorts of electronics shortages and problems here in the U.S.
Why Are We Discussing Electronics Supply Chains?
Because it would be easier to get tougher on China for commodities such as steel. And though China has curbed excess capacity in recent years, we could see a scenario in which tough trade policies such as a tariffs could significantly limit Chinese imports, which currently make up about 10% of domestic steel demand according to a recent analysis by Stratfor.
China will retaliate but a scenario exists that China could account for far less steel imports into the U.S. than it currently does (China has cut excess capacity already). In terms of grain oriented electrical steel, however, China does not represent the bulk of GOES imports into the U.S., in fact, Japan, Russia and the U.K. are far bigger GOES exporters to the U.S.
Therefore, any President Trump trade policy that goes into effect (no pun intended) will likely have a bigger impact on the broader steel markets and a far less significant impact on the U.S. GOES market.
Next month, we will examine the potential impact of NAFTA changes on GOES markets.
Grain-Oriented Electrical Steel M3 retook last month’s loss rising by more than 3%.
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The U.S. Steel Granite City Works captured by Google Street View in September, 2014 — a year and two months before the latest idling of the mill.
See the latest multimedia version of this story here.
This is our final top-rated post of 2016. Chinese market economy status was a huge issue for the entire year and this interactive package, originally published in May, put all facets of the problem into one package. How China will change its economy to compete with the rest of the world without overproduction for export is still an open question and a major threat to market stability. — Jeff Yoders, editor
Dan Simmons has seen a lot during the 38 years he’s worked at U.S. Steel’s Granite City Works in Illinois, just outside St. Louis.
From starting out as a general laborer, to swinging hammers on the track gang, to “feeling like Mr. Haney from Green Acres” while trucking around the mill, Simmons took it all in. There were days “you were whistling when you came in, and whistling when you left,” he said.
But nothing compares to what he’s seeing now.
“I have grown men coming into my office, crying,” said Simmons. “You see the pain, the ‘what ifs,’ the blank stares…”
Simmons, who just turned 56, is now the president of the United Steelworkers Local 1899, and some of the grown men coming to him are pipefitters just like he had become during his long tenure, which began in 1978.
However, those men and women aren’t coming to him because they’ve been hurt on the job. They are coming to plead for help, because they have lost their jobs, and in many cases still don’t know when they’ll land their next one.
Cyclicality in steel production is nothing new, but it wasn’t until 2008 — when the global markets began crashing — that USS Granite City Works endured its first indefinite idling in its history.
“We had the unemployment office cycling 400 people through at a time,” Simmons told MetalMiner. “The biggest fear is not knowing. If I could have given them a definitive timeframe, they would’ve said, ‘OK, I can handle that.’ But after two to three months, people come to me and don’t know what to do with themselves.”
And now, after the mill went idle a second time in December 2015, some of those workers have been without a job for nearly half a year. Last December, 1,500 people were laid off — 75% of the mill’s total workforce. Across the country, a total of 13,500 steel workers have been laid off over the past year.
Simmons knows what it’s like to feel that fear firsthand. “I got a brother that works here, a brother-in-law that works here, so it’s personal. You worry about where your whole family will be.”
So what’s different today, compared to 2008?
For Simmons and scores of others in the country’s steel sector and other manufacturing industries, much of the pain can be traced back to one main source: China.
A History of Unfair Trade?
The world may have never encountered a more crucial Year of the Monkey than 2016.
That is, at least as far as global trade between China and the Western world is concerned. At the end of this year, China believes it ought to receive Market Economy Status (MES). This would allow China to enjoy the same market status as the U.S. and European Union when it comes to anti-dumping investigations before the World Trade Organization.
In its quest to grow its economy over the past two decades, China has become the leading producer — by far — of steel, aluminum, cement and other industrial materials. Read more