Author Archives: Stuart Burns

Well, this would be an interesting one for the anti trust authorities. If the world’s largest steel maker Arcelor Mittal were to take a controlling stake in one of the world’s largest iron companies, what kind of advantage would that give Mittal over their opposition? In a Reuters article today, it is reported by Goldman Sachs, the board of which he recently joined, that Lakshmi Mittal is considering taking a 9% stake in Rio Tinto, similar in size to that of Chinalco and Alcoa earlier this year. As the world’s largest steelmaker — controlling one of the world’s lowest cost iron ore producers — Mittal  could control the delivered price of steel while  distorting the cost base of his competitors. All the steel producers are scrambling to control their raw material costs by buying into producers or production assets; Mittal themselves recently increased their share in McArthur Coal to 19.9% at the same time that South Korea’s Posco took a 10% stake in the same firm. Macarthur supplies steel mills with more than a third of the world’s pulverized coal and had been the subject of rumors that one or more steel mills was trying to make a full takeover.

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Car Prices to Rise

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Speaking at a shareholders’  meeting in Japan, Nissan’s Carlos Ghosn warned that car prices would rise regardless of the strength of the market because of the soaring cost of steel. Prompted by Baosteel’s agreement with Rio Tinto to accept a near doubling in iron ore prices, Ghosn was warning that all steel makers would feel the increase in one way or another and in turn they would pass this on to automakers around the world. Earlier this year, we similarly reported that the price of steel could hurt the price of cars.

We are not so sure the knock on effect of Rio’s record breaking price increase is quite so dramatic, though. Rio’s contract sales deal with Baosteel is FOB Pilbara and the increase over the price Vale agreed with the Chinese earlier this year was justified on the basis that freight rates from Australia to  Asia are very much less than from Brazil. The total landed cost for the Chinese (and Japanese, Korean, Taiwanese, etc) steel mills will therefore be no more on material purchased from Rio (and probably BHP which is still in negotiation) than it is from Vale. Indeed with freight rates for bulk carriers rising this year it may actually be cheaper than the Brazilian material.

One has to sympathize with Carlos Ghosn. Automakers like Nissan are caught between falling sales driven by a weak consumer market in the west, the worldwide move to smaller more economical cars due to the high cost of fuel (smaller cars mean lower profits per unit sold) and the rising cost of not just steel but plastics and non ferrous metals. Steel price increases alone are estimated by Nissan to result in a 3% increase in car costs this year.

Better order that convertible you had your eye on for the summer now, before the price rises!

–Stuart Burns

As a metal, molybdenum has had a funny life. For decades the price bumped along around $ 2-4/lb, largely produced as a by-product of copper production with a few pure play molybdenum mines operating as swing production if the price rose sufficiently to make them viable. Molybdenum grades are so thin, typically between 0.01 and 0.05% Mo in copper mines and 0.12 to 0.20% Mo in primary molybdenum mines, that production as a by-product from copper mining is generally far more viable. Then on the back of rising demand, the price has relentlessly risen since 2003 from $5/lb to $33/lb today. Indeed the metal spiked even higher during 2005 as China closed smaller mines but a return to previous output levels the following year and a general shift from 316 stainless to lower nickel/molybdenum grades has helped prices to ease a little since. However many observers are expecting the price to stay high and even rise further. 93% of mined molybdenum comes from three regions, South America, North America and China and though  new mines can take years to bring on stream, supply is constrained more by limited roasting facilities, the process required to take ground ore to Molybdenite concentrate. New roasting facilities are expensive and environmentally sensitive so they take a long time to come on stream. But with the price over $30/lb it’s no surprise that many plants are being planned. Rio Tinto has a $270m autoclave planned for their Bingham Canyon operation near Salt Lake City and Peru, Canada and Argentina all have new facilities coming on stream. Read more

Ferro Silicon: Further to Go?

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The Ferro Silicon market has gone through some rapid price escalation over the last 12 months, but finally appears to be drawing breath. To understand what drives the price does not require any great insight. Ferro Silicon is produced from silica (usually a form of sand), coke, a source of iron (such as scrap or furnace metallics) and of course a lot of power. Larger electric arc furnaces are used to make higher Silicon content FeSi of about 15% and up. On the demand side most FeSi is used in the steel industry for a number of applications, including alloying in a wide range of iron based materials and deoxidizing, in addition to the production of magnesium from dolomite via the Pidgeon process (that’s the inventor not the bird!). Steel production has undergone huge growth these last few years and is still growing globally at a robust rate. So with rising input costs in the form of coke and energy prices, and rising demand from the steel sector it is no surprise FeSi prices have risen 50% in the last year.

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Ever heard of Indium? Me neither. Well, not entirely true, I had heard of it but never taken much interest. According to Wikipedia it is a soft white rare metal, similar to aluminum or gallium and produced as a by-product of zinc. And therein lies the problem. Indium is the magic ingredient in making LCD screens, demand for which is defying a downturn in western consumer markets and growing at 25-30% per annum. Indium was plentiful a year or so back as zinc production boomed and new mines were opened up. But with the collapse of the zinc price many mines have scaled back or even closed and with them so has the availability of Indium. In addition, the largest producer China (who else) is stockpiling material, further restricting availability and pushing up the price. At $ 650-700/ton Indium cannot be said to be expensive, and the small amount required in each LCD screen means at approximately $3/screen manufacturers can afford to pay a lot more for the metal without it seriously impacting the cost of production. So with rising demand, dwindling supply and a relatively cost blind consuming industry it is no surprise funds are springing up to invest in Indium stocks. Investors are looking for $ 1,000/ton this year and higher, seems like something of a one way bet.

–Stuart Burns

Have you noticed as the summer vacation period approaches the level of activity tends to gradually decline? Maybe this week is worse because we have a (well deserved!) July 4 Friday coming up and the prospect of a long weekend. It’s times like this when business is a little slack that good sourcing practitioners take the opportunity to re visit those to-do’s that have been gathering dust for the last few months. We thought a few reminders would not go amiss. Read more

Wind Drives Metal Demand

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We just love it when a developing technology opens up a new demand for metals. Wind power cannot be said to be new, but advances in technology are rapidly making wind power a viable alternative to conventional power generation.

The critical point will come, according to an Economist report this week, when a carbon tax is levied on coal fired power stations. Even the industry widely believes this will happen, as witnessed by the dozens of new coal fired power plants stuck in the project stage pending a ruling on how much and when. Read more

Decoupling Those Emerging Markets

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There has been much talk about decoupling in the economic press this last year or so. The story goes something like this: even as the western economies slide into a period of stagnation or worse recession the emerging markets will continue to power ahead fuelled by massive infrastructure investment and domestic consumption. So far, so good; the US, Japan and western Europe have indeed been experiencing a difficult time these last 12 months and share prices have reflected this as investors have realized growth prospects are limited in the short to medium term. Meanwhile Asia, South America and Russia appear to have continued to achieve rapid growth rates between 6 and 12% year  over year.

If a recent survey by Merrill Lynch is correct that tide has turned and investors, often those with their eyes focused most firmly into the medium term, have concluded run away inflation is for the emerging markets what the credit crunch was for the industrialized markets. The exodus from any emerging market that is reliant on imported oil, minerals and food has been dramatic as investors view inflation as being out of control. So if there is a massive flight of capital out of emerging bourses where has it gone –  Europe? No, the 204 Fund managers interviewed by Merrill Lynch believe Europe is in for a tough time as the ultra hawkish ECB raises rates even as growth slows.

Apparently the smart money is on the USA, re-emerging as a safe haven where trusted institutions command a premium. Manufacturing has proved to be surprisingly robust in the face of high oil prices, a dramatic fall in construction and a tightening of credit. On average the fund managers reported themselves a net 23% overweight on US equities, the highest level since 2001, and there they intend to stay.

–Stuart Burns

The high price of oil is spurring demand for more fuel efficient engines. As airline accounts slide rapidly into the red, they  demand both engine upgrades and new aircraft with engines that consume less fuel per passenger mile. Consequently, Rolls Royce and General Electric are drawing on military technology and using exotic minor metals like Rhenium to introduce super alloys that can run at higher temperatures and in the process use less fuel. As a result, Rhenium prices have soared to $11,250 a kilogram, more than double last year’s level and up from about $1,000 in early 2006. Rhenium  is often obtained as a by-product of molybdenum production, with supplies coming from Chile and Kazakstan there is the possibility of supply disruptions and further increases in price. Chromium and cobalt have also been affected by the same demand from engine makers. Chromium rose this month to a record of $11,000 per ton, up from about $6,800 last year and less than $4,000 in 2000. Cobalt as we have reported previously
was at US$ 52/lb earlier this year although as we predicted prices have eased a little recently. Airlines are caught in the cross hairs between rapidly rising fuel costs, a fickle market that will shed demand if airfares rise and an uncertain economic future in terms of the global economy and demand for air travel. The one near-certainty is that fuel costs will stay high for the foreseeable future, even if the oil price drops back from $140 per barrel. So like it or not, airlines have to intensify the pace of aircraft upgrade as they struggle to remain profitable. Rhenium may have been the last  naturally occuring element to be discovered but today it is certainly center stage in development of super alloys for aero engine makers.

–Stuart Burns

Who would have thought the UK  which sits at only fifth in the world league tables based on nominal GDP and for which manufacturing only accounts for 1/6th of national output could also hold the position of the world’s largest arms exporter in 2007? It may explain why the UK still has a robust metals distribution market; the defense industry is a large consumer of high quality metals. The UK won $10b of export orders last year giving it 33% of the world market and with it there will be a multi-billion dollar demand for specialist steels, aluminum, titanium and other exotic alloys. Even averaging over the last five years Britain is second to the USA at $53b relative to the US’s $63b and way ahead of the next placed Russia at $ 33b or France $17b. Orders were spread over a wide range of product areas too. These areas include typhoon jets for Saudi Arabia, warships for Oman and the Caribbean plus extensive joint venture engagements with US defense contractors for the US market. Despite having only the 27th largest armed forces, Britain has the second highest military expenditure in the world, due to the high reliance on expensive advanced technology. Arguably Britain  is well placed to support a large domestic military industry. With the weakness of the US dollar this may represent yet another export opportunity for US manufacturers, already Britain’s largest partner in defense projects.

–Stuart Burns

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