This is a follow-on piece to our previous base metals quarterly pricing update post from last week. You can read that post here.
Next we will cover the ferrous markets to include stainless steel and steel. These will also be reported as separate blog posts.
The relentless rise of steel prices has been the subject of widespread reporting for the last two years. The end of long running iron ore contracts earlier this year at up to 97% over the previous levels has done nothing to ease the pressure for yet higher prices. Though the steel market is not inflated by the speculative element that has exacerbated base and precious metals markets, it has presented an opportunity for steel mills to maximize profits to unprecedented levels. The low dollar has restricted imports and boosted the export opportunities for domestic US mills leaving the US market short of material and many companies on allocation. In such a climate, the mills have pushed through price increases on a month by month basis with little or no real resistance. Both anecdotal evidence and an analysis of the mills quarterly results shows that even though the mills are paying more for raw materials the sales prices they are achieving has meant profit margins are at unprecedented levels. Read more
Like many others who watched the opening ceremonies of the Olympics, I was glued to the screen as scene-after-artificially-enhanced-scene ” OK, Beijing admits that only the fireworks were digitally modified ” brought amazement to my eyes. Part of what I was admiring, though, was not the digital eye candy or even the beautiful little girl who turned out was lip-synching a song ” the actual singing seven year old was deemed not beautiful enough by the Chinese media politburo to qualify for media prime time ” but rather the exceptional new stadium known as the Bird’s Nest that China built for the opening ceremonies and track events. The awesome structure with exposed steel beams was “built with 36 km (22.4 miles) of unwrapped steel, with a combined weight of 45,000 tonnes (49,600 tons),” according to Wikipedia. If we take today’s price in China of $924 per ton for cold rolled steel (which is still 15% cheaper than in the US at today’s costs) according to MetalMiner IndX, that’s roughly $45 million in total steel costs. Now that’s some serious Yuan. But let’s look on the bright side for the Chinese. If China’s medal goals don’t work out, they can always scrap it ¦
Yesterday’s Wall Street Journal reported that Japan slipped into recession in the quarter running from April to June. A few factoids the article references include: Japan is the second largest economy in the world and that the dip was the largest in seven years with exports falling 2.3% due to declining American and European orders as well as slowing Asian orders. Whereas our own blog coverage and that of major news publications tends to be skewed toward China, the impact of a Japanese recession has large ramifications for the global economy. And it tells us a little about the health of the US economy.
Consider this just in terms of US imports: Japan supplies 5% of the US steel market and its steel exports (Japan) actually grew 5.6% from a month ago. In terms of total steel imports, the US has taken in 9.5% less volume then it did a year ago from Japan, 853,000 short tons this year compared to 942,000 short tons a year ago according to the American Institute of International Steel.
MetalMiner has conducted its own analysis of Japan as a trading partner for metals related products. Based on ITC (International Trade Commission) 2007 data, in terms of all metal products, Japan is America’s 7th largest source of supply. From a steel perspective, it is America’s 3rd largest supplier after Canada and Mexico. So is the one month increase of Japanese purchases significant? It’s probably too early to tell but since purchases from Canada and Mexico were down in June, perhaps it’s time to take a look at Japan as a supply source.
Steel imports are up slightly 6.9% from May to June 2008. According to Dave Phelps quoted in a recent press release, president of AIIS (American Institute for International Steel), the high prices in the US market for some products “suggest that conditions for imports could improve later in the year.” That and a rising dollar would also provide some relief to steel-buying firms in the US. Earlier today we wrote about China’s trade surplus, unexpectedly increasing again. How did that increase affect overall US steel imports? Interestingly enough, imports increased 20.1 percent from China from May to June though overall, steel imports have dropped 40.0 percent from last year to this year. The month to month changes may be more telling then the year over year changes.
The monthly numbers also show big percentage increases from Brazil, Turkey and the Ukraine. Europe’s numbers were also up by over 13 percent. Though steel imports are dramatically down compared to one year ago, they are up from Canada (26.9%), Mexico (12.1%), Ukraine (11.9%) and India (57.3%). Oddly enough with the exception of the Ukraine, none of the import increases on a monthly basis correspond to increased imports from a yearly basis. Arbitrage opportunities may be the name of the game for now.
But no matter where these steel imports and better prices come from, they are welcomed. They sure aren’t coming from domestic producers!
If you caught Stuart’s earlier piece on the economic difficulties facing China, you might not be surprised to learn about the weak outlook for Chinese steelmakers. Reportedly, the first half of the year played out well for leading steelmakers in the region: “As per the news from the China Iron and Steel Industry Association, the first half of this year, Baoshan Iron and Steel Group get profit CNY 28.664 billion an increase of 28.5%, and more steel listed companies also estimate that they [will] profit in the first half [of the year].” However, slowdown is expected in the second half of the year. As property and banking stocks in Shanghai and Shenzhen began to drop earlier this month, steelmakers weren’t far behind, and shares should keep tumbling. According to the Wall Street Journal, Chinese steelmaker Angang Steel fell 8.1% in Shenzhen and nearly 12% in Hong Kong. Read more
After much delay that we have previously reported, Nymex has re-announced its intention to offer a steel futures contract for hot rolled coil for the Midwest during the early part of the fourth quarter, according to this Wall Street Journal article. Not to be outdone by Nymex, the London Metal Exchange also intends to offer a North American contract. According to the article, hot rolled coil represents 20 million short tons of 50 million tons produced annually.
Though the steel producers have opposed futures trading, it will provide some pricing stability for steel buyers. MetalMiner will be publishing several blog entries on this new offering and how manufacturers can take advantage of the new contract.
China has something of a reputation as a copier rather than a developer of new technologies, so it is encouraging to read that researchers at Hunan Normal University (one wonders if they also have an Un-normal University?) have pioneered a technique to remove chrome as a polutant from waste waters. None would argue that chrome is a highly useful metal, mainly of course as an alloying element in stainless steels where it’s environmental problems are low but it’s use in chrome plating, dye production, battery manufacture and so on often results in the developing world in large scale pollution in the form of leaching into water sources of chromate or hexavalent chrome. The research team is developing a low cost method of absorbing the chrome onto magnetic nano-particle beads and then recycling the metal. The contaminated particles are removed from the water via an external magnetic field where the metal is extracted before the particles are returned for the waste water to be used again.
The technique would be of use anywhere. Heavy metals are present in waste water and could reduce the need for alternative and more expensive environmental safeguards associated with use of heavy metals in manufacturing.
Stainless steel prices will be flat this year but rise in early 2009 said MEPS this week in a brief report, blaming the current weakness on soft seasonal demand in Europe and a weak US housing market. We wouldn’t argue with the soft seasonal demand but we feel it goes further than that. Though nickel prices have been falling, the price of stainless has been supported by a rising chrome price, but that too appears to have hit it’s peak and supply disruptions notwithstanding an easing in chrome prices would see stainless continue to slide well into next year. Global stainless production has continued to rise in spite of severe cut backs by China according to purchasing.com. Outokumpo the Finnish producer is saying the world is in over supply and without an increase in demand, prices are likely to continue to slide. Distributors are living hand to mouth avoiding stock replenishment in the belief prices will continue to ease, so the advice to consumers is do the same. Tomorrow’s price may be lower than today’s!
Less than two weeks ago, we explained why the announced acquisition of Alpha Natural Resources, America’s largest producer of coking coal by Cleveland-Cliffs, North America’s largest iron ore pellet producer would be a better move for steel buyers than if a steel producer made the same acquisition. But the deal announced by Cleveland-Cliffs may not happen and instead, ArcelorMittal may counter with its own bid, according to this Bloomberg article.
Cleveland-Cliffs’ largest shareholder, hedge fund Harbinger Capital Partners, however, signaled its own opposition to the Cliffs deal. With a 16% ownership stake in the company, it would be difficult for the Cleveland-Cliffs’ Board to generate the necessary 2/3 vote needed to go forward with the takeover. The Harbinger opposition re-opens the door for ArcelorMittal who had made an earlier all-cash bid back in June. According to one analyst, the acquisition would allow ArcelorMittal to plug a hole in regard to securing raw materials.
But buyers should be suspicious of an ArcelorMittal/Alpha type tie-up. As we have previously reported, the costs to produce steel are more than reflected in the sales price. Though it would be difficult to prove from an anti-trust perspective (because this involves raw material and not the steel itself), I can’t help but think we should all be hoping Cleveland-Cliffs is able to pull of this acquisition.
Not long ago in a land actually quite nearby lived two metals distributors. One was called IM Hassle and the other was called Defiance. Defiance, being the bigger distributor with more power told all of his poor subjects (and they were quite poor you see because the price they had to pay for their steel was starting to take a real toll on other expenditures), “We must pass cost increases to our customers!” But what were the subjects to do? They needed the metal for there were oil and gas plants to build, so they paid. And lo and behold Defiance was happy, for they had set record second quarter sales and profits.
But IM Hassle, on the other hand, well, they did not have a record quarter. Oh yes, sales increased, afterall, the subjects needed their metal (and some plastic). Yet IM Hassle’s profits declined from a year ago. And when IM Hassle went to their owners, and the public to explain what had happened they said, “Ye higher operating expenses and costs from carbon products pressured margins and eroded earnings,” according to their henchman.
And so the moral of our story is this: If you don’t do well, blame it on rising costs. If you do well, blame it on rising costs.