The big three automakers have moved from public auctions to discrete swaps and return deals with the steel producers in return for new coil. They are fixing the prices via agreed upon formulas which presumably are more to the auto makers’ liking than the auction prices they were previously getting (and had expressed disappointment in).
By itself, there is nothing wrong with the car makers’ approach. The problem for the market was these auctions had set the US market prices for new sheet scrap bundles ” auto bundles and without them the market is casting around for a replacement benchmark. Various publications including AMM, Platts and SBB all post prices based on what is reported to them by contacts in the market but as this Purchasing.com article points out, they vary by 10% from low to high and none of them can be said to set the benchmark.
To compound the woes of the scrap consumer, exports are at record levels up 10% year over year as scrap traders take advantage of the weak dollar to sell material to Taiwan, Turkey, Korea and other SE Asian markets. This has prompted talk of limiting scrap exports in the way that some other producers do such as Russia and the Ukraine but most observers think it will stand no better chance than the last attempt at controls in 2004/5. Temporarily restricting exports does release more material onto the domestic market and suppresses prices but eventually it dampens supply and harms consumers and producers alike.
So with the volatility of increased exports and the lack of a firm benchmark previously provided by the auto makers’, the market is a like a ship at sea without a compass. All we need now is the steel market to take a downturn and the scrap market could hit the rocks without warning.
Like some of you, I read a lot of procurement trade magazines. Many of these magazines sit un-read next to my bed stand, primarily because they lack a catchy title to get me to stay awake long enough to read. But every once in awhile, I come across a story with a few nuggets of insight that could be helpful to the sourcing practitioner. And just recently I read an article from Efficient Purchasing that I would recommend every sourcing practitioner working inside a global corporation read. The title “Driven by Global Growth” is aptly named. And for construction equipment manufacturer, JCB who buys 200,000 tons of steel and 100,000 tons of castings annually, a few lessons learned and shared should not be missed. Read more
A colleague recently penned an excellent piece on strategies buyers can use to mitigate cost increases. Herb Shields, the author, suggests several tactics purchasing professionals may use to delay and/or mitigate price increases imposed by suppliers. Some of these tactics include rejecting “dear customer” letters to looking at substitute products or delaying decision-making. At MetalMiner, we often write about ways to mitigate cost increases within the metals industry by deploying sophisticated hedging strategies, implementing product substitutions or perhaps running reverse auctions in stagflationary environments.
But one of the most effective tools used in preparation for a negotiation is a cost build-up worksheet or analysis. Yes, I’m talking about those painful spreadsheets folks use after a reverse auction or electronic bidding event to extract additional information from the supply base about their bids and cost structure. Cost breakdown worksheets, when well developed and completed by suppliers, provide huge opportunities for analysis and insight on the part of the buying organization. They can also be used as a means for more effective negotiations pre-bid. Read more
We reported earlier that steel prices may have peaked and our own anecdotal evidence also supports this claim. We understand that one major steel producer shipped July orders early because of weak demand. And all of this ‘demand’ that everyone seems to talk about, is well, not exactly meeting expectations.
Every single steel producer and probably 80% of the financial analysts making their “picks” site rising demand from, you guessed it China. But the Chinese themselves acknowledge that supply is exceeding demand. And with automakers reporting their biggest sales declines in 15 years, this ‘demand’ argument doesn’t seem to be holding up. And yet like Honda before them, Ford, GM and Toyota have also been asked to cough up a $250/ton steel surcharge according to this Wall Street Journal article.
It is interesting that all of the automotive OEM’s seem to be relying on the contracts as a negotiation tactic. There probably aren’t too many other strategies available. But, what goes up, must come down. Will China demand keep steel prices high? Time will tell.
Well one analyst is anyway. Liberum Capital released an interesting report to investors last week along the following lines which if correct we felt has some interesting observations for our readers.
Liberum drew initially on the significant falls in mining stocks with the sector down about 19% since May with heavy falls last week in US Steel stocks down 10% and iron ore miners down 6-7%. The catalyst to recent falls appears to be a big drop in thermal coal prices precipitating a wider sell off but particularly in the steel sector.
Some of the key points observed were:
- Traders reporting large stocks of heavy grade plate in the EU with stockholders offering lower prices as stock levels reached saturation level
- Arcelor Mittal admitted it had experienced trouble passing on the May price increase for flat rolled in the US
- GM, Ford, Chrysler and surprisingly Toyota are seeing dramatically lower sales and hence purchases this quarter
- Metal Bulletin reported southern Europe rebar and wire rod sales quiet as a result of the construction slow down which is likely to continue for a year or more. MB also reported FeCr prices down 5% in China due to lower demand
- Coking coal spot prices remain at $350/ton but with some trades down to $300/ton, the market for coking coal is still very tight
- Iron ore sales remain stable at $180/ton in the spot market but inventories in China are very high. With fuel and hence freight rates at record highs the higher FOB prices secured by Rio Tinto and BHP are providing lower CIF prices than Vale’s material shipped all the way from Brazil. Consequently Rio and BHP are tipped as better buy options than Vale
With ferrochrome trading at 2x marginal cost there is little to support a further slide in prices. Likewise vanadium prices are sliding but molybdenum and manganese remain firm, although manganese trades at over 3x marginal cost so any weakness in demand could see a slip in prices.
The conclusion to the report was that share prices for producers in certain commodities are at risk because of the prospects for prices this year. Those at risk were steel raw materials and those considered safe were precious metals, aluminum, copper and nickel. This analysis broadly supports our own reports on these metals over recent weeks.
Our thanks to Michael Rawlinson of Liberum Capital for the reproduction of parts of his investors report
Having gone on record a little under two months ago that the lead market had moved into over supply and prices would continue to come off we were a little alarmed to read that our predictions could be thrown into doubt by a recent article drawn from a Bloomberg report . According to this and another report the e-bike or electric bike market in China is consuming 20% of the country’s lead consumption and is rising from 13 million units in 2007 to 16.3 million this year and will be over 23 million by 2010. How could I have missed this burgeoning new market for lead, was I asleep? In a panic I whipped out my calculator and started checking these figures. Each battery uses about 5 kgs but the trend is towards larger machines which will use up to 10 kgs, so on average lets say 8 kgs at present. A little more digging revealed the battery life is only 1.5 to 2 years, so the after market is huge. Assuming your e-bike doesn’t get crushed under a 20 ton truck on China’s rapidly filling highways you will need to replace the battery let’s say every 18 months. China will produce 2.8 million tons of lead this year according to Standard Bank. Calculator is no good, we need a spreadsheet, – we have replacement demand lagging new build but rising with it over time. Five minutes later I have a percentage for e-bike battery consumption in 2008 ” 4.82%. Mmm it’s a bit less than 20% and I suspect closer to reality but even my 4.82% rises to 7.23% next year and 9.6% in 2010 which becomes a significant figure when you consider China will be producing some 3.3 million tons per annum of lead by then.
Will it lift prices? We still think not, lead stocks are rising even faster and the market is due to be in surplus to the tune of 356 thousand tons this year and 709 thousand tons in 2009 ” according to our goods friends at Standard Bank. Since our May article, the price has fallen from $2300/ton to $1700/ton on the LME , so far so good. There is only one thing we like more than finding a new market for metals, and that’s not being proved wrong!
Now why do I feel that many of you would rather be reading about about GrinderGirl than what the CEOs of two major steel producers had to say about futures markets? Well in a way, some of the statements made at that ironically named “Steel Success Strategies” conference were about as crazy as GrinderGirl’s antics. Many of these comments raise a lot of questions. Consider the following:
Dan DiMicco, Chairman and CEO of Nucor recently said “that futures trading was Ã‹Å“phony baloney’ that encouraged unethical and illegal activity.” Why would the CEO of Nucor make this comment? Specifically, who/what does he mean by unethical and illegal? Mortgage CDO traders? We can’t help feeling Dan DiMicco is being deliberately misleading when he discusses futures trading and sub-prime loans in the same breath. He knows there is no connection or even similarity between the two but he is attempting to bad mouth futures markets by making a false link to discredited CDO’s. There is nothing illegal about futures markets they have been in existence for well over 130 years; if there was anything illegal about them you can be sure a lawyer would have found it before now. And tell me is there anything immoral about a buyer or seller wanting to stabilize their company’s prices by buying or selling forward on an exchange? Nucor is making record profits on the back of a market made unnecessarily tight by US producers opportunistically exporting while putting their long suffering domestic customers on allocation. Now Dan, is that a morally defensible position? Read more
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.
Last week I had a chance to pour over our blog statistics. And, we’re happy to report that traffic is steadily growing. But what I really like to track is what people are reading….what gets a lot of visitors and what doesn’t. So it will likely be no surprise that you all are reading everything and anything that has to do with ‘pricing’. Whether it is copper, metal prices in general, steel or aluminum, our top 30 pieces of content are mostly comprised of price trends. We’re also happy to know that some of our more outrageous and silly articles are equally well-read such as Amy’s biking mishap, my Iron Man prototype suggestion and Stuart’s “urban mining” piece.
And though it is a lot more fun to write the lighter pieces, I thought a light intro into a controversial topic might make for good reading as we prepare for the long holiday weekend.
So here is the topic: Why are steel prices so high? Read more
In late afternoon news on Wednesday my Crain’s Chicago alert came in with the headline “Russan Suitor Wins Esmark”. We have been reporting on this story for a couple of weeks now because the battle for Esmark has been well, rather exciting and interesting. To recap, two companies bid for Esmark, Essar of India and OAO Severstal of Russia.
The deal in the making has been exciting because first, it brings new players to the US market which fosters additional competition. And with the steel market we’ve seen, how could that development not be a good thing? Second, I personally believe Severstal would make for the better suitor based on one tiny little point that remained quite buried in much of the press coverage on this story. That one tiny point relates to Severstal developing a more favorable agreement for the United Steel Worker’s union. Now whether you are a union supporter or not is irrelevant. What is relevant is that the winning suitor knew that to make this acquisition successful, it needed the full support of Esmark employees. Kudos to Severstal for passing the “people” test. Now let’s see how they do on the rest…