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…
Several big iron ore contracts are set to expire at the end of this month. According to a recent Financial Times article, “Macquarie, the Australian bank, said Rio was committed to securing a price in excess of the 85-95 per cent the market is expecting. That stance suggests investors should be prepared for an extended and potentially hostile conclusion to the negotiations, it said in a report.” To add salt to the wound, according to this Forbes article, BHP Billiton has also been looking for a “freight premium to reflect the lower cost of shipping ore to China from their mines in Australia than from Brazilian mines.” I had to re-read that last sentence a couple of times. In short, BHP Billiton because it is closer to China (Australia vs. Brazil) wants to make sure that any potential savings the Chinese receive in freight is lost in material (resulting in more profits for BHP Billiton). But Vale, the Brazilian producer only received a 65% increase, according to the same article.
This news should come as no surprise. In fact, we covered it back in early April. Secretly I’m pleased to learn the Chinese aren’t just going to take this and instead, will likely postpone orders for as long as possible in retaliation against the iron ore producers who would then force the Chinese to buy off the [much more] expensive spot markets. The Forbes article quotes Lehman Brothers, “each 10 percent change in the iron ore contract price should result in a 9 percent change in Rio Tinto’s earnings and a 3.5 percent change in BHP Billiton’s earnings.”
I wonder what Lehman’s earnings analysis for Rio Tinto and BHP Billiton looks like when Chinese orders drop off for a quarter or more? Now that would be fun to watch!
Last week, West Virginia-based Esmark Inc. implemented a shareholder’s rights plan, also known as a “poison pill” anti-takeover measure, while the two companies bidding for Esmark continue to battle. As we discussed late last month, the interest from Russian metals-and-mining company OAO Severstal and steelmaker Essar Steel Holdings Ltd. of India springs from their desire to create a foothold in the U.S. market. Although Essar was unofficially selected for the buyout this week, the choice is not final due to disputes within the companies and Esmark’s steelworkers’ union.
While the future is still uncertain, the poison pill is activated if a company or person attempts to acquire more than 15% of Esmark’s common stock. It doesn’t apply to stockholders who already hold 15% or more or a purchase offer from the United Steelworkers, Esmark’s labor union.
“We believe the adoption of the stockholders-rights agreement will … maximize shareholder value as we move forward with the current process to sell the company,” Esmark’s Chief Executive James P. Bouchard told the Wall Street Journal this Monday. Read more
I am sort of surprised to see that nobody seems to be talking about a pretty major acquisition that took place yesterday. No. 1 metal service center Reliance Steel & Aluminum Co., announced they intend to acquire No. 10 service center PNA Group from Platinum Equity, a private equity firm. In a deal valued at $1.1b, it is significant to metals buyers throughout the US. Given the rapid ascent of steel prices (PNA’s primary products), the timing of this sale worked in Platinum Equity’s favor.
So what is driving the deal? The first is market entree to Mexico, where PNA has joint ventures established. That is a pretty smart move given some of the re-sourcing activities going on between China and Mexico . It’s hard to believe that the market leader, Reliance did not have a Mexican operation already but there you have it. The second reason behind the deal is the quest to continue Reliance’s spectacular stock market climb. Since the beginning of this year, Reliance stock prices have increased by 56% according to this recent research report. The acquisition of PNA is immediately “accretive” to earnings. This means it will likely lead to increased earnings per share immediately.
According to that same research report, published just one day prior to the acquisition, the news is not all positive. Sellers are starting to short the stock, anticipating a fall and investors are not convinced of the stock’s strength. From an operational perspective, “April carbon steel inventories, as reported by Metal Service Center Institute, were higher as flat rolled shipments by the service centers fell, offsetting increases in plate, beams, bars, and pipe and tube,” according to Purchasing.com. Furthermore, July steel hikes are much less than April, May’s or June’s so maybe there is reason for investors to start becoming a bit pessimistic about steel producers and service centers.
As Reliance digests their most recent acquisition perhaps the rest of us might catch our breath.
Nothing like pointing out the obvious, so it was with a chuckle that I read a report in GlobalAutoIndustry from Xinhua News that The China Iron and Steel Association (CISA) has denied rumors of an increase in steel export taxes this past weekend. Apparently, this is pretty scandalous stuff, “some media reports, which speculated that export taxes on more than 80 types of steel products might be raised by 5 to 10 percent as of June 1, had ‘disordered the industry’s normal production and exports,’ the CISA said in a statement on its website.” Apparently this top secret information “went against the stability of the economy and the ongoing quake-relief work”.
Umm, excuse me, but are we at all surprised or shocked at this top secret leak over export tax increases? I mean, they sort of have been increasing since 2005. Since this blog went live in December of 2007, we’ve covered this juicy news story many times: here, here and here. Actually, there are a few more articles on the topic, but you get my point. The article goes on to show the actual drops in steel exports coming from China.
However I will share the one little interesting nugget from the article – in the first four months of 2008, “China sold 1.79 million tons of rolled steel to Vietnam,” a 66% increase. As a comparison, China exported 1.51 million tons of rolled steel to the EU during those same four months and 997,000 tons to the US. Me thinks it’s time to check out Vietnam.
My favorite metals-related article this week? Let Burning Metals Lie, a piece on the risks of industrial metal fires, featured online in Popular Science this Wednesday. Firefighters, it appears, have little control over these fires, so halting the blaze is out of the question. Instead, easily ignited metals such as lithium, sodium, and magnesium, have to control themselves: they “build up ash that chokes off their oxygen supply, so they slowly burn out.” Attempting to resist one of these fires will make matters much, much worse. Read more
I used to work with someone back in my days at Arthur Andersen who used to say, “the first time you hear something, it’s a data point….the second time you hear something, it’s a line but the third time you hear something, it’s a trend.” First, let me relay to you a few data points that I have been wondering about:
1. Gold futures fell 3% on news of a pressured dollar.
2. Fed Chairman Ben Bernanke recently said inflation risks are growing.
3. The Fed is also concerned about a “dollar rout”. Since that term doesn’t make plain sense to me, I refer to a link to the Economist on the subject the subject – the point here is The Fed wants to be sure there is no free fall in the value of the dollar
So what can we conclude by these data points (besides that there are three of them)? There are a number of conclusions one can draw. First and foremost, is to point out the inverse relationship between gold and the dollar. When gold goes up (it did hit $1000 ounce earlier this year), the dollar is down (the dollar slide is likely what causes gold to go up). But the point here is that gold futures are coming down which means the dollar may be on the rise. Second, with Fed Chairman Bernanke publicly stating his concern about inflation, he is hinting that the economy may need some interest rate increases in the near future. When interest rates go up, so does the dollar.
What other factoids can we bring up? Exports are starting to drop off a bit and lo and behold, steel imports are starting to come up a bit. Imports help keep inflationary pressures in check (as many of you steel buyers would attest to). I’m not an economist but I’m going to call it here…the dollar has bottomed out and may be on a slow ascent. We’re going to see more imports and all you metals buyers out there will start to see a few chinks in the armor.
This weekend we had a chance to catch up with a partner of ours, German Dominguez, who is based out of Juarez, Mexico. German sources parts on behalf of American companies. This is Part One of a Two Part interview.
Question: How many programs have you quoted on during the past 4-5 months where the buyer was trying to decide where to go between China vs. Mexico? Please describe what types of program these were as well.
Answer: I have looked at 10 new programs in total. Six of them moved to Mexico (four were for new products) and two migrated from China. Four were awarded to China (and one went from Mexico to China). Four of these programs were for new products altogether where we looked at a full concept-to-market and two programs were currently sourced in China but the buyer had hoped to re-source to Mexico. The re-sourcing projects were machined components and light metal fabrications. The new products were machined components and light metal fabrication with electro-mechanical components. So I could characterize all of these as value-added parts and/or assemblies.
Finnish-based Outokumpu, the second largest stainless steel maker in the world, is one step closer to reaching their ultimate goal becoming the world’s number one stainless steel maker. Earlier this week, Outokumpu announced plans to double their ferrochrome production to 530,000 tons per year, making the company self-sufficient in ferrochrome. Ferrochrome is essential for the stainless steel industry, since stainless steel expends more than 80 percent of all ferrochrome produced. Read more
When is a contract not a contract? Apparently it’s when you are a U.S. Steel company in an extremely tight market. Honda chief executive Takeo Fukui told Reuters in Tokyo that an unnamed U.S. mill had requested (polite speak for demanded) a price increase during April on an annual contract negotiated earlier this year. Favorites are U.S. Steel or Arcelor Mittal, as both have imposed surcharges on contracts recently and both have been at the forefront of pushing through price increases above those widely believed purely necessary to cover raw material costs. If Honda has been asked to pay more, then probably so have Toyota and Nissan. This comes on top of cost increases facing the Japanese transplants, caused by the weak dollar inflating the cost of imported parts made overseas. Read more