There was a time when if the price of a metal doubled in a year it would be the stuff of headlines. Not only trade journals, but newspapers and even TV channels would post features on the dramatic price rise and the ensuing calamity that was likely to follow ” whether it be a crash in the price or consumers being forced out of business. Nowadays we appear hardened to trebling or even quadrupling of prices in a single year such is the bull market that has prevailed this decade. So as the price of manganese has doubled in the last 12 months maybe we can be forgiven for not having taken too much notice. Read more
Articles in Category: Ferrous Metals
Several weeks ago, a gentleman that we know (no, this is not an Eliot Spitzer story), mentioned to us that he was looking to re-source a number of different assemblies that he currently has in China, hopefully to Mexico. The assemblies are fabricated parts, quite heavy by weight, powder coated with some welds. It’s a classic mid-market assembly….relatively low volume (less than 10,000 assemblies annually), high individual dollar value but low aggregate value (a couple of hundred thousand dollars). The gentleman, leading the effort at the company, shared his frustration over not identifying a single source in Mexico that was remotely competitive. How uncompetitive were the Mexican sources? Nearly double the delivered costs from China! Read more
Some of you may remember hearing from us several weeks ago regarding plant shut downs in China in the run-up to the Olympics. Well, it has been decided for sure, according to my friend Richard Brubaker who writes a terrific blog at All Roads Lead to China and has been covering this story. But the plant shut-downs are only one part of the story. As Richard points out, the other short term issue of great concern to anyone importing anything from Northern China is the trucks-off-the-road edict in and around Beijing. In short if you import metal products or finished goods containing metal products, you could be facing delays and/or plant shut downs, depending on a range of factors.
Rich discusses several risks with the new closures including: a possible expansion of the radius of closures if target pollution levels are not met, water rationing due to a continued drought and energy shortages could close additional manufacturing facilities. He is spot on. Our man on the ground in China offered up some additional perspectives:
- Coal plants were on the list of plants to be shut down. But coal is in huge demand in China which could exacerbate energy shortages. Any high energy consuming industries such as ferro alloys, pig iron and refineries will be greatly affected
- Most metal exports have already been greatly curbed, due to export tax changes (the exception is high precision machining)
Since Jason is based out of Tianjin, one of the cities affected by the plant closures, we asked him to comment on the affect of the closures on metals manufacturers. He said it was likely some plants may close forever whereas others will only close for the time being. The export duties have put some ferro alloy plants out of business already. When asked if the proposed provinces/regions will be sufficient to achieve cleaner air for the Olympics, Jason said we may hear of the south delivering water to the North (e.g. digging a canal from the Yangtzi River to Beijing). All high pollution emitting companies along the river have been forced to shut down already. And many in China feel this stricter policy is necessary to further reduce pollution.What is perhaps most interesting is the dramatic change all of these factors are having on trade between the US and China. Many textile plants, shoe making companies and clothing factories are no longer in business. Many outbound vessels are being shipped with dead freight (since Q4 ’07). There is now no problem getting vessel space for west bound goods and it is now possible to book containers out of China at the last minute. Imagine that! Stay tuned.
Shipping Lines use the same principles of supply and demand to judge freight rates as does any other business. Typically a
route in one direction is more popular than the reverse. For example containers travelling from China or Europe to the USA, bringing in finished goods, commanded a higher rate than the same containers being sent back to those overseas markets.
Shipping lines are keen just to re-position the container back to where the demand is greatest ready for the next load and
would happily take low value cargo (at low rates) like metal scrap just to cover the cost of returning the container. The US
demand for imports over the last 10 years has made this a steady one way bet, until about 12 months ago according to the the Wall Street Journal. Read more
It was meant to come to market in 2006, then in 2007 and with much anticipation in Q1 2008. I speak of course of the NYMEX HR steel futures contract. But the start date has been put back yet again. Meanwhile the LME steel billet contract has got off to a quiet but solid start in London back in February. It will go live later this month. Further shapes and grades are being added as the contract gains popularity but meanwhile North American buyers will have to wait a while longer for the proposed start date of their HR coil contract. Read more
Nothing seems to rattle the tail of a manufacturing organization quite like being asked to participate in a reverse auction. But it is our contention that reverse auctions within the manufacturing sector are way down according to a comment in this article which appeared over on Spend Matters a little while ago. There are several comments in the post worth reading. But I think in context of metals raw materials, semi-finished materials and possibly further worked products containing metals, auctions are down and possibly out but not necessarily for the reasons you might suspect. Read more
I am reminded every day how sourcing strategies in today’s red hot metals markets don’t really resemble the strategies of just a couple of years ago. Today, we learned of a company whose China supplier needed to execute a contract cancellation clause because it couldn’t purchase its raw materials at a price to supply profitably. It’s no surprise as everyone can attest. In addition to rising costs for non-ferrous and ferrous metals, many of the metals needed to make other metals such as cobalt, beryllium, tin, titanium and molybdenum are also in short supply.
So besides signing long term agreements, many western firms use forward contracts, options, swaps etc. But this is not a practice that appears “typical” in most Chinese operations. The notion of Risk Management has yet to hit many global suppliers. Luckily the buying organization, whose contract had been canceled, already developed several alternatives and the impact of the cancelled contract will likely be minimal.
Forward contracts, options, swaps etc are the stuff made of traders but they are also the “new tools” of buyers and suppliers around the world. Check out this post from affiliate blog Spend Matters. New steel futures contracts will create more opportunities for steel buyers. Watch this space for information on NYMEX’s new hot rolled steel futures market to open later this year.
But I digress. I wasn’t going to write about metals futures contracts.
Even though we still predict some metals prices to drop later this year, I can’t help but wonder how purchasing organizations have modified their negotiation strategies. Or, in some cases, how they may not. According to another post on Spend Matters, “historically, the standard approach to reducing commodity price volatility in the supply tiers was to hammer and threaten individual suppliers in the hopes of avoiding price increases. This often involved threatening the use of “reverse auctions” when market conditions change. Other options included purchasing on the spot market whenever conditions looked unfavorable for on-contract spend and relying on trading companies to individually quote the best possible piece-part price on items. Perhaps the last ditch option was to pass along price increases to customers by increasing the amount you charged for products.”
So what do you do if your supplier cancels a contract because of rising raw material costs? If you re-negotiate with the incumbent supplier but agree upon a higher price – because alternatives may be too difficult to implement – are you perceived ‘as caving in’ to the supplier? In the case of a supply relationship a buying organization hopes to develop for the long term, how would this be perceived in terms of future negotiations? The whole notion of game theory changes when markets shift from buyer to supplier. Buyer sourcing tactics change too. But one thing is for sure, when overseas suppliers start canceling export contracts, a heavy hammer will do no good.
With both global prices and sales of steel steaming away over the last twelve months, the sometimes overlooked stainless market has been quietly contracting. The market contracted by 2.9% in terms of production last year to 27.6 million tons according to the International Stainless Forum. But the reasons for the decline – a sharp fall in nickel prices, appears counter-intuitive to us. We expected the fall in stainless demand in the second half of 2007, due to the rise in nickel prices in the first half of the year, as manufacturers switched from stainless to other products. There is a lag in these situations and production is hit only 6-9 months after the price spike. Western Europe and Africa reported a 13.3% decrease in stainless steel production to 8.7 million tons during 2007 while the Americas reported a 15.2% decrease in production to 2.5 million tons.
Asia, on the other hand, saw stainless steel production rise 6.3% to 16 million tons in 2007. China is now the world’s largest producer. Its production rose 36% to 7.2 million tons. While at the same time, the Chinese government has actively tried to curb exports of semi finished steel products by adjusting the incentives and penalties for exports. The result has been a decrease in exports of semis and an increase in exports of stainless containing components and products. Read more
The Institute of Supply Management (ISM) released it’s monthly report last week on the state of the economy for the month of March. Instead of reporting the results which are widely available you can read them here, we thought we would call out some of the more pertinent metals related data. The ISM findings in general showed contraction in the manufacturing sector (48.6 reading). 50 indicates growth. But the data had improved over February’s 48.3 reading.
Metals, which according to the findings, increased in price include: aluminum, aluminum extrusions, copper, copper laden products and steel. Other noteworthy indicators in the report include imports. In the case of metals, the industries that reported decreases during March are: primary metals, fabricated metal products, among others some of which include metals as finished products. Export orders increased for the following: electrical equipment, appliances and components; paper products; primary metals; miscellaneous manufacturing; food, beverage and tobacco products; computer and electronic products; transportation equipment; chemical products; and machinery.
Still significantly, many industries face rising prices and metals are no exception. ISM findings indicate prices are still on the rise for primary metals and fabricated metals. Specific feedback from survey participants related to the metals industry include the following:
- “Automotive demand continues to decline.” (Fabricated Metal Products)
- “Business is still cautiously optimistic.” (Machinery)
- “European business continues robust.” (Primary Metals)
Given some of the latest manufacturing news, we wanted to introduce you to a trusted and respected colleague of ours that works in the field of lean manufacturing and purchasing cost control, Cadent Resources. In an effort to share cost reduction ideas amongst the manufacturing community we are looking for our readers to share their practices on how to control inventory and streamline purchasing practices. After you have shared your idea, come back in May and vote for what you think are the “best” or most practical ideas. (We’ll do a follow-up post in May)
Suggestions should be 100 words or less and must contain an explanation of what action should be taken and why. You can post your suggestions as a comment on our Speed of Demand and Supply Blog at “What are you Doing Differently with Inventory and Purchasing Today?” Don’t keep this contest to yourself – share it with your peers to get them to enter an idea or vote for yours.
Suggestions will be accepted until the end of April with voting commencing on May 1st and ending on May 16th. A minimum of 10 suggestions must be entered for voting and prize eligibility. Your suggestions will be posted on the Cadent Resources Wiki and then voted on. The suggestion receiving the most votes will win a $150 gas card.
Thank you in advance for your participation!
It may be illegal (and so is not even officially admitted) but it appears pretty obvious that the Chinese authorities are playing hard ball in their iron ore price negotiations with Rio Tinto and BHP Billiton. Vessels destined for the spot market require licences to discharge, not normally a problem in a country that imports some 40% of its iron ore requirements but only 35% of which are supplied at the long term contract price.
China concluded a contract price with Vale, the world’s largest producer from Brazil, of about USD 76/ton for this year but spot market prices are over USD 200/ton. Rio and BHP are holding out for higher contract prices in their annual round of negotiations on the grounds that it costs less for the Chinese to ship from Australia to China than it does for their Brazilian competitors shipments from Vale. Although the contracts are based on the FOB port of export, the Australians are trying to take advantage of the lower freight rate they know their clients pay when they buy Australian ore. Both Brazilian and Australian quality is much better than lower grade Chinese domestic or imported Indian iron ores, both of which trade for over $200/ton on the spot market in China. Read more