Articles in Category: Ferrous Metals

Forget oil, coal prices have been going through a bull market for the last year with the curve taking on hockey stick proportions over the last four weeks. Spot prices for thermal coal used in power stations reached $130/ton last week, a 37% increase from the beginning of the year following a 73% rise in 2007. Power station prices reached $145/ton CIF North European seaports in response to severe coal production and shipping constraints in Australia, China and South Africa, three of the largest coal producing countries. Vessels queuing at Australia’s Newcastle port face a month delay and production has been hit by bad weather in Australia’s NW territory and China. Price pressures are exacerbated by critically low inventories according to Goldman Sachs.

All eyes are now on the 2008 annual contracts which, like the iron contracts just concluded, will be under pressure from the high spot prices to show another dramatic rise. Goldman Sachs are predicting thermal coal to rise to $110/mt starting in April, when the new prices come into effect. This represents a rise of 98% from last year’s $55.65/mt.

China has switched from being a coal exporter of 83m tons five years ago to a coal importer today as power demand has rocketed and new coal power stations can not be built fast enough to meet demand. Vietnam, China’s largest supplier, plans to reduce exports by 32% this year due to rising domestic demand for power and   coking coal. South Africa, a net coal exporter will have to import over 22m tonnes this year to replenish depleted stocks. Australia cannot increase exports because of port congestion; new investment is planned but will take a long time to reach fruition.

Cement producers (the third largest user after power and steel) outside Asia are switching from coal to petroleum coke as a cheaper alternative, an option not open to the steel industry.

Meanwhile the steel producers are quickly pushing through price increases on the back of rising costs. Like thermal power companies, the steel industry buys the majority of its high quality coking coal on longer term agreements, usually negotiated annually. Prices have more than doubled this year to over $200/ton but the effects won’t kick in until May-June just as several of the world’s economies may begin to show a softening of demand.

With oil and gas prices high and coal rising fast, do not expect any respite in electricity costs this year. The cost of power may not immediately hit the big western metals producers who buy their power on longer term contracts but it will certainly affect producers in developing countries where contract terms tend to be of shorter duration. This will hit the small to medium sized metal smelters in Asia, Africa and South America particularly hard. These producers have been cushioned from rising power and ore prices by rising refined metal costs over the last few years but the relentless surge in power and ore prices may well meet a stagnant refined metal price if the demand curve flattens towards the end of this year.

What will that mean for metal prices? It’s anyone’s guess but there could be a lot of pain out there if high power prices agreed to now can not be sustained with high metal prices as the year unfolds.

–Stuart Burns

BHP Billiton, the world’s leading diversified mining company, tried to win over smaller rival Rio Tinto through a hostile bid last week to create the world’s third-largest corporation,  behind Exxon Mobil and General Electric. The proposed corporation would become  what Purchasing.com calls “a mining giant worth approximately $400 billion and possibly  … the world’s largest iron-ore supplier” — or, at the very least, a formidable opponent for Vale of Brazil, the current top supplier of iron-ore. A merger could also create the world’s largest producer of copper and aluminum. Despite a 3.4-to-1 takeover offer, however, Rio Tinto seems to have little interest in the deal at its current value. Rio Tinto chairman Paul Skinner wrote a letter to shareholders on Monday explaining the board’s view, noting that the current  unsolicited bid of $147.4 billion  undervalues the company and its stronghold. He stressed that no action is needed on behalf of the shareholders. A copy of the letter can be found online through various news outlets, but here are some quick excerpts:

— “BHP Billiton’s offers, while improved, still fail to recognize the underlying value of Rio Tinto’s assets and prospects.”
— “Our plans are unchanged and will remain so unless a proposal is made that fully reflects the value of Rio Tinto.”
— “BHP Billiton’s announcement is not a firm offer for your shares or ADRs (American Depository Receipts). There is currently no formal offer to consider. You do not need to take any action.”

BHP already increased their  bid to give Rio shareholders 44 percent  of the combined entity rather than the 36 percent  they offered in November. If  a mere half  of Rio shareholders endorse the bid, a hostile takeover could occur. Don Argus, BHP Billiton chairman, released his own letter this week, sending a forceful message to  his company’s shareholders. In the letter, he  told  BHP shareholders, “The offer we have made [to Rio Tinto] is both compelling and responsible and, very importantly, is value enhancing for you.”

The inner workings of the possible deal and legal arrangements between these dual-listed companies tend to be complicated, as the International Herald Tribune disclosed this week. The above-linked article describes a diverse assortment of separate legal arrangements in Australia, Great Britain, and the U.S., all of which will be necessary for these international companies to come to a complete agreement.

Earlier this month, China’s steel sector responded to fears of such an agreement. State-owned Aluminum Corp. of China (Chinalco) decided to purchase a hefty 12 percent of Rio Tinto’s London shares, accounting to nine percent of the entire company, with help from Alcoa Inc. Approximately $14 million was spent on this foothold, which Chinalco hopes will not only prevent the birth of an imposing super giant  — this will be no fledgling infant, as a combined BHP/Rio company could control more than a quarter of the world’s iron-ore  — and diversify Chinalco’s focus.

Similarly, the International Iron and Steel Institute  recently announced that a merger between Rio Tinto and BHP Billiton should not be allowed. The merger, they say, is not in the public interest and would likely create a monopoly.

London-based Rio Tinto will release its full-year earnings this morning at 6 a.m. local time. Bloomberg predicts that second-quarter earnings have amplified, estimating, “[Rio Tinto Group] may report second-half profit rose 9.4 percent because of record iron-ore production and its $38.1 billion acquisition of Alcan Inc.” The figures released today could have a dramatic  effect on the future of the company and its role with BHP Billiton.

Readers, what do you think? How will this play out? How should each company respond to the situation? As always, we would love to hear your thoughts in our comments section.

–Amy Edwards

Update: Rio Tinto Group earnings for 2007 are now available online. –AE

The Organization for Economic Co-operation and Development (OECD) in Paris has just released their Composite Leading Indicators (CLI) for the major economies. Despite the dry economic analysis, one can read some very interesting predictions. I should start here by defining CLI as a qualitative rather than quantitative measure of the trends in an economy. A CLI above the long term average of 100 suggests an economy on a growth trend. Below 100 suggests an economy on a slowdown. It can be more subtle than that but for our purposes we are looking at the medium term trend rather then month to month implications. Read more

Happy Monday. I’m sorry to do this to you but I must go off on a slight rant. I saw an article in ThomasNet (they also have a blog) that came out last week with the headline Chinese Subsidies Hobble US Steel Industry and thought, hmmm….this is going to be interesting. The article discusses a new study published by the AAM (the Alliance for American Manufacturing). That group was founded by a mix of large manufacturing (actually, mostly metals) companies including US Steel and its labor union according to this International Herald Tribune article. Established in the spring of 2007, one of AAM’s first tasks is to, “address how U.S. factory owners and workers have been hurt by what the group says is the Chinese government’s improper currency manipulation and industry subsidies.” Not being that familiar with the AAM I visited their website and learned that despite their non-partisanship mantra, they are completely one-sided in their views. By one sided, I mean that they are there to push what I call “US Big Steel” agenda items. Read more

There’s an age-old adage that one thing is constant ” and it’s change. No, I’m not leading into politics and the 2008 presidential election in the States. Rather, let’s think beyond Super Tuesday and look to the metals industry. With all of the  metals industry’s longstanding practices, are there really ways for metals and metals-related processes and purchases to become eco-friendly? Rest easy, because the answer is a resounding yes. In fact, the metals industry is the vibrant host to several new ecologically aware innovations, and they might be the key to sustainable growth and development. Read more

Several weeks ago, we published an article titled Industrial Economic Signals: Down But Not Out. At that time (January 4, to be exact) everyone was speaking the “R” word but the indicators weren’t saying it was so. We’ll know in a couple of days what the indicators are telling us for the month of January but if you pick up any local paper (I picked up Crain’s Chicago), you can’t go to far without reading headlines such as, “Winded City market mahem, recession darken local business mood”. The story goes on to describe a local castings company whose revenue has dropped by 15% while customers were demanding 15% cost reductions ‘or they would move their business to China or Mexico’ according to the article. (Have at it, we would say as the owner of that business….you aren’t going to get 15% savings out of China these days but we’ll leave that rant to another post.)

Back to the headline at hand. Wall Street, according to a recent Purchasing article, basically feels that prices of steel will increase sharply in Q1 “due to increased buying by service centers, benign imports, and increased export opportunities.” The article quotes Michael Willemse, the industrial products research analyst at CIBC World Markets, as saying, “these factors will offset weak end-market demand in North America” and allow the mills to get $660-$680 prices for March deliveries. The article goes on to say that many of the steel analysts in the last month believe the price of steel is set to rise.

But what goes up must come down. And in this case, we could see supply side cost increases pushing up prices in the first half of the year but weak demand would mean they wouldn’t stick. And we said that back in December when we first launched this blog. Read more

The recent power problems in China, largely caused by bad weather reported in our recent article, comes at the same time as widespread power problems in South Africa have affected Ferro-Chrome, coal and precious metal mining.

So much for mining companies, but what of the manufacturers? It is estimated that the Chinese power problems have idled up to 10% of the country’s steel production and several aluminum pot-lines. Power failures are particularly damaging to aluminum smelters because the molten aluminum rapidly solidifies in the cell, taking months to get the cell operating again at a very high cost. So if power is likely to be disrupted, smelters usually voluntarily take pots out of operation to reduce the demands on the grid and ensure reliable supply for those cells left in operation. That is what is happening at Southern Africa’s three smelters, Bayside 190kt, Hillside 709kt and Mozambique’s Mozal 564kt following warnings from South Africa’s power generator Eskom that due to heavy rains they can’t guarantee power supply for the next 4 weeks. We have heard that due to under investment there will be intermittent cuts for the next 4 to 7 years! In addition, expansion plans at Mozal and Hillside and the proposed new Coega smelter of 700kt are all in doubt according to Standard Bank, Leon Westgate, Base Metals Flashnote, 29 Jan 2008. Read more

To suggest that prices are going to remain firm let alone possibly rise in the face of a potential recession seems perverse but that is the prospect facing the US Tool Steel market in 2008. As predicted in a recent article on Cobalt the metal price has continued to rise with trading this week at $49/lb on the spot market, levels last seen in 1978. The price of a range of other tool steel raw materials have been driven upwards by a combination of tight supply and the changes in Chinese Ferro Alloy export taxes reported in MetalMiner. The Chinese authorities doubled taxes to 20% on a range of Ferro Alloys in an effort to husband domestic supplies and dissuade investment in what are seen as polluting industries. This week has seen increases in Ferro Moly, up $2/lb to $34/lb following 20% price increases during 2007.

Molybdenum  has faced a squeeze as supplies reduced 5% during the year but demand increased by 4% per annum. Analysts expect production to slide by 20 million pounds this year due to reduced output from Kennecott Utah Copper, Codelco in Chile and reduced Chinese exports.

Ferro Tungsten rose $.50/lb this week to trade on the spot market at nearly $16/lb. With the exception of Nickel just about every ingredient in tool steel is on an upward trend driven by the same combination of global supply tightness and reduced Chinese exports following the recent tax changes. Even Natural Gas, a key cost component for North American Stainless Steel mills has been rising on the back of Oil. An additional cost driver, at least for the US market is the weakness of the US dollar, which will increase the cost of imported material. With so much of the US market traditionally supplied from imports, exchange rate weakness will force importers to raise prices and allow domestic producers to push through raw material cost increases that much more readily.

Where this will lead Tool Steel prices as the year unfolds would look to be a one way story. Universal Stainless & Alloy Products increased prices back in September, according to Platts.

Certainly in the short term we see H1 prices continuing to rise, so cover your short term requirements now to carry you through for 6 months but after that, all bets are off. If demand slumps enough (and it appears as though most think China is not immune from an American recession), tool steel will come off too.

–Stuart Burns

While many of you were undoubtedly enjoying your weekend — those of us in Chicago were trying to stay warm in 5 degree weather — I stumbled across an interesting article from the New York Times on how overseas investors are scooping up US companies often at fire sale prices. This should not come as a shock to anyone. All one needs to do is head to a mall and listen to all of the foreign accents. The Brits think there is a two for one sale here on everything and many Europeans are flying to NYC for a weekend getaway and some bargain shopping.

So what does a weekend getaway in NYC have to do with metals? Well, according to the Times article, ThyssenKrupp Stainless just spent $3.7B to build a stainless facility in Calvert Alabama because “of the low cost production of the United States. But that news has been previously reported. What is interesting is the why and the when. Since imports are now so expensive, ThyssenKrupp did what any investor might do and establish a local presence. ThyssenKrupp will now be able to take advantage of NAFTA and position themselves for a larger chunk of the North American stainless market. The goal is a 5% US market share and up to 1M tons of flat rolled product according to the company’s press release on the same subject. According to an article by Recycling Today, “There are 15 prominent manufacturers of stainless steel flat products, three of which (ThyssenKrupp Stainless, the Acerinox Group and Posco) manufacture around 1.8 million metric tons.” This new investment is quite significant.

Perhaps ironically, ThyssenKrupp is pursuing this strategy in the face of sagging profits and sagging demand for stainless, according to this recent Forbes article. But no matter. It’s still a great buyer’s market and there are plenty of foreign firms sniffing around at both American acquisitions as well as greenfield opportunities.

Though some view foreign buying of US companies as a threat, we think it will be a boon to US buyers. From the buyers point of view, competition among suppliers is nearly always a good thing. This new plant will be state of the art if it is to compete in the decades ahead and not only will it increase supply, helping to keep down prices but it will also raise the quality expectations in the wider market place forcing incumbent suppliers to improve quality too.

How can buyers prepare for when ThyssenKrupp comes on stream in 2010? Well, given our 2008 stainless steel price predictions, consider locking in some longer term contracts as prices drop. And maybe, just maybe, buyers will see some better pricing for the longer term.

— Lisa Reisman

In the face of a slowing US economy, a mixed position for the European economies and a still strong Asian market, it is a particularly tough call this year to judge where prices will go. Our call is the US will teeter on recession. Europe though restricted by high ECB interest rates will still enjoy some (if reduced) growth providing the Euro/US Dollar exchange rate does not strangle exports. Asia in general and China in particular are still enjoying robust growth. China may well drop from the double digit growth of the last 5 years to high single digit figures but that is still a very significant driver for the world economy and particularly the world metal markets.

So here are the 2008 predictions:

Read more

1 544 545 546 547