Articles in Category: Ferrous Metals

We had a chance to take in a little R&R this weekend at a farm we go to in Wisconsin. Looking at the cows and pigs, I was trying to find a topic that may be fitting for the sights when lo and behold I stumbled upon this story.

The plethora of headlines  highlighting who is doing well in a rising steel market never ceases to amaze me. Check out this article on US metal distributor Reliance Steel & Aluminum’s second quarter   earnings results. According to the article, David H. Hannah, Chairman and Chief Executive Officer of Reliance said, “The 2008 second quarter turned out to be quite a bit better than we had originally anticipated. The main reason for the increased earnings was higher carbon steel prices, which resulted in higher gross profit margins as we quickly passed through the increases to our customers.”

Now if that isn’t a brilliant earnings strategy I don’t know what is. He’s almost gloating about his company’s performance which had nothing to do with any apparent: operational improvements, better customer service, acquisitions of new clients or adding any kind of value. As they say, a pig will eat just about anything put in front of it and will keep eating and eating until it can’t get any bigger. But the good news for metals buyers is we all know who will get slaughtered in the end. I can’t wait to get out my Smokey Joe when the markets turn.

–Lisa Reisman

My hometown paper, The Chicago Tribune had a great little article on an anti-dumping case involving dry cleaner hangers. It’s interesting because everyone who takes their clothes to the dry cleaners will feel the pain of the ITC’s (International Trade Commission) ruling. Our government ruled in favor of the hanger producers here in the US and imposed anywhere from a 33% to a 164.5% duty, according to the ITC.

What does that mean for Joe laundry goer? Well, a box of pant hangers was $24 six months ago, according to the Tribune article and is now $50, because that is the going rate of hangers made by American producers. Dry cleaners are either eating that cost or passing it onto the consumer. We have published several posts on the ill effects these ITC decisions have on global trade and more important, inflation here in the US here in the US. When you cut off imports, domestic producers increase prices which causes inflation. Inflation causes people to reign in spending and that is exactly what the government does not want you to do. So why do we continue to listen to these anti-dumping claims? Because Big Steel and their specialty steel producer brethren have perfected the art of using these antiquated laws to their advantage.

What was perhaps the most interesting element of the article, however, were all of the comments suggesting that dry cleaners ought to reward customers for bringing back and recycling hangers. What a great idea, though my dry cleaner refused to pay me or rebate me anything for returning hangers when I recently offered to. Perhaps she has a cheap Korean source? Well, I’m sure the US producers will put the kibosh on that soon.

–Lisa Reisman

I grew up in a family of teachers, writers and musicians (though my mother should have been a mechanical engineer). So having a son who is obsessed with manufacturing processes (his favorite show is How It’s Made) gives me a chuckle. It’s not enough for him to know that his new Razor is made of metal; he needed to know if it was “stainless steel” (it’s actually aluminum). And so when his robotic engineer cousin Scott showed up with the toy Capsela well, let’s put it this way, we didn’t hear a peep out of our son.

Scott designs robotic medical equipment during the day and nifty gadgets at night. I thought it would be interesting to get his perspective on the use of metals in the medical device industry as well as test a few industry stereotypes. Read more

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  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.

–Stuart Burns

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.

–Lisa Reisman

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.

–Stuart Burns

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!

–Stuart Burns

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 Ëœphony 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

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