Articles in Category: Ferrous Metals

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.

–Lisa Reisman

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!

–Lisa Reisman

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

I love articles that really make you think. So I particularly reveled in an article that appeared last week in the Financial Times claiming, “new research shows demand from industrial users has spurred a price boom in a range of metals.” I immediately double checked the date of the article to make sure it wasn’t some April Fool’s joke (it wasn’t). I’m assuming that this finding was to contradict the widely held notion (including that of the editors of this blog) that speculative investors and “the stupid money” is what is causing this metals commodity boom.

The article highlights a number of different pieces of analysis. To wit: iron ore and cobalt have risen faster than copper, which is traded on exchanges, according to Lehman Brothers. In addition, ferrochrome, cobalt, molybdenum, magnesium, rhodium, hot rolled steel, iron ore and alumina are all traded over the counter amongst traders, producers and consumers. It is these metals in particular that the article points to that are not easily accessed by speculators and thus the 598% price increases for non-exchange traded metals far exceeds the 246% price ascent for the exchange traded metals. The metals were analyzed from January 2002 to early this year. The article claims that ‘supply and demand factors, as opposed to financial flows are behind the boom in prices’. Read more

For years tungsten supply and demand used to hang in a balance if you will. This widely used but often overlooked metal featured as a significant cost inflator. Tungsten has been considered a strategic metal due to its use in cemented carbide parts for wear resistant applications such as drilling, mining and metalworking. In addition, it is an important constituent in heating and lighting elements, welding, the production of super-alloys and armor piercing ammunition. Consequently tungsten has been considered a metal of strategic importance for many western economies but now other countries are waking up to the rising demand and limited supply situation. Notably China – both the world’s largest producer and consumer – has imposed export taxes on tungsten concentrates and refined metal, reducing exports and increasing imports. Smaller Chinese mines have become depleted and the authorities are seeking to secure resources to meet growing domestic demand. Read more

Try combing the mass media for some positive economic news and let me tell you, it’s hard to find! But when I speak to folks both in and out of manufacturing, the picture is not as doomsday as the mainstream press would have you believe. Okay, I’m not saying everyone is having the best year, but we are hearing that firms are holding their own. I thought you would get a chuckle out of this headline I saw today from the Financial Times entitled: US Midwest Business Activity Contracts. Wait a second, no the headline isn’t funny but the first sentence of the article is, “A pick-up in US new orders and production helped a barometer of regional business activity decline less than expected last month alleviating some of the concerns about the outlook for the US economy.” To reiterate, it’s not wonderful news to be sure, but why so negative?Perhaps negativity sells.

This business activity report published by The National Association of Purchasing Managers showed overall economic contraction (a reading of less than 50 is indicative of a contracting economy vs. a reading of over 50). The index came in at 48.2 for March but this represents a huge improvement from February’s 44.5 reading. One non surprising finding relates to the prices paid for raw materials and other value-add inputs. This index increased from 79.4 to 83.9, according to the survey.

We recently chatted with a VP of Global Procurement for a middle market holding company (they own 7 companies within their portfolio) and their biggest issue is the rising cost of steel. However, as a portfolio, their companies are growing this year. Export orders are up and the balance of end-user industries has helped the holding company weather the storm.

We see strength in demand from other companies ranging from electronic manufacturing to capital equipment (the NAPM activity report indicated a sharp increase in new business orders from 48.8 to 53.9). Purchase volumes are holding steady. Again, perhaps not for all industries but it sure does not appear to be a doomsday scenario for everyone.

Later today, the Institute for Supply Management’s manufacturing index will also be released and though we are likely to see this index also come in under 50, personally I’m going to be looking for that cloud with a silver lining…

–Lisa Reisman

A friend and colleague of mine recently made a very interesting observation about global trading.

She said to me, “Lisa, if you think of importing as a privilege, it will be a lot easier to deal with the nonsense that our government subjects companies to.” My friend’s comment seems very poignant particularly after reading this article from Purchasing Magazine. The article talks about how U.S. Trade Representative Susan Schwab made some recent comments at the World Economic Forum claiming China was violating WTO rules because “Beijing, the world’s largest producer of many industrial commodities, is driving up costs for companies outside China by limiting its export of such key steel ingredients coke, tin, zinc and rare earths; such semiconductor materials as antimony and silicon; tungsten for mining and construction; and fluorspar, magnesium carbonate and talc.”

When China implemented a number of export reforms (as a response to US political pressure because of the trade imbalance) as we reported back in early January, Chinese exports slowed and according to Schwab, created an oversupply situation in China allowing other Chinese producers (such as ceramics and fiber optic producers) to buy these input materials cheaply. These export reforms were designed to steer Chinese companies away from low value-add manufacturing into higher value-add manufacturing. Good for the Chinese, right?

Well, now for the flip side. As many of you saw, and we have reported last week, there are a number of anti-dumping cases going on now (involving metals) in which the Chinese, among others, have been accused of selling “below fair market.” Voila! — one of these products, mattress innersprings, a value-add product, made of steel of all things, was targeted by a few US innerspring producers. The result is that Chinese mattress innerspring manufacturers are no longer exporting to the US and US mattress manufacturers are forced to buy from the “higher-priced” domestic suppliers. Remind me again how that helps the US economy?

So let’s see if I have this straight. Our government does not want China to limit certain exports used to make steel because that would mean US steel producers would have to pay more for key input materials, putting them at a disadvantage to other global steel producers. But US steel producers, in turn, sell steel wire to the mattress innerspring manufacturers, who can no longer be cost-competitive because Chinese-priced springs are coming in “under market value.” Hence the anti-dumping case. When I look through the list of anti-dumping investigations under review, I see a very mixed list of raw materials and value-add products. What message are we trying to make to the WTO? “We’ll decide which products are in violation of WTO rules”? “We’ll decide which industries in the US require the lower priced input materials”? In the meantime, if you feel you can’t sell competitively in the US, go ahead and file an anti-dumping petition. It’s a very mixed if not downright disconcerting message.

This comment from Spend Matters sums it up nicely: “I’m going to bet that if there is an anti-dumping duty on springs, there won’t be one on mattresses containing those springs. I remember once there was a 200% anti-dumping duty on laptop displays but not on laptops containing those displays. Guess what happened to the US laptop building industry?”

It’s quite a political game, these gyrations between WTO violations and anti-dumping petitions. Actually, it makes me wonder if “Big Steel” has got this administration by the short and — oh, I won’t go there…

–Lisa Reisman

Those with long memories in the magnesium industry may recall the last major price rally magnesium went through back in 1994/5. That rally had been sparked by Dow Chemical’s unexpected announcement of the closure of their US facilities. The price peaked around $2.30/lb only to fall back to $0.60-0.80/lb in the following years. Consequently, new investment in magnesium facilities during the 1990’s were few and far between with only the Chinese quietly adding capacity so that by the early part of this decade, China had become the dominant producer of magnesium metal. Today out of a global production of some 670,000 metric tons, China produces 500,000 with producers two, three and four ” Russia, Israel and Kazakhstan languish far behind with 50,000, 28,000 and 20,000 tons of capacity respectively.   Read more

It is hard to believe that we are coming up on the close of the first quarter of 2008. What a quarter it has been! We thought it would be fun to review our predictions from the beginning of the year and grade ourselves. At the same time, we will chime in with what we believe is in store for metals buyers and traders in Q2 and beyond. In case you missed our original predictions, you can find them here. Read more

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