Articles in Category: Imports

Reshoring should be nothing new to MetalMiner readers, as we’ve covered closely as it relates to US manufacturing. (Feel free to get a refresher on the pros and cons by clicking on the previous links.) For some, it may make more business sense to reshore labor-intensive castings, stampings, or other industrial metal parts or machinery, as shipping cost considerations, not to mention labor, factor in heavily.

But TVs? After LG Electronics sucked Zenith up into its folds 17 years ago, we thought TV production was never coming back from China!

Turns out a couple Midwestern companies are bucking the trend. A recent article outlines how Minnesota-based Element Electronics and Michigan-based Lotus International are teaming up to make TVs right here in the Midwest.

Michael O’Shaughnessy Element’s owner-president (and former Polaroid CEO), will employ 100 workers at Lotus’ Canton, Mich., plant, producing 46-inch TVs as early as March, according to the article. 100 workers? Peanuts!” you may say; and you’d have a point. But, one step at a time, O’Shaughnessy’s approach seems to say: “We are doing this to set an example … this is the right thing to do,” the article quotes him as saying.

So how will Element make a killer profit if the US-made TVs will cost the exact same as those units made in and shipped from China, as the company promises?

Lotus’s production facilities are tooled to service both the electronics and automotive industries, and its value propositions (not only being able to assemble, test and deliver final products upon manufacturers supplying components, but managing the entire supply chain by working diligently with the vendors including procurement, logistics and providing assembly, testing services and coordinating final delivery of the product”) certainly sound like they would reduce a partner company’s total cost of ownership (TCO).

Element Electronics started out by importing TVs and other electronics to sell at Circuit City (wow, remember them?), and in 2011 contracted with Tongfang Global, based in Shenyang, to produce its products. However, once Element hires its first American workers in Canton, they’ll pretty much just be assembling — nearly all of the parts for TVs are still made in China, so Element will have to ship those from Shenyang.

Also, according to O’Shaughnessy, the economics only work for TVs 46 inches and larger. On a price basis, apparently, it still costs Element less in parts/labor/shipping etc. to make small TVs in China. (Although Chinese labor costs have been slowly increasing, other costs have been dropping in the short term — cerium oxide, europium oxide, and terbium oxide and metal, all rare earth metals used in TV image coloring and screens, for example, have all fallen off 15-20 percent over the last 2 months, according to our MetalMiner IndX.)

So ostensibly, companies like Element likely want to keep a closer eye on the end of their supply chain and finished product quality, as well as proximity to their core consumer markets, not to mention ‘doing the right thing’ and creating more US jobs. (‘Doing the right thing’ is all well and good, but if there’s no profit motive, most companies likely won’t be paying workers simply out of social compassion.)

Will there be any government incentives to continue reshoring? If so, what are they?

Check in for Part Two later today.

–Taras Berezowsky

TC Malhotra contributes to MetalMiner from New Delhi.

The impact of rupee depreciation on Indian auto companies is so high that many car- and car-parts makers are adopting various strategies to control their import costs.

Upward trends in commodities prices have further burdened the auto firms and as a result, the pressure on margins has been high for auto and motor-parts makers. India’s rupee, over the last month, had reached its lowest ever point against the dollar at Rs 52.50 due to growing demand for the dollar. (Check back in later today for a post on undervalued currency and commodity volatility.)

While auto giants like Toyota and General Motors are considering a price hike to offset the rising import costs on components, some leading auto-parts suppliers are considering shifting some production to India to reduce their import bills.

Indian news agency PTI quoted GM India Vice-President P. Balendran as saying that they import lots of parts and the rupee depreciation is impacting them. They were planning to review prices in January, but due to the currency fluctuation, may have to do it sooner rather than later, Balendran was quoted as saying.

Toyota’s Kirloskar Motor (TKM) Deputy Managing Director Shekar Viswanathan was quoted as saying that rupee depreciation could result in the company posting a loss for this year. Sandeep Singh, DGM (Marketing) at TKM echoed that their company had been seriously affected by the exchange rate volatility. It was double jeopardy for the Indian operations of the company, as the yen was growing while the rupee was depreciating. This was greatly affecting their margins.

Toyota Kirloskar is a joint venture between Toyota Motor Corporation and Kirloskar Systems.

Meanwhile, component makers at the ongoing Auto Expo said the depreciation in the currency, which dropped 19 percent against the dollar in 2011, had increased costs and hurt their profits during the year.

Spending on imports of auto parts increased by 22.1 percent to Rs 105 billion ($210 million) in the six months to October, commerce ministry data shows.

Carmakers face fewer difficulties because they typically have larger turnovers and are more likely to be hedged against currency fluctuations. High interest rates and slowing demand have also hit smaller component makers before vehicle manufacturers.

Onshoring – and Go!

Some carmakers are discovering that sourcing locally provides respite in troubled times.

According to a report published in Business Line, auto companies have drawn up aggressive plans to step up localization. Diesel engines for the Nissan Micra are currently being imported from Europe, but the company plans to manufacture this locally by setting up a diesel engine plant next to its current plant in Oragadam, Chennai. The diesel variant of the Sunny is expected to benefit from this move.

The Business Line report says that Toyota has also announced an engine-and-gearbox plant in India. Valeo, a French components manufacturer, is expanding its friction material factory at Maraimalainagar, Chennai. It is also setting up a new factory at Oragadam for clutches.

In addition, Valeo is looking to locally manufacture wiper systems, top column modules, compressors and air management systems.

–TC Malhotra

After reading a fair amount of provocative material on the steady, unmistakable shift in China’s society/economy (and subsequently deciding to write a series of posts on how this topic relates to the world of metals sourcing), I came across a very apt definition of “intelligence by the founder and CEO of Stratfor, George Friedman. It’s no surprise that Friedman would be writing about intelligence, seeing as how Stratfor’s raison d’etre is to provide their customers with geopolitical intelligence to aid in their decision-making whatever business they may be in.

“As a way of looking at the world and a method for collecting information, intelligence differs from journalism in many ways, Friedman wrote in a form email. “Perhaps the most important is that where journalism focuses on what has happened, intelligence also concerns itself with what will happen — and even more important, why it will happen.

Now, if this rings a bell, it should. In the paragraph above, the words “intelligence could be substituted with MetalMiner, and the result would be a sort of mission statement for our publication. In other words, while we report on what happens in the metals, manufacturing and policy worlds, we strive to add a little more a forward-looking bent that we hope (more often than not) gives our readers actionable intelligence and a different way of looking at the markets. So, it’s only fair to assume that right now, you may be asking yourself: where are you going with this?

Answer: where none of us has ever gone before. Namely, into a 21st century world not only where China is already on everyone’s radar, but also where changes in Chinese society, economy and policy may put the entire globe on an unprecedented track into the future. As nearly everything that happens in Chinese economy and government somehow touches the global metals supply chain, it seems essential to take a step back and analyze which factors in today’s changing China may have the broadest or, conversely, most acute impact.

A multitude of sources several Stratfor intelligence reports; articles from the Economist, the Boston Consulting Group and Trade Reform, among others; and data from the National Bureau of Statistics of China, not to mention countless other bureaus formed the basis of our need to explore this massive issue. And the torrent of reporting on China will only keep coming harder and stronger so how to make sense of it all?

Well, the key is to begin somewhere, and that’s what we’re going to do with this mini-series (not that we haven’t been extensively covering China already just enter “China into our search on the MetalMiner home page and it’ll quickly become evident). We’ll look in-depth at what China’s demographics, upcoming governmental shifts, economic policy changes, the import/export balance, arts and media repression and the youth movement all have to do with our metals world. Believe you me there’s plenty out there on which to base future decisions, tie in with existing business philosophy and transactions, and create worldviews.

Check back in soon for Part One.

–Taras Berezowsky

Commodity prices are on the rise again, even for products like oil and coal for which there is little discernible supply shortness. We wrote about the rise in thermal coal prices last month driven by demand across the emerging market but particularly in India and China.

Source: Reuters

This month China announced measures to try to reduce their import bill by boosting domestic production. At a conference last week, Reuters reported that China’s top energy official, Zhang Guobao, said China’s overall coal production is expected to increase by some 200 million tons to about 3.2 billion tons this year. At the same time, they continue to try and consolidate production to a smaller number of major players, cutting out less efficient small mines with poor safety records.

Not so fortunate is India, whose rapidly rising demand for thermal coal will increasingly need to be met by imports. The Indian economy is on track to grow 8.5% in the current fiscal year, but demand for coal is forecast to grow by 11% as the country aims to halve its peak-hour power deficit of nearly 14% over the next two years. India will no doubt be pleased to hear of any moves by China that mitigates their impact of the global seaborne coal market by boosting domestic production. The goal for India is to triple electricity generating capacity over the next decade and so Coal India, which in contrast to China’s fragmented industry accounts for nearly 80% of coal output in the country, is having to look at projects in Australia and Indonesia to maintain its domestic supply dominance. A recent IPO valued the company at $48.9bn placing it fourth in the country behind Reliance Industries, state owned oil company ONGC and State Bank of India.

The Indian state is embarking on a program of share sales to take advantage of booming commodity prices and probably to inject additional commercial skills into state sector companies. Following the successful offering of Coal India, 15 times over subscribed according to Reuters, Power Grid Corp is looking to raise $1.9bn this month followed by Manganese Ore India Ltd next month and additional shares in Hindustan Copper. The increased global investor liquidity following US quantitative easing will add support to India’s share sale program, as will firm commodity prices. Like China, major Indian state companies are gradually coming to the private market and gaining recognition as global players in their own right. Unlike China, India broadly lets their privatized companies behave like private entities rather than seek permission from the state at every turn. With solid growth and a gradually more accessible economy, India is certainly commanding a lot of attention in the resources sector with these IPOs.

–Stuart Burns

As we head to the polls today in this important mid-term election, we wanted to take the opportunity to once again highlight some of the key policy platforms as well as specific pieces of legislation (and in some cases regulation) likely to impact manufacturing and metal buying organizations. We have covered many of these policies in recent months on MetalMiner and have recapped a few of them and added a few twists.

Plank One: Strong Manufacturing policy to drive job growth – We have often discussed a series of federal policies some positive and some negative that will or would have a lasting impact on the ability of corporate (or small businesses for that matter) to positively impact the job situation and stimulate growth (including export growth which we will come to in a moment). The policies include:

  • R&D tax credits The Obama administration has publicly stated it wants to “enhance, make simpler and make permanent these tax credits. We think this contributes to a vital manufacturing policy
  • Tax policy Much of the discussion around tax policy relates to individuals earning more than $200k or couples earning more than $250k and the fact that their taxes will increase in January 2011. These people are of course considered “rich but what many fail to see is that couples earning greater than $250k/year (or individuals earning over $200k/year) are often owners of S corporations – job shops, small manufacturers and small business owners those most likely to create new jobs
  • Uncertainty as to the impact of new health care legislation on businesses of all sizes (as an example, our own health care premiums increased by 28% for next year, the single largest percentage increase we have ever seen)
  • Corporate tax rates small and medium sized manufacturers end up paying a much greater percentage of their profits on taxes vs. some companies such as Google read the accompanying article for more information on the structures behind these effective tax rate minimization strategies (the US has one of the highest corporate tax rates in the world 35% which results in:
  • Lower foreign direct investment the US used to be the leader in foreign direct investment but has now fallen to fourth place

Plank Two: Energy policy we could probably write ten posts on energy policy. Instead we’ll link to one that examines the facts behind an average (dare we say typical) American’s energy consumption and what that means from a policy perspective. Carbon cap and trade legislation, despite not having passed during this last session of Congress could get passed during a lame duck Congress. The uncertainty around energy policy (among other uncertain policies) continues to mute economic growth.

Plank Three: International Trade policy – We take a page from the Consumer Metrics Institute, with its analysis of GDP and in particular, some recent conclusions on the impact of X-M (exports imports) on overall trade numbers. First the GDP equation:

GDP = private consumption + gross investment + government spending + (exports − imports)

Or in algebraic shorthand: GDP = C + I + G + (X-M)

But look closer and we see that tremendous impact the trade balance/deficit has on overall economic numbers:

According to the Consumer Metrics Institute, “One of the real eye-openers in the above table is how much the export-import portion of the equation (“X-M”) has impacted the headline growth number over the past seven quarters. For the newly reported quarter the net contribution from foreign trade was -2.0%, as contrasted with a -3.5% number for the prior quarter — resulting in an improvement of 1.5% in the foreign trade contribution relative to the prior quarter.

But we’d caution readers not to get overly excited. The export numbers have declined for three consecutive quarters. Any improvement has more to do with a slowing growth rate of imports that as our friends at ISRI have pointed out to us, tend to go hand in hand with weaker economic activity. And with that a slew of policies aimed at re-balancing the trade situation (see our follow-up post this afternoon).

Much is at stake this mid-term election cycle. Vote wisely!

–Lisa Reisman

Success in securing steel import restrictions has encouraged the United Steelworkers and a number of producers to push for similar measures against Chinese aluminum extrusions. Coming fast on the heals of US countervailing duties announced in August ranging from 8.18% to 137.65%, the US Department of Commerce announced last week that they would set preliminary anti-dumping duties on imports of aluminum extrusions imported from China. The duties have been set at 59.31%.

The action was initiated and funded by the United Steelworkers and Aluminum Extrusions Fair Trade Committee in March and had the active support of a group of U.S. producers a Reuters article says, including William L Bonnell Co, Hydro Aluminum North America, Kaiser Aluminum Corp and Sapa Extrusions Inc,  The US producers complained that Chinese imports undercut their market and depressed prices pointing to an increase in imports from that country from $306.8m in 2008 to $513.6m in 2009, a 67% surge according to a Global Times article. Another article quotes the WSJ as saying in 2007 China controlled just 8% of the U.S. aluminum extrusion market, a share that jumped to 20% last year. Over that same time, the WSJ says, prices of Chinese imports of aluminum extrusions have fallen 30 to 50%, figures that could be a little misleading. For a start if the US extrusions market is worth some $3.57bn then $500m is 14% not 20%, but arguably it could mean 20% of a particular sector.

Source: LME

Second, all aluminum prices have dropped from 2007 to 2009 due to the fall in the underlying price of aluminum ingot as the chart above shows.

Nevertheless it is almost certainly a valid point that Chinese imports at a time of relatively low domestic mill utilization will only have been able to compete on price and as such will have had to undercut domestic mills in order to grow market share even though a proportion of the increase from 2008 to 2009 will again be solely due to the rise in the ingot price over the time frame discussed, 2008-9. What is interesting is that as with similar announcements made recently on steel, currency is now being accepted and used as an appropriate example of subsidy. As we have argued for some time, the Chinese are clearly rigging the system by keeping their currency artificially low, just as Britain did in the 1650’s, the US did in the 1800’s, and as Japan and South Korea did in the latter part of the last century. In one form or another, all mercantilist states have implemented protectionist measures in the development stages of their economies. The twin problems for China are that first the country makes up such a significant part of global output that such actions cause severe trade distortions and second that in this century we (including China) have all signed up to WTO rules that make such actions illegal. While economists may argue about what is a realistic level for the Renminbi against the US dollar, none would argue that it should be higher than it is now.

These recent duty decisions will not stop imports from other countries but arguably China is one of the lowest priced and as such domestic US extrusion prices should rise in coming months helping those extruders that have found themselves under pressure. Now that the US Department of Commerce is de-facto accepting that China is manipulating its currency, you have to wonder how much longer it can pursue this policy of hypocrisy in implementing duties on the basis of currency manipulation on the one hand but failing to call China a currency manipulator on the other.

–Stuart Burns

Sounds a little counter intuitive doesn’t it but that is the general consensus to come out of the Dalian Iron Ore conference last week. In a note to clients, Credit Suisse used the memorable phrase Goodbye Angst; Hello Harmony when commenting on the China Iron and Steel Association’s (CISA) acknowledgment that the use of spot index-linked pricing structures holds merit for contract volumes. After years of negative rhetoric, particularly against contract changes proposed by the miners and the use of spot prices in particular, this was seen as a sea-change in Chinese strategic thinking setting the scene for improved pricing harmony. The bank went on to report that China is considering the introduction of iron ore futures trading – epitomizing the phrase if you cant beat Ëœem, join Ëœem.

Although Q4 prices are expected to ease on the back of an increase in supply and muted demand, the bank remains bullish on price in the years ahead for a number of reasons. In the short term, China’s domestic miners are facing hefty rates of inflation in their operating costs. The bank estimates 10% per annum, supporting price rises available to the overseas suppliers as China is deprived of lower cost domestic supplies. In addition, the bank sees overseas suppliers as unable to ramp up production as fast as many in the media suggest. New mines of 20mtpa plus will take years to come to fruition. Last, the long term building boom in China is unlikely to end before 2020 according to the bank. While there may be weaker and stronger periods of growth during that time, the long term demands of rising GDP and urbanization will fuel commodity consumption much as it did in Europe and the US over many decades of their industrialization.

In a separate note regarding Japanese steelmaker JFE’s move to more flexible pricing contracts with its major customers, President and CEO Eiji Hayashida warned iron ore miners to not continue to relentlessly increase prices, warning it is in their interests to support steel makers in order to protect their long term market. The attraction of steel is its strength and its cost. If it becomes too expensive, creeping substitution will set in. Mr. Hayashida has a point. Steel does not need to become more expensive than say aluminum or carbon fiber to be substituted, the difference just needs to make the case for change to other products with more attractive features worthwhile.

A study in the IBRC revealed in the latter part of the last century steel cost relative to other metals increased substantially opening the door for greater use of other materials. Since the 1980’s the process reversed and steel costs relative to other materials were back to earlier ratios by the early part of this century. A prolonged period of strong iron ore prices could force steel producers to again move out of line by rising prices and opening the door for rising substitution.The use of aluminum and carbon fiber in automobiles is a prime example in which higher steel costs would accelerate the migration to lower weight materials.

–Stuart Burns

This is the second post of a two part series. You can read the first post here.

Perversely one significant difference between the UK and the US is that the UK is surprisingly still a net exporter of steel. According to the UK based Iron and Steel Statistics Bureau – ISSB the apparent consumption in the UK will be 7.9 million metric tons in 2010 although production will reach 9.3 million metric tons. The country imports about 3.7 million metric tons but exports 5.3 million metric tons. Part of the reason that UK steel production did not drop in percentage terms as much as some other countries after the financial crisis, is because imports took the hit dropping 46% while exports dropped only 30% and consumption 39%.

Although China in particular and Asia in general, is often cited as the major cause of steel trade imbalances (and of a host of other trade issues we haven’t time for here) according to the ISSB, the former Soviet states of Russia, Ukraine and Kazakhstan collectively import 3 million metric tons, internally trade just 8 million metric tons but export a whopping 49 million metric tons. What comparative advantages are these states employing? Well, I can throw in a few – low capital cost of equipment the steel mills were inherited at low cost from the Soviet state, cheap power, low labor costs, in most cases low raw material costs and low environmental costs.   In some parts of the world such as Europe these East European mills are major sources of imports and represent a considerable threat to domestic producers but so far have not figured significantly into the US with the exception of slab for Russian owned US rolling plants.

Although China is positioned below South Korea, Japan and Germany on the latest Steel Monitor Import survey, (and of course well below Canada and Mexico) that is in part due to previous trade disputes. If it were not for these Chinese imports would undoubtedly feature more prominently on the list, not necessarily because Chinese mills enjoy a comparative advantage in the Adam Smith sense, indeed the efficiency of many medium to smaller mills would compare badly with those in Europe or the US but rather because of the distortions to the free trade model we touched on above. In spite of variable efficiency and quite appalling environmental damage, Chinese steel mills have continued to expand beyond even domestic demand. The fear is that China will go too far, that rapid investment in steel production will overshoot a gradual cooling of domestic demand resulting in massive over supply and a flood of exports onto the world market.

So back to our opening section, should industrialists be worried that steel production is shrinking in countries like the UK and the US, and to varying degrees imports have become a long-term feature of the supply landscape? We have not made the case for domestic employment or environmental responsibility or any one of a number of other perfectly valid arguments in favor of domestic steel production. In our opinion one of the most basic issues is that we don’t live in a fair and open free trade world as envisaged by Adams, Ricardo, etc, we live in a trading environment heavily distorted by national interests and state manipulation. As a result, we need to encourage domestic producers across the whole range of goods and materials providing they can operate without direct state subsidy. To become totally or even majorly dependent on imports leaves our whole economy exposed to supply and cost volatility. Yes metals are commodities and as such we all face volatility but this is exacerbated many times over when an economy becomes wholly or unduly reliant on imported supplies.

–Stuart Burns

Much is written about the US Steel industry and its fall from preeminence in the latter part of the 1900’s. In the early part of the century, the US had gone through a dynamic period of growth and had already become the largest economy in the world. It produced 37% of the world’s steel and imports did not exist until well into the second half of the century. US steel production had the highest efficiency rates in the world, both due to technology and economies of scale. But the rise of competitors, largely encouraged and sponsored by the US following WWII, saw a gradual rise in imports and as the US economy matured, a comparative drop in the US share of world production.

Likewise, Britain once claimed title to largest steel producer in the world back in 1850 when world production reached 70,000 tons according to a Financial Times article. That piece quotes Britain as having two thirds of global production, but following the invention of lower cost steel production processes, massive steel growth ensued and although UK production continued to rise, the country’s share of global world production dropped to below 20% by the turn of the century as production soared to over 28mn tons. By 1934, the UK had just 10.9% of a total global production of 82.2mn tons and yet in the early 1970’s Britain still ranked 4th in the world.

As the following table shows, the UK steel industry has not had a terrible recession, falling only 20% compared to 35% in the US. Yet the long-term decline of the UK steel industry has continued and the country now sits as number 18 in the world for steel production. As in the US, this has raised serious questions about the consequences of such a decline.

The FT article mentioned above quotes Doug McWilliams Chief Executive of the Centre for Economics and Business Research, saying if Britain achieved greater success in traditional industries (such as steel), the whole economy would benefit. Economists on the other hand argue from the theoretical that steel output in isolation does not matter. To quote Philip Booth, Editorial Director at the Institute of Economic Affairs, “A developing world economy will have continual shifts in comparative advantage. There is no more reason for the UK to be a major producer of steel than a major producer of teddy bears. We suspect this argument though is based on the rather narrow principal of absolute comparative advantage; that if the UK is not the lowest cost producer of a certain product, in this case steel, then it should import steel and focus on making other products where it has an absolute comparative advantage. This is the theory first laid down by Adam Smith, although he just looked at labor as an input cost to the model (as with all economics it comes down to models) it can be expanded to look at energy, raw materials, cost of capital, environmental impact etc.

But even economists would admit that in the real world, the result of allowing free expression of comparative advantage is trade deficits with all that that entails with transfer of wealth and accumulation of currencies from one country to another, as we have seen between the US and China over the last decade. The detrimental effects are exaggerated still further if one or both parties distort the terms of trade by artificially fixing or influencing any of the inputs, such as raw material costs, labor or currency.

From the 1960’s to the 1980’s both the UK and US integrated steel making industries (BOF production method) lost their comparative advantage in steel making in part due to lack of investment in new technology and high labor costs (not to the same extent as the auto industry but relative to the global average). Rising competition from Germany, Japan and later South Korea, much of it supported and developed by the US after WWII, began to challenge US steel making supremacy internationally and following the steel crisis of the 1970’s imports began to eat into the domestic steel industry in the US just as it did in the UK. That is not to say that the whole of US steel industry was languishing in a kind of global backwater, at the same time as US Steel, Bethlehem Steel and so on were having major problems new players were developing the EAF steel making method to a new level, investing in bigger plants and improving the technology such that now they run some of, if not the most, efficient steel making facilities in the world. Coming back to Adam Smith if we had a level playing field, the US EAF producers would have a global comparative advantage, some may even have an absolute comparative advantage. The operative word of course is IF, but we will come back to that.

We will continue this series tomorrow.

–Stuart Burns

The iron ore market is unquestionably in a state of flux, as everyone who opens a paper or watches the business news is aware, iron ore prices have been violently volatile as this graph from environmental website shows. Not shown is the latest fall in prices again reflected in both spot and quarterly price reductions.

Steel producers and consumers have gone through a lot of pain as a result and steel producers in particular have spent the last couple of years ducking and diving to minimize price rises and maximize their opportunity when prices fall. This very volatility is in large part what killed off the decades old annual price contracts which dominated the seaborne iron ore trade in SE Asia since the 1960’s. Steel consumers simultaneously complained loudly about successive price rises and played their internal market buying at contract prices and selling on at spot to smaller consumers. Then when prices fell they reneged on contracts with miners as they found they could buy cheaper on the spot market. This year the annual contract was announced officially dead and a quarterly price formula was introduced based on spot prices in the preceding months. The quarterly contract has met with mixed success and some (including MetalMiner) have already suggested it will go the way of the annual contract although Rio Tinto called on consumers this week to give it more time, claiming the stability of a quarterly fixed price had advantages for steel consumers over spot changes. In reality though most Asian steel mills change their prices frequently during the month and only selected clients like automotive have any degree of continuity.

China though has other ideas, calling on miners to adopt a pricing formula with similarities to the aluminum industry where raw material alumina is priced as a percentage (13-14.5%) of the finished price of refined primary aluminum ingot. Quoted in a Reuters report, Shan Shanghua, secretary general of the China Iron & Steel Association (CISA), said iron ore prices should be based on steel prices, a reversal of the current market in which China, the world’s biggest steelmaker, largely has iron ore prices dictated to it by the big three iron ore suppliers.

“I view iron ore as an intermediate ingredient that only has value because it is processed into steel by the steel industry,” Shan told a conference in the Chinese port of Dalian.

He may be right but persuading the iron ore miners to give up their right to set prices will be a monumental task. Miners would argue that currently prices are largely set by supply and demand as reflected by the spot price, although Vale, Rio Tinto and BHP dominate the SE Asian seaborne iron ore trade they are not the only suppliers and a growing futures market has the potential to increase the liquidity of the market to the point where it becomes the primary price setting mechanism. If iron ore supply becomes too great and prices slump as a result of over supply, miners have the option to reduce production and manage (of course some would say manipulate) the market. If iron ore was priced as a fixed percentage of the price of finished steel slab or steel billets the most basic refined finished steel products iron ore producers would be at the mercy of over supply created by too much investment in steel making exactly the position China finds itself in today. Indeed even the similarly decades old alumina to aluminum pricing formula is showing signs of coming apart in recent months as major alumina refiners have announced their intent to sell at spot as long term agreements expire in coming years. Spot alumina prices exceeded contract pricing by a considerable margin over the last 10 years, on average by around $75 per ton or one third according to the Toronto Star.

So seductive as the idea is for steel producers it is highly unlikely that pure play miners would agree to such an arrangement. Fraught as the last two years price negotiations have been, spot open and transparent pricing arrangements are the way the whole metals industry is trending.

–Stuart Burns

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