Articles on: Metal Prices

A couple of days ago we reported that heavy steel plate and galvanized sheet/coil may see global price increases due to supply constraints, namely rolling power outages for primary Japanese steel producers. Last week, Gerdau’s Steel Market Update suggested wire rod as well as hot rolled bar exports from Japan may also see some declines due to damage at an integrated mill and several mini-mills. But that may not limit supply or push up prices as China may pick up the missing volumes. Here in the domestic market, prices for HR band, CRC and all forms of scrap appear to still move in an upward direction — albeit at 1 percent increase levels, according to Steelbenchmarker. This suggests to us the upward price trend has started to slow. In fact, rebar declined by 2 percent. At these levels of increase, we tend to think the market has moved close or reached the top of the price curve. Other steel industry sources have indicated that pricing momentum has turned neutral.

On the other hand, plate prices increased by 4 percent, according to SteelBenchmarker. Since November, we have seen some buying organizations pay 32 percent more for plate today. With some galvanized steel and plate shortages expected from Japan, could we have a market in which a couple of steel product segments continue on an upward price trajectory while the balance of the market hits the top of the price curve?

Again, turning to Gerdau, their latest steel market indicator chart suggests some softening of the fundamentals, particularly around construction spending and some historical indicators such as general steel shipments and capacity utilization. But the Gerdau update report also suggests buyers still see rising prices. Does that mean we have a bifurcated market?

Oddly enough, China prices have not corresponded to domestic pricing (see this chart of key products from the last 30 days from China):

Source: MetalMiner IndX

As we said from the outset this year, we expect some ups and downs. In addition, we have also said, “very small demand upticks tend to create disproportionate price increases and in some cases, supply shortages. In addition, we know that the correlation between steel prices in China and steel prices in the US remains somewhat tight as raw material inputs (or steel-making inputs) tend to share the same general price trends (e.g. when iron ore costs increase, so too do scrap prices) meaning we can take pricing cues from places like China. Will China’s prices lead the US market or will it work the other way around? Stay tuned.

–Lisa Reisman

Nothing gets the creative juices flowing more than a good debate! We, particularly, enjoy debates in which we see nearly opposite points of view, all within the same time period. In today’s headline match, we examine one side of a debate around the direction of metal prices, particularly for copper, aluminum, zinc and steel as a result of the Japanese earthquake and tsunami. In the ring we have Goldman Sachs, who laid out their point of view according to a recent Reuters Metal Insider piece: “Demand and price risk for industrial metals has now skewed to the downside due to recent developments including Japan’s earthquake disaster, and as tighter monetary policy is priced in. In the other corner, we have MetalMiner’s own Stuart Burns, who on March 17, only six days after the natural disaster suggested demand may appear down but not out (and with it, prices).

When we received a call from Wayne Atwell, managing director of Casimir Capital, and he offered up some commentary on the direction of metals and mining markets post-Japan tsunami, we wanted to know who would win the fight, so to speak. Wayne reminded us of a metric he and many others in the metals industries use to assess demand for particular products specifically, metal intensity. We have seen this metric expressed as a number (or quantity) per individual or, as Wayne explained, as a percentage of global consumption by country. He suggested the following metal intensity levels:

Japan: 4.7% of aluminum, 4.9% of copper, 4.2% of zinc and 2.4% of thermal coal

By way of comparison, China appears as follows:

41% of aluminum, 39% of copper and 41% of zinc

“The Japanese economy has been hurt badly¦in the short term, they will consume less material. But metal prices are higher today then when this story unfolded. The earthquake/tsunami has thus far had no detrimental affect on prices, Wayne said, though he did acknowledge that the rebuilding effort will go “slower than you think. The sheer task of removing debris, gas shortages and moving goods in and out of the country will make for a slower recovery. Plus, designs will have to be drawn up and approved. From a commodities perspective, we can expect the demand to increase in about a year to a year and a half.

Which metals will likely [eventually] benefit from increased demand as Japan rebuilds? According to Wayne, “Zinc is the one on the top of the list   – 45% of zinc goes into galvanizing, 33% of copper goes into building plumbing and electrical and the like. Aluminum is pretty far down the list 10% of aluminum goes into building (much smaller).

But some metals supply markets will remain in short supply far in advance of any rebuild. In particular, according to a recent report from The Smart Cube, though annual steel production will likely drop due to rolling brownouts (and the Chinese will likely pick up the slack), two areas within the Japanese steel sector may create global supply shortages and subsequently, higher prices hot rolled heavy plate and galvanized sheet. The Smart Cube report gives an excellent overview of other supply markets in which Japan plays a key role.

But in essence, according to Atwell, “the market has sort of yawned at commodity prices. Uranium is down, coal is up as is natural gas, though that is harder to transport. You would need an LNG terminal for that. Hydro power is already operating at 100% of capacity.

Certainly, commodities tied to energy sources (nuclear uranium being the one exception) will see price escalation. Beyond that, whether falling demand or tight supply will deliver the knock-out blow, we may have to wait it out and go the distance.

–Lisa Reisman

That famous ad campaign, “What happens in Vegas stays in Vegas, no longer works in steel markets. During internal discussions here at MetalMiner for the past 12-18 months, I and my colleague Stuart have bantered back and forth regarding the impact of iron ore and coking coal prices in China and their relationship (or lack thereof, depending on one’s viewpoint) to scrap prices here in the US and vice-versa. Last year, the relationship appeared less than “fully correlated, to use a statistical term. But no longer¦

This past September I spoke at this event covering metals markets, where I met Roger Bassett from Plymouth Steel, who put forth a concept I had not heard articulated this way: all raw materials can be compared via “steel making units. By that, I can assume he referred to the notion that essentially key raw materials essentially become “fungible, meaning the trends in one ought to correlate with the trends in another. So as iron ore prices rise, one might expect scrap prices to follow suit.

But to understand how that trend actually correlates, we turn to an extremely informative website put out by steel producer Gerdau. In the chart below, though we can see a tight correlation between scrap and iron ore prices in China halfway through 2009, the price trends appear to have drifted apart throughout 2010, but now may head back toward a convergence:

Source: Gerdau Steel Market Update

Gerdau points to weakening demand from China buyers for iron ore and, as we recently reported, steel prices in China have correspondingly also declined due to a mix of factors including rising oil prices, poorer demand for construction related products and rising iron ore prices set to increase, according to our earlier story.

Chinese finished steel prices certainly have eased of late, particularly for construction-related products such as rebar and beams, whereas prices for cold rolled steels, used more in automotive and white goods have merely plateaued:

Source: MetalMiner IndX(SM)

If we were to superimpose our MetalMiner IndX chart of China steel prices to the US domestic steel prices, we would see a tight correlation (which is not to say that the prices were the same, merely that both markets appeared to follow a close price trend). They both moved in similar fashions. Today, we have a dichotomy in that the US market appears to still have upward price momentum (or as some believe, has started to plateau) but the Chinese market appears to have declined through the first part of this year and now plateaued.

Why?

We’ve stated why we believe Chinese steel pricing has seen downward and now plateauing price momentum. But here in the US, we still see prices ratcheting up (at least through March 14, according to Steelbenchmarker) though the economic outlook remains full of mixed signals — e.g. poor housing starts in February, against decent automotive demand and continued PPI strength. As is often the case, markets often move before reality sits in China steel prices may have declined in advance of Chinese monetary tightening and US prices may have improved based on a few positive economic indicators.

Can the divergence in steel prices between the US and China be explained via the iron ore/scrap correlation (or lack thereof)? Probably not — but no matter, we’ll keep watching all the correlations.

–Lisa Reisman

As investors in precious and base metals manufacturers and metal producers certainly among them begin looking toward ETFs as a viable alternative to hedging their metal buys, it may behoove them to look at the recent activity surrounding gold and silver, not only individually, but the trending relationship between the two.

Source: The Economist

Nicholas Brooks, the global head of research and investment strategy for ETF Securities, sounded reasonably sure last Thursday during a conference call that prices, and therefore returns, on the two precious metals are going nowhere but up.   “In today’s environment, with fiscal account and sovereign debt issues, I suspect gold and silver will benefit from that on a medium term basis, Brooks said.

Indeed, investors held their breath as the US and the rest of the international community debated a “no-fly zone for Libya as Col. Qaddafi’s forces and their opponents continue clashing, which not only sent gold higher, but also sent silver holdings in The iShares Silver Trust (the largest silver ETF in the world) to a record high, according to Reuters.

“I think silver is only chasing gold. Some people think silver could reach $100. But I guess it needs to surpass $40 first before hitting a new high,” a precious metals dealer in Hong Kong told the news organization.

The gold-silver ratio has been dropping significantly as silver has continued its streak (although not without its bumps along the way). The spot price of silver — $35.72 an ounce as of Mar. 10 — puts the ratio relative to gold now at about 40:1, dipping below that magic 50:1 mark and well below the average 60:1 that’s been prevalent over the past 30 years or so, writes Brad Zigler from the research-oriented site Hard Assets Investor.

Zigler gives us a refreshingly phrased reminder of the gold-silver ratio’s meaning. “The ratio, which describes silver’s buying power by dividing the per-ounce price of gold by that of silver, has averaged 60:1 over the past 35 years, meaning it’s taken 60 ounces of silver to purchase one ounce of gold. Though with silver’s most recent push to the $36/oz level, it now takes much less.

But there may be a correction point due very soon for silver. “Based upon silver’s outperformance, fueled by investment and industrial demand, there’s still room for some downside for the ratio, he mentions. “Amid the turmoil swirling in North Africa and the Middle East, safe-haven demand for gold could outstrip silver’s industrial-driven demand.

Since silver is much more of an industrial metal than gold, look for other macroeconomic factors — the volatility in oil prices for one, and the reported February trade deficit in China for another as signs that the silver price may indeed force the gold-silver ratio back to a more historical average in the foreseeable future.

–Taras Berezowsky

*Please click here to download the MetalMiner Conflict Minerals Legislative Guide, covering the details of the new Dodd-Frank Wall Street Reform and Consumer Protection Act and how mandated audits will affect companies that purchase tin, tantalum, tungsten and gold.


A recent CRU report outlines the attractiveness of tin as an investment vehicle, but uses the supply/demand picture to show that the (perhaps) over-reported supply tightness resulting from Indonesian production shortfalls may not be the end of the story.

Because tin commands such a high price per ton, and because of its recent entry into the physically backed base-metal ETF sphere, among many other factors, the LME cash price as of this writing stood at $31,745 a ton, well on its way to historical 1980s highs (in real prices, using the Dec. 2010 value of the USD). According to the report, tin’s very strong supply/demand stance is supported by more technical buying based on its upward trajectory and a decrease in hedge selling, making it an investor favorite.

From a supply-side standpoint, the main reason that supply is not as tight as initially predicted is that China is unloading an excess of the metal on the rest of the world, mostly due to the large premium of the LME price over China’s domestic physical price. (The country continues to be the largest global refined tin producer.) Secondly, high prices alone are keeping the demand-supply cycle going; higher prices spur an incremental increase in supply, which eventually may cool demand, and so on. Thirdly, even though larger tin mining projects are two to three years away from operation, small-scale production and recycling have been picking up. ITRI estimates that the global tin recycling rate to secondary refined pure metal is around 8 percent, and a United States Geological Survey report noted 14,000 tons of recycled tin in the US in 2010.

For context, and for an example of how China truly drives the global tin market, let’s take a quick look at how their production numbers stack up against the rest of the world. Here’s a graph of the top 12 tin companies in 2010:

Source: CRU Group

Note that five of them are in China. Four of the Chinese producers reported production increases from 2009 to 2010, three producers notched quite sizable gains, and one producer straight up doubled its output. In total, the Chinese producers represent nearly 40 percent of the Top 12’s 2010 refined tin production.

On the consumption side, tinplate usage which is, I think safe to say, may be of more interest and use to industrial-minded MetalMiner readers than other applications for refined tin has experienced a 9.1 percent increase year-to-year from 2009 to 2010 (after down years in both 2008 and 2009.) ITRI estimates the total tinplate usage in 2010 to be 58,800 metric tons. For more background on the tinplate market, check out what Rodrigo Vazquez, founder and senior vice-president of Harbor Intelligence Tinplate Unit, told MetalMiner back in February.

Back to the investment side, all of this means that the physically backed tin ETFs may be picking up as well. After a slow last December, with 180 tons held by the end of January, ETF stocks in Malaysian and Singapore warehouses went up to 405 tons by the end of February, and could be growing more as LME stocks are slowly dropping.

The Democratic Republic of Congo is a continent and a half away from China; where does the DRC stand in all of this? Check back in tomorrow for Part Two.

–Taras Berezowsky
*Please click here to download the MetalMiner Conflict Minerals Legislative Guide, covering the details of the new Dodd-Frank Wall Street Reform and Consumer Protection Act and how mandated audits will affect companies that purchase tin, tantalum, tungsten and gold.


In line with Stuart’s and my recent articles, palladium is hot, and platinum not so much. (In saying that, I am, of course, speaking rather relatively.) While Middle East unrest and European sovereign debt concerns push oil prices beyond $100 a barrel and gold prices are at all-time highs, other precious metals may be overlooked especially those with primarily industrial uses. But the rolling Chinese auto market is doing its part to keep PGMs in the spotlight.

Source: Bloomberg via ETF Securities

Platinum spot returns are up 18 percent over 12 months, which pale in comparison with palladium (86%). According to an ETF Securities report based on statistics compiled from Bloomberg, outperformance of platinum prices in early 2009 saw the platinum to palladium ratio reach historic highs. Palladium prices caught up by the latter part of 2009 and continued to outperform in 2010, causing the platinum-palladium ratio to fall to its lowest level in 9 years by February 2011.

This “pretty much reflects a slightly larger supply surplus in the platinum market that evolved in 2009 and 2010, said Daniel Wills of ETF Securities. The surplus did shrink in 2010, however. Overall, the disparity in the platinum-palladium ratio, marked by the swift run-up in palladium prices, bodes well for much better performing platinum prices in 2011.

“Palladium’s love affair will continue, but platinum will attract more interest than last year, said Edel Tully, an analyst at UBS, citing a stronger rand, rising mine inflation and supply risks in a recent Kitco report. South Africa, the world’s leading platinum producer, battles perpetual electrical power issues, and is also dealing with “strikes and safety-related stoppages at a number of the country’s mines. Tully said UBS forecasts an average platinum value of $1,905 per ounce for the rest of 2011 (which is short of the $2,000/ounce threshold that many South African miners consider spurring production) and $1,950 for 2012.

Platinum’s greater supply surplus as compared to palladium may also be moot due to Russia’s secretive stockpiles of the latter, keeping it under wraps as classified information. If it’s considerably more than investors think, then palladium’s higher price may come down. Russia produces just over half the world’s palladium, according to Johnson Matthey data. However, said ETFS’ Wills, there is less evidence of a palladium surplus (or Russian stockpiles being lower than widely expected and thus playing less of a role) in 2010, when Switzerland a key European hub for storing and trading of precious metals reported that the Russian shipments they received represented only a third of the twenty-year average.

Source: Johnson Matthey via ETF Securities

Investment demand for platinum is slowly but surely growing over the past three years or so averaging 7 percent of total demand from 2008-2010, against only 1 percent from 2005-2007, according to Johnson Matthey and represented by the light blue in the graph above. But total holdings considering both net inflows and outflows of the white metals over the past two months have remained rather stagnant. However, taking a more historic view, the uptrend of platinum and palladium physical ETF holdings over the past three to four months has continued mainly because of the US doing much more heavy lifting on the manufacturing side in addition to emerging market demand growth, Wills said. (The Fed’s implementation of QE2 also had a partial effect on this.)

“It’s been difficult to expand mine production for platinum over the past five years, and at the same time, there isn’t the same level of recycled platinum or palladium as there is in the gold market¦it’s been a rather fixed supply growth, said Wills.

The current economic landscape certainly serves as an indicator for where platinum may go. High oil prices, for example, encourage the purchase of diesel vehicles, which require higher platinum loadings than gasoline engines. The expected drop in Chinese car sales growth this year compared to 2010, as initially forecast by the China Association of Automobile Manufacturers, may also push prices the other way. From what we can see, even slightly slowed auto demand in China will continue buoying the need — and the price — for platinum. Palladium’s more upmarket cousin just may be due.

–Taras Berezowsky

The Iron Ore (IO) forward price curve is a fair reflection of popular sentiment regarding the likely direction of iron ore prices in Asia.

Source: Credit Suisse

As MetalBulletin reported this week, IO prices are softening for the first time since October in the face of weak Chinese demand and falling steel prices in China. The fear is that rising oil prices will impact global growth, rising iron ore stocks at ports are reflective of falling steel production and concern that current weak demand is a result of too much tightening by the Chinese authorities.

Source: MetalMiner IndX

As our chart shows, Chinese finished steel prices certainly have eased of late particularly for construction-related products such as rebar and beams, whereas prices for cold rolled steels, used more in automotive and white goods have merely plateaued. To add to steel makers’ woes, according to a Reuters article, quarterly contract prices are set to rise substantially from the first quarter — Vale estimates by some 20 percent — continuing a trend that has been ongoing for all of 2010 as this graph from Credit Suisse research shows.

Source: Credit Suisse

The quarterly price is set on the average of the previous three months spot price and hence lags the market, so IO consumers could be excused for thinking the quarterly rise will be temporary; but Credit Suisse suggests otherwise. In a report to investors the bank systematically analyzes the critical price drivers and sees more upside than downside for just about all of them.

In part two we review those drivers and what they tell us about the likely direction of prices going forward.

–Stuart Burns

We are pleased to welcome a two-part series from guest contributor Spencer O. Johnson, who has worked at INTL-FCStone as the primary risk management associate for steel since December 2009. (Read Part One here.)

The most common of all misconceptions about futures markets is that they increase, or even promote, market volatility. The first response to this issue might be that crying volatility hardly seems unique. Even without an active futures market, volatility in the price of steel has been increasing at unbelievable rates. In fact, steel is already as volatile and in some cases more volatile than many of the metals that do have active futures markets (aluminum, lead, etc.). The reason for this has nothing to do with futures and everything to do with the way raw materials are now priced. A producer can no longer receive an annual price for key inputs like iron ore or coking coal and that means the volatility of those markets is now regularly priced into steel when in years prior, annual pricing made this concern far less relevant in terms of week-to-week volatility.

So, many readers will wonder, will futures add to this problem or alleviate it? Well, considering the historical precedent, the consensus opinion is that futures actually function in a way that alleviates volatility by having speculators take the opposite side of trades with industrial clients. Perhaps the best academic analysis of this issue is done by Dr. David S. Jacks, a professor and Economics and Faculty Research Fellow at the National Bureau of Economic Research. Jacks has tracked the historical relationship between futures and volatility in a number of key commodity markets and has concluded that futures markets are more often associated with lower commodity price volatility than higher volatility. As the author of “Populists versus Theorists: Futures Markets and Volatility of Prices, he notes in his opening discussion on speculation, “in few other areas do popular views and those of most economists more widely diverge.

Jacks uses a number of more complex economic and mathematical models to make his point, but of more interest to most will be the use of several historical examples of outright bans on futures trading, which further support the fact that futures tend to smooth out volatility, even during times when fundamental concerns might otherwise drive volatility higher. The first such historical example may seem dated, but may actually serve to illustrate the point best because of the clear demarcation in price action between an active futures market, and a market without any financial instruments for price risk management. Due to volatility in food prices, populist sentiment at the turn of the century forced a ban on wheat futures trading in Berlin. The ban was followed by wild swings in the price of wheat and, as you can see in the graph below, the volatility in the market was dramatically reduced during times when futures trading was permitted.

Berlin Wheat Futures, Before, During and After Ban on Trading

Source: “Populists versus Theorists: Futures Markets and Volatility of Prices by David S. Jacks

In fact, volatility became such an issue without an active futures market that Berlin rescinded the ban and returned to allowing futures speculation. This is not a mere coincidence in fact, far from it. All 16 of the commodities tracked in Jacks’ study confirm the trend of dampening volatility in a world of active futures markets.

What about domestic examples? Well, the US government has only once in its history created a ban on futures trading in a commodity — that was in 1958 when Congress passed the “Onion Futures Act, which banned onion futures trading in response to frequent claims of extreme volatility being caused by speculative traders. But average monthly price swings (see graph below) during times when futures were legal actually appear slightly lower than after futures were banned, which would seem to offer more evidence to support the fact that even in a largely un-storable seasonal commodity that should be naturally volatile, that price was slightly less volatile or at worst, no more volatile during the time when speculators were allowed to place wagers on the price of onions.

Onion Futures Before and After Ban on Trading

Source: “Populists versus Theorists: Futures Markets and Volatility of Prices by David S. Jacks

So historical examples that allow us to compare markets before, during and after futures trading provide a necessary glimpse into the fact that speculation in futures probably smooths volatility or at worst, does not increase it in any measurable fashion. But even if we were to take critics of futures markets and grant them the fact that futures do, in some instances, increase volatility, the futures market is itself the remedy for that volatility. Regardless of the movement in flat price, a consumer of steel who is properly hedged does not concern himself with flat price volatility because it is the very act of hedging that insulates the consumer from that volatility in the first place. If a consumer knows they will need to purchase 10,000 tons of steel this December, buying December futures at the current market price will allow that consumer to profit from increases in the price of steel, thus offsetting the higher price that consumer will pay for the physical steel they will eventually buy. It is precisely in this sense that futures criticism that supposes some speculative interests will hijack steel prices, creating some wild casino-style roller coaster in prices, is historically inaccurate and fundamentally misunderstands the value futures bring to commodity markets.

–Spencer O. Johnson

MetalMiner and its sister site, Spend Matters, along with Nucor, will host a live simulcast, International Trade Breaking Point on March 1, 2011. If your company sources products from overseas, you will not want to miss this half-day event:

Register for the live simulcast today!


 

We are pleased to introduce a two-part series from guest contributor Spencer O. Johnson, who has worked at INTL-FCStone as the primary risk management associate for steel since December 2009.

Until 2008, steel and its raw material counterparts like iron ore, were the largest commodity market in the world that had yet to be tapped by exchanges and transformed by an active futures market. Indeed, most estimates suggest iron ore alone has a physical market second in size only to crude oil. And yet even global industry leaders like Lakshmi Mittal and Dan DiMicco of Nucor have echoed concerns about futures, though Mittal has been more hesitant about condemning them outright. Even so, the world’s largest and the US’ largest steel producers, respectively, have both stood in opposition, at various times, to the establishment of a futures market for steel. But thankfully for the industry, that was not the end of the story, as steel futures, despite a slow start, posted record full year volume levels in 2010 for both LME steel billet and NYMEX hot-rolled coil products, and are very likely poised to become a major force in the steel industry in the years ahead. So what happened? The answer is found in a careful assessment of the concerns raised by these producers and the realities of commodity hedging.

The best way of understanding the validity of these concerns starts at the outset with the fact that steel companies like Nucor have already relied on commodity futures to hedge their own risk exposure in commodities outside of steel for years. For example, Nucor’s most recent 10-k states that: “Nucor uses cash flow hedges to partially manage its exposure to price risk of natural gas that is used during the manufacturing process. The 10-k also shows that Nucor uses hedging to deal with its copper and aluminum exposure. This might seem confusing, as it would suggest that DiMicco’s company is acting in direct opposition to his concerns about volatility, legality and ethics in today’s futures markets. Actually, it is not confusing at all like steel prices, natural gas and other metal prices can be highly volatile. It is therefore advantageous, and probably even necessary for the likes of any steel producer to hedge its price risk in those volatile commodities to avoid exposing themselves to dramatic swings in the purchasing price of energy or metals.

Functionally speaking, this is in no way different than what steel futures offer to those in the steel industry whether it be a service center that is looking to hedge the value of its base inventory against devaluation or an OEM looking to fix its costs for purchasing steel, hedging is a crucial component of any business with significant exposure to price volatility in a given commodity. In fact, if there is one important distinction between natural gas futures and steel futures, it is that natural gas futures prices are currently driven far more by speculators than are steel futures; an analysis of fund positions in the two commodities confirms that there is a massive pool of managed money invested in the natural gas futures market, as evidenced in the graph below:

Source: CFTC

Of course, this is not a serious problem in fact, quite the opposite. Those speculators provide the necessary liquidity for end-users of natural gas to manage their price risk. In fact, unlike oil, most market participants agree that the forward curve in natural gas is a fair one and despite speculative interest, the future price is a reasonable result of market forces that produces a fair approximation of what natural gas prices might be over the course of the next few years, based on the information that is available now. Currently, speculative interest in steel futures has been non-existent as the contract is not active enough to attract that kind of interest, but as futures volumes increase, speculation will be a useful and necessary component.

Steelmakers’ hesitations over futures are not surprising; a free market that determines the price of steel will take some of the pricing power away from the producer, but in doing so it also provides a valuable tool to virtually every segment of the industry, including the producer. This advantage stems from the ability to use futures to lock-in forward pricing. Whether it be a service center looking to establish a firm margin on inventory or an OEM looking to insure against a dramatic spike in prices, futures represent a key tool in the steel risk management toolbox, and one that will play an increasingly relevant role in the business of buying and selling steel.

(Read Part Two here.)

–Spencer O. Johnson

(This is Part Two of a two-part series. Read Part One here.)

Global demand is irrefutably rising — Alcoa estimates at 12 percent this year, after a 13 percent rise last year. Reuters suggests it could be 15 percent saying this year it could reach 45 million tons compared to 39 million last.

All of this sounds bullish, right? Supply is being constrained, demand is rising strongly and even the stars are aligned for a push higher. Well, no, says the counter argument. Ed Meir is quoted in the article as pointing out that the production capacity the Chinese have idled can easily be turned back on; indeed, previous closures in the second half of last year were reversed in some situations. Truly, China has a massive overhang of production capacity, some of which has barely seen the light of day in 2010 before being temporarily idled to meet environmental limits. Producers must be desperate to get this back on stream and with the cost of production around $2100 per ton in China they would be making healthy profits if they were able to do so.

 

Meanwhile global stocks are still huge — in the region of 10 million tons (if reported and unreported are combined) — and the market remains in surplus, estimated in a Reuters survey to be around 383,000 tons in 2011. Having said that, there is a huge range depending on who you speak to: the survey ran from 1 million tons deficit to 1.5 million tons surplus as the possible outcomes for this year!

The 800-pound gorillas are those long-term finance deals that are tying up so many millions of tons of primary metal in warehouses. We have written about this situation many times before, the death knell has been sounded on numerous occasions, either due to a flattening of the forward price curve, or rising warehouse rents, or rising finance costs most likely due to rising interest rates. For the time being, the deals continue, but detractors say that if that metal starts finding its way back into the market (and the first sign will likely be falling physical premiums) expect the aluminum price to drift south.

If you were expecting this analysis to finish with blinding insight into which direction the price is going this year, we are sorry. Our money is on a continuation of the status quo, and the risk is, in our opinion, more to the downside than the up. Prices could drift off to $2300 this year, maybe $2200 as premiums weaken or those Chinese smelters restart in any significant numbers. The upside has to be capped by the surplus most observers think we will experience this year, but could still be around $2650-2700 per ton. Keep an eye on those physical premiums and reports of Chinese smelter re-starts.

–Stuart Burns

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