Articles on: Metal Prices

An intriguing article in Reuters this week indirectly addressed the question that has absorbed many aluminum consumers this year —   should I be long or short? (or if not short, then buying hand-to-mouth in preparation for a price drop). The article approaches the topic from the direction of investors who have seen the copper price triple since December 2008 and the aluminum price double since early 2009. Lately however, copper prices have dropped back and yet aluminum prices have held relatively firm. Indeed, in the face of relatively lackluster buying of physical copper, aluminum premiums have remained firm, even reaching record highs of over $200 per ton in Europe this month.   The article rightly goes on to pour cold water on the suggestion that aluminum is the new copper and will benefit from substitution at the expense of copper. But the examination of whether the aluminum price will remain firm or fall remains an interesting one for anyone active in position-taking or exposed to price movements.

The chartists would have us believe the aluminum price shows all the symptoms of a metal due to run up to $2800 per ton, as this graph from Reuters purports to show.

Source: Reuters

Sorry if I sound less than convinced. I am not a supporter of predicting price movements from charts, seeing it as analogous to reading tea leaves. However, I am aware that some do follow astrologers’ predictions and hence, prophecies can become self-fulfilling. I also accept that on occasion, chartists have correctly predicted price movements, but then so have I. In this case though, we would be staggered to see aluminum run up to $2800 per ton anytime soon, but we include the data as it is a potential driver.

Quoting from the article, according to the International Aluminum Institute, China produced 16.131 million tons of aluminum last year compared with 12.964 million tons in 2009. “China was effectively using cheap energy to produce aluminum and exporting it to the West,” said Julian Treger, fund manager at UK-based Audley Capital. “They will shut down some of their capacity and that will be bullish. They don’t want to export cheap energy to the West any more, they will cut back production.” China’s energy cannot be characterized as low-cost today, unlike the new Middle Eastern smelters with very low-cost gas supplies. Most of China’s aluminum smelting relies upon coal-powered electricity production or precious hydroelectric capacity, power desperately needed for more value-add industrial uses and for rapidly rising domestic consumption. Some 40+ percent of the cost of aluminum production in China comes down to electricity, compared to an average of 30 percent elsewhere. China truly exports high-cost aluminum in a low value form by exporting primary and lower value-add aluminum products. You can’t fault Beijing’s attempts to dissuade exporters of lower value aluminum products.

(Continued in Part Two.)

–Stuart Burns

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While there’s considerable focus on silver regarding what returns it can gain as an investment asset and as a hedging tool both valid applications, amidst sovereign debt risks and currency devaluations it’s helpful to zero in on the fundamentals of silver and how it plays next to gold, its precious cousin, and the more industrial-focused platinum and palladium. In light of China urging its citizens to buy gold (more on that key topic in a two-part series from Stuart on Monday), where does silver stand in all of this?

If there’s anything to say of silver’s performance in the ETF market, it’s all good. According to Bloomberg data compiled up to Feb. 11 and presented by ETF Securities in a recent presentation, silver has outperformed most of the other precious metals, key commodities such as Brent oil and equity benchmarks like the S&P. In terms of spot returns, the one-week return for silver stood the highest at 3.1 percent, compared to gold (0.7%), platinum (-1.7%) and palladium (-0.4%). The 12-week returns for silver stood at 91.9 percent, second only to palladium (94.5%).

Back to the fundamentals, however: investment and industrial demand, although playing off each other in different directions through the years (as the graph below shows), may be at odds with supply of the metal the rest of the year and beyond. (Just today in London, the silver spot price broke $32 per ounce, a 30-year high.)

Source: GFMS, compiled by ETFS

Although Will Rhinds, head of ETFS’ US operations, recently told MetalMiner in an interview that he sees no noticeable shortage of silver. “If people believe the mine supply of silver will fall this year, then some people can extrapolate that into something more extreme, he said. “But from our vantage point, we don’t see any signs of a visible shortage.

At first blush, that could seem to be at odds with the most recent outlook, presented by ETFS senior analyst Daniel Wills, who pointed out the relatively steady 2 percent growth of silver mine production from 2000 to 2009 may not be enough to offset the 86 percent decrease in above-ground stocks in 2009. Granted, Wills spoke based on data trends through 2009, while Rhinds may have more recent insight.

Source: GFMS, compiled by ETFS

Whatever the supply situation at the current moment, it’s inevitable that we’ll be seeing unprecedented broadening of the silver demand spectrum beginning this year, if the above graph of demand sources is any indication, going by Wills’ conclusions. With high inflation concerns across the globe and sovereign debt risk in Europe (but let’s not count out Japan and the US as well), and with miners increasingly looking to hedge their metal buys, this period may make for an interesting silver environment. (The gold-silver ratio dipped below its 50-year average at the end of 2010 the last time it was that low, Reagan was in office.)

–Taras Berezowsky

*For a much broader picture of the silver and gold investment environment, you can attend a free conference: Phoenix Investment Conference & Silver Summit on February 18-19, 2011.

Details contained in the referenced link.


Arguably the best commercial that aired on Super Bowl Sunday featured the rapper Eminem, the city of Detroit and an ostensibly reinvigorated Chrysler Corp. hawking the new Chrysler 200. To say nothing of the quality of the videography and editing which were excellent the ad was more an explicit endorsement for Detroit itself, showing how the city and the Big Three (or Big Two plus Chrysler, as the case may be) are inextricably linked.   But it got me thinking about the still-ailing Chrysler (relative to Ford and GM) and how the US auto companies relate to the current platinum and palladium market.

OK, this may be a stretch, you say, but platinum and palladium are on our radar again after hearing ETF Securities outline their “new (at least to the US market) basket of white metals last week. Consisting of platinum, palladium and silver shares backed by the physical metals, WITE (as the basket is listed on the NYSE ARCA) is taking just a bit more metal out of the supply stream for the investment world.

Is industrial metal buying and base metal investment converging? Not in a literal sense, no. But we have been reporting on how they are becoming increasingly linked, as steady price rises in platinum and palladium due mostly to the auto industry’s use of the metals in catalytic converters and the like continue to push analysts and journalists to speculate on whether they make solid investment tools.

Surely, ETF Securities is one of the firms pushing investment in the white metals as a hedging tool in a volatile economic environment. They offer individual ETFs for palladium and platinum, but contend that placing these metals in a basket takes commissions and spreads out of the picture (by offering an expense ratio of 60 basis points) and simply allows for a diversified portfolio. Supply-wise, ETFS currently holds 13.3 tons of platinum and 19.6 tons of palladium; according to the USGS, with 2010 global production of platinum estimated at about 183,000 kg and palladium at 197,000 kg (both roughly 3 percent increases from 2009), it is tough to make the argument that the ETF is sucking vast amounts of physical metal out of the global market.

But generally investor interest follows industrial demand, and that clearly moves the market. Based on an ETFS graph (that we cannot reprint here), China’s PMI has correlated rather tightly with platinum and palladium prices from 2006 to 2010. Even though China is set to cut certain auto subsidies in 2011, gas prices remain high and more registration rules will take effect, Tim Harvey of ETFS’ marketing arm, said in a conference call the country’s auto manufacturers are increasingly turning to gas engines rather than diesel, which is good for PGM demand.

“China is the buzzword on everybody’s lips, Harvey said.

According to data from the China Association of Auto Manufacturers, China produced 18,264,700 vehicles overall, a 32.44 percent increase from 2009. In December 2010, production was up more than 6 percent from the month before, and 22.3 percent higher than December 2009. India is the other burgeoning Asian auto market, with demand rising. The US market looked good in 2010 as well; with Ward’s data showing a 31 percent increase in total light vehicle sales, from 869,828 in November to 1,140,165 in December.

Which brings us back to the Big (Formerly-Known-As) Three. GM has made moves to secure its palladium supply by making a deal with just about the only US producer of the metal, Stillwater Mining Co., based in Montana. The AP reported just before Christmas that GM signed a new contract with the miner to supply the automaker’s palladium for three years. (Ford Motor Co. also has a contract with Stillwater that is set to expire and needs to be renegotiated). Both GM and Ford had a much better 2010 than their domestic competitor: although Chrysler “sees profit ahead, it still reported a $652 million net loss last year. (Better than the $3.8 billion loss in 2009, though.) However, Chrysler’s heads are looking to increase sales by 45 percent this year, confirming a bullish outlook on the domestic and global auto market.

Ultimately, many analysts and investors are bullishly maintaining that the emerging market auto demand should keep platinum and palladium prices up through 2011. Societe General, for example, upped its 2011 palladium price forecast to $840 per ounce (from $755 an ounce), citing strong fundamentals.

In a previous MetalMiner interview, Will Rhind, ETFS’ head of US operations, just about summed it up:

“Global economic growth does seem to be picking up, he said, “and that may have more of a positive effect on the pro-cyclical metals such as silver, platinum, palladium and copper to name a few.

–Taras Berezowsky

Those interested in the silver market can attend a free conference Phoenix Investment Conference & Silver Summit on February 18-19, 2011.

On this Friday, in the wake of Mother Nature dumping nearly two feet of snow on the Second City, leaving people stranded, and mercilessly busting lips, we’ve slightly less editorial/analytical energy to go around¦(OK, OK, I’ll speak for myself I don’t have much energy left, after doing my share of snow shoveling, etc., during the “Blizzaster, as the weather wordsmiths had put it.)

What I do have to offer are one rather small story and one rather large story in the metals sphere, straddling the gamut of everything in between that happened in the world this week, from protests against Hosni Mubarak in Egypt to Cyclone Yasi in Queensland, Australia.

Let’s start big, shall we?

Several sources reported that Japan is back on the global steel scene in a big way, with Nippon Steel (the country’s No. 1) and Sumitoto Metals (a domestic rival) joining forces to create the world’s second-largest steel company after ArcelorMittal. Whether the merger will end up being as big as the hype makes it out to be, well, that remains to be seen. (If anything, the move should bode well for the corporate restructuring that much of Japanese industry must face if the country’s economy wants to get back up to play with the big boys.) What the union does do, however, is spur fond thoughts of other memorable mergers:

Source: The Telegraph



Speaking of steel, the smaller story but arguably just as important is that MetalMiner officially instituted its office-recycling program this week. (No, we’re not recycling our office; the office is now recycling.) I know what you’re thinking: a metals publication that hasn’t recycled its metal (and paper, plastic, etc.) until now? Steel companies like top scrap recycler Nucor would likely kick our butts.

Our inter-office recycling program kick-off coincided with an interesting piece my colleague Lisa wrote about the tinplate market. Incidentally, those “tin cans of baked beans I eat for lunch and yes, the office does hate me in the afternoons have hardly any tin in them whatsoever, but are instead composed of steel tinplate. According to Rodrigo Vazquez, founder and senior vice-president of Harbor Intelligence Tinplate Unit, tin accounts for only about 8 to 12 percent of the total cost of tinplate. (If the percentages were much higher, those cans of baked beans would be costing me a fortune: tin’s LME price per ton reached $30,540 on Feb. 2.) Also, higher tinplate prices in Europe affected food can manufacturers, who have agreed to increases of 22 to 24 percent with their suppliers. Guess it’s even more cost-effective to recycle those cans across the pond these days¦

–Taras Berezowsky

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!

Source: UN Trade and Development Report 2010

Pascal Lamy, the director-general of the WTO, has been a busy guy of late. No sooner did the World Economic Forum wrap up in the hoity Swiss ski-spot Davos, the Global Commodities Forum in Geneva (home to the WTO) got going, with Lamy making the inaugural address.

Put on by the United Nations Conference on Trade and Development, the GCF brings together ministers and high-level government officials in charge of mineral resources, corporate leaders in the area of hydrocarbons and metals, commodity trade and finance, academia and NGOs working on “commodity problematique, according to their Web site. (You may have guessed that this forum is mainly Euro-centric, with a degree of support from China.)

The major concerns: not only sustained price increases, but unforeseen price volatility. “In general, the ascent in prices is likely to be most pronounced for crude oil, due to contracting global inventories, copper, gold, corn, and soybeans, Lamy said in the first of a number of high-profile speeches. He cited “lingering sovereign risks, fears of policy mis-steps in high growth economies, and bouts of a strong US dollar as the stew of challenges that face markets in the coming decade.

Lamy hit on a number of points that spoke to reducing volatility as much as globally possible; significantly, his speech was an explicit endorsement of the Doha Round talks and their potential to even out the trade landscape between rich and poor countries. Lamy especially emphasized reducing the man-made tariff restrictions such as tariff peaks (which discourage the developing world from industrializing), tariff escalation (“It hurts commodities that range from cocoa all the way to metals), export taxes and restrictions. Other speakers echoed Lamy’s lead.

Banks seem to be in the crosshairs of political leaders and analysts alike. Nicolas Sarkozy, president of France, criticized the speculative actions of global bankers as the primary reason behind commodity volatility over the weekend at Davos, the UK’s Guardian reported. The health of sovereign states and banks are strongly, intertwined, indicated Barrie Wilkinson, a partner at the consulting firm Oliver Wyman, in a recent Bloomberg article. While essentially a “nobody attending the WEF events at Davos, Wilkinson recently published a report detailing that if banks don’t deleverage themselves via accepting lower ROEs (returns on equity), they may fuel a new bubble by chasing high returns in commodities or emerging markets, and the world could be facing an unavoidable crisis come 2015. “The fundamentals haven’t been addressed at all, Wilkinson said. “The things that caused the previous crisis loose monetary policy and trade imbalances they’re actually bigger now than they were then.

Banks and other independent organizations a la the WTO and UN must work together to create a global balance. An environment that only serves a certain few developed nations (or certain emerging economies) cannot sustain itself in the long term. While keeping a close eye on governments such as Ireland, Portugal and Spain, other nations in the Eurozone and beyond must take steps now to insure against not only future volatility, but also against future global crashes as well.

–Taras Berezowsky

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!

If your January looked like our January, then you have probably read a few price forecasts, metal outlooks or more than one economic analysis.   You may have even attended the recent steel market outlook we gave last week. We would suggest one more outlook that metal buying organizations might find relevant this one supplied by material demand aggregator Supply Dynamics. The Supply Dynamics 2011 Metals Outlook makes for an interesting read because the company aggregates the raw material volume of 14 of the largest OEMs, according to their website, which includes 2000 parts suppliers spanning a range of industries from medical, nuclear, heavy industry, aviation, petrochemical and industrial gas turbines.

Not only does Supply Dynamics maintain broad visibility across industries, it also has broad visibility across metals, particularly in stainless steels, aluminum, nickel but also steel and copper.

Based on that demand visibility, Supply Dynamics offers up several noteworthy trends and in particular, on the demand side of the equation they have pointed to growth in the following areas:

  1. Both auto and aerospace demand and sales have improved. The company anticipates aerospace demand to increase once the 787 moves into full commercial production
  2. The US nuclear and wind industries will likely stay flat largely due to the failure of cap and trade legislation, but oil prices, if they exceed $90/barrel could provide the impetus for some of these alternative energy industries to come back to life
  3. Housing markets up but commercial construction flat
  4. Global energy industries up

On the supply side of the equation, Supply Dynamics points to a few disconcerting factors that have gone largely unreported. The first factor involves the acquisition of key alloying materials used to make steel by both governments and companies alike. Besides coking coal, severely impacted by the recent Australian floods, Supply Dynamics suggests metals such as molybdenum also face supply constraints. In addition, the company sees price increases for stainless long products due to a fire at Roldan’s stainless plant in Spain.

Readers can learn more about Supply Dynamics’ aggregation model here.

Their specific price forecasts can be found here.

–Lisa Reisman

Disclaimer: Supply Dynamics is a sponsor of MetalMiner

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!

If one answered that question by reading the recent press on gold and silver, one might conclude with a resounding “no,” given the “outflow of dollars in various gold and silver funds. But drawing that conclusion, along with a few others we have seen of late, might not tell the complete story. Let’s consider the “bifurcation of the silver market as expressed in this recent article comparing the record purchases of silver coins versus the significant outflows from ETF funds.

By way of background, SLV, backed by JP Morgan, warehouses silver just like SIVR, an ETF Securities Fund (which uses HSBC). The recent dollar outflows of SLV may only have occurred because the fund started earlier than SIVR and investors might have sought an opportunity to take some profits off the table (e.g. the run-up in SLV, because it is an older fund, might explain some of the dollar outflows). SIVR has a cheaper management fee of 30bps (vs 50bps for SLV) and owns physical silver bars audited by an external metal assayer two times a year. We chatted with Will Rhind, head of US operations for ETF Securities, to gain a better understanding of some of the issues involved in the silver market.

MetalMiner:   Can you explain why investor dollars have been pouring into silver coins, but leaving ETFs?

Will Rhind: The trend of investors buying silver coins, and gold for that matter, has been strong over the last few years. Buying coins and buying ETFs are two different things. Coins are tangible and have numismatic value, i.e. people may want a coin because it is deemed more collectible or desirable than another. Silver ETFs like SIVR are investment tools and are designed to track the price of silver with minimum premiums and discounts to the spot price. Coins on the other hand can attract premiums on purchase and discounts on sale. As such, coins are not so much investment vehicles but more a medium for people looking to collect or store. People looking to tactically trade the silver market are probably more likely to execute this using an ETF than a coin. Silver coins are cheaper than gold coins.

MM: What does this dichotomy suggest in terms of silver prices going forward?

WR: I think this is positive for silver prices. It shows that the silver market is seeing demand both on the investment side through ETFs and futures and on the physical side through coins and bars. Until interest rates rise and get to a certain level and take some of the attractiveness off precious metals, prices look bullish. When real interest rates remain negative, one is effectively incentivized to go ahead and buy real assets such as precious metals.

MM: What do you see as the short, mid-term and long-term trends going forward?

WR: The macro environment for metals is still positive and nothing much has changed from last year – negative real interest rates in the US and many European countries, large deficit and debt levels in many western economies and the recent quantitative easing programs have relaxed monetary policy and may ultimately lead to inflation. The European sovereign debt concerns of 2010 still linger and may surprise us again in 2011. Global economic growth does seem to be picking up and that may have more of a positive effect on the pro-cyclical metals such as silver, platinum, palladium and copper to name a few.

MM: Can you comment on whether supply shortages exist for silver, as some have reported?

WR: We see no noticeable shortage of silver. Supply fluctuates yearly; however, the availability of silver within the physical market still exists. If people believe the mine supply of silver will fall this year, then some people can extrapolate that into something more extreme. But from our vantage point, we don’t see any signs of a visible shortage.

Those interested in the silver market can attend a free conference Phoenix Investment Conference & Silver Summit on February 18-19, 2011.

Details contained in the referenced link.

–Lisa Reisman

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!

The Chart of the Day on last Wednesday’s version of Reuters’ metals report showed a historical and technical outlook for tin. This seems an especially apt editorial choice, because, as the market would have it, tin prices have hit all-time highs (as we recently reported). The metal hit a record high of $28,698 a ton on Wednesday; it’s up about 6 percent so far this year after a gain of almost 60 percent in 2010, according to Reuters.

Source: Reuters Metals Insider

More news is coming out of the tin world based on a weekly report from the UK’s International Tin Research Institute, which they released Tuesday. ITRI has an ongoing Sustainability Project, and included summary results from their latest annual survey of tin use and recycling. This research is especially important in light of tin’s recent supply tightness and the fact that the majority of tin supply comes from only a handful of nations.

This year’s survey (which details completed data for tin use and recovery from 2009 and initial estimates for 2010) was reported to be the most successful, with 171 companies contributing data, which represents 47 percent of estimated refined tin usage in 2009.

China, the world’s biggest tin producer and consumer, is in the driver’s seat far as responsible tin use and recycling go. ITRI studied the China tin market; below I’ve quoted a few key findings:

There has been strong growth in secondary tin production in recent years. ITRI estimates that secondary refined tin production will have exceeded 60,000 tonnes in 2010, with China accounting for over 75% of the world total.

China’s tin use has reached a new record level of almost 147,000 tonnes, although consumption in the rest of the world is some 25,000 tonnes less than its 2006 peak.

In addition to 320,000 tonnes of refined tin metal, tin users are estimated to have utilised some 59,000 tonnes of tin contained in secondary alloys and other scrap during 2009.

In Q4 2010, China’s imports were down nearly 24 percent, mainly because of higher LME prices, while more than half of their 2010 export total of 7,000 tons was received by importing countries between September and November. However, China’s imports of tin concentrate shot up 94.5 percent in 2010.

The country’s domestic prices have risen 8.3 percent since January 10. The rise “has been “fuelled by good export sales and attempts by secondary tin producers to push up prices to compensate for the anticipated cancellation of the VAT rebates on scrap which had been available for the last two years.

Since China remains such an active importer and exporter of refined tin, alloy and concentrate, global price fluctuations should continue to be dictated by their activity throughout 2011 and beyond.

–Taras Berezowsky

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!

Join MetalMiner and Metalwest for a webinar tomorrow, Jan. 27 at 10:00 AM CDT, for a co-presentation of a steel price and market outlook for the upcoming year, as well as how new ways of lean sourcing can improve profitability. Metal price and cost of business look to loom large in 2011, as raw materials are demanding a premium and emerging markets in China, the other BRIC economies and elsewhere show few good signs of slowing down.

Lisa Reisman, MetalMiner’s editor, takes myriad economic factors and drivers into consideration to present her outlook on the steel market an outlook that comes from a range of experience.

Tim Maierhofer, general manager at Metalwest, will present “Improving Profitability Through Lean Metal Supplier Programs: How a Lean Supplier Can Help You Find Other Ways to Improve Profitability. Tim has years of practical experience under his belt when it comes to lean programs, and will walk through a number of scenarios dealing with 5S, SMED, and other approaches.

Prices for both raw materials and finished steel products are hitting record highs.

Just over the past week, the Financial Times released a veritable month’s worth of steel reporting. In one article, executives and analysts have said “steel prices are set to jump by up to 66 per cent this year¦a burst of inflation on a scale the industry has suffered just once in the past 70 years. This panel of experts projects a year-on-year price rise of 32 percent by the end of 2011.

So that’s what’s going on with the outputs what of the inputs? Another article focuses on the iron ore prices reaching record highs. “Supply disruptions in India caused price spikes ahead of the Chinese New Year. The Australian spot price for the raw steelmaking ingredient reached $185 per ton, if one factors in freight costs, and $177.90 if one doesn’t, according to Platts. This was mainly due to an Indian state cracking down on iron ore exports (although just today, Reuters reported that Brazil is doubling their iron ore output.)

As we know, China’s market (and predominant BOF production) almost single-handedly accounts for global iron ore demand. However, yet another FT article finds that China’s growth in steel production may not be as hearty compared to the rest of the world as it has been before. Sixteen experts brought together by the FT expect global output “to climb 6.2 percent to about 1.5 billion tons, with an increase of 5.2 per cent in China and 7 per cent by countries outside.

All things considered, though, a bullish environment on steel prices is heating up all the more reason for companies to implement the most effective lean techniques to get the most out of their steel spend.

–Taras Berezowsky

The US economy is giving off a bevy of mixed signals, as some economic indicators point toward good signs of recovery while others highlight the uncertain nature that the manufacturing sector faces.

Much of that uncertainty is manifested in fears of rising inflation. (What do you say to that, Ben Bernanke?)

In terms of the raw numbers, two indexes we track are showing increases. The Institute of Supply Management’s Purchasing Managers’ Index (PMI), certainly one of our key indicators, posted a 0.4 percent increase in December 2010, which put the index at 57 percent. (Click on the table below for a larger view.)

Source: Institute for Supply Management

This is good news, and shows that overall US manufacturing is growing (when the PMI is over 42 percent, it generally indicates growth), and it corresponds with roughly 5 percent GDP growth. The upward trend has generally been sustained since the dark days of mid-2008.

Source: ISM

The Primary Metals and Fabricated Metals Products sectors reported overall growth to the ISM; aluminum, copper, nickel, steel and stainless steel, tin plate and titanium dioxide all posted increases in price.

Which brings us to the other index that has a lot to do with prices the Producer Price Index (PPI), put out by the Bureau of Labor Statistics and measuring the average change over time in the selling prices received by domestic producers for their output. Metals buyers and sellers are not alone in battling inflation to wit, December 2010 saw the largest increase in the PPI since last March, posting a 1.1 percent rise in finished goods. (Click on the graph below for a larger view.) General freight trucking increased 0.4 percent, and general warehousing and storage increased 0.7 percent.

Source: US Bureau of Labor Statistics

But raw material price rises are up and rising across the board, and amid the gradual growth that manufacturing has been experiencing, this could be cause for concern. Coking coal prices, just for an example, could see sustained rises (and not just because of the latest act of God the disastrous floods devastating northeastern Australia). Oil is again flirting with $100 per barrel, and that has a direct effect on shipping costs.

The Financial Times and Reuters have picked up on this with a raft of stories in the past few days, allowing readers to hear a host of industrial voices decrying the price increases. John Byrne, Boeing’s director of commodities, and Chris Lidell, GM’s CFO, both expressed concern that raw materials costs would cut into 2011 profits in a recent FT article. The largest metal components of the average car are steel, averaging 2,100 pounds, and aluminum, at around 400 pounds, according to the piece and let’s not forget copper. David Leiker, an auto analyst at RW Baird, “estimated that raw materials made up about $3,500 of a car that sells for $28,000.

A Reuters analysis took an interesting look at how consumer product manufacturers are ingeniously cutting costs Kraft shorting its Singles packs by two slices, Kimberly-Clark skimping on the size of its toilet paper squares but the woes extend to base metal industries as well. China’s Baosteel, the country’s biggest steelmaker, recently upped its prices again. The article quotes Oliver Pursche, co-manager of the GMG Defensive Beta Fund, saying “the greatest uncertainty for commodity prices, especially metals and energy, is how aggressively China moves to try to cool its economy.

“If there’s a sense China will continue to raise interest rates, raise its loan requirements and try to slow things down, you can see a pretty quick sell-off,” he told Reuters.

American companies are also digging in their heels. Wagner Cos., a Wisconsin-based manufacturer, expects to see steel prices increase anywhere from 5 to 10 percent this year, and is bracing itself by “beefing up steel inventories at lower prices, according to the Milwaukee Journal-Sentinel.

One of the bottom lines here is that we must watch steel closely as it comes out of its trough early this year, since it reaches across so many industries and shows up in so many finished goods. (Not only in the US but also globally, especially as construction and automobile demand pervade emerging economies.) As price inflation could hit steel even harder, we’ll keep an eye on how metal manufacturers continue to cut costs in innovative ways.

Join us for a free webinar on steel price trends and outlook for 2011 along with guest speaker Metalwest, where we’ll discuss how OEMs can improve profitability through lean metal supplier programs.

–Taras Berezowsky

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