Articles on: Metal Prices

As part of a new effort to more routinely cover both ferrous and non-ferrous scrap markets, we turn to some recent data that could have a profound impact on how analysts look at overall steel prices. Though dated August 12, 2010, Recycling Today reports that, “a new report by the firm Global Industry Analysts Inc. forecasts the global ferrous scrap market to reach 631.5 million tons by 2015. The research group notes that the figure is expected to be driven by the rise in steel production following a lull in steel industry operations due to the global recession. Ferrous scrap plays a significant role in the raw material cost calculation steel buyers often use to help determine the direction of steel prices. The Bureau of Labor statistics believes EAF production makes up “well over half of all steel production in the US. But industry participants believe that number is now north of 60% of the total market.

To clarify, steel scrap also represents a key cost factor in integrated steel-making, though not as large a percentage of the overall cost as for electric arc production. So let’s break down the numbers a bit further to analyze how scrap prices impact steel prices. According to our own cost breakdown analyses available in our Price Perspectives (our next steel edition will come out this month), the overall scrap cost factors relating to the production of one of steel are as follows:

Integrated Production Using $300 as an average scrap cost (using HMS as the ballpark form) we calculate that for integrated mills, scrap makes up about 9% of the costs to produce one ton of steel.

Electric Arc Furnace Production Again, (using HMS scrap and technically we should be using a mixed ratio of shredded and HMS), we calculate that for the electric arc furnace producers, scrap makes up about 71% of the costs to produce one ton of steel.

So when we see reports suggesting that scrap markets will continue to grow and many developing nations have much less scrap supply (e.g. China, even Turkey), we should not find ourselves surprised that ferrous scrap prices will maintain an upward price trajectory. When we examine the latest ISRI broadsheet data, we can see the index shows positive price momentum:

Source: ISRI and Bureau of Labor Statistics

And though we witnessed a few short-term dips in ferrous scrap prices for November, the long-term fundamentals appear bullish, particularly when one factors in large overseas purchases from countries such as Turkey (read our earlier analysis on Turkish scrap markets).

So though many analysts remain slightly bearish on steel prices at least in the short term, scrap-pricing volatility creates enough uncertainty that we don’t see any near term Ëœdrop-off-a-cliff’ steel pricing. In fact, the underlying scrap markets will largely support steel prices going forward.

Disagree with our analysis our numbers? Drop us a line or leave a comment.

–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

As we continue to develop our coverage of the steel industry, we find ourselves struck by the number of enigmas we encounter in our research. For example, about ten days ago, my colleague Stuart wrote a two part series examining the steel industry from a US and UK perspective. In that second post, Stuart rattled off a number of countries that export an excessive amount of steel tonnage when compared to the size and demand for steel within those local markets, “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. Though Stuart’s post did not mention Turkey specifically, Turkey clearly exports a significant amount of steel in proportion to its own local demand. Consider the following data from the World Steel Association:

Source: World Steel Association

US steel demand, typically in the 100+ ton range, has slipped to between 58 million metric tons in 2009, due to the economy whereas Turkey’s production reached 25 million metric tons despite the fact that Turkey has only one quarter the population as the US. According to H. Metin Surmen from Traxys Europe S.A (a raw materials trading company), “ Turkey has always been a steel producing country which has produced more than its consumes. Turkey has to export its production and manage its product range wisely.

Now let’s turn to the method of steel production.

Turkey produces steel using both EAF and BOF production methods but clearly EAF production methods have increased as a percentage of overall steel production:

Source: World Steel Association

Examining Turkey’s exports, we’ll let you draw your own conclusions:

Source: World Steel Association

It is no surprise to see how Turkey’s purchases of scrap (most of it coming from the United States) drives scrap prices on the world market. Although ferrous scrap prices have declined this month by $25-34/gross ton for obsolete grades and $55/ton for Chicago bushelings, according to ISRI, fresh Turkish scrap buying may drive US scrap prices higher.

And though steel price momentum appears to be moving in a downward direction (and many analysts have revised their forecasts lower as we will we with our fourth quarter price perspective), Turkish scrap purchases do impact domestic scrap price levels. If we see some Q4 scrap purchases from Turkey, we suspect the scrap numbers to increase domestically lending some support (although perhaps limited support) to steel prices here. Stay tuned.

–Lisa Reisman

In the short time since its soft launch on February 22 of this year and its full launch on May 21, cobalt has had a pretty volatile time. From a low of around $37,000 (16.78/lb) to a high of over $43,000 per ton ($19.50/lb) the metal has since fallen to around $39,000 per ton today. A large part of the volatility can be put down to the early life of the contract and low liquidity, but there is a lot going on outside in the real world too.

Demand has been good, particularly from Asia where demand for hybrid batteries, catalysts and machine tools has been robust, but also from OECD markets where super alloys particularly in aerospace has been strong. On the supply side, availability has been a major transformation from just 12 months ago as this table taken from data supplied on the excellent Cobalt Institute Ltd. website shows.

In the first half of 2010, China has increased supply by 125% from the same period last year to 15,532 metric tons. Africa is by far the largest source of raw material with both concentrates and refined metal coming from not just west African states of the Congo and Zambia, but also South Africa, Morocco and Botswana. A Dow Jones report identifies several significant expansion projects underway in Africa and elsewhere which will add high quality supplies to the market in the year ahead. Indeed as a significant portion of cobalt is produced as a by product of copper and other metal concentrate mixes, the strength of those markets will spur new mine development and expansion regardless of the position for cobalt. Tony Southgate a trader with Standard Bank is predicting prices will fall next year as a result. Catherine Virga, director of research at CPM Group is reported in a Reuters Africa article as predicting prices will rise late this year to around $25/lb on supply disruptions in the DRC but then fall next year as oversupply predominates to $18/lb. Subject as it is to applications in fast moving technologies and with supply driven more by demand for mainstream base metals than the demands of the cobalt market, the metal looks set for as a volatile year in 2011 as it has had in 2010.

–Stuart Burns

Aluminum Losing its Shine?

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Metal Prices, Non-ferrous Metals

Aluminum has had a bull run these last couple of months as this chart from the LME shows:

True a fair part of the price strength has been due to dollar weakness and riding on the coat tails of copper. But falling LME inventories and strong physical premiums have contributed to the sense that aluminum is, if not in tight supply, then at least is not as readily available as the falling but still large inventories suggest.

So a less than enthusiastic message from Ben Bernanke last week regarding the economy and the probability of a modest level of QE gave the foreign exchange markets pause for thought and the dollar rallied against the major currencies while the metals promptly retraced a little of their recent gains.   These recent gains in the dollar are giving all the base metals a chance to catch their breath after two months of strong gains. But is this the end of the run buyers may be excused for asking?

A   Reuters article this week focusing on the technical price movements suggests it is. Wang Tao at Reuters says aluminum’s recent fall back to $2318 per ton is a bearish trading pattern, calling the recent $2459 per ton price a peak and suggesting the rally is exhausted. His chart suggests the price could slide further and although we are not among the technical chartist faithful we would say from a historical perspective given the bounce in the dollar it would be reasonable to expect aluminum along with several other metals to go through a period of consolidation before taking on a new direction next month.

Our own feeling is $2459 per ton could well be a peak for this year and significant movements in foreign exchange notwithstanding it is unlikely to challenge that level again much before the year end. What happens next year of course is a different matter and will be the subject of a later review.

–Stuart Burns

LME week in London is always a time for reviewing market trends and boy what a market the traders have had to review this year. There is much discussion (and even more opinions) making the rounds about whether prices are too high or if they have only just got started. Part of the problem is the highly fluid situation the global market place is in at the moment. OECD recovery has been a feature this year but is now faltering in the US. Beijing is deliberately orchestrating a cooling in Chinese growth via a number of mechanisms such as bank reserve requirements and loan to value ratios, and indirectly via a clamp down on polluting and energy consuming industries. Asia and the emerging markets of India, Brazil and so on are still growing strongly in spite of such currency volatility that the Brazilians have likened it to a war. Last, just this week as we have reported, ETF Securities, the UK based market leader in Electronic Traded Products has announced their intention to launch physically backed base metal ETFs at some stage in the future.

In such a state of flux it is hardly surprising there are such diverse opinions on the future direction of prices but a review of the comments from a few well-respected analysts present at the LME Week deserve airing. In a Reuters report Robin Bhar of Credit Agricole upgraded his forecasts for metals next year following expectations on a new round of quantitative easing (QEII) and the effect that will have on the dollar (weakening) and the increased liquidity finding its way into commodities. Specifically the bank has raised copper from $7,200 to $8,725/t next year, aluminum from $2,350 to 2,450/t, lead from $2,500 to $2,544/t, tin from $20,500 to $25,000/t and nickel from $23,500 to $24,500/ton. Only zinc remains unchanged at $2,475/t. Supporting the case, Bhar points to falling exchange inventories as evidence of tightening supply markets for metals like copper and tin.

Not all analysts agree however, Edward Meir, senior commodity analyst at MF Global is concerned about aluminum saying we will see an 800,000 ton surplus this year with global stocks at 7 million tons (exchange plus trade). Explaining the continuing rise of aluminum Meir says, “Fund flows will be a positive, commodities are now nothing to do with supply and demand – they are being driven as investment asset classes (or) anti-dollar plays.” Meir’s concern is that there has been a disconnect between prices and fundamentals in the last year and a half. “Stocks have almost doubled from 2009 to date, and yet we’re also seeing a dramatic price increase,” he said, “Next year, we’ll see another 600,000 ton surplus.” In the first six months of this year, aluminum production outside of China increased 15% from a year before and production in China is only slightly down on the spring record of 1.418m tons per month. In his opinion, production has remained strong in China and the global surplus has so far been soaked up in financing deals. Although the death knell of the long-term finance deal has been sounded before, Meir raises questions about how profitable they are in today’s more volatile forward curve market and how long they can continue. Read more

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

I wish I had actually published the price forecast Jorge Vazquez made of aluminum back at the HARBOR Aluminum conference in late June of this year. If I had published it, I would have put some sort of wrapper/caveat on the prediction by stating, “Jorge sure is bullish on aluminum,” perhaps even indicating that I personally didn’t quite agree with him. And now I’m here to tell you that Jorge’s predictions (he was at $2400/ton by the end of this year) have already nearly come to fruition as aluminum reached $2380/ton yesterday. Besides eating some crow on that point, Jorge also suggested that buying organizations might want to take advantage of [historically] lower prices in September. Anyone who had been paying attention and acted on that information would have looked good today.

A range of factors have led to price increases including increased demand and falling inventories. But see what HARBOR has to say about the market. By completing the registration form, you will instantly receive their weekly report.

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Join us for our weekly MetalMiner Aluminum Pulse Series by taking our short poll. Results discussed on Friday this week!

–Lisa Reisman


From a global economic standpoint, arguably it was a close run thing but we can probably say we have avoided a double dip, thanks in large part to continued strong emerging market demand keeping the world economy ticking along and the production lines of international manufacturing companies humming.

Indeed while consumer demand and construction markets in mature economies have been depressed the one abiding feature of the post crisis period has been relatively strong manufacturing performances. With access to cheap cash and in most cases strong balance sheets, manufacturers have weathered the storm and are continuing to be upbeat. In a Reuters report the Institute for Supply Management’s index of U.S. factory activity slipped to 54.4 last month from 56.3 in August. While the Markit Euro Zone Manufacturing PMI suggested a two-speed recovery taking hold in Europe, with the headline index dropping to 53.7 in September from 55.1 in August led by strong German and French performance and weak Club Med economies such as Ireland, Spain and Greece. Manufacturing growth in Britain, meanwhile, fell to its lowest since November as exports declined for the first time since July 2009, but even so the PMI remained in positive territory only falling to 53.4 from 53.7. Meanwhile, China’s official PMI rose to 53.8 in September from 51.7 in August, well above a median forecast of 52. A separate Chinese manufacturing PMI from HSBC also showed a strong upturn in September, rising to 52.9 from 51.9 in August.

So not surprisingly on the back of such positive manufacturing indicators steel demand is expected to hit a record 1.34 billion tons next year even though steel growth will slow to 5.3%. According to a later Reuters article, China will make up 45% of global demand in 2011, while India will emerge as the world’s third-biggest steel consumer after China and the United States the World Steel Association is quoted as saying. In an example of how emerging market production is coming to dominate the global market, the World Steel Association is said to be picking Xiangang Zhang, president of Anshan Iron & Steel Corp, as its chairman for the following year, which will be the first time its head has come from China. China’s demand in 2011 will be 42% above the level in 2007, compared to demand in the developed world in 2011 which is expected to be 25% below the 2007 level, Paolo Rocca, the body’s current chairman.

Demand for steel is set to rise 13.1% to 1.27 billion tons this year, much faster than an earlier forecast of 8.4% growth but still leaving the market in surplus. The great unknown will be growth in both demand and production in China. Titanic forces are at work in the Chinese steel market with Beijing trying to reign back polluting and energy consuming industries. At the same time   simultaneously curbing excess speculative construction activity on one side while steel producers jostle for market share supported by their local governments and encouraged to keep producing by a cooling but still strong domestic steel consuming market. Growth is predicted by the association to slow in China next year to 3.5% from an estimated 6.75% this year. Whether that will happen is anyone’s guess.

–Stuart Burns

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