Articles on: Metal Prices

This is the third (and final post) of a three part series examining the current domestic steel collusion case currently in discovery. You can read the first post here and the second post here. The previous posts examine a range of issues. This final post aims to address the role of imports during the period covered in the case, the changed structure of the steel industry, the validity of the plaintiffs case and finally, what impact (if any) this case will have on steel sourcing organizations.

Let’s start with imports. Plaintiffs allege, “¦the US market for steel is characterized by significant barriers to entry, high capital requirements, and regulatory barriers, while import competition is limited by transportation costs (including ocean freight rates), trade duties and currency exchange rates. Whereas we can’t argue with the former, we have reposted here an analysis we conducted of the steel trade (deficit) as of the end of 2009:

Although this snapshot covers the period of 2009 (not part of the current legal case), we can assure MetalMiner readers that the steel trade deficit was alive and well during the periods covered by this legal case. In other words, there was no shortage of steel imports coming to the US to help fill the gap. The notion that import competition was somehow limited by transportation costs, trade duties (many of which came later), and currency exchange rates are “spurious to borrow a legal term.

Imports made up over 20% of the market during the period in question and clearly played a large role in supplying the domestic market.

In the olden days (we’re talking pre-2000), when steel mills operated in the non-profit motif of keeping lines running (due to the high fixed cost environment), some mills (those that aren’t here today) would take orders, even if they didn’t cover marginal costs. Well, after the industry consolidated between 2000-2004, many of these high cost mills were shuddered. Now here is a question for all of you manufacturers out there when demand sank in 2009, did your management allow you to sell your products below marginal cost? Perhaps for some of you that answer was yes but for others, did you dare do what the steel mills did? Did you lay people off, reduce hours and/or shifts or shut lines down? Of course you did! That’s what any logical firm might do if they see demand dropping. Why would anyone be surprised that the more streamlined domestic steel industry post-2004 idled capacity when it saw demand dip? But there is another claim in the plaintiffs’ argument that seems a little out of whack. Whereas a mini-mill can essentially shut down a line with a flip of the switch (okay, we’ll give it a little more time than that), an integrated facility takes at least three weeks to “turn back on not to mention incur expense in shutting a line down. The notion that the industry can both ramp up and down on a dime particularly during the time periods identified by plaintiffs also seems a little far-fetched.

So what’s our take? We think the plaintiffs will have a difficult time proving a conspiracy. The reality is this: a more mature domestic steel industry in greater control of its economic destiny with greater economies of scale will naturally become more efficient. With the weak firms off the playing field, the balance of the industry will become more effective reading the economic tea leaves giving the impression that there is some sinister coordinated production discipline but unless plaintiffs can prove collusion, this case should go in favor of defendants.

Instead, metal-buying organizations should get used to the new reality the domestic steel industry is in greater control of its own economics. The days of $400/ton HRC are over. Consider other tools of the sourcing trade to achieve cost savings aggregation of spend, volume commitments, strive for better demand forecasting capability, create strategic supplier relationships, move away from the 3-quote monthly bid (so extremely prevalent in this industry), benchmark, analyze your suppliers’ cost structures, introduce competition, etc. And forget about trying to extract concessions via collusion cases. There are more effective methods¦.

–Lisa Reisman

For any of you in the heat treat plate market, please join us at a FREE webinar covering: Heat Treat Plate Market Applications, Market Outlook and Cost Savings Opportunities.

After several years of talking about curtailing excess capacity, it would appear the Chinese authorities are finally getting serious about it. The Ministry of Industry and Information Technology said on Thursday of last week.

China has said it will close a total of 300,000 tons of copper smelting capacity, 600,000 tons of lead and zinc capacity, 800,000 tons of aluminum capacity and millions of tons of steel capacity under a three-year plan intended to reduce overcapacity and cut down pollution. China has pledged to cut the amount of carbon dioxide produced from each unit of economic growth by 40-45% by 2020, compared with the 2005 level. Closing old excess capacity serves that purpose at the same time as bringing capacity in line with demand for many metals. This year, Beijing’s target is to shut down outdated capacity of 339,000 tons of aluminum, 117,000 tons of copper smelting, 113,000 tons of zinc and 243,000 tons of lead, according to a Reuters report in ChinaMining.

For some metals the numbers are significant. Although 339,000 tons of aluminum doesn’t make much of a dent on an estimated 20m tons of capacity it could reduce what is clearly a state of over production at the moment. Of more profound impact could be lead. A reduction of 243,000 tons of capacity from a market that globally is in surplus by just 168,000 tons per year according to the ILZSG quoted in Reuters would have a significant impact on China’s demands on global supplies.

The devil will be in the detail however as many issues in the report remain opaque. A Reuters report states Chalco (Aluminum Corp of China) has asked Beijing for approval to add 250,000 tons of primary capacity at its Pingguo plant in Guangxi currently producing 140,000 tons. Whether the authorities will give their approval is uncertain however as it flies in the face of recent announcements that no new capacity is to be added for three years. Smelters have however been given permission to buy power directly from generators to cut costs and there are rumors that semi’s producers could see VAT rebates increased on exports increased to the full 17%, which would be consistent with the authorities attempts to support value add production but suppress further investment in primary production across a range of metals products.

It would appear the authorities have been buying metals for stock again, as a continuation of last year’s dramatic intervention by the State Reserves Bureau. A spokesman for the state owned research group Antaike said the three year reserve plan was to buy one million tons of aluminum, 400,000 tons of copper and 400,000 tons of lead and zinc from domestic smelters. Apparently the State Reserves Bureau has already bought 590,000 tons of aluminum and 159,000 tons of zinc since December. At least some of China’s vociferous appetite for metals is not going into consumption but into state stocks. Unlike speculative trade stocks there is no danger these will come back out into the market if prices turn or demand falters but it does mislead superficial impressions of continued high consumption rates real consumption is clearly not quite as strong as it appears.

No wonder the authorities are keen to cut excess capacity and drive some consolidation into what has been a fragmented and undisciplined domestic market before cooling growth rates meet yet higher levels of over capacity and results in a general price collapse.

–Stuart Burns

In the last six to eight weeks, I have heard numerous rumblings about an anti-trust case brought against eight US steel producers (ArcelorMittal; ArcelorMittal USA, United States Steel Corporation; Nucor Corporation; Gerdau Ameristeel Corporation; Steel Dynamics, Inc.; AK Steel Holding Corporation; Ssab Swedish Steel Corporation; Commercial Metals, Inc.) The case, Standard Iron Works vs. ArcelorMittal et al., though not a “newsworthy event from a timing perspective (the case remains in discovery), does raise plenty of interesting issues from a strategic sourcing and steel pricing perspective. We spoke to a few attorneys (some on and some off the record) who shared with us some background and insight on antitrust cases in general and this one impacting the steel industry in particular.

First a little background on the case. We should point out this case is a class action lawsuit with a named plaintiff, Standard Iron Works. According to the complaint, Standard Iron Works “purchased steel products directly from Defendants between January 1, 2005 and the present, a multi-year antitrust conspiracy amongst Defendant domestic steel producers to reduce the production of steel products in the United States in violation of Section 1 of the Sherman Act, 15 U.S.C. § 1.Specifically, Plaintiffs collectively allege that on at least three occasions during the class period”mid-2005, late-2006, and mid-2007 ”each Defendant implemented coordinated production cuts for the express purpose of raising the price of steel products.

Antitrust allegations in the steel industry go back to the turn of the last century (if not earlier). In fact, US steel producers have often found themselves embroiled in antitrust litigation going back to 1911 when an antitrust case was brought against US Steel. However, we’d argue that many factors have changed in regard to global steel markets (and now more than ever, we need to include the global element to provide context for antitrust claims against US producers). According to the complaint, “A successful claim under Section 1 of the Sherman Act requires proof of three elements: (1) a contract, combination, or conspiracy; (2) a resultant unreasonable restraint on trade in the relevant market; and (3) an accompanying injury.” The complaint has proceeded to the discovery phase. One interesting note involves the Judge hearing the case, Judge Zagel (who will also preside over the Governor Blagojevich case) has published a book and appeared in two movies, “¦was appointed to the federal bench in 1987 by President Ronald Reagan, and while his law enforcement background has given him a reputation for leaning toward the government’s view, he is widely viewed by members of the defense bar as predictable and fair, according to this blog post from the Chicago Tribune.

So what makes this case interesting? We believe two key issues provide context and color. We’ll describe both of them here and then in a follow-up post review the case made by the plaintiffs as well as review some of the case law history. The two primary issues relate to: the markedly changed structure of the US steel industry (from many/most producers operating un-profitably, often below the marginal cost of production) to greater industry concentration and hence a fundamental shift from poor industry economics to a healthier set of economics and the role of imports in setting domestic steel prices and how those imports affected the market during the period in dispute. Other factors that we will examine include historic demand (during the time in question), the resulting economic collapse in 2008 that severely impacted the steel industry and the speed in which mills can increase/shut down capacity. We’ll also weigh the merits of the plaintiff’s case and what impact this decision could have from a buying organization’s perspective.

MetalMiner would like to thank Don Hibner an anti-trust expert with the law firm, Sheppard, Mullin, Richter  & Hampton. Mr. Hibner is a member of the California State Bar, and the Bar of the United States Supreme Court, and has represented clients in federal and state antitrust proceedings for over 40 years.

–Lisa Reisman

Iron ore and coking coal prices have been driven up by insatiable demand from China. Steel producers the world over, but especially in Europe and Asia have suffered margin pressure due to rising iron prices driven not by their own regions’ demand but largely due to China’s. So it is perhaps a little ironic that just as European mills announce price increases to accommodate rising raw material costs, Chinese imports of iron ore and Chinese domestic steel prices begin to come off. As the following chart shows with data taken from MetalMiner IndX, Chinese domestic prices of steel products have been drifting lower since the beginning of this month.

According to Credit Suisse, iron ore prices have also weakened over the period in response to lower demand from traders on the China spot market:

Source: Credit Suisse

In addition, producers are increasingly turning to exports to maintain capacity utilization, although not yet to the levels seen in 2006-7, but certainly an about-turn from this time last year when China briefly returned to being an importer on the back of high domestic demand for steel products.

As further evidence of cooling demand, the bank reports that steel inventories in China have increased with a build-up of both long and flat products.

Source: Credit Suisse and MySteel

One could point to a weakening of steel scrap prices in the US as evidence the recovery is going through a global dip but we are reminded of the perversion of the old saying which goes, if China sneezes the world catches a cold. For the US or Europe to pause in its recovery is to be expected and the impact is limited, but if China (the world’s engine of growth at least for metals prices) to slow could have a significant impact on iron ore and coking coal prices, finished steels and non-ferrous metals. It would pay to track China’s steel prices, inventory and iron ore spot market buys over the next few weeks to see if this is a temporary lull or part of a longer term trend of cooling growth.

–Stuart Burns

There is an interesting debate going on right now in one of the Rare Earth community networking groups of which I am a member. The debate centers around this question, “Is China really the “bad guy” in REE that a lot of media makes them out to be? Of the 5 comment responders, 4/5 answered “no, not really but I as the fifth respondent said, “I think some China bashing is absolutely justified. The arguments against my position run the gambit from “western exploitation justifies China’s behaviors to “the sky is falling claims made by mainstream media. (I can buy into that second point e.g. hysteria) Another valid point comes from another member of the community, “As long as Western consumers demand metal products at the lowest possible prices without considering the environmental cost of production or that massive energy subsidies from the Chinese government make the low price policy possible in the first place, industries will continue to shift eastwards.

So maybe I stand corrected, some of the China bashing is not fair but folks, let’s look at China in a larger context shall we? The world of REE (rare earth elements and rare earth metals) is not quite the same thing as the world of industrial metals.  We acknowledge that point. Yet an outside observer of Chinese policies in regard to good old fashioned industrial metals (e.g. steel, aluminum etc) tell a very different story, one where I would argue some China bashing is not only fair, it’s justified.

Now that is not to say that the US sits here blameless. We do not. The federal agricultural subsidies we provide domestic farmers look an awful lot like the tactics Beijing deploys to boost its own heavy industries including steel production. But this article from AMR’s Kevin O’Marah explains some of the concern over China. Kevin points to six factors that ought to make any global procurement manager give pause when considering China as part of a supply chain. We’ve included five of the six points we found most relevant for metals supply chains:

  1. Capricious trade rulings. Kevin cites a NY Times story about a “prohibitive export tax and we’d argue that we have long reported on export tax/rebate/VAT schemas deployed by China to encourage/discourage certain imports/exports
  2. Rampant IP piracy one may think this can hardly matter for commodities like REE’s but in fact, China is known for stealing technology know-how. We know through credible industry sources that China has hacked into computer systems of major US producers specifically to steel trade secrets
  3. Exchange rate by fiat we have written countless articles on China’s currency issues. Nobody can convince me that China’s currency freely floats or is somehow “not manipulated
  4. Poisons, pollution and contamination I’ll leave it with the lead poisoning fiasco last year and the cadmium fiasco of this month. Don’t get me started on carbon cap/trade/tax legislation and how that would impact trade with China
  5. Rare earth chokehold well, that’s the topic we are covering here but Kevin makes the point that the only way to “secure supplies is to set up an operation in China but who is to say that it won’t one day get expropriated by the Chinese government?

Sorry folks but even if only one of these points is true, some of the hysteria around China seems justified to me. If an organization operates under the pretense that China is a “perfectly safe place from which to source key rare earth metals, we sure hope the mainstream media keeps up the China bashing. From our vantage point, the risks appear very real.

–Lisa Reisman

China’s aluminum smelters have a problem power, or to be more precise, power costs. Coming fast on the heals of an electric power cost increase announced last week in Henan, the industry has now heard that all subsidized power deals are to be withdrawn.

The announcement last week was a result of rising thermal coal prices pushing up the price for generators in Henan home for a fifth of China’s production. Spot prices of thermal coal in China’s top coal port Qinhuangdao rose by about 2% last week and are expected to rise further as Chinese power plants buy more coal to build stocks ahead of the peak consuming period in the summer. Generators have pushed up electricity prices by 6% to compensate for a series of rising coal costs and have also advised smelters that they will face rationing if power consumption reaches 75-80% of total capacity. The Henan hike would increase the cash production cost for aluminum smelters in Henan to around 15,500 yuan per ton, compared to the average cost of about 15,000-15,700 yuan for other smelters in China according to a ChinaMining article.

Meanwhile market prices for aluminum have fallen in line with softer demand and a fall back in world prices. Currently domestic China prices are 15,350 yuan per ton according to MetalMiner’s IndX but smelters said they could see capacity being closed if prices dropped to 14,500 yuan per ton.

That was before the announcement last week in a Reuters article by the National Development and Reform Commission to the effect that power costs for energy hungry industries such as aluminum, cement, steel, zinc, ferro-alloy, calcium carbide and sodium hydroxide would double from June 1st. For firms that fall into the restricted category, power surcharges will rise to 0.1 yuan per Kw-hr from 0.05 yuan previously and any preferential power rates in the name of direct trade between power generators and power users but without any approvals must be halted immediately, the report said. In the past ,calls by Beijing to remove preferential power deals have been ignored by regional governments keen to protect revenue and local employment, but now the authorities have issued a direct edict.

Smelters use 13,000-15,000 kilowatts of electricity to produce one ton of primary aluminum in China so a doubling of electricity costs from 0.05 to 0.10 yuan per Kw-hr would add 700 yuan or US$100 per ton to smelter costs. This is enough to nearly bring the spot price of 15,350 back to the 14,500 point at which the industry was saying smelters could close. With the market in oversupply a trimming of capacity would be no bad thing but if played out in any volume would likely support LME prices at or above current levels going forward.

–Stuart Burns

For steel consumers the change to quarterly iron pricing in Asia and the resulting fait accompli that Europe would be forced to follow must have been viewed with dread. For 40 years the benchmark system of contract iron ore prices has allowed steelmakers to fix prices for steel semis up to one year forward. This allowed steel consumers to price their products from cars to washing machines with some degree of confidence that the major raw material cost inputs wouldn’t change.

Well that’s all a thing of the past now, due to Chinese demand pushing spot prices to dramatic premiums over contract prices. Iron ore miners have felt compelled to shift contract pricing to a more flexible formula that more closely follows the spot price. Enter the quarterly contract amid anger from steelmakers who see not only their costs rocketing but risk multiplying dramatically. ArcelorMittal, the world’s largest steelmaker, said in a Bloomberg Businessweek article it will raise its steel prices in Europe as much as 16% after an “overwhelming surge in the cost of iron ore and coking coal.

ArcelorMittal will increase benchmark European hot-rolled coil prices to 650 euros ($825) a metric ton in July, from 560 to 620 euros currently.

The steelmaker says it has no alternative other than to pass on cost increases to its clients, but we ask whether that is true. All steel makers that rely on iron ore as an input and who are not vertically integrated with their own mines are facing the same problem. ThyssenKrupp for example Germany’s largest steelmaker, is according to a different Businessweek article, among those considering using new Iron Ore Swaps to hedge against more rapid price swings. The swaps allow buyers and sellers to fix prices for single cargoes of the material months in advance and were launched by Credit Suisse and Deutsche Bank in May 2008. The end of the annual contract and introduction of the quarterly price model could not have come at a better time for the young derivatives market. Volumes have grown dramatically this year. Some 100 participants are now involved in the market and trade grew to about 5 million metric tons in April, from 2.8 million tons in March. Swaps trading cleared on exchanges totaled 2.5 million tons in April, with over-the-counter trades carried out off exchanges about the same according to Phillip Killicoat, market specialist at Credit Suisse quoted in the article.

So steel makers and even major steel consumers have the ability to hedge their price risks via iron ore swaps. The qualification requirements for opening a swaps account are not a barrier for significant players in the market such as steel mills or major consumers such as automotive companies or major white goods manufacturers. The biggest hurdle is education and corporate acceptance in using hedging derivatives. For some steel companies and consumers the biggest barrier to achieving a degree of control over price stability may be their own treasury department.

–Stuart Burns

It seems inconceivable to consider steel prices in China could drop when you listen to the relentless stream of reports detailing China’s robust growth this year and the rude health of its construction and automotive markets, but many were saying the same about equities and base metals just a few weeks back and look at those now.

The argument in the case of steel has been both supply side and demand side. Demand as we have said appears to be robust with little argument from any quarter that China is in for a double digit GDP growth in 2010. On the supply side cost pressure has been intense with iron and coking coal contract prices nearly doubling, spot prices remaining high and supply from India constrained by import regulations banning lower purity iron ore (which will disproportionately impact Indian suppliers) and the looming monsoon likely to impact export volumes.

But the reality, as a Reuters article reports, is something different. The article states Chinese steel prices have remained largely unchanged this last week but our own MetalMiner IndX that tracks daily price movements for domestic Chinese steel markets shows that prices not only reached a plateau a month ago but have even come off slightly in recent weeks.

The Reuters article goes on to say concern is widespread that inventory levels are high and although this is typically a period of high consumption, mills are maintaining both production rates and prices in spite of the cost pressures they are experiencing due to rising costs. In fact those rising costs probably explain why mills have not dropped prices significantly to try and win more business. The question remains what will happen going forward. Mills cannot continue to feed metal into inventory and the stagnant prices suggest demand is at best weak. Maybe in spite of iron ore price rises steel prices have gone about as far as they are going to go in Asia for now, much the same as the position back home.

–Stuart Burns

The other day I wrote a post discussing whether or not an iron ore surcharge applied by US domestic producers was justified. Our conclusion? Not exactly based on the make-up of the domestic market with 50+% of production using electric arc furnace making methods (some state that number is now over 60%) vs. China’s 9.1% and the fact that one of the US’ largest integrated producers is largely “self-sustained from an iron ore perspective (US Steel). We estimated their market share at 25%. But one way the US can’t remain immune to rising iron ore costs involves steel imports from China. Let’s take a look at the numbers.

As we reported in the earlier piece, China will produce 612 m metric tons of steel, up by over 22% from 2009, according to the World Steel Association (we’ve seen other reports of China production reaching 675m metric tons this year). China produced 500.5 m metric tons in 2008. In 2009, China produced 567 m metric tons. Though China’s steel exports by dollar value and volume to the US appear much smaller then say Russia, Japan’s or Canada’s, check out some of these latest statistics according to trade publication Steel Home “April Chinese finished steel exports surged to 4.31 million tonnes (mt) last month, up some 29.4% sequentially as well as 205.7% from year-ago April levels. Finished steel imports actually declined in the month, down some 8.0% from 1.63mt to 1.5mt. Net finished steel exports rose to 2.8mt in the month, up 65.3% from March and 1438.1% from year-ago levels, for the highest monthly posting since October 2008.

Clearly all that cheap money sloshing around in China has found its way into the hands of state-owned (and/or privately held) steel producers. Excess capacity is exported. Is this good for US buyers?   One may think so from a short-term perspective but let’s look at it in a different way. Chinese producers, known to be less efficient than Western producers (that 90+% of China production comes from integrated steel production methods, many relying upon aging and antiquated equipment) are “buying up iron ore, causing prices to rise, only to turn around and export the excess finished products to undercut Western producers. And though we have attempted to make a case that much of the domestic US steel industry should not be affected by rising iron ore prices, at least 25% of the US market may still face rising prices. So here is a thought for you to consider – by buying China steel products, are US buyers actually helping fuel rising iron ore prices?

Meanwhile, the trade deficit will likely increase from $39.7b in February to $41b in April, according to University of Maryland Smith School of Business Professor Peter Morici. Morici makes several additional claims including: “At 3.5 percent of GDP, the trade deficit subtracts more from the demand for U.S.-made goods and services than President Obama’s stimulus package adds to demand, as well as, “Unemployment would be falling rapidly and the U.S. economy recovering more rapidly but for the trade deficit with China and Beijing’s currency policies. Stuart touched on some of these arguments in his earlier post today. And we remind steel buyers that the US currently faces a $6.3b steel trade deficit.

–Lisa Reisman

Perhaps some of you caught the headlines this past week that Severstal Sparrows Point announced a $125/ton iron ore surcharge, “The Severstal NA spokesperson, Elizabeth Kovach, told SMU in an email statement: “¦we are confirming an increase of $125 per ton for shipments to non-indexed contracts for Severstal Sparrows Point products effective June 1, 2010. This increase partially offsets the significant escalation in raw materials costs, which have increased in the range of 120 percent this year alone. The more interesting point that John Packard raises in his post involves the speculation of one steel executive, “who believes it is only a matter of time before some form of iron ore and/or scrap surcharge for both contract and spot customers will become commonplace.

And though in our price forecasts on steel we felt the US market would see some impact from rising iron ore prices incurred by the Asian steel mills, we felt that the US market still faced much less volatility with regard to iron ore due to a couple of key factors.

First, more than half of US steel production comes from Electric Arc Furnaces (EAFs) which, “now account for well over half of American steel production, according to a December 2009 Bureau of Labor Statistics report. Last year, the US produced 58.1 m metric tons of steel as compared to 91.4m metric tons in 2007. (The US typically produces in the 90+m metric ton range). China produced 567.8m metric tons in 2009 and 500.3 m metric tons in 2008. (And are currently on pace to produce 612m metric tons this year, according to data from the World Steel Association). We have seen estimates that EAF production in China represents 9.1% of total steel production, according to the World Steel Association. We should add that electric arc furnace making methods in China are not quite the same as electric arc furnace making methods in the US (e.g. the Chinese use much less scrap and instead add hot metal or cold pig iron). If the US produces more than half of its steel via EAF, iron ore surcharges do not at all relate to that same percentage of the market. Read more

1 978 979 980 981 982 984