I received a phone call last evening from a friend in Shanghai. He had asked me if I heard about the power shortages and energy crisis in China. Oddly enough, I had been planning on writing a short piece on how power shortages were having an impact on various metals markets. In China, the country’s largest aluminum producer shut down operations at two plants in Guizhou and Zunyi, according to this recent article in Forbes. With annual production of “320,000 and 110,000 tons respectively”, the loss of this production is bound to have ripple effects in the Chinese and possibly wider markets. No date has been set for when the plants will begin production again. The effect on aluminum prices coming out of China remains to be seen. I have read that the prices of alumina, will drop due to lack of demand but the cost of primary aluminum or semi’s may increase. Read more
Articles in Category: Non-ferrous Metals
While many of you were undoubtedly enjoying your weekend — those of us in Chicago were trying to stay warm in 5 degree weather — I stumbled across an interesting article from the New York Times on how overseas investors are scooping up US companies often at fire sale prices. This should not come as a shock to anyone. All one needs to do is head to a mall and listen to all of the foreign accents. The Brits think there is a two for one sale here on everything and many Europeans are flying to NYC for a weekend getaway and some bargain shopping.
So what does a weekend getaway in NYC have to do with metals? Well, according to the Times article, ThyssenKrupp Stainless just spent $3.7B to build a stainless facility in Calvert Alabama because “of the low cost production of the United States. But that news has been previously reported. What is interesting is the why and the when. Since imports are now so expensive, ThyssenKrupp did what any investor might do and establish a local presence. ThyssenKrupp will now be able to take advantage of NAFTA and position themselves for a larger chunk of the North American stainless market. The goal is a 5% US market share and up to 1M tons of flat rolled product according to the company’s press release on the same subject. According to an article by Recycling Today, “There are 15 prominent manufacturers of stainless steel flat products, three of which (ThyssenKrupp Stainless, the Acerinox Group and Posco) manufacture around 1.8 million metric tons.” This new investment is quite significant.
Perhaps ironically, ThyssenKrupp is pursuing this strategy in the face of sagging profits and sagging demand for stainless, according to this recent Forbes article. But no matter. It’s still a great buyer’s market and there are plenty of foreign firms sniffing around at both American acquisitions as well as greenfield opportunities.
Though some view foreign buying of US companies as a threat, we think it will be a boon to US buyers. From the buyers point of view, competition among suppliers is nearly always a good thing. This new plant will be state of the art if it is to compete in the decades ahead and not only will it increase supply, helping to keep down prices but it will also raise the quality expectations in the wider market place forcing incumbent suppliers to improve quality too.
How can buyers prepare for when ThyssenKrupp comes on stream in 2010? Well, given our 2008 stainless steel price predictions, consider locking in some longer term contracts as prices drop. And maybe, just maybe, buyers will see some better pricing for the longer term.
— Lisa Reisman
And what does the price of Ferro Nickel in India have to do with that spatula you used last night? Actually, quite a bit. India is about to cut the import duty for Ferro Nickel by 3% for 2008. According to this Economic Times article both nickel and chromium prices are also expected to fall in 2008. The result? According to the article, a 10-15% reduction in the price of stainless steel utensils! Hee Haw! So if you were holding off on that fork purchase, you might consider a spring 2008 excursion to your local cutlery store.
Okay, so you laughed. But there is a lesson here … the price of these ferro alloys, along with nickel and chromium in India most certainly affects U.S. buyers of all types. If your company is importing stainless steel utensils, these price drops matter to you. You want to be sure your spring contracts reflect these price changes.And despite all of the recent anti-trade sentiment, the fact remains that we are all operating in a global economy. South Africa controls about two-fifths of the world’s production of chromium, but India is also a significant producer. We’ll continue to report metals price developments from around the world. Alloying elements can and will continue to have a dramatic effect on finished item cost. In the meantime, if you are considering replacing your serving ware, hold off until spring/summer.
For any consumer of Cobalt metal or components with any significant Cobalt content the price pressures must have been nigh on unbearable this past year. Driven by consumer demand and an element of speculative buying in the face of tight supplies, Cobalt has increased from $13/lb at the beginning of 2006 to $27/lb at the beginning of 2007 and closing 2008 it stood at $40.25/lb.
The supply market is tight, apparently producer stocks are low, one of the world’s principal and traditional sources, the Democratic Republic of Congo (DRC) placed a moratorium on exports of cobalt concentrates and trickle sales form the US government stockpiles are finally coming to and end. The DRC was the world’s largest single supplier of Cobalt, often produced as a by-product from Copper production, in the days when DRC’s Gecamines was a major producer sitting on the world’s richest ore Copper and Cobalt ore bodies during the 1980’s. Even today many of the tailings dumps contain higher copper and cobalt levels than new rock projects in other parts of the world. But decades of mismanagement, corruption, war and under investment has brought production to 10% of what it was in its heyday.
Demand on the other hand has been driven both by China but more broadly by the strength of specific high tech industries for which Cobalt is a non substitutable material. Historically, cobalt has been in super alloys used in gas turbines and this still remains an important market, particularly with the strength of the aerospace and power generation markets. But more recently cobalt’s use in rechargeable batteries for cell phones, laptops and fuel efficient hybrid cars has created demand growth of 7% per annum. The Financial Times is quoted as saying a Toyota Prius contains 2.5 kg of cobalt in its batteries, production is currently 350,000 per annum and is set to reach over one million by 2012 . Read more
A couple of years ago, Stuart told me about a few metals related thefts in his area including his own 20 ton aluminum container worth about $60,000 (at the time). Stuart maintains an ownership stake in a specialist stocking company in the UK. Then, just two weeks later, a truckload of copper worth $100,000 was stolen just outside his warehouse. They never caught the perpetrator and the police could not be bothered. I remembered thinking how clever it must be to steal semi-finished or raw metal materials. Unlike stealing the same dollar amount from a bank, a metal theft is typically not a felony (unless of course the goods are transported across state lines). So in a sense, smart criminals may find such materials well, crime-worthy, if you will. Of course they would have to do a little work to realize the fruits of their labor. I would imagine it would be hard to come up with mill test certificates. But, it’s relatively easy to create a packing list, invoice etc. One would only need to pull and test a few samples to determine the alloy, chemical composition etc to pitch it to the local scrap dealer. But I had taken Stuart’s story as a random act. Random and stand-a-lone. But given rising metals prices, dear Stuart is not the only victim of metal theft. Consider these examples:
- Newsweek recently reported that thieves were stealing catalytic converters (for the platinum content) from police impound lots.
- In Washington state, thieves stole bronze headstones from a cemetary .
- In a more outrageous example, two vans with five people carried off approximately $60,000 worth of lead from a UK concert hall roof.
- Continuing on the outrageous or not-what-you-would-think theme, I saw this headline…about thieves stealing brass water valves.
- Unfortunately for this fellow, who was electrocuted stealing copper from an abandoned building, he didn’t get to reap the rewards of his theft.
Our research indicates a few other interesting findings such as these crimes are not only occurring in the US. They are occurring all over the world. It is no longer just drug addicts that are committing the crimes for a quick buck. The primary buyers of these materials include scrap yards and scrap dealers (which may not appear as a surprise to anyone) Because there is such great demand for metals, scrap dealers, historically, have not questioned their sources of supply in terms of product origin.
The good news however, is that many local governments are looking at new regulations and laws to curb metals-related thefts. Some of the provisions include things like scrap dealers registering their business and keeping detailed records, sellers would need to show a photo ID and in some cases provide a thumbprint, age requirements for sellers and limitations on those that can sell scrap air conditioning parts made of copper (e.g. compressors).
The Scottish Business Crime Center has published a wonderful checklist of preventative measures any industrial products company can take. For those of you considering making your catalytic converters a little more secure, consider buying yourself a spot welder! Apparently, a little spot weld makes it trickier to rip them off!
At the same time that respected Wall Street guru David Rosenberg, Chief Economist at Merrill Lynch declared that in his opinion the US is actually in the first month of recession, we came across a wonderfully upbeat report on the prospects for the world economy in Britain’s Daily Telegraph that we wanted to share with you as you pondered the falling value of your house and impending tax return.
Tom Stevenson, often noted for his insightful and contrarian views, noted a report by the research group Iris for fund managers Robeco on the subject of scarcity as a theme for investment. Some of the findings may on reflection not come as a great surprise individually but looked at cumulatively they paint an astoundingly positive picture for companies able to position themselves to offer products or services identified as being in high demand.
The background briefly is that the world is fast moving from being an agrarian, dispersed population of some 2.5B in 1950 to 6.5B today and 9B in 2050, 85% of whom will be in what are emerging markets today. Well before then, over 60% will live in cities where their newly resource hungry lifestyles will require an explosion in demand of commodities, water and energy. Per capita consumption of energy in China is comparable with S Korea and Japan at similar stages of their development. If China follows a similar path, its demand for energy will rise 10 fold in the next 30 yrs. Calamity you say, opportunity says Stevenson ” for human ingenuity and creativity to find solutions to water scarcity, energy consumption, pollution and food supply. Specifically these are the certainties identified:
¢ Demand for industrial metals will outstrip supply. China currently uses a third of the copper per head compared to Europe or North America., but by 2030 China, Mexico and not far behind India will have living standards closer to Spain today, nearly 3B people with a metals demand to match. Just look at the effect car consumption will have on copper demand. Currently mining companies as a whole spend only 5% of their profits on exploration. With demand outstripping supply, exploration will have to increase.
¢ World energy demand will be 50% higher in 2030 than today. Both oil and alternative energy prices will remain high.
¢ Food prices will continue to rise, both for human consumption and for feeding cattle. Meanwhile bio fuels targets will mean 12% of the world’s agricultural land will be needed for transport compared to 2% today.
¢ The WHO predicts 35% of the world’s population will be in water stressed areas by 2025, the non economic pricing of water will have to change.
¢ Air pollution will get worse but so will the opportunities for companies providing solutions. The market was US$60B last year and is forecast to double in five years.
So there is plenty of growth out there, once we raise our sights to look beyond the housing market and the availability of short term credit.
A wise colleague once told me the first time you hear something, it’s a data point. The second time you hear it, it’s a line and the third time you hear it, it’s a trend. Said differently, the demand for the world’s precious raw materials is going to increase and so too will the prices.
Though we stand by our 2008 metals predictions (including copper) – the fact remains the underlying data may be pointing to a very different financial picture long term. Consider the following:
- Tata Motors just unveiled their $2500 car for the Indian (and other) markets
- Examining per capita “consumption rates” as recently published in the The New York Times by noted professor and author Jared Diamond, “The estimated one billion people who live in developed countries have a relative per capita consumption rate of 32. Most of the world’s other 5.5 billion people constitute the developing world, with relative per capita consumption rates below 32, mostly down toward 1.” But, “China’s catching up alone would roughly double world consumption rates. Oil consumption would increase by 106 percent, for instance, and world metal consumption by 94 percent.” And we haven’t even talked about India or any other developing country.
- According to a March 2007 article quoting Sanford C. Bernstein, an investment management firm, a hybrid car, “costs US$4,500 to $6,000 more to build than a conventional vehicle.” Some of this cost is due to the added metal content for a hybrid vs a regular car. For example, there is more copper used because of the electrical motor and the larger the motor, the more copper required. In addition, more nickel is also used in hybrids than in conventional cars. And, according to this same article, the automotive industry accounts for 5% of global copper usage.
And the data goes on and on…though the metal content of cars has historically been dropping as a % of the overall content of a car (and electronics has risen), metals consumption overall will increase exponentially as more of the lesser developed world purchases cars.
Of course all of these data points examine the demand side of the equation. We’ll come back to the supply side in another post. But consider this odd trade agreement as reported in The New York Times between Chile and China hint: Mandarin lessons were part of the accord. China is busy brokering long term raw material, in this case copper, supply arrangements. The long term writing may be on the wall.
Compounding changes to the China import/export tax and VAT rebate schemes in July of 2007, additional changes were announced on December 14 for implementation on January 1. With help from Jason Zhang, our metals expert in China, we review these changes and offer some early insight into the likely effects.
Broadly, there are three different changes that have been made or are taking place that will affect the markets going forward. These changes specifically include: import duties, changes in export duties and changes in the RMB/USD exchange rate. Read more
In the face of a slowing US economy, a mixed position for the European economies and a still strong Asian market, it is a particularly tough call this year to judge where prices will go. Our call is the US will teeter on recession. Europe though restricted by high ECB interest rates will still enjoy some (if reduced) growth providing the Euro/US Dollar exchange rate does not strangle exports. Asia in general and China in particular are still enjoying robust growth. China may well drop from the double digit growth of the last 5 years to high single digit figures but that is still a very significant driver for the world economy and particularly the world metal markets.
So here are the 2008 predictions:
I mentioned to you a couple of days back that from time to time, I would share a few war stories on these virtual pages. But since we are still getting to know each other, I won’t be able to get into some of the more scandalous stories (like about a former boss of mine from my aluminum trading days who lived a parallel life to Marc Rich — who incidentally was one of the most entertaining characters in the metals industry). You all might remember Rich as the guy who evaded taxes but who was pardoned by Clinton right before he left office (I think my former boss and Rich, in fact, knew each other from their Phibro days). Or how my first trading deal was with Carlos Slim (okay, not him directly but his company Productos Nacobre)…but those tales will also have to wait.
Today, I’m just going to share a quick tidbit about one of the firms Stuart and I used to work with in Russia called Rusal. I happened to type them into Google this evening just to check out their latest happenings and lo and behold, I found this article from Reuters about what their access to cheap Siberian hydropower has allowed them to do and that is to become the number one aluminum producer in the world. Back in my early trading days (1994 to be specific), energy was important but it didn’t seem to dominate the headlines as it does now. There were so many market inefficiencies and with a nascent internet, it was easy as a trader to identify un-competitive suppliers and subsequently undercut them. Moreover, the notion of vertical integration – shoring up energy supplies combined with the mining and or manufacturing processes had waned as companies were looking to shed non-core assets. But more recently, things have changed. Competitive advantage in the metals industries can be gained and lost based upon access to low cost energy supplies. We have seen Chinese suppliers duke it out for contracts with the winning supplier just undercutting its closest competitor by minimizing its energy costs.
We are also seeing buying organizations of all sizes doing more to identify the cost drivers behind the quotations. Just recently I heard of a Fortune 500 company seeking to implement a strategy of multi-tier sourcing in China. We also know of a small consumer products manufacturing firm seeking to do the same thing by aggregating component supplies across their Chinese supply base. The challenge will be accessing the cost information from component suppliers. Without question, the times they are a changin’.