The recent power problems in China, largely caused by bad weather reported in our recent article, comes at the same time as widespread power problems in South Africa have affected Ferro-Chrome, coal and precious metal mining.
So much for mining companies, but what of the manufacturers? It is estimated that the Chinese power problems have idled up to 10% of the country’s steel production and several aluminum pot-lines. Power failures are particularly damaging to aluminum smelters because the molten aluminum rapidly solidifies in the cell, taking months to get the cell operating again at a very high cost. So if power is likely to be disrupted, smelters usually voluntarily take pots out of operation to reduce the demands on the grid and ensure reliable supply for those cells left in operation. That is what is happening at Southern Africa’s three smelters, Bayside 190kt, Hillside 709kt and Mozambique’s Mozal 564kt following warnings from South Africa’s power generator Eskom that due to heavy rains they can’t guarantee power supply for the next 4 weeks. We have heard that due to under investment there will be intermittent cuts for the next 4 to 7 years! In addition, expansion plans at Mozal and Hillside and the proposed new Coega smelter of 700kt are all in doubt according to Standard Bank, Leon Westgate, Base Metals Flashnote, 29 Jan 2008. Read more
To suggest that prices are going to remain firm let alone possibly rise in the face of a potential recession seems perverse but that is the prospect facing the US Tool Steel market in 2008. As predicted in a recent article on Cobalt the metal price has continued to rise with trading this week at $49/lb on the spot market, levels last seen in 1978. The price of a range of other tool steel raw materials have been driven upwards by a combination of tight supply and the changes in Chinese Ferro Alloy export taxes reported in MetalMiner. The Chinese authorities doubled taxes to 20% on a range of Ferro Alloys in an effort to husband domestic supplies and dissuade investment in what are seen as polluting industries. This week has seen increases in Ferro Moly, up $2/lb to $34/lb following 20% price increases during 2007.
Molybdenum has faced a squeeze as supplies reduced 5% during the year but demand increased by 4% per annum. Analysts expect production to slide by 20 million pounds this year due to reduced output from Kennecott Utah Copper, Codelco in Chile and reduced Chinese exports.
Ferro Tungsten rose $.50/lb this week to trade on the spot market at nearly $16/lb. With the exception of Nickel just about every ingredient in tool steel is on an upward trend driven by the same combination of global supply tightness and reduced Chinese exports following the recent tax changes. Even Natural Gas, a key cost component for North American Stainless Steel mills has been rising on the back of Oil. An additional cost driver, at least for the US market is the weakness of the US dollar, which will increase the cost of imported material. With so much of the US market traditionally supplied from imports, exchange rate weakness will force importers to raise prices and allow domestic producers to push through raw material cost increases that much more readily.
Where this will lead Tool Steel prices as the year unfolds would look to be a one way story. Universal Stainless & Alloy Products increased prices back in September, according to Platts.
Certainly in the short term we see H1 prices continuing to rise, so cover your short term requirements now to carry you through for 6 months but after that, all bets are off. If demand slumps enough (and it appears as though most think China is not immune from an American recession), tool steel will come off too.
The last time you pulled up at the pump to fill your car with gas, did you wince when you saw the bill? Well, that’s why overall freight costs are headed north. The shipping lines usually lag the gas pump by about a month, so you won’t be surprised to hear Bunker (or fuel) surcharges are to be adjusted upwards. No surprises there, you say. What is different this time are the amount and the mechanism.
For many years, NVOCC’s (Non-Vessel Operating Common Carriers) like Exel, Kuehne & Nagel, CH Robinson, and others have been able to negotiate the freight rate and BAF (Bunker Adjustment Factor) in March/April and fix it for the year ahead from May 1. This year the lines are imposing an EBAF (you guessed it — Emergency BAF) and the word is that it will be in the region of an additional $280/20ft and $320/40ft — the ratio is usually the 20ft being 80% of the 40ft. How this will manifest itself in quotations remains to be seen. The lines may just quote one enhanced BAF figure, but behind the scenes agree part as regular BAF and part as EBAF, or they may actually call out the two surcharges. The fact is that they will be applied — and unlike previous years, they will be floating, adjusted month by month or quarter by quarter, so if gas gets to $4/gallon the EBAF will rise further. Read more
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
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.
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.
Back in my Andersen days (yes, that Andersen), the firm had the motto “think straight, talk straight.” Not that we always did, but that certainly was the goal. My boss at Andersen, a wonderful guy named Jim Broering, had an even better motto: “Don’t make them yawn.” You laugh, but it had profound ramifications on what came out of people’s mouths or onto their powerpoint slides. Jim was the “so what” guy. What did the finding, the factoid, the news bit mean to the person receiving the information? That was the question he always pushed me to answer. And so I can’t help but feel that publishing New Year’s predictions, though perhaps helpful to some, may actually just be a yawn if there isn’t something more tangible for the reader.
So thinking of Jim’s words of wisdom, we thought we’d profer not predictions but our sense of different sourcing strategies companies have used in various markets (up, down, sideways etc). Of course there may be wildly different strategies for sourcing raw materials or semi-finished products (e.g. sheet, coil, plate, tube etc) vs. more finished products (fabricated parts, castings, forgings etc) which contain some of those metals we wrote about the other day. Read more
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’.
It may have been 1967, but the one-word of career advice that Benjamin Braddock received from a family friend — “plastics” — remains iconoclast. But heck, we don’t write about plastics; we write about metals — so it came as a pleasant surprise to read this article in ASM International about a new alloy called Crutonite, developed by Eaton and Crucible Materials Corp for Caterpillar’s C15 heavy-duty on-highway diesel engine.
The alloy contains a lot less nickel than similar alloys used for these types of applications. We have heard in the past year of a number of material substitutions for various stainless grades. What we find interesting about this application is that the Crutonite appears to withstand a very rugged industrial products application, namely to perform “flawlessly on an engine for more than one million miles.” The fact remains that innovation is not limited to plastics or high tech; it is indeed very alive and well in the metals industry.
Looking at innovation more broadly, what I also find interesting is the factors that drive innovation in the U.S. Product differentiation and the need for suppliers to move up the value stream are certainly large motivating factors, but what I most appreciate is the sourcing angle, or the need to drive down costs. For anyone who has been tracking nickel for the past two years, product substitution has likely become a primary cost reduction strategy. What will be most interesting to watch is how companies deploy their green strategies within the metals industry to design and create new products and materials not for some social do-gooding — which we don’t have a problem with — but rather for cost reduction. I suspect when it makes pure financial sense, we’ll see a lot more metals innovation, and the U.S. will likely lead that effort. We’ll be sure to highlight some of the metals related innovations.
The Dubai Air Show ended recently, and already the papers are announcing the massive sales secured by Airbus and Boeing — not just for their new offerings, the A380 and 787 Dreamliner, but for the stable stock in trade of A320’s and 777’s. Both makers have bulging order books with more than 1000 aircraft each on order. In addition, producers of smaller commuter aircraft like Embraer and Bombardier are also booming.
We see so many opportunities for the aircraft industry, but how does this affect the supply market feeding these production lines? After several years of sustained growth both in the West and Asia, the metals markets are already tight, particularly for the supply of semi-finished metals like plate, larger diameter bars, and the famous fasteners that have so delayed the Dreamliner. Read more