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: Supply & Demand
As shipping company shares drop dramatically across the world’s stock markets, could the Baltic Exchange be pointing the way for the Global Trade market during the year ahead? Several days of sharp falls in London on the Baltic Exchange’s Dry Index caused major shipping corporation stocks to fall sharply this week, led by COSCO, China Shipping Container Line and others in double digit reductions across North American and European bourses.
Followers of the rather dry (pun intended) Baltic Dry Index will know that the measure of freight rates for dry commodities like coal, iron ore and grain rose from 4,000 a year ago to 11,000 towards the year end. The Index measures the cost of chartering a ship, and although volatile and sensitive to short term chartering, demand has been an accurate measure of the strength of the global market for trade in the volume dry commodities that power the major economies. This year it has dropped out of bed, plunging to 8,000, and in the process brought down the share price of the shipping corporations. At the same time, the market takes the view that if demand is dropping for shipping space, it is bad news for the shipping lines.
It’s true to say the BDI is a very sensitive barometer and a few cautious voices are suggesting this could be a short term correction to an overly bull-run during 2007. But the drop in demand started late last year, and it has persisted since the holidays. The fear is that steps taken by the Chinese authorities to cool the country’s demand for raw materials may finally be having some effect, just as problems in the U.S. and European economies reduces demand there. It is too early to call this as a warning of impending recession, but it’s certainly one to watch in the months ahead.
We’ll keep you posted periodically.
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
Just days after making our metals and currency predictions for 2008 I read that many notable commentators are supporting our comments on the Chinese currency. Driven by stubbornly high inflation, Beijing looks set (unofficially) to let the RMB appreciate significantly in the coming year in an attempt to dampen exports and reduce demand for imports, hoping this will cool the economy. With inflation running at 11.5% last year driven by growing exports and China’s foreign currency reserves just shy of $1,500B the government is desperate to bring growth back into single figures. Our call was from 7.3 to 6.7 over the year but Stephen Green of Standard Chartered Bank is predicting the RMB could rise to 6.17 per USD by year end. The effect for importers of Chinese product could be a 9% increase in prices on top of recent changes in export taxes export taxes and VAT rebates.
We have long said that China’s role as the low cost country of first choice is on a slow decline and for many commodities this is increasingly becoming reality. A weakening US dollar and rising efficiencies have made many US companies competitive in the international market place where they were once hopelessly over priced. Not that we would recommend devaluing the US dollar as a remedy for US competitiveness, as Britain found in the 1970’s and 80’s it is at best a short term solution, but as China’s dollar costs rise we may at least see the flow of more labor intensive jobs to China slow from the flood a few years ago.
From a personal point of view I will find it interesting during the coming year to see to what extent the currency and tax changes impact China’s consumption and exports of metals. As we have previously posted, the Chinese government has taken deliberate steps to try and reduce exports of basic steel products and certain non ferrous metals while at the same time increasing incentives for imports of other metals. The currency movements will amplify that process as imports appear cheaper to Chinese consumers but exports less attractive. Where Chinese consumption has been the main driver of price for certain commodities, like Copper, this could see the resurgence of Chinese demand and support for prices in the year ahead. The recent abolition of import taxes on refined Copper has already seen renewed buying interest.
So whatever your particular metal interest is 2008 is likely to see China continue to play a significant role in determining price and availability. We now have the additional dynamic of currency on top of supply and demand to increase the volatility.
While the rise in iron-ore prices will hurt steelmakers without their own iron resources, steelmakers with their own iron-ore are possibly about to hit payday ” along with company investors. OneSteel of Australia, for example, was recently featured in an Andrew Harrison article in the Wall Street Journal as one of the few steelmaking companies that won’t be affected by the higher prices of iron-ore. Approximately 98 percent of iron ore is used to make steel, and the product is vital to the steelmaking industry. OneSteel is particularly self-sufficient in this regard and, unlike other companies, not left brawling for the critical raw material. Instead, OneSteel boasts of its own mines that are basically neighbors to its steelworks site in South Australia.
OneSteel, Australia’s second-largest steelmaker, isn’t your typical steel company, reports One Steel Chief Executive Geoff Plummer. Formerly part of BHP, OneSteel became an offshoot from the company in 2000, two years before the largest steelmaker in the country, BlueScope Steel, did the same. Rather than just making steel, Harrison explains in his article, OneSteel is one of the few global steelmakers involved in everything from iron-ore extraction to scrap recycling and product distribution. Since it’s rumored that iron-ore prices could soar as much as 50 percent this year, the company — with its mines, durable assets, and quality management — is looking like a win to investors.
Since not all companies are blessed with their own mines, other groups are taking more unique approaches, looking to new and unusual places for iron-ore. Mining and resources group Rio Tinto is also getting involved in the iron-ore situation, as was noted in a recent article in The Australian. The article declared that Rio Tinto is looking to do what its rival BHP Billiton has failed to do — develop a new iron ore export business out of India despite that Government’s focus on husbanding ore for local steel production. This looks to be a fascinating possibility, particularly after reports that Chinese steel mills are losing negotiating prices with miners. The more possibilities, the better, some might say. But steelmakers such as OneSteel have it the best, since they can find iron-ore in their own backyard.
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
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.
It’s easy to jump on the bandwagon of doom and gloom for the US economy. A falling dollar, a sub-prime mortgage mess, sluggish holiday retail sales and a whopping $9 trillion of national debt make it hard to conclude anything other than a recession for 2008. Since Q3, 2006 leading CEO organization Vistage has been predicting a Q2 2008 recession.
But the data is not yet supporting that position. Crain’s Chicago in late December reported on the National Association of Purchasing Manager’s latest business activity index for the Midwest which was at a healthy 56.6. Anything over 50 indicates growth. A reading under 50 indicates contraction. This survey is an interesting benchmark because it largely examines factory activity. The article goes on to say that these numbers are much better than economists forecasted. Perhaps the most interesting note however relates to pricing specifically, “prices paid fell to 63.8 from 76.2 a month earlier”.
What ramifications does this have for metals prices? It’s unclear. We’ll be coming out with our 2008 metals pricing predictions shortly. But many of those predictions are based on economic fundamentals. And though some of the large industrial bell-weather companies (e.g. Caterpillar) are having down years, it’s too early to call the sector out.
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: