Articles in Category: Supply & Demand

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.

–Stuart Burns

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.

–Lisa Reisman

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.

–Lisa Reisman

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:

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A recent tongue-in-cheek article on Spend Matters about the U.S. becoming the low-cost country source for Europe due to a falling dollar looks like it may have substance as well as humor on its side. Rolls Royce has announced that they are establishing a manufacturing and assembly facility in Virginia to service the growing corporate jet engine market and the sophisticated manufacture of Blisk components for the U.S. Joint Strike Fighter F136 engine. These components are bladed discs machined from large solid titanium forgings, and Rolls Royce gained acceptance for their use on the F136 project two years ago in collaboration with DutchAero. Could the strength of the Euro against the dollar be the prime motivation behind this move to Virginia? Rolls Royce certainly states the exchange rate as one of three principal reasons for the move.

Meanwhile, Bloomberg has reported that U.S. exports are surging on the back of the weak dollar and cited aero engines as a specific example. With the credit crunch, volatile equities, and a slumping housing market, it would appear technology exports are the one bright spot on the horizon for the U.S. economy.

–Stuart Burns

I saw yet another tidbit of news this week that will further erode the savings coming from China’s steel exports. This Interfax news article reports a 5% export tax increase (from 20-25%) for all steel billet and long products coming from China. Long product refers to rebar and wire. There are no changes to the export tax on flat products such as hot rolled coil or cold rolled coil. This likely does not come as a surprise to many American buyers of China steel products.

The cost of imports has been slowly increasing both with the VAT rebate changes as we reported several months ago in conjunction with   and an appreciating RMB. So where is it all going? Our call is nothing but up. In addition to the currency changes and VAT, there does not appear to be any slowdown in China demand for metals products. In fact, some metals face supply shortages. On the face of it, we don’t see what will stem the rising China price. Add on top of all of this are two key underlying trends in American politics today – curbing the trade deficit and protecting US jobs. One can see how the China price is not going to get any lower.

But what the politicians and mass media fail to talk about is that trade with China is not just about Chinese jobs vs. American jobs (or the steel pipe producer in the US vs. the one in China) but also American jobs vs. American jobs. There are two American jobs at stake in these transactions….the steel producers’ jobs (who happen to have a far more effective lobbying campaign going) and the jobs of those who buy steel products…all of the value add assemblers and parts suppliers within every industry in the US. And unfortunately, they do not have a very effective lobbying campaign. Who ever said a rising tide lifts all boats?

-Lisa Reisman


Almost everyone knows the age-old adage, Buy Low, Sell High, with the possible exception of a scoundrel trader for whom I used to work. He practiced a Buy low, but do whatever you need to sell strategy. Although buying low and selling high is a rather duh concept, I always get a kick out of hearing how XYZ company offloaded some old nickel or copper they purchased before the markets went crazy. So this article suggesting that now might be a good time to sell off gold jewelry purchased several years ago made me chuckle. Playing the price arbitrage game can work for buyers and sellers of all sizes.

I once met with the VP of global purchasing for a middle market manufacturing group who suggested that metals prices (we’re talking about the raw materials here) are similar throughout the world. But this couldn’t be any further from the truth. In fact, the arbitrage opportunities for buyers are probably more abundant as commodity volatility increases. Simply put, the more the prices for metals gyrate, the greater the opportunity to take advantage of arbitrage. Perhaps we can find an academic who would be willing to run some regression analysis for us to confirm that last statement. As an example, if the market is going down and a domestic supplier sets his price using a trailing three-month average, while a Chinese producer is using a spot price to set his price, a buyer can take advantage of an arbitrage opportunity (provided the product does not involve complicated tooling or high switching costs). Of course, there are many other variables, including the buyer’s required lead time, quality requirements, etc., but if the purchasing organization develops and creates multiple supply options for a particular category, there could be some savings or cost avoidance opportunities.

In the meantime, it is tempting to consider a little profit from those old gold necklaces!

–Lisa Reisman

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.

–Lisa Reisman

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