I used to work with someone back in my days at Arthur Andersen who used to say, “the first time you hear something, it’s a data point….the second time you hear something, it’s a line but the third time you hear something, it’s a trend.” First, let me relay to you a few data points that I have been wondering about:
1. Gold futures fell 3% on news of a pressured dollar.
2. Fed Chairman Ben Bernanke recently said inflation risks are growing.
3. The Fed is also concerned about a “dollar rout”. Since that term doesn’t make plain sense to me, I refer to a link to the Economist on the subject the subject – the point here is The Fed wants to be sure there is no free fall in the value of the dollar
So what can we conclude by these data points (besides that there are three of them)? There are a number of conclusions one can draw. First and foremost, is to point out the inverse relationship between gold and the dollar. When gold goes up (it did hit $1000 ounce earlier this year), the dollar is down (the dollar slide is likely what causes gold to go up). But the point here is that gold futures are coming down which means the dollar may be on the rise. Second, with Fed Chairman Bernanke publicly stating his concern about inflation, he is hinting that the economy may need some interest rate increases in the near future. When interest rates go up, so does the dollar.
What other factoids can we bring up? Exports are starting to drop off a bit and lo and behold, steel imports are starting to come up a bit. Imports help keep inflationary pressures in check (as many of you steel buyers would attest to). I’m not an economist but I’m going to call it here…the dollar has bottomed out and may be on a slow ascent. We’re going to see more imports and all you metals buyers out there will start to see a few chinks in the armor.
This weekend we had a chance to catch up with a partner of ours, German Dominguez, who is based out of Juarez, Mexico. German sources parts on behalf of American companies. This is Part One of a Two Part interview.
Question: How many programs have you quoted on during the past 4-5 months where the buyer was trying to decide where to go between China vs. Mexico? Please describe what types of program these were as well.
Answer: I have looked at 10 new programs in total. Six of them moved to Mexico (four were for new products) and two migrated from China. Four were awarded to China (and one went from Mexico to China). Four of these programs were for new products altogether where we looked at a full concept-to-market and two programs were currently sourced in China but the buyer had hoped to re-source to Mexico. The re-sourcing projects were machined components and light metal fabrications. The new products were machined components and light metal fabrication with electro-mechanical components. So I could characterize all of these as value-added parts and/or assemblies.
Finnish-based Outokumpu, the second largest stainless steel maker in the world, is one step closer to reaching their ultimate goal becoming the world’s number one stainless steel maker. Earlier this week, Outokumpu announced plans to double their ferrochrome production to 530,000 tons per year, making the company self-sufficient in ferrochrome. Ferrochrome is essential for the stainless steel industry, since stainless steel expends more than 80 percent of all ferrochrome produced. Read more
When is a contract not a contract? Apparently it’s when you are a U.S. Steel company in an extremely tight market. Honda chief executive Takeo Fukui told Reuters in Tokyo that an unnamed U.S. mill had requested (polite speak for demanded) a price increase during April on an annual contract negotiated earlier this year. Favorites are U.S. Steel or Arcelor Mittal, as both have imposed surcharges on contracts recently and both have been at the forefront of pushing through price increases above those widely believed purely necessary to cover raw material costs. If Honda has been asked to pay more, then probably so have Toyota and Nissan. This comes on top of cost increases facing the Japanese transplants, caused by the weak dollar inflating the cost of imported parts made overseas. Read more
It’s possible you didn’t even realize it was missing, but the news is official: Aluminum’s back. The U.S. Environmental Protection Agency is now amending a clear water regulation, the F019 hazardous waste listing, which previously restricted the use of aluminum in automobiles. It’s been decided that cuts in carbon emissions are worth possible water contamination from the manufacturing process, although some consumers are still skeptic. Either way, this new legislation should lead to widespread use of the metal in the automobile industry. In fact, Forbes shares that the 2008 Ford Focus is already replacing steel with high-strength aluminum in front-brake calipers. Read more
This is part two of a two-part series. Click here to read the first part.
Yesterday, we talked about predictive markets and touched on their applicability to metal markets in general. Without surveying all of the literature, suffice it to say that predictive markets, can be much more accurate than traditional polling techniques or other analytical methods. So given the fact that there are dozens of research firms and analysts covering the metal and mining sector, why are there no predictive markets (at least, we couldn’t find one), with the exceptions noted from the comments in yesterday’s post (e.g. the futures markets for aluminum, copper and the balance of base metals).
To begin, there are several “must-haves” for a predictive market to work. And perhaps not surprisingly, many of these must-haves relate to the requirements of all markets in general. They all need liquidity or people to take positions. One of the primary reasons why the steel long products futures market has not come on stream, in our opinion is due to lack of liquidity on the producer side. See an earlier MetalMiner post on that subject here. Read more
If you can’t buy them, build them, seems to be the philosophy driving the major steel mills investment in new mines. A recent report in The Wall Street Journal details the challenges steel companies are facing in turning themselves into miners. Arcelor Mittal has purchased the rights to develop the old Liberian-Swedish-American mining company Lamco’s facilities in Liberia, closed in 1989 during the first of many civil wars and coups to blight the country in the 90’s. Mittal see this as one component of a hub of West African mining operations strategically placed to feed both their European and North American steel mills. The challenges are significant, since railway lines, bridges and roads have been lost over the last 20 years of strife. Prospective miners will need to rebuild the infrastructure before they can move one ton of iron ore. Project costs have already escalated from $900m to $1.5bn, and the mine isn’t due to start production before next year. Read more
As the AP reported late Thursday, the US economy skirted a recession posting a 0.9% increase in Gross Domestic Product (GDP). According to analysts, a recession is defined as two straight quarters of negative growth. One key factor in keeping the US economy out of recession — exports — helped pull up GDP. Although exports grew by 2.8%, analysts had expected stronger growth. Moreover, exports in the previous quarter had grown by 6.5%. Unfortunately this does not bode well for the second quarter as exports and business inventories were the key variables propping up the numbers.
The hope is that the economy will pick up in the third quarter from the positive effects of tax rebates and lower interest rates. The big question is how much the slowing economies of Europe and Japan will have on US exports. According to the AP report, economists are also very concerned about inflation, particularly oil, food and energy prices. But if steel prices have peaked, as we have reported and predicted in early 2008 predicted in early 2008, perhaps some of the inflationary pressures will ease and we can all catch our breath.
Only 20 days ago we reported that steel imports were set to rise. And that’s not a minute too soon, given that the price of steel has increased by 49-65% since the start of the year! According to Platts, US steel imports in April increased 14.5% over March and were 3.4% higher than in April 2007. Although the steel lobby might have you believe otherwise, steel imports are great for US manufacturers because they provide much needed competition in the marketplace and will help bring some semblance of normalcy back to the market place. Mind you, we aren’t going to see a big price drop off — but we’ve seen the rate of price increases drop heavily between May orders for June deliveries and June orders for July deliveries. Read more
If not, then the peak is possibly in sight, according to Purchasing.com. Drawing on comments made by CIBC Capital Markets, the article states that recent price increases have been more than can be warranted by raw material price increases alone — something long suspected by distributors and consumers alike — and levels now being charged are unsustainable.
Feedback from our own contacts in the market suggest that some major mills are completing June orders early and have spot capacity opportunities available, both of which are an about-face from just a couple of months ago, when requests for additional capacity were flatly declined.
We would be hesitant to call mid summer as the peak, but the availability of more capacity coupled with the room for some price adjustments could be the ingredients needed to bring some sense to the market.