Steel

I have to admit that I haven’t read one article on this whole Google showdown in China. I’m assuming we all agree it’s a showdown of sorts. But an article with a headline like this one “Why America and China Will Clash, just grabbed my attention. Whether one buys steel or aluminum, a zinc die-casting or a finished part from China, the relationship between the two countries forms the backbone of many of our posts (not to mention many of your businesses) and some of our behind-the-scenes research. You may have noticed I haven’t penned too many metals-only pieces these past few days, (with the exception of a molybdenum article I wrote last week). That’s because we have been spending our days writing our market forecasts and price predictions for the various metals many of you buy.

We look at dozens of reports, attend conferences, speak to contacts, conduct primary research, survey buying organizations, run spreadsheet models etc- all in an attempt to get our arms around metals markets and the myriad road signs for the metals covered on MetalMiner. And in nearly all of our research, we attempted to assess the Chinese economy analytically looking at risk, growth scenarios, projections, macro economic indicators etc. But this Google story suggested a far riskier scenario, one in which few if any of us have likely considered. In the Financial Times article, the author, Gideon Rachman suggests, “that the assumptions on which US policy to China have been based since the Tiananmen massacre of 1989 could be plain wrong.

The author goes on to suggest that the case against China will likely be made by labor activists, security hawks and politicians. But we see it also coming from various business sectors. The article goes on to suggest that President Obama may toughen up its China stance with, “an official decision to label China a “currency manipulator. Increasingly we have written about the case against China in the area of exchange rate setting. But make no mistake about it. The United States is caught in a classic Catch-22. We have this debt because we import more than we export (and we have for years now). Those dollars that flowed into China are funding our current stimulus and rescue plans. According to a webinar I recently attended, by 2015 over 34% of our GDP will go toward debt service. Our growth in recent years has been fueled by deficit spending.

I admire Google for pulling out of China. Now what we the masses do, and what we’ll do if the relationship turns icy, well, that’s an entirely different matter.

–Lisa Reisman

STEEL-PRICES_011810_02

I have steel on the brain (my apologies) and thought this would make for an interesting Wednesday morning quiz question:

Don’t be fooled by the flood of new economical small cars being announced this year, of which those on display at the Detroit Motor Show are only the beginning. Whatever the manufacturers may tell us, they are not really aimed at the US buying public. Led by Ford and Toyota, long the visionary leaders in developing the concept of the world car, a model so ubiquitous it would appeal in its standard form to buyers from Shanghai to Seville to Seattle, manufacturers have poured billions into developing models that can be produced on the same platform in multiple locations around the world and in so doing save them millions in production and duplicated R&D costs. Ford’s new Focus is probably the pinnacle of this trend, widely anticipated to be a huge hit in the US following its release at the show and already a best seller in Europe. While the economics of a one world car are indisputable it raises the question of whether  the world is really ready for the concept. The desire for small, medium and large cars varies dramatically around the world and to pour all one’s resources into developing small cars, manufacturers are ignoring a still significant market for medium to large saloons.

In 2009, 89% of cars sold in China were for the compact and sub compact market, stimulated no doubt by the government’s financial incentives to buy sub 1.6ltr engines, but in the US, which was going through the worst recession in 70 years, numbers had only crawled up to 21%. Jim Hall, managing director of motor industry analysis firm 2953 Analytics is quoted in the  Telegraph as saying manufacturers are perhaps fooling themselves, as outside of major urban centers like Manhattan, Boston and San Francisco, there is little actual demand for compact cars, especially with petrol prices back at the $3-a-gallon mark compared to the $4-plus peak in the summer of 2008 when oil topped out at $147-a-barrel.

Sales in North America for these small cars are likely to disappoint compared to other parts of the world and a better solution may be to develop more fuel efficient engines to power larger sedans (the route Mercedes and BMW are taking with their E class and 3 & 5 series diesel saloons),  some  of which are now capable of over 50mpg. Part of the manufacturers need for smaller cars stems from new environmental standards, with cars expected to be able to return 35.5 miles per gallon by 2016 under new US guidelines, manufacturers are judged on the average efficiency of their fleet. American buyers are, on the whole, not interested in small cars or in paying high upfront costs even if the long term economics are more attractive. Witness the hybrid market. After 10 years of availability in America – the most affluent major car market in the world only 2.8% of US cars are hybrids.

This has implications for the metal supply industry. Where during the recession the temporary  trend to smaller car sales exacerbated the decline in steel and aluminum consumption, the migration back to larger saloons likely to result from a gradual improvement in the economy will see a larger per vehicle metal consumption adding incrementally to metals consumption in the reverse of the demand destruction we saw last year. All this hype about a new generation Prius, the Nissan Leaf and GM’s Chevy Volt will amount to nothing in metal consumption terms. At a likely sales price of $30k, even after a $7,500 per car green technology rebate, sales of the Volt will be a dismally small part of the anticipated 11.5 to 12.5 million production units predicted by the industry for this year. And what does Mr. Hall think sales will be for 2010? He is expecting a double dip due to the heavily indebted commercial property market and says sales as a result will be just 10.9m. Let’s hope he’s not right on that one.

–Stuart Burns

Yesterday I had an opportunity to talk metals with Tracy Brynes and Chris Cotter on FoxBusiness.com. Back in my broadcast journalism days (well, that was one of my college majors if truth be told), every comment and every item was heavily scripted. Today, these internet interviews are a bit more refreshing as you have longer than 10 seconds to make a point. Of course no metal discussion would be complete without talking about the headliners: steel, copper, China, gold and of course rhodium.

Rhodium you may ask? Well, we have spent a good part of 2009 tracking various rare earth metals so rather than talk about neodymium (my other rare earth metal option for this year or lithium), I thought we’d give the low down on Rhodium.  The interview runs about 6 minutes. I’d welcome your feedback:

In the coming weeks, MetalMiner will be rolling out two versions of price predictions. We’ll cover the high level directional trends on the blog and then integrate detailed price forecasts including data from our own proprietary MetalMiner IndX(SM) and specific sourcing strategies via a premium content section.

If you have a metal you would like to see covered, drop us a line at info (at) agmetalminer (dot) com.

–Lisa Reisman

Who would be a steel producer in India? Just as the market is showing signs of a decent recovery, your government is pouring millions into infrastructure projects and the demand is allowing you to raise prices, as the market strengthens you are raising prices in modest increments only to have the government make you reverse the increases according to the Hindu Times. Not something the steel industry in the US has to contend with but in India things are done differently and the government feared Steel Authority of India’s (SAIL) recent Rupee 1,500/metric ton increase (US$33/ton) would add to inflationary pressures and force the state owned steel producer to retract the announcements and compromise on the increase. Although SAIL had cited rising raw material costs as the reason for the price increase, the government reasonably pointed out that as SAIL owns most of their own coal and iron ore reserves, raw material costs hadn’t materially changed. The price increase was taking advantage of an increasingly tight domestic market. What the government didn’t add was the market is partially shielded by import duties, without which SAIL would be facing much stronger competition from China and the Ukraine.

The domestic Indian steel market is doing very nicely this year. Tata Steel, the world’s eighth-largest steelmaker and India’s second, said last week sales from its Indian operations rose 73% in December to 636,000 metric tons from a year earlier and sales for the  third quarter rose 49% to 1.60 million metric tons. The Indian operations account for about a quarter of the group’s total annual global capacity of 30 million tons and no doubt helped the group nurse losses from their Corus subsidiary, Europe’s second-largest steelmaker. The breakdown of growth by product category illustrates that unlike China, the growth in India is coming more from consumption. Sales of flat products, used in automobiles and consumer durables, surged 90% in December, while sales of long products, primarily used in construction, rose “only 56%.

A recent Reuters headline said, “Metals power Indian shares to best close in 22 months says it all.   In addition to Tata, JSW, India’s number 3 steel maker said its crude steel output jumped 88% to 1.47 million metric tons in the three months to December encouraging all the private steel mills to raise prices. And not just steel – aluminum producers Hindalco and Balco are also enjoying rising returns as demand remains strong and rising world commodity prices allow them to realize higher sales prices while enjoying fixed raw material costs.

So in answer to who would be a steel producer in India, right now I think the answer is anyone given half a chance would jump at it. Producers of a range of basic metal products look like the blend of partial protection from imports, largely fixed raw material costs and a robustly growing domestic market will provide a profitable formula for the year ahead. No wonder the government is keen not to choke off India’s competitiveness by allowing prices to rise un-sustainably.

–Stuart Burns

What the global steel industry has gone through over the last 18 months is nothing to what it will go through over the next five years. To say the turmoil of the last 18 months has been good for the steel industry sounds ridiculous when the hardships it has created among steel communities and the losses in share values for investors is taken into account, but it has acted as a catalyst to hasten changes that otherwise would have taken the next decade to achieve. Increasingly, steel will only be made in high cost locations like North America or Western Europe by the most efficient of producers. The last 12 months has seen plants that were idled in late 2008 closed permanently by steel companies who have come to the realization that new investment should be focused on where the new demand is coming from. ArcelorMittal, the world’s largest steel producer and arguably one of the most dynamic in terms of its strategic thinking and long term ambitions has just permanently closed plants in Lackawana, N.Y. and Hennepin, IL while shifting investments to Brazil, India and eastern Europe. Arcelor sees growth in the next decade coming from these markets.  Demand in India alone is growing at 9%, with the prospect of yet higher growth in the years ahead as long term infrastructure investments are rolled out. The steel company is planning to team up with the iron ore producer Vale in a US$5bn steel mill investment as its sees long term growth in Brazil as a better bet than established western markets. Both Arcelor and the India home grown steel giants like Tata are increasingly focusing investment decisions on the  domestic Indian  market rather than looking to take on more old world producers. Indeed old world facilities like Corus’ Teeside steel plant in the UK had closed in early December as applications for new plants in India were being submitted.

Not all emerging markets make solid investments though. China has benefited if that is the right word from massive state supported investment in their steel industry during the current decade. Business Standard reported China is now sitting on steel capacity of 610 million tons and will be commissioning another 50 million tons next year. A spokesperson for China Iron & Steel Association said at a recent conference in Beijing that the country would end the year with production of 565 million tons of crude steel. That will be a lot more than China’s domestic requirements, and because of the fragmented nature of China’s steel industry, difficult to control. This and a desire to clean up more polluting and less efficient steel plants is leading to ever more strident attempts by the authorities to effect in China what is happening elsewhere in the world namely the consolidation of production under a small number of ever larger steel companies. The Chinese Ministry of Industry and Information Technology (MIIT) published details of a new scheme this month for the restructuring and upgrading of raw-material industries in central China in the 2010-2011 period. The scheme is to cover nonferrous metals, steel, building materials, coal and chemical industries. The program requires forming several “super-large-scale and “large-scale enterprises in central China through mergers and acquisitions. MIIT is to encourage Wuhan Iron and Steel Corp., the parent company of Wu Steel to acquire the production capacities of smaller rivals in the central areas of China and Ma Steel, Taiyuan Iron & Steel Co., and Hunan VALIN are also encouraged to conduct mergers and to acquire smaller rivals to form one or two super sized steel companies able to operate on the world stage. As with Arcelor’s long term investment plans, the convulsions of the last 12-18 months have driven steel mills everywhere to look much more aggressively at where the growth in the coming decade is going to come from and divert investments to those markets at the expense of the old.

–Stuart Burns

Copenhagen has Failed

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Copenhagen has failed and American workers should heave a sigh of relief. Not because global warming does not have any scientific basis we don’t have the evidence to refute or support the proposition that man-made emissions are impacting global temperatures, we have our doubts and hunches but truthfully they are nothing more. No the reason American workers should heave a sigh of relief is because signing up to Copenhagen would have obliged the administration to push for a European style Cap & Trade scheme at home and Europe has shown that is simply a transfer of wealth from the developed to the developing world. It aims to reduce carbon emissions in the west (though that is debatable) and increases them in the east.

The example of Corus’ Redcar plant is a case in point. The plant was closed because key clients reneged on long term contracts and the 3m ton facility was left without enough sales to cover its costs. European steel producers receive about 2 tons of carbon credits for every ton of steel produced. Closure of Redcar will mean Corus will reduce its carbon emission by the equivalent of 6m tons of carbon emissions. But Tata, Corus’s owners,  are rapidly expanding steel production in India where it could receive hundreds of millions of dollars annually from the Clean Development Fund by building new plants that are less polluting than existing Indian plants (not less polluting than Redcar you understand, just less polluting than older plants in India). As we have written recently elsewhere, the Indian steel industry is set to more than double production to some 124 million tons a year by 2011-2012. Even environmentalists must see this is a disaster for the reduction of carbon emissions. It merely transfers production from western steel mills where steel is produced in a carbon constrained environment to a non constrained market India and China understand this, that is why they will not sign up to a Copenhagen accord.

As a Wall Street Journal article puts it, Cap and Trade is a scheme that would impose heavy carbon taxes and allowances on U.S. industries, which would then have an incentive to move overseas themselves, or to sell those allowances to overseas companies that could use them to become more competitive against U.S. companies. Like the 1,700 Brits at Redcar, American workers would be the big losers.

–Stuart Burns

It is interesting how the dynamics of a protected market differ from those of an open market. State owned Steel Authority of India (SAIL), the country’s largest steel producer, is predicting rising steel prices in its domestic market from January 2010 largely on the basis that iron ore and coking coal costs have continued to rise. Ask a US steel producer if all they need is rising raw material costs to ensure their sales prices increase and they would laugh in your face. Steel prices here are based on what the market will bear, not because of any drop in raw material costs but simply because of market demand. But in India imported steel is in large part controlled through tariffs and as world prices have fallen, SAIL has asked the Finance Ministry to impose a 10% duty on Chinese and Ukrainian steel to allow them to maintain their profits in the domestic market. So far the ministry has resisted but they will probably give in, as they did earlier this year with duties on certain other Chinese steel products.

Driven by demand from China, prices for iron ore have gone up sharply over the past two months to $106 per ton from almost $81-$82 per ton just a few months ago. Coking coal prices have also gone up to $165-$170 per ton from $128 per ton. By playing hardball with the iron ore producers and not coming to an agreement, China’s negotiating position has steadily deteriorated as the spot price has risen. Meanwhile inventories of iron ore from all of China’s principal suppliers are reported to have increased in China’s major ports by 830,000 tons to a current 66.75 million tons, suggesting either Chinese importers were stocking up when prices were lower, or demand is slackening and the inventories are not being drawn down as quickly as they were.

Nevertheless SAIL is looking at these rising costs and saying steel mills must put up prices but the reality is even China’s sales prices are falling as excess capacity is struggling to find a home. Chinese and Ukrainian steel is being offered at $400 per ton into the Indian market when the domestic (and indeed world) price is more like $500-550 per ton. It’s hard to see how such levels from China and the Ukraine can truly reflect the cost of production plus transport and finance.

Whatever one may say  of  SAIL’s argument for higher domestic prices they are probably right in saying steel prices will rise next year. Analysts are predicting 10-20% increases, whether that proves right remains to be seen but recovery is gathering pace in North America and Europe will probably not be far behind. Mill capacity levels are creeping up although still a long way off the summer of 2008. As some western mills move to permanently close capacity that had been temporarily idled earlier this year, utilization rates will rise laying the ground for price rises in the event of supply chain re-stocking taking off. For the time being though SAIL will no doubt continue to push for import duties and Indian steel consuming industries will continue to struggle in export markets against competitors in lower cost locations.

–Stuart Burns

Steel has had a very interesting year, ending nearly where it started but for steel producers, hope that an upward price trend will continue into 2010. And certainly, the price momentum for key raw material components used in steel-making indeed appear to suggest prices will increase. But demand has remained a persnickety little problem for producers as it has undergone more of a de-stocking/re-stocking run-up and run-down throughout the year as opposed to anything steady. Next year, according to some, based on demand for at least one key end market will look different. For one, the automotive sector, according to this post we ran last week suggesting an enormous pent-up demand. But that won’t help all producers, nor will it drive the entire market (most steel for automotive consumption is galvanized and produced by integrated mills with galvanizing lines).

Other stories came to the fore in 2009 involving steel and some with profound ramifications on end markets such as oil and gas. The OCTG and line pipe cases represent some of the largest domestic trade cases. Anti-dumping cases will likely continue in 2010 albeit at a slower pace.

Here are some of the key stories involving steel that may impact markets next year:

We will come out with our 2010 steel price predictions during the early part of January along with a production cost model for electric arc furnace produced steel.

–Lisa Reisman

After a largely useless attempt in March to control over capacity in the Chinese steel industry, the authorities are now using a twin track approach to try and reign in steel production capacity which only the most radical super-cycle supporter could believe is justified.

First, no doubt with one eye on the current Copenhagen summit, the Ministry of Industry and Information Technology is reported in a Bloomberg article as laying down maximum consumption and emission standards for steel makers in an effort to force closure of less efficient and/or more polluting production capacity. Steel plants should cap blast furnaces energy consumption  at 411 kgs (906 lbs) coal equivalent and fresh water use at 6 tons for each ton of steel they produce. Furthermore, steel plants should cap effluent discharge at 2 cubic meters (2 metric tons) and sulfur dioxide emission at 1.8 kgs (4lbs) for every ton of steel made. Banks should not give credit support and government departments must not issue iron ore import permits or supply the steel-making ingredient to mills failing to meet the new requirements, the Chinese ministry is reported as saying.

The second track is an effort to close smaller steel production plants and consolidate production among the larger mostly state owned enterprises. The proposal is for carbon steel mills to have a minimum production capacity of 1 million tons, and specialized steel makers such as stainless mills to have at least 500,000 tons. China is estimated to have between 300 and 400 carbon steel mills with individual capacity of less than 1 million tons.

Past attempts to control investments in the steel industry have come to nothing but reports suggest this time the government is keen to get to grips with the problem. China’s steel production could be 570 million tons this year but capacity is estimated to be up to 700 million tons or higher, the National Development and Reform Commission, the country’s top economic planner, said last week. Small mills may be easier to squeeze out of business but medium sized mills will prove more of a challenge. We have seen over the last year the steps regional governments are willing to go to support local employment. Steel mills and their support industries like coal are big employers in China and there will doubtless be much backtracking and manipulation at the regional level to closures. In the long run though, China has to get to grips with this situation and its encouraging to see they are having another go at it. Let’s hope for the health of steel mills in the west, the Chinese have more success this time around.

–Stuart Burns

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