Steel

We spend quite a bit of time talking about trends in two key steel making raw material sectors, iron ore and coking coal (we reported on both materials last week) but admittedly don’t track scrap markets as closely as we should, though we will endeavor to do so going forward because scrap markets provide as many price clues as some of these other raw material inputs. What trends should we watch in terms of scrap? As it turns out, quite a few, take for example the following:

  • 80% of scrap supply comes from old household goods and cars which this year have not turned as quickly as in previous years due to the recession
  • According to the same article, Sims Metal Management, the world’s largest metals and electronics recycler sees a 79m ton decline in scrap consumption this year (of course this makes sense in relation to declining production volumes in 2009)
  • New mills coming on stream (with the exception of China mills) use electric arc furnace technology and hence require steel scrap. Since some of these countries have higher growth rates then the US, scrap demand has grown faster than in the US
  • A falling dollar makes US scrap exports more attractive in overseas markets. In particular, it has fallen against Australian and Brazilian currencies (those two countries account for a large percentage of iron ore) so the product substitution becomes attractive for steel producers thereby reducing scrap supply
  • Finally, when the markets went haywire during the summer of 2008, scrap became so “dear that much of the easy-to-get available scrap had been used leaving scrap inventories depressed.

Former Federal Reserve Chairman Alan Greenspan used to track No. 1 heavy melt steel scrap (he references that practice in his autobiography). He felt it served as a good proxy for manufacturing demand. When scrap prices increased, manufacturing demand followed. Whether or not that trend holds true today remains to be seen.

But according to MetalPrices.com, scrap steel prices, despite the ups and downs from one year ago, still trade within the same range as they did last year. But obviously any changes in availability could impact cost:


In addition to MetalMiner’s adaptation of an integrated steel production cost model, if you are interested in downloading the model, fill out the form here and you can download it for free:




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We will endeavor to publish an electric arc furnace production cost model within the next two weeks. We use these models to help tell us the “should cost for various steel making operations.

–Lisa Reisman

It would seem the western world is not the only place where licensing and land acquisition hinder economic development. Contrary to what many supporters of trade barriers would have one believe, steel mills in some developing countries don’t all have land handed to them with licenses in place to build a steel or other kind of manufacturing plant. Quite the opposite in fact. Around 70 million tons of steel making capacity planned for production by 2012 in India is struggling to be realized as project after project is bogged down in planning issues and disputes with local land owners.

According to  Bloomberg, India’s plans to raise steel production from the current approx 57m tons to 124m tons by 2012 are unlikely to be realized. In total, steelmakers aiming to set up 160m tons of capacity in the eastern states of Chhattisgarh, Jharkhand and Orissa have failed to win mining licenses from the state governments and acquire land from protesting farmers in recent years. These three states alone hold 70% of India’s coking coal and 55% of its iron ore according to this article.

South Korea’s Posco has announced plans to invest $12bn in a plant in Orissa. Arcelor is to invest $10bn in neighboring Jharkhand and Tata, India’s biggest domestic steel producer, plans to build two plants of $6bn each, one in Orissa and one in Chhattisgarh. Unfortunately the states where the iron ore and coal are situated are also the states with a history of opposition to development. The India business blog says 22 major steel projects in the country are being held up because of procedural delays in obtaining environmental impact assessment clearance and delays in land acquisition mainly due to public protests.

With gross domestic product growing at 6.1% in the first three quarters of this year and 7.9% in the last quarter, steel demand is rising fast. Steel Secretary Atul Chaturvedi is quoted as saying demand increased 7% in the first seven months but is expected to hit 10% by March of 2010. However, with current consumption running at about 57m tons it would be 2015 before consumption topped 100m tons never mind the 125m tons hoped for by the government. The reality consumption is unlikely to continue to grow at 10% but then neither are all these plants likely to be built, either way India will have a long way to go to match China’s approx 500m tons of capacity.

–Stuart Burns

Besides perhaps the health care debate, no single policy issue has created as much controversy as the EPA’s recent Ëœendangerment’ declaration that greenhouse gas emissions cause people harm. And as my colleague Stuart posted last week, “whatever one may think of the whole concept of carbon trading and  however flawed one believes existing trading systems are and believe me this site has frequently criticized both the fact remains that carbon trading is almost certainly here to stay and will have a major impact on business and our personal lives in the decade to come.

Stuart didn’t touch the hot potato of whether the science supports the argument behind the case for global warming (or if the best way to address it involves carbon cap and trade or just a plain old carbon tax or curbing emissions via the Clean Air Act or some other scientific means making its way around such as injecting sulfur dioxide into the stratosphere which by the way, a very prominent metals subject matter expert who has posted on MetalMiner subscribes to but for which we are not yet at liberty to discuss). We’ll steer clear of that one as well but the science behind global warming and the trail of hacked emails suggesting the science may not sit on as strong a foundation as some would like us to believe may very well turn out to be what will ultimately undermine the EPA’s ability to regulate greenhouse gases. In addition, the fact that the EPA made the ruling, whereas Congress failed to act, may place the entire issue squarely on President Obama and his administration. And therein lies the rub – Congress, instead of tackling this controversial issue, can punt it to the EPA and leave the implementation of the ruling to the lawyers (you can be sure there will be lawsuits) as well as the burden of proof to the EPA (the EPA has to prove greenhouse gases are harmful to human health). And that’s where those ugly leaked emails can get a little tricky for the EPA.

Prior to the EPA’s ruling last Monday, organizations like the American Iron and Steel Institute, “has made it known it wants to make sure energy-intensive imports such as steel bear the same climate-related costs as domestic products.”  If the EPA sets policy, as opposed to Congress, the AISI concerns become very real. The EPA could only regulate domestic producers. A unilateral solution will have a devastating impact on US manufacturing. Consider the following:

  • A piece on manufacturer Quality Float Works a company that makes metal float balls used on flagpoles, weather vanes, plumbing and industrial devices raises concerns about how a middle market manufacturer will compete globally
  • Nucor has not made a decision on where to put a new plant (it is deciding between Louisiana and Brazil) pending the outcome of climate change legislation, Copenhagen etc.
  • Here is a list of a few of the trade associations who have come out against the EPA endangerment finding:
  • So here is my prediction: Congress will do nothing on carbon cap and trade because now it no longer needs to do anything. According to this Forbes article, “Around March, look for the EPA to finalize its ruling for the auto sector (editor’s note: to federally regulate automotive emissions). It will also put the finishing touches on its decision to tailor greenhouse gas regulation under the Clean Air Act. What happens then? Lawsuits.

    And that’s my second prediction.

    –Lisa Reisman

    The loss of 1,700 jobs is always a tragedy although in the steel industry unfortunately not an unusual story. Nor did Tata’s Corus come in for a huge amount of blame when they announced this week that they were closing the three million ton per year merchant bar plant at Teesside in the UK after four long term clients failed to honor their commitments to take product from the plant earlier in the year. Corus tried manfully to keep the plant going, losing some $130m over the intervening 7 months since the original announcement was made regarding the contracts, according to Bloomberg.

    But there is another story doing the rounds following an article in the Times that detailed the windfall $1bn benefit ArcelorMittal are said to have secured from the European Union after intense lobbying by them and their trade body Eurofer. Arcelor have been granted the rights to 20.8 million surplus carbon emission allowances given to it free by the EU. With the carbon price at over $21, they are worth about $440 million. But, with additional surplus allowances up to 2012 and an increased carbon price expected to rise to over $45 – the company could have gained assets worth around $1.6 billion.

    The next largest beneficiary of this largesse is none other than Corus, with ThyssenKrupp coming in third. The story suggests Corus stands to gain at the current carbon prices $165m and, with an increased carbon price and its additional allowances, the asset value of its cap and trade holdings could amount to over $600m. But that may not be the end of it. Closure of the plant will deliver further “savings” of over 6m tons of carbon dioxide, worth an additional $130 million per annum at current rates but around $330 million at expected market levels.

    Meanwhile, producers like Arcelor and Corus are keen to build new production facilities in developing countries like India. New facilities are not only lower cost but under the UN’s Clean Development Mechanism the producer is paid up to $50 a ton for each ton of carbon dioxide “saved” by building a new plant, while the company which owns them also gets paid $50 for each ton of carbon dioxide not produced in its European plant, for which read Redcar.

    I am sure this was not the intention of the European Union when it first dreamed up the Cap and Trade scheme, but like most politically driven initiatives, once the politicians have nailed their colors to the mast they stubbornly refuse to change course or admit they could be wrong. One can’t blame Corus. If the above scenario is correct they are merely responding to the business environment the politicos in Brussels have created.

    –Stuart Burns

    As many a consultant might say, the best way to rid oneself of high material cost is to not design it in, in the first place! Though MetalMiner frequently looks at the range of metals categories from a strategic sourcing perspective, it would behoove us not to discuss various metal product innovations particularly when they have (or claim to have) the ability to reduce costs. Last week, Carpenter Technology announced a new material, PremoMetâ„¢ Alloy that claims could serve as an alternative material to cobalt-containing steel alloys.

    Judging by cobalt prices for the past year, identifying lower cost alternatives might make good business sense:

    Courtesy of MetalPrices.com

    The target applications for these materials include power train components in heavy-duty diesel engines (including on-highway over the road trucks), off-road (construction type vehicles) and large marine engines. The new EPA determination that greenhouse gas emissions causes people harm probably helps some of the buying communities as weight reduction and engine efficiency improvements help reduce such emissions. According to Mike Wilkes, Market Manager, Automotive at Carpenter, “Manufacturers will therefore need to specify higher strength metals for their light-weighting projects in order to achieve lighter weight. The lighter components will need to maintain performance requirements. Mike suggested life-cycle costs can be reduced by purchasing less material per part. In addition, the substitute material should allow for longer engine life and lower fuel consumption.

    All of those arguments sound good on paper. But how do purchasing organizations reconcile the fact that specifying proprietary alloys and products can result in higher prices over the longer term? Simple, according to Carpenter enter into a long term supply agreements to allay concerns.

    If you are a metal producer and have a new product on the market, drop us a line. We’d like to hear about it at lreisman(at)aptiumglobal (dot) com.

    –Lisa Reisman

    As my colleague Stuart reported earlier this morning, price increases for coking coal appear certain. Analysts believe iron ore prices will also increase in 2010 anywhere from 15-20%. Contract prices for iron ore during 2009 averaged $65/ton according to the Wall Street Journal and our own market research. Those prices could jump to $70-75/ton sometime in April, during the annul contract negotiation period. Though BHP would also like to sell iron ore on the spot market (they also wish to do so for coking coal), iron ore negotiations center around annual contract settlements with the other two key iron ore producers, Vale and Rio Tinto. The first contract that settles tends to form the “baseline for other countries and additional negotiations.

    This past weekend included two key iron ore developments. First Chinese producer Baosteel will replace CISA (China Iron and Steel Association) as lead negotiator for iron ore contracts, according to Bloomberg quoting a website, QQ. As you may recall, CISA botched negotiations last year as many Chinese steel producers made end-runs around CISA to secure pricing for 2009. Several employees of Rio Tinto wound up in jail for allegedly leaking state secrets. That case remains unresolved.

    BHP and Rio signed a definitive agreement to supply iron ore to steel producers around the world by combining Western Australian iron ore operations. The iron ore producers argue the joint-venture would allow each company to reduce operational costs. But steel producers will likely argue to European regulators that the proposed joint-venture will limit competition, even potentially creating a cartel (as if that isn’t what they face now).

    MetalMiner developed an integrated steel production cost model adopted from Steelonthenet.com to help steel buyers better track raw material production costs. Readers can play around with the model plugging in both spot and contract pricing for coking coal and iron ore. We update these models quarterly so we can see price trends. Note: These models can’t predict actual demand but they can enable better planning and steel price forecasting.

    If you are interested in downloading our latest integrated steel production cost model, fill out the form here and you can download the model for free


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    All of this means steel producers will end up increasing the price of steel despite the fact that China has a glut of material and new production continues to come on-stream. MetalMiner will address that second point in a follow-up post.

    In the meantime, mills continue to announce price increases for steel. AK Steel just announced surcharges for electrical and stainless steel and Severstal increased sheet prices. Finally, scrap may become a big issue in 2010, this time in the form of shortages, placing additional price pressure on mills. MetalMiner will publish its complete 2010 steel price forecast in early January.

    –Lisa Reisman

    BHP, the world’s largest supplier of coking coal used in steel making is pushing for annual contract pricing to be based on spot prices rather than the traditional annual fixed price contracts. If successful, costs for steel makers are likely to rise as spot prices are predicted to be higher in 2010/11 than now.

    BHP is successfully moving iron ore pricing to the spot market and although it took some five years has also migrated thermal coal, used in power stations, onto spot pricing so the tide of history is running against steel producers clinging to the annual fixed price mechanism.

    According to an FT article, coking coal spot prices have rallied in the past six months as China becomes a large importer owing to strong local demand and domestic mine closures. Traders said that prices had surged to about $175 per metric ton, the highest so far this year and more than 30% above the level at which annual contracts were settled for 2009-10. Moving to contracts linked to spot prices would enable BHP to obtain higher prices for its coking coal the firm believes as prices could reach $200 per metric ton in the first quarter of 2010. Prices reached a record of $300 per metric ton in 2008.

    Demand from China has remained strong despite the industry reportedly running at only 72% capacity utilization and the Ministry of Industry and Information Technology’s announcement last August of a ban on all new capacity projects for the next three years. Since then, 32 new expansion projects have been announced at 27 different steel mills. Clearly economic priorities take precedence over government directives. In fact the scale of excess capacity in China is positively scary, at the end of 2008, China’s steel capacity was 660m tons against demand of 470m tons. This difference is much the same as the European Union’s total output. Yet, there are currently 58m tons of new capacity under construction in China further exacerbating the problem.

    With demand running at these levels BHP is playing with a strong hand even if other Asian buyers are still struggling. Nevertheless it could be a year or two before the producer manages to move the whole market over to spot but as it does, providers of OTC coking coal contracts are likely to be the other major beneficiary to BHP.

    –Stuart Burns

    Gold has certainly had a roller coaster ride this last 12 months, up to a peak of $1030/ounce before falling back some $200. You’ve heard the popular saying: “When the dollar falls, gold rises.” In reality, the relationship between the euro, the dollar, and gold has been 94% accurate, according to a   Reuters report in Mineweb.

    In that case,  what could the current fall in gold tell us about the direction of the euro and the dollar? If the dollar were to make a significant gain against the euro this year, from its current 1.55 towards 1.45 last seen in 2007, we could see a flood of cheaper imports, particularly steel, come into the market. The dollar won’t change the fundamentals of the world steel industry, but a combination of a stronger dollar and more imports could curtail price rises later this year if the assumed relationship between gold, the euro, and the dollar holds true.

    –Stuart Burns

    Contrary to expectations earlier this year that the weak dollar would boost exports and shield domestic producers from imports, it looks like US imports are set to rise again, according to the Steel Business Briefing. Sighting import license applications SBB says US applications for April came in at 2.64m metric tons, 16% higher than the March preliminary import count of 2.28m tons, which in turn was higher than February. Interestingly, this is despite a continued decline in steel imports from China, suggesting the export taxes imposed in January by the Chinese authorities are having the  desired effect. For April, China will likely fall to fifth place among the largest steel exporters to the US at 168,000 tons. That lags behind Canada at 646,000 tons, Mexico at 239,000 tons, Japan at 193,000 tons, and Korea at 172,000 tons  — based on the license applications.

    So if imports are rising, does this mean increased competition for domestic producers and lower prices for consumers in the months ahead? Not yet, as strong global demand, still rising raw material costs and capacity issues mean prices will be high for the second and third quarter at least. Read more

    There was a time when if the price of a metal doubled in a year it would be the stuff of headlines. Not only trade journals, but newspapers and even TV channels would post features on the dramatic price rise and the ensuing calamity that was likely to follow ” whether it be a crash in the price or consumers being forced out of business. Nowadays we appear hardened to trebling or even quadrupling of prices in a single year such is the bull market that has prevailed this decade. So as the price of manganese has doubled  in the  last 12 months maybe we can be forgiven for not having taken too much notice. Read more

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