The recent power problems in China, largely caused by bad weather reported in our recent article, comes at the same time as widespread power problems in South Africa have affected Ferro-Chrome, coal and precious metal mining.

So much for mining companies, but what of the manufacturers? It is estimated that the Chinese power problems have idled up to 10% of the country’s steel production and several aluminum pot-lines. Power failures are particularly damaging to aluminum smelters because the molten aluminum rapidly solidifies in the cell, taking months to get the cell operating again at a very high cost. So if power is likely to be disrupted, smelters usually voluntarily take pots out of operation to reduce the demands on the grid and ensure reliable supply for those cells left in operation. That is what is happening at Southern Africa’s three smelters, Bayside 190kt, Hillside 709kt and Mozambique’s Mozal 564kt following warnings from South Africa’s power generator Eskom that due to heavy rains they can’t guarantee power supply for the next 4 weeks. We have heard that due to under investment there will be intermittent cuts for the next 4 to 7 years! In addition, expansion plans at Mozal and Hillside and the proposed new Coega smelter of 700kt are all in doubt according to Standard Bank, Leon Westgate, Base Metals Flashnote, 29 Jan 2008. (more…)

To suggest that prices are going to remain firm let alone possibly rise in the face of a potential recession seems perverse but that is the prospect facing the US Tool Steel market in 2008. As predicted in a recent article on Cobalt the metal price has continued to rise with trading this week at $49/lb on the spot market, levels last seen in 1978. The price of a range of other tool steel raw materials have been driven upwards by a combination of tight supply and the changes in Chinese Ferro Alloy export taxes reported in MetalMiner. The Chinese authorities doubled taxes to 20% on a range of Ferro Alloys in an effort to husband domestic supplies and dissuade investment in what are seen as polluting industries. This week has seen increases in Ferro Moly, up $2/lb to $34/lb following 20% price increases during 2007.

Molybdenum  has faced a squeeze as supplies reduced 5% during the year but demand increased by 4% per annum. Analysts expect production to slide by 20 million pounds this year due to reduced output from Kennecott Utah Copper, Codelco in Chile and reduced Chinese exports.

Ferro Tungsten rose $.50/lb this week to trade on the spot market at nearly $16/lb. With the exception of Nickel just about every ingredient in tool steel is on an upward trend driven by the same combination of global supply tightness and reduced Chinese exports following the recent tax changes. Even Natural Gas, a key cost component for North American Stainless Steel mills has been rising on the back of Oil. An additional cost driver, at least for the US market is the weakness of the US dollar, which will increase the cost of imported material. With so much of the US market traditionally supplied from imports, exchange rate weakness will force importers to raise prices and allow domestic producers to push through raw material cost increases that much more readily.

Where this will lead Tool Steel prices as the year unfolds would look to be a one way story. Universal Stainless & Alloy Products increased prices back in September, according to Platts.

Certainly in the short term we see H1 prices continuing to rise, so cover your short term requirements now to carry you through for 6 months but after that, all bets are off. If demand slumps enough (and it appears as though most think China is not immune from an American recession), tool steel will come off too.

–Stuart Burns