Industry News

11:03 am: Some things to take away — how sourcing tech can not only drive new negotiation models, but new info discovery models, and learning to solicit and explore the pricing of your materials. There are more, but explore Spend Matters’ and MetalMiner’s whitepapers further for the complete lowdown!

11:01 am: Put information discovery first; collect as many supply chain data points as you can; and evaluate as many suppliers as you can — more, not fewer, is the key here.

11:00 am: Huge variability in transportation costs; container rates have been up and down the last few years. If you’re not tracking the Baltic Dry Index already, you probably should be.

10:57 am: “An oldie but a goodie” — total landed cost model overview. Flashbacks to the International Trade Policy Breaking Point Conference

10:55 am: There are almost too many options to hedge against commodity price risk — so have suppliers bid different time frames, and check those premiums, Lisa says. See if you can take risk out yourself, or hire a third party to do so.

10:52 am: Lisa hints at why reshoring is just as good a choice these days…

10:50 am: What does demand aggregation do for us? Consolidating multiple independent buys is the name of the game to achieve discounts. A big benefit is creating win-win scenarios – resulting in sizable cost savings.

10:47 am: Act more like a “modern military” — you need to be equipped with more information than your suppliers! “Souring information asymmetry”, as Spend Matters puts it.

10:45 am: Audience interaction component: How many of you participated via reverse auction? Fewer are still doing it. There’s a reason for that — what we’re seeing companies do is wanting to buy “security of supply” and manage risk and their supply chain more effectively.

10:43 am: Many more Harbor attendees have heard of MetalMiner this year! 10-15 people raised their hands…thanks for reading, guys!

10:41 am: The premise…helping you source.

10:39 am: Lisa not the only female speaker at the conference for once! So there goes her kickoff line…shucks.

 

Welcome to the live blog of Lisa’s presentation!

Let it not be said that Vale doesn’t know a good thing when they see one.

The mining giant Vale may have needed a little encouragement from government, but the presence of significant quantities of “rare earths (RE) in areas where the firm already mines has encouraged them to look at getting into the latest bubble — er, sorry, hard asset. Rare earth metal prices have rocketed in recent months as China has further reduced supply.

An FT article states that across the board rare earth prices have increased three- to five-fold since January with some such as cerium oxide jumping 475 percent, neodymium oxide up more than 300 percent and dysprosium oxide up 338 percent. The squeeze comes as China has further cut rare earths exports; according to Chinese data, this year’s overseas sales license is 4.5 percent lower on an annualized basis than last year’s and more than 40 percent below the 2009 quota meanwhile, global demand for the metals has been growing.

The article states statistics collected in Hong Kong show an even more extreme situation — exports of rare earth metals have halved over the past year to reach just 1,819 tons last month. At the same time, the value of exports has soared to more than $121,000 per ton, a 10-fold increase from a year ago.

It would be tempting to paint this as China’s bid for world domination of the RE market, but the reality is more mundane. Illegal and uncontrolled mining of RE ores has caused widespread ecological damage and is fast depleting China’s domestic reserves of these resources. While the Chinese are unquestionably profiting from the sharp increase in prices, the authorities are desperately trying to control the industry and raise environmental standards by limiting the licensing to large state-owned entities they feel they can better control.

Nor are the resources themselves particularly rare. They exist in widely dispersed deposits around the world; the rarity is in the processing and refining facilities to turn the ore from the ground into metals and salts that can be used. This is where the West needs to catch up and where a mega-mining firm like Vale has the financial muscle to fund research and development into refining techniques that are environmentally safe and economically viable on an industrial scale.

According to another FT article, Brazil has large deposits of rare earths, although it doesn’t go into detail on the mix of the 17 elements involved (usually deposits are richer in lighter or heavier REs, but not uniform across the range.) Nor does Brazil yet have a major internal market for the high-tech applications the metals and oxides are used for. However, Aloizio Mercadante, Brazil’s science and technology minister, sees a homegrown source as not only a major economic opportunity for export markets, but also a competitive advantage in encouraging the development of homegrown wind turbines, electronics, electric cars, and other high-technology industrial applications.

He’s right on the former, but may not be so much on the latter. Rare earth developments around the world have taken a long time to get off the ground since the last of the majors, California’s Mountain Pass, was closed in 2002 and 90 percent of production was taken over by the Chinese, but the last few years have seen a flurry of activity and recent price rises will drive further investment. The probability is that 5-6 years from now the world will be well served with multiple supply sources, paying higher prices than they were in the last decade, but finally justifying the cost of complex extraction processes these valuable materials require.

For more on recent rare earths commentary from MetalMiner, click here to read Lisa’s recent post.

–Stuart Burns

Although Nissan claims production of the new Leaf all-EV car has been sold out for 2011 already, a recent survey by Accenture covered in a car tech blog called cnet.com found that among the key 34- to 55-year-old buying segment, anxiety over the range of all-EV cars is the main obstacle to higher sales. The blog reported that if they had to choose between a plug-in hybrid or a pure electric vehicle, 71 percent of the responders favored the more conservative plug-in hybrid vehicle, and only 29 percent would prefer an all-electric car. Range anxiety, limited charging infrastructure, and convenience of the dual-propulsion power train were cited as the main preference for hybrid cars, even though the average driving range for survey participants was only 32 miles per day. Respondents were looking for an average EV range of 271 miles on a single charge, according to Accenture’s survey data.

So while there is room for all shapes, sizes and approaches to the clean-tech car market, the mainstream is likely to be dominated by those manufacturers that are to supplement the all-electric component of their products’ propulsion with a range extending supplementary power source in some way, suggesting that GM’s Volt at least has the concept right, whether you like the execution or not.

Interestingly, this opens up the supply market for externally designed and produced range-extender internal combustion engines, designed to run within a narrow yet highly efficient range to provide electric current to the batteries. The motors are designed to be separate from the drive train of the automobile and hence can be configured in any way the OEM car maker desires. The engineer magazine recently ran an article focused on the UK’s Lotus, which has just brought to market a 1.3-liter three-cylinder motor running at speeds from 1,500 to 3,500 rpm with a simple, low-cost, reliable 2 valves per cylinder design. Lotus intends to offer the motor in two power ratings, 35 kW and a supercharged 50 kW, both able to run on methanol, ethanol or gasoline. Range extenders of this type are said by Lotus to enable an EV with just a 30-35 mile range to achieve up to 350 miles on par with regular petrol engine cars. By supplying the range extender as a standalone component, all kinds of assemblers can get into the EV auto market; economies of scale will still count, but while the market is still in its infancy, even the global auto makers don’t have much of a scale advantage yet — sales are just not up there with gasoline engine models.

The choice of two power options is the result of feedback from major OEM car-makers. At the luxury-car end of the market, OEM’s have said it is not acceptable to have their EV models restricted to, say, 50 mph when running on a charge-sustaining mode; their clients will expect a minimum 80 mph capability, particularly in Europe where German drivers have no speed limits on autobahns. Traveling at 50 mph in a small car on a German autobahn is particularly unnerving when passing traffic can be traveling well over 100 mph.

Until such time as inductive charging is built into urban streets, allowing EVs to charge while they drive, some form of additional power source is likely to be required to overcome range anxiety. Although Lotus appears to have a viable product offering, the idea has far to run and it will be intriguing to see how compact, powerful and efficient these little range-extending motors can become it can only benefit engine design and technology.

–Stuart Burns

With all the ups and downs in the construction and housing markets recently, it may be hard to make heads or tails of where prices are going to go with any consistency. For the latter half of 2011, most analysts generally agree that volatility will continue, especially in precious and base metals markets. On the construction side of things, countless indicators — two of which come from the USGS and Reed Construction Data — gauge the demand for new infrastructure as we move forward. Of critical importance: the US numbers (as the emerging world continues its growth tear with merely a hiccup or two).

First off, the USGS Mineral Industry Survey reported a 2 percent decrease in US secondary aluminum production in Q1 2011, down from the previous quarter (Q4 2010). US aluminum was also down 6 percent year-over-year. Although iron ore was down 11 percent in Q1 2011 from Q4 of last year, US production of the increasingly pricier raw material in Q1 jumped 25 percent year-on-year “because of increased demand for steel, as economic activity increased from its level in the same quarter 1 year ago, according to the USGS survey. And zinc, the only metal posting increases in both categories, was up 4 percent year-over-year, and 5 percent since Q4 2010 although the global zinc market remains in somewhat of a surplus.

Below is the extended USGS table of construction-related commodities by quarter:

Another source, Reed Construction Data (RCD), painted another forward-looking picture from April’s data based on the graphs below, highlighting the better performance of metals versus the field:

Source: Reed Construction Data

Jim Haughey, RCD’s chief economist, noted the significant increases in nonferrous pipe and tube and structural steel, as well as the effect of higher energy prices. “The spike in energy and food prices is now boosting prices for all items in the index via freight rates, fuel surcharges and higher business operating costs, he wrote, continuing, “construction inflation will probably dip below overall inflation in the next few months but will be back above the overall inflation pace in the second half of the year because of the high share of commodity imports in the construction material price equation.

–Taras Berezowsky

 

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Generally we don’t spend much coverage time or space on minor metals, but the latest news in the iridium market made us perk up our ears. The price of iridium more than quadrupled last year, which put the precious metal’s price per troy ounce over $1000 and all-time high. Like other precious metals, namely platinum, palladium, and silver, iridium is not known primarily for its popularity as a hedge against inflation (ahem, gold), but for its industrial properties and uses. Just as platinum and palladium’s industrial demand continues to go up (due to their environmentally friendly function in catalytic converters in cars), demand for iridium is very quickly heating up, as it plays a role in LED screens.

The two-year graph for the iridium price shows the spike beginning in early 2010, and consistently rising throughout the year and into 2011. It broke $700 per ounce in the summer, then broke the $1000 mark earlier this year and continues to hold at $1050 today.

Source: infomine.com

According to the Financial Times, iridium “is used in crucibles for growing crystals that are used in the manufacture of light-emitting diodes (LEDs). These, in turn, form the basis of backlit screens, which are essential in devices such as iPads and flatscreen TVs. As these products are in high demand all over the world, precious and rare earth metals are garnering a lot of mainstream media attention. Electrical industry demand for iridium rose to 194,000 ounces last year, 27 times the demand in 2009, according to Johnson Matthey, the PGM group that put out a report earlier this week in which these trends were disclosed. Overall iridium demand rose to 334,000 ounces. This is obviously good news for iridium producers Anglo Platinum, Impala Platinum and Lonmin, cited by the FT and Bloomberg.

“Iridium crucible manufacture expanded suddenly and rapidly during 2010, Johnson Matthey said in the report, as reported in turn by Bloomberg. “The small size of the iridium market helped amplify movements in the price as industrial buyers built their stocks of working metal in response to technology changes.

That’s the interesting thing about iridium and the fact that makes the importance of the metal quite real: the price increase is not reflective of investor speculation, but pure fundamentals. Back in early February, Johnson Matthey’s general manager for market research, Peter Duncan, called the price rise and told Reuters that the upward trend is “not speculative, there is real industrial buying driving it. One sector that’s a considerable driver of iridium demand, according to that report, is the chlor-alkaline industry, accounting for about 20,000 ounces.

But of course, the explosion in iridium demand and price will force buyers to look for substitutes, since the high market prices are not really sustainable for continued industrial use. Paul Walker, the chief executive of metals consultancy GFMS, told the FT that prices would have to fall back down to the $700 or $800 level to guarantee the metal’s place in various technologies.

“We’re on the cusp of an explosion in growth of LED applications, Walker told the paper. “The question comes down to what technology do you use to grow the LED crystals? That depends on the price point.

–Taras Berezowsky

At a recent metal industry forum hosted by Grant Thornton and Winston & Strawn LLP in their Chicago office, executives from Ryerson, Inc. GE and others spoke about the current condition of today’s metals markets and offered insightful commentary regarding the M&A landscape. The group presented a comparison of M&A activity between 2009 and 2010 and concluded that 2010 saw an increase in deals from 5906 to 7301, according to Mergerstat. The panel of speakers, including Brian Deck, vice president of finance and treasurer of Ryerson, Greg Eck, senior vice president of metals and mining for GE Capital in the Americas, Lars Luedeman, a director at Grant Thornton and Marc O’Neill, senior appraiser at Hilco Appraisal Services, made several interesting points which we have summarized here:

  1. The steel producers and scrap processors have largely consolidated and today we see more details around the coal side of the steel supply chain
  2. The area in which they predict further consolidation will occur involves the steel processor and distribution segments of the market
  3. Volatility will disproportionately impact middle-market companies that have inventory and receivables and lack cash flow to weather the full business cycles

Finally, and perhaps most telling, the panel concluded, “the risk is that industry capacity utilization rates are not high enough to ensure steady profits for all competitors. Smaller Mom-and-Pop operations that often rely on private financing may face more risk than their larger peers.

The panelists walked the audience through the raw material end-use OEM supply chain and described where the M&A activity will occur.   The steel producers as well as the white goods space “are relatively consolidated, and as we have commented on previously, the producers have high industry concentration: “80% of steel volume is controlled by seven players. However, the panelists noted some risk exists on the production side, particularly around new capacity coming on stream without some of the older, less efficient capacity coming off-stream. Despite the capacity issues, the panel still concluded the market will see quarter-to-quarter improvements and better growth rates in terms of earnings and end-market growth.

Though companies in the metals supply chain will need to adjust their “2007 valuation expectations, the IPO markets appear stronger along with public debt markets as well as PE money resulting in greater competition for deals. The current low interest rate environment will continue to push momentum toward getting deals done. Brian Deck of Ryerson mentioned that in 2010 most companies took a lot of costs out and valuations appeared in the 5-6x EBITDA range at current run rate numbers. Bigger companies with better capital and banks will have access to all of the deals. Deck pointed to Reliance, Ryerson, and Metals USA as examples, along with Klockner’s recent purchase of Macsteel and Namasco, showing that more international players have come into the market, in turn continuing to drive consolidation.

The panelists also concluded that “debt is back, with ABL (asset-based lending) the most popular form of financing. We’ll explore ABL in the metals industry in the next couple of weeks.

–Lisa Reisman

 

MetalMiner is pleased to welcome guest columnist TC Malhotra. Based in New Delhi, Malhotra has been published in Minesite, Pipes and Pipelines Magazine and International Freighting Weekly (U.K), and will be reporting on the Indian metal and manufacturing industry for MetalMiner.

A high-level panel set up by the Indian federal government to recommend rules for pricing of all natural resources is likely to suggest auctioning of mines, despite reservations from the Indian mines ministry. The panel, chaired by former Indian finance secretary Ashok Chawla, is likely to oppose the existing concept of profit sharing in its draft report. Facing lack of transparency from state governments in the mining sector, the Indian federal government had set up the panel on Feb. 8, 2011, to recommend procedures for allocating natural resources in the country. The Chawla committee includes senior government officials and people from chambers of business, and is expected to release its report by the end of June.

It is reported that the Chawla committee is of the view that auctioning should begin right at the exploration stage with respect to allocation of mineral rights; however, the mines ministry does not agree. The ministry feels that only fully prospected deposits need to be auctioned. The mines ministry thinks that any move to put the initial mining permit ” reconnaissance permit (RP) ” under auctions could dampen investor enthusiasm.

The bidding process is not quite a new thing in the mining industry, and is quite common in many countries in oil, gas and coal exploration. The going rationale is that bidding may bring more transparency in acquiring mining rights, and if the survey reports are available, the process may also bring healthy competition from investors.

The Indian government has already successfully launched the eighth round of bidding in oil and gas under The New Exploration Licensing Policy (NELP), and the ninth round is underway. The Chawla committee also wants a similar style in metal mining, but the metal industry and industry experts chafe at the proposal because they believe that oil, gas and coal exploration is different than metal mining.

A report published in an Indian business daily states that the panel, in its report, is likely to oppose the concept of profit sharing with project-affected persons, on the argument that profit can be manipulated. Instead, it wants enhancement of royalty rates, of which a portion is transferred to a non-lapsable fund in mining districts. The Business Standard newspaper has also reported that the domestic industry, too, feels auctioning should be limited to cases where detailed exploration has been done.

The newspaper report quoted the Federation of Indian Chambers of Commerce and Industry (Ficci) as saying to the committee that  in cases of unknown mineralization, the Committee may consider an Open Sky policy. An auction system may not be appropriate in cases where adequate information about the extent of minerals is not available. It may lead to speculative bidding, with a high risk of over-paying by the investor.

But, according to the report, the Chawla panel does not agree with the Ficci views. The panel feels private companies would apply for a mining lease for well-defined deposits, using the principle of security of tenure, while the mining ministry feels a competitive bid process would have a negative impact on exploration due to the risk involved.

Under the present policy, for concessions for minerals other than minor ones, the principle of Ëœfirst-come-first-served’ is followed. However, a person who has undertaken reconnaissance operations has the preferential right for obtaining a prospecting license (PL), which is the second-stage license. Similarly, a person who has prospected for the mineral under a PL has the preferential right for obtaining a mining lease. In the new Mines and Minerals Development and Regulation (MMDR) Bill, mandatory bidding will only be for recognized mineral zones, which means bids can be invited only at PL and mining lease (ML) stages and not the reconnaissance permit (RP) stage. The unrecognized mineral zones will follow the first-come-first-served policy.

The mining industry is the backbone of India’s industries, being the main source of raw material for most other industries. India produces as many as 84 minerals comprising 4 fuels, 11 metallic, 49 non-metallic, and 20 minor minerals.

–TC Malhotra

Reporting live from The Steel Index Steel Scrap Conference in Amsterdam, we have just had a fascinating presentation from Tim Hard of TSI regarding developments in the North Asian Scrap markets.

In the US we have tended to view Turkey as the main story and indeed in tonnage terms that has been the major growth story for the last ten years. But when you step back and look at the ten-year trends and the growth of EAF production around the world, you realize that the steel scrap market is becoming tighter with each passing year. While EAF production has risen slightly in North America even as total steel production has declined, EAF production in the Middle East and Asia has increased dramatically to some 83 million tons in 2011.

It was expected that there would be substantial scrap arisings from Japan post-tsunami, but fears of radiation contamination and problems in processing and preparing scraps have meant scrap exports actually fell from the single-most important supply market in Asia. Meanwhile, although the majority of Chinese steel production is BOF (some 90 percent of total steel production in fact) scrap is still used as a component of blast furnace operation and as the preferred feed for EAF. The Chinese are trying to develop their domestic scrap processing industry and many major shredder and processing investments have been made in recent years. But even so, domestic Chinese scrap prices are still at a premium to the rest of the world and steel producers are opportunistic buyers that step into the global scrap trade when prices fall. As such, even if finished steel prices fall and downward pressure is placed on scrap prices in the US and Europe, the presence of Chinese buyers willing to come into the market and take positions will increasingly create a floor under the scrap prices, supporting them at levels that may seem unjustifiable due solely to domestic US supply and demand fundamentals. Where Turkey has been the scrap story of 2000 to 2010, the next decade will increasingly be about Asia, even as Turkey continues to add further demand the market.

As demand from the North American construction industry has remained weak, US EAF producers have been squeezed between uncomfortably high scrap prices driven by Turkish and North Asian demand, a trend that is likely to drive greater volatility in scrap prices and the need for parties throughout the supply chain to turn to hedging techniques to cover their exposure to price movements — ideas on which we are looking forward to hearing some solutions later in the conference.

–Stuart Burns

Tata Motors is, to its credit, a pretty progressive firm even for the automotive industry arguably already the most innovative sector among heavy manufacturing. The speed and degree to which they have turned around Jaguar LandRover in the UK, not by pouring money into it (although they have invested) but by building the innovative WMG collaboration between university research and company design teams, which has resulted in a near universally acclaimed range of beautiful and popular saloons and SUVs. As a result, JLR is on track to turn in a profit of £1 billion ($1.65 billion) this year, a far cry from the loss making decades under Ford’s ownership. Credit should be given to Ford, though; a fair part of today’s success is a result of the investment and change they brought to the firm while it was under their control, and it’s a shame they were not around to reap the benefits.

Back in India, Tata grabbed the world’s attention with the world’s cheapest car, the gas-engine Nano, which got off to a rocky start when the production location had to be moved following local political unrest — and a few early models caught fire. Sales have settled down to an uninspiring 8,500 per month, according to the unfortunately acronymed Indian motoring blog site BSMotoring. For a country of 1.2 billion, that’s still pretty small beer and compared to the small-car Indian market favorite Maruti Suzuki Alto at 25,000, the Nano clearly has some catching up to do.

Well, Tata thinks it has the answer. If a cheap purchase price is not enough, they will shortly be offering fuel consumption to match most 180-cc Indian motorcycles. The diesel engine under development with Bosch India is said to be a 600-700 cc two-cylinder CRDI (common rail direct injection) diesel engine producing about 30-35 bhp and much more torque than the petrol engine. Although no official figures have been released, it is expected the car will be able to return 40 kilometers per liter or 94 miles per US gallon (118 miles/imperial gallon). The model is expected to do well as diesel is subsidized in India, unlike gasoline. In Mumbai, unbranded diesel is 33 percent cheaper than petrol. At 40 kilometers/liter, the running cost of the new Nanos are estimated to be Rs 1/km ( about US$0.02/mile). The capacity of the fuel tank is expected to be 15 liters, good for about 375 miles if economy results live up to expectations. Bosch, who worked with Tata to develop the Nano’s original petrol engine, says the development is well underway and the finished car should be available by the end of this year. Prices are likely to be higher than the Nano, but will be competitive with Bajaj Auto’s new Ultra Low Cost Car that is under development in collaboration with Renault-Nissan, said to also be on track for 40 kilometers/liter fuel economy.

It’s doubtful that even with such frugal consumption figures either car will find its way to Europe or the US anytime soon, with local manufacturers like BMW able to offer bigger, more sophisticated models capable of 60 mpg (70+ mpUSg) and for buyers used to the sophistication such models bring, the Nano will remain an emerging market auto. But Tata is to be applauded for breaking ground in this way, and where they lead others will be challenged to follow.

–Stuart Burns

One might believe the above headline contains misleading information, particularly when we here at MetalMiner have long advocated that countries (and companies) that pursue clean energy sources as well as technologies will need to secure new sources of supply for their rare earth metal needs. (As we all know by now, China controls over 97 percent of rare earth metal production.) So when news hit the press over a week ago that the Malaysian government had ordered an environmental review of Lynas’ Advanced Material Plant before it could commence production, the proverbial alarm bells began to ring. Not only did Lynas take a hit in its share price (and Molycorp, conversely, received a bump), but good old – NIMBY (not-in-my-backyard) politics reared its head, putting pressure on the Australian-based miner.

Local residents and activists expressed concern about radiation leakage and according to a story in The Australian, a Mitsubishi refinery closed back in 1992 due to pollution problems. In addition, the nuclear power problem in Japan has exacerbated the issue, even though as the story noted, the technologies used in rare earth processing differ from nuclear technologies.

The case with this Lynas plant in Malaysia centers around a more fundamental environmental concern: are companies locating plants/facilities in different regions of the world to sidestep environmental concerns?

Before we attempt to address that question, remember folks, we can’t have our cake and eat it too. We can’t have a world of “clean energy without some of the “dirty activities that go along with the development of the clean technologies. Specifically, mining is nearly always a dirty process. Consider some of these statistics from a recent Bloomberg piece on China’s rare earth industry pollution issues: China’s rare earth industry each year produces more than five times the amount of waste gas, including deadly fluorine and sulfur dioxide, than the total flared annually by all miners and oil refiners in the U.S. Alongside that 13 billion cubic meters of gas comes 25 million tons of waste water laced with cancer-causing heavy metals such as cadmium, according to the story.

In the case of rare earth metals, thorium, a naturally occurring radioactive element, commonly appears in the ores of other rare earth metals. The processing of the rare earth ores generates this radioactive waste.

At a recent REE conference in China, Daniel McGroarty of Carmot Strategic Group (and also a speaker at our recent International Trade Policy Breaking Point Conference) told MetalMiner the subject of “exporting pollution came up during one of the panels and Cooper Lee of Lynas Corp. offered a spirited defense of his firm’s environmental policies in regard to the Malaysian project.” According to McGroarty, Lee stated that Lynas had implemented the exact same environmental plan in Malaysia as it would for a plant in Australia.

Lynas was unavailable for an interview or any additional comment for this post.

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