Market Analysis

The Stainless MMI shot up 7 points this month, reaching summer 2015 levels. Skyrocketing nickel prices across all markets led to the jump.

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Stainless steel surcharges have decreased for this month after increasing two consecutive months in August and September.

Source: MetalMiner data from MetalMiner IndX(™)

Stainless buying organizations will also want to review the potential impact of the latest electrode surcharge for stainless steel products.

Stainless Steel Market

Meanwhile, crude stainless steel output could hit 47.5 million tons for 2017. 2017 forecasted output would represent an increase of 3.8% compared to last year’s reading, also a record.

Domestic stainless steel output will likely have grown by 10% this year, totaling 2.75 million tons in 2017. In addition, the U.S. International Trade Commission (ITC) announced in October the continuation of dumping and subsidization of stainless steel flanges from China and India. The estimated dumping margins range from  99.23-257.11% for China and 78.49-145.25% for India. Moreover, mills announced higher base prices starting in November.

2017 Chinese forecasted output will likely come in lower than expected due to capacity curtailments. However, recent data point to higher production during the summer months.

LME Nickel Skyrocketing

Sharp nickel price increases will directly impact stainless steel prices.

Source: MetalMiner analysis of FastMarkets

“Volatile” best describes nickel prices this year.

Recently, nickel prices rallied over the previous peak. MetalMiner pegged $12,380/mt as the upper level limit for nickel prices. However, nickel prices closed October over that level, with sharp increases in both prices and volumes. The latest price movement bolstered the nickel rally after the price pullback in September.

What This Means for Industrial Buyers

Stainless steel momentum may have taken a breather, just as all the other forms of steel did.

However, stainless steel prices appear to have additional momentum triggered by strong demand.

To understand how to adapt buying strategies to your needs, dive deeper into our Monthly Metal Buying Outlooks or you can take a free trial now.

To read more about longer term stainless steel price trends, download the free Annual Outlook.

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The Raw Steels MMI decreased again this month, falling two points down to 77. Steel prices seem to have lost momentum and fell this month both domestically and internationally. However, mills have announced price hikes for November.

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Prices in October fell for all forms of steel, although HRC and plate prices increased slightly at the end of the month.

Source: MetalMiner data from MetalMiner IndX(™)

However, historical Q4 price trends generally suggest rising  prices and increasing demand. In addition, industrial metals remain solidly in a bull market.

Will steel prices see a bump too? Let’s take a look at the market indicators.

Domestic Steel Market

Domestic steel prices fell this month after trading flat (sideways) for the last few months. Steel price momentum has declined but Q4 increases often come in November and later. Service centers still report steady demand, despite significant steel price drops in October.

Lead times increased for all forms of steel. Increasing lead times generally support rising steel prices.

Let’s Not Forget About China

Curtailed Chinese capacity has supported steel prices during most of the year (particularly during Q3).

However, no real shortage exists, as China increased production in the summer to meet heavier winter demand.

In October, the  Chinese Steel PMI fell to a 6-month low, though it remains above 50, which still signals growth.

Source: MetalMiner data from MetalMiner IndX(™)

During the first few days of November, Chinese CRC prices held steady while HRC prices fell slightly. As HRC and CRC prices commonly move in tandem, prices will likely adjust during the month. Buying organizations should watch Chinese prices for signals of a price rebound.

Raw Materials and Scrap

Scrap prices fell together with steel prices this month. Scrap prices held somewhat steady during 2017 (as have steel prices).

Source: MetalMiner data from MetalMiner IndX(™)

Raw material price dynamics tend to correlate with steel prices. Steel prices decreased in October, following iron ore’s September price falls. Coal prices traded sideways in October, despite the short-term uptrend that began in April. Early November iron ore prices appear flat, while coal prices increased to the $100 level. Increasing raw material prices may create some upward movement for steel prices.

What This Means for Industrial Buyers

Steel price dynamics continued to lose momentum this month.

However, buying organizations will want to pay close attention to Chinese price trends, lead times and whether domestic mill price hikes stick.

To read more about our longer term steel price trends download our free Annual Outlook.

To understand how to adapt your buying strategy this season, take a free trial now or subscribe to  the Monthly Outlook for a short-term analysis.

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The Construction MMI dropped a point for the second consecutive month, falling from 90 for a November reading of 89.

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There were not many significant movements in either direction within the basket of metals. Chinese rebar rose in price, while Chinese H-beam steel dropped. U.S. shredded scrap, meanwhile, fell 6.3%. European commercial 1050 sheet aluminum also fell, dropping 1.3%.

Total Construction Spending

According to U.S. Census Bureau data released Nov. 1, total spending for September amounted to an estimated $1,219.5 billion, up from the revised August total of $1,216 billion.

September spending was up 2.0% from the September 2016 estimate of $1,195.6 billion. As for the year to date, during the first 9 months of this year construction spending amounted to $917.0 billion, which was up 4.3% from the $879.6 billion spent during the first nine months of 2016.

Spending on private construction amounted to a seasonally adjusted annual rate of $942.7 billion, or 0.4% below the revised August estimate of $946.2 billion. Residential construction was at a seasonally adjusted annual rate of $515.4 billion in September, only slightly lower than the revised August estimate ($515.6 billion). Nonresidential construction was at a seasonally adjusted annual rate of $427.3 billion in September, 0.8% below the revised August estimate ($430.6 billion).

Public construction, however, was up for the month.

In September, the estimated seasonally adjusted annual rate of public construction spending was $276.8 billion, 2.6% above the revised August estimate of $269.8 billion. Within the public construction umbrella, educational construction was at a seasonally adjusted annual rate of $71.9 billion, or 5.2% above the revised August estimate of $68.3 billion. Highway construction was at a seasonally adjusted annual rate of $84.3 billion, 1.1% above the revised August estimate of $83.4 billion.

ABI Shows ‘Modest Slowdown’ in Billings

According to the most recent Architecture Billings Index (ABI), put out by The American Institute of Architects, billings slowed down in the month of September.

The ABI posted a 49.1 for the month (a reading of 50 indicates no growth, while anything below 50 indicates a drop in billings). The September figure broke a multimonth streak of billings growth.

However, the ABI report cautions against hasty reactions to the relatively down month.

“Billings have been growing at a strong pace in recent months, so it is too early to determine whether this is a new trend or just a modest course correction,” the report states.

The impact of Hurricanes Irma and Harvey, which rocked Florida and Texas, respectively, also showed in this month’s batch of data.

“The general economy showed more signs of the impact of the hurricanes in September, with nonfarm payroll employment posting its first monthly decline in seven years,” the ABI report states.

Nonetheless, in this month’s ABI survey questions, a majority of construction firms indicated either it was still early to ascertain the scope of any potential impacts to projects as a result of the hurricanes or that they had not seen any impacts to date.

According to the survey results, three-fourths of respondents said they have not seen any hurricane-related impacts on their projects (49%) or that it was too early to tell (26%).

Probing into the results further: 12% of respondents indicated they have seen higher construction materials prices from companies impacted by the hurricane; 8% have seen higher energy prices due to refineries affected by the hurricanes; 7% have seen labor shortages due to increased demand from areas affected by the hurricanes; and 6% have seen construction material shortages due to increased demand from areas affected by the hurricanes.

On the other hand, only 5% of firms nationally said they had to cancel or delay projects due to the hurricanes (unsurprisingly, that figure rises to 12% when focusing specifically on firms based in the South region).

Broken down by region according to billings from September 2016-September 2017, the Northeast led the way with a ABI reading of 56.9, followed by the South (54.0), the Midwest (50.4) and the West (48.4).

The Housing Market

As always, the U.S. housing market is something to keep an eye on.

According to Census Bureau data released last month, privately owned housing starts in September dropped 4.7% below the revised August estimate. Single-family housing starts were down 4.6% for September from the previous month.

The next new residential construction report is scheduled to be released Nov. 17.

As for existing-home sales, the National Association of Realtors (NAR) put out a rosy outlook for 2018.

The NAR’s chief economist, Lawrence Yun, estimated existing-home sales will finish at a pace of 5.47 million, which would be the best number since 2006 (6.47 million). However, that number would represent a 0.4% uptick from from 2016 (5.45 million).

In 2018, sales are forecast to rise 3.7% to 5.67 million, according to the NAR.

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The Copper MMI inched four points higher this month, returning to September levels. This comes as no surprise, as copper outperformed other base metals again.

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Source: MetalMiner analysis from FastMarkets

Copper prices look strong as they twice breached the $7,000/metric ton ceiling in October. Moreover, copper prices climbed over the previous peak (during the beginning of September, yet  below the $7,000/mt ceiling), which signals the continuation of the bullish sentiment.

Even if price pullbacks occur, the uptrend appears sustainable. Readers may notice the green dotted line in the chart above, which signals the start of the sharp copper rally. Copper prices today stand about $1,000/mt higher than prices in July.

Supply and demand indicators also point to a continuation of the copper rally. The International Copper Study Group forecast a of 151,000-ton deficit for this year. The deficit may continue next year, which would support copper prices.

What is the U.S. Dollar Doing?

Copper is commonly treated as an economic indicator (often referred to as Dr. Copper). Copper prices remain linked to the U.S. dollar. As with many other dollar backed  commodities, if the U.S. dollar is strong, copper prices often fall. In other words, copper prices and the U.S. dollar have a negative correlation.

The U.S. dollar in black. Copper prices (EOD) in blue. Source: MetalMiner analysis from StockCharts

Based on the chart above, for much of last year, the opposite dollar/copper correlation did not hold true. Copper prices, however, appear to fluctuate with dollar movements on a daily basis (when the dollar increases one day, copper prices decrease too, and the opposite also holds true), as well as on a long-term trend basis.

However, it may take some time for both to correlate negatively again.

Despite the latest short-term uptrend of the U.S. dollar, MetalMiner remains hesitant to call a bull market for the U.S. dollar.

Copper Scrap vs. LME Copper

The latest copper price increase came as a result of a Chinese copper scrap ban, hence the need to also analyze copper scrap prices.

Source: MetalMiner data from MetalMiner IndX(™)

Scrap prices increased this month by 3.2%, compared to a copper price increase of 4.6%. The Chinese government has imposed tougher copper scrap import requirements. The ban may result in tighter supply of copper scrap, forcing China to import more refined copper. Even if the percentage increase in prices between scrap and LME copper remains unequal, we expect them to still trend together.

What This Means for Industrial Buyers

As copper prices continue increasing, buying organizations may want to “buy on the dips.”

For LME copper prices, buying organizations can also read more about longer-term copper price trends with our free 2018 Annual Outlook, or take a free trial now.

You can also subscribe to the Monthly Outlook for a short-term analysis. Reacting to short-term movements in the market will reduce purchasing risks.

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The Renewables MMI dropped a few points this month, falling from 83 for a November reading of 80.

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The sub-index dropped for the second consecutive month after hitting a 2017 high of 84 for the September reading.

Within the basket of metals, Japanese steel plate, Korean steel plate, U.S. steel plate and U.S. grain-oriented electrical steel (GOES) coil all posted price drops. Chinese steel plate, however, posted a slight price increase.

Cobalt in Cobalt

As demand for electric vehicles (EVs) increases, so, too, will demand for that rare but vital metal: cobalt.

Most of the world’s cobalt is mined in the Democratic Republic of Congo — political instability there this year has led to production slowdowns and skyrocketing prices, leading some batterymakers to recalibrate their battery formulas to make their batteries less dependent on cobalt.

Speaking of cobalt, one aptly named town is experiencing a boom related to the metal.

Bloomberg earlier this week reported on the town of Cobalt in Canada’s Ontario province.

Ironically, the town was built on another metal — silver — but a recent “cobalt rush,” in line with growing global demand for cobalt, has breathed new life into the small town, Bloomberg reported.

While the DRC produces a majority of the world’s cobalt, Canada sits at third in cobalt production behind China, contributing about 6% of global supply. As the Bloomberg report indicates, political instability in the DRC could lead to growing demand from other sources, like Canada, where the business climate is more predictable.

“This area’s seen more airborne surveys in the last year than in the last hundred,” said Gino Chitaroni, a local prospector and geologist, to Bloomberg. “Two years ago, if you had a cobalt property you couldn’t give it away. All of a sudden, within six months, everything changed.”

Cobalt, Ontario, is just one example of a town experiencing such a boom. As EVs become more and more prevalent, there’s no doubt others will follow in its footsteps.

The Kobe Steel Saga

Kobe Steel, Japan’s third-largest steelmaker, has been in the news in recent weeks because of the firm’s quality data falsification scandal.

Of relevance here, as reported by Reuters, is the fact that steel plate is included in the scope of the problems for Kobe.

According to Reuters on Oct. 19, Kobe Steel Executive Vice President Naoto Umehara said the company had found a new case of falsification of data at a unit that cuts and processes steel plate.

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An interesting article in The Telegraph this week explores the challenge facing the U.K.’s industrial sector in terms of power costs and the government’s competing priority of decarburizing the U.K.’s economy.

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The U.K. is not alone in this.

Much of Europe and the U.S. face a similar challenge of rising energy costs and concerns that industry is disadvantaged relative to competitors due to high energy costs and that retail consumers are being forced to pick up much of the bill for the government’s green agenda.

According to the article, British industry already pays well above the average for Europe, and Europe itself is a high-power-cost region relative to many other parts of the world.

Source: Telegraph

Only Denmark has higher industrial power costs than the U.K. Denmark generates much of its electricity from wind turbines, for which the technology is only just becoming economically viable, without subsidy and without costing in the backup generating capacity the variability of wind demands.

Decarburization and social policies, which includes subsidies for renewables but also programs to improve energy efficiency, add 20% to U.K. bills at present. But — and it’s a big “but” — they are rising fast.

Levies for such programs are estimated by Andrew Buckley, a director at the Major Energy Users Council (MEUC), to reach 40% by 2020, according to The Telegraph. Some major users, such as the steel industry, have been made a special case and the government has reluctantly granted an 85% rebate of green taxes for steelmakers. However, that makes the problem worse for firms that do not qualify; every subsidy for one is pressure to increase costs on another.

Some firms are moving off grid, investing in their own turbines, solar parks or micro gas plants, sometimes backed up by battery storage if based on renewables.

Rather than ease the problem for those left on the grid, it makes the situation worse. Funding a network with fewer consumers spreads the fixed costs over those that are left.

Of course, the U.K. is not alone in this, but policymakers create different policies in different countries depending on their priorities. Consumers, even in common markets like the EU, can therefore find themselves paying substantially more than their neighbours.

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For the top ten highest energy users, the annual energy bills stands at around £120 million ($155 million). If they are paying 20% or more than their neighbor, that could equate to a £24 million disadvantage before they produce a single ton of product.

No wonder energy is becoming such a hot topic despite low oil and coal prices.

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Tin prices decreased last month with high volatility. The drop in prices appears similar to a pattern that took place in February and June.

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Source: MetalMiner analysis of FastMarkets

Price drops of this magnitude on heavy trading volume usually point to price weakness. However, this year tin prices have recovered from similar price drops.

Before the latest price drop, tin prices increased somewhat dramatically. The price increase  occurred on heavy buying volume, and tin prices looked poised to follow other base metals for a bull run.

Readers might remember that tin outperformed many other base metals last year. Tin prices rallied throughout 2016. Tin prices began to waver only in the beginning of this year, which then pushed tin into more of a sideways trend and/or up-and-down trend.

Source: MetalMiner analysis of FastMarkets

Despite the volatile drops, tin prices appear to keep returning to the same levels throughout this year. Although price drops appear hard to predict, they often appear as buying dips for buying organizations.

What About Industrial Markets?

To understand the industrial metals complex, MetalMiner analyzes the underlying DBB index trend. Both the long- and the short-term trends still point to a bullish market.

Source: MetalMiner analysis of Stockcharts

Even if the DBB index fell in September — caused by price retracement in some base metals, such as copper or nickel — no doubt October saw a big increase. Most base metal prices increased this month, driving the DBB index to higher levels.

The CRB index (commodities) has also traded higher this month, correlating again with the DBB index. We still expect upside movements for most base metals and the DBB index.

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What Does This Mean for Buying Organizations?

Tin price drops appear as buying dips. However, given current market trends, buying organizations should be watching closely as to when to commit purchases to reduce risks. At the beginning of October, MetalMiner published a long-term perspective for base metals and steel.

For those who want to reduce risks when committing purchases, MetalMiner analyzes the market each month. Readers can take a free trial now or subscribe to the Monthly Outlook. 

McKinsey is a highly respected firm of consultants, but we rarely report findings of its work because the material released into the public domain is often too generalist for our practitioners at the coal face of metal procurement.

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Arguably, a recent article on the future of containerization could be said to be in the same vein, comparing as it does their findings in 1967 to today and weighing up current trends extrapolating how the industry could change over the next 50 years. Fifty years is a long time — many of us won’t even be working anymore by then — but of course changes will happen gradually over the period. Some of the developments they mention are already in process today.

Careful not to make specific predictions, McKinsey suggest the following may happen by 2067. Like cars, the firm sees ships becoming autonomous — a scary thought, but, realistically, if you can do it with trucks and cars, why not boats?

Read more

Last week, MetalMiner examined the latest graphite electrode surcharge announced by two mills. Outokumpu and AK Steel published a new surcharge starting with November shipments of 30 Euro/mt and $13.20/mt respectively.

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The mills cite rising graphite prices as the culprit. MetalMiner analyzed the electric arc furnace (EAF) production process along with graphite prices, and concluded that the surcharge does not appear justified.

MetalMiner reader Franck Fraudeau from Safe Metal provided us with some data, which we have used to conduct additional analysis.

Rising Graphite Electrode Prices

Fraudeau reminded us that the new surcharge came as a result of an increase in graphite electrode prices, not graphite prices. According to Fraudeau, graphite electrode prices tend to fall between the $2,000-3,000/mt range. Prices today stand at $13,000/mt.

Let’s re-examine the cost to produce one metric ton of graphite electrodes.

Source: Graftech

Needle coke, a crude oil derivative, accounts for 40-44% (depending on the year) of the cost to produce one metric ton of electrodes. Graftech, one of the leaders in graphite electrode production, prices graphite electrodes to their customers along two parameters:

  • Base price, which tends to vary in a range depending on the graphite electrode diameter and properties.
  • Energy surcharge, which includes the volatile changes of raw materials, utilities, freight and manufacturing costs. This surcharge changes depending on crude oil prices. If Brent crude oil climbs above $90/barrel, then a surcharge goes into effect for each dollar above the $90 barrel level.

Brent Crude Oil prices. Source: TradingEconomics

Brent crude oil prices have remained below the $90/level since the end of 2014. Therefore, this surcharge has not caused the increase in graphite electrode prices; in fact, the increase comes down to the base price.

Needle coke comes from either petroleum or coal. Needle coke prices increased from $450/ton to $3,200/ton in one year. For graphite electrodes, coal is commonly the raw material.

It is true that coal prices have increased since the beginning of 2016. However, prices were higher at the end of 2016 than they are today.

Coal prices. Source: TradingEconomics

The Role of Coal

The whole surcharge hinges on an increase in one of two raw materials needed to make needle coke: coal.

As mentioned, the producers of electrodes can use the substitute material, oil, which of course has traded flat. Graphite electrode production is currently controlled by only a few companies, such as SGL Group and Graftech, each with substantial operations in the U.S., and China-based Fangda Carbon.

North American global market share is approximately 45%, of which the U.S. controls around 70%. Europe controls around 25%, while China has an approximate 20% share of the electrode market.

However, needle coke production is mainly located in China.

Thus, the ongoing capacity closures that the Chinese government has developed to curb pollution will also threaten needle coke supply. (Source: Research Nester Subscription Required)

Graphite Electrode Market Suppliers

There are three major companies supplying the U.S. graphite electrode market: SGL Group (21% domestic market share); SDK (a Japan-based company with 35% of domestic market share) and GrafTech (22% of domestic market share). Other countries — Japan, India, Russia and China — account for the other 22% U.S. market share.

Contracts and purchases are based on a bidding process, but generally these three companies supply most of the domestic market. In 2016, SDK tried to buy SGL Group, but the U.S. started a complaint against both groups in September 2017, claiming that it limits market competition. By joining forces, the two firms would account for 56% of the domestic market, resulting in decreased market competition.

It’s possible — and we have not done the research — that the European market relies more on needle coke made from coal and not oil, hence the real rise in prices for electrodes to European companies (including Outokumpu). North American electrode producers may have a competitive advantage by using oil instead of coal.

According to Roskill, “The graphite electrode industry is oligarchical with very few companies having the production technology. Prices are set by the major players including US company, GrafTech International, and Chinese company, Fangda Carbon New Material, which together, account for around 22% of global capacity for graphite electrodes, as well as other major companies in Japan, China, India, Russia and Germany.”

Producers Ought to be Asking…

  1. Are GrafTech and SGL using oil, which has traded sideways to flat for all of 2017, instead of coal? (Maybe they have used product substitutes?)
  2. It appears as though the European market is supplied differently from the U.S. market. Whereas U.S. stainless and steel producers can buy electrodes domestically, European firms rely upon Chinese mills for these materials and the Chinese are cracking down on high-polluting industries.
  3. Moreover, China has both higher coal as well as oil prices (versus the U.S.), making product substitution in the electrode-making process untenable.

Our New Calculation

Even if needle coke prices have increased, margins appear wider than before.

Are graphite electrode companies trying to pressure steel and stainless producers to lock in forward using today’s spot prices? Probably.

And if we were on the negotiating team for EAF producers, we would put some pressure on the electrode producers to use oil-based derivatives versus coal.

The table below models the COGS of graphite electrodes shown at the beginning of this article. Based on current needle coke prices using 40% as the cost basis, we can see the producers’ cost has increased from $1,240/mt to $8,900/mt. The current sale price indicates the prices for graphite electrodes, as reported by Safe Metal.

Thus the needle coke price increase has a significant impact on the overall margins of the electrode producers.

Source: MetalMiner analysis of Safe Metal content

Although needle coke prices have increased, as shown in the table above, graphite electrodes can be produced using crude oil. In fact, GrafTech’s most recent annual report specifically states that one of its U.S. facilities produces petroleum needle coke.

How Does This Impact Steel Prices?

Since steelmakers deploy two different processes to produce steel (EAF or BOF blast oxygen process), we might expect to hear some noise from the EAF steel producers.

However, we suspect the EAF producers have long-term contracts for electrodes. Steel EAF producers may have locked purchases and contracted supply on a 6-12 month basis, as contracts are settled in the graphite electrode industry.

Some Turkish EAF producers have changed steel production times (for example, at nights, when electricity is cheaper) as they consider this increase an operational cost and and have adjusted steel prices.

Did stainless steel producers buy forward for their electrode requirements? We’d like to think so. Why have some mills, such as Outokumpu, announced the surcharge for Mexico and Canada and not the U.S. market? Was AK Steel caught short by not locking up raw material supply, or does AK want to try and capture additional margin from customers with a surcharge?

Some in the industry have started to question the logic behind the electrode surcharge, stating that the most recent base price increase should cover this increased cost. Why hasn’t it?

Free Download: The October 2017 MMI Report

Please feel free to share any of your thoughts with us privately at research@metalminer.com or leave a public comment.

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Chinese steel output is falling, according to The New York Times.

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Crude steel output hit 71.83 million metric tons in September, the lowest since February and down from 74.59 million tons in August, according to National Bureau of Statistics data last week. September’s average daily output was 2.39 million tons, down 0.8% from August (but still 5.3% higher than in 2016).

After a year in which mills have been cranking out every ton they can muster and prices have been booming on the back of plant closures, the recent fall in output is telling.

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