China

Some of you may remember hearing  from us several weeks ago regarding plant shut downs in China in the run-up to the Olympics. Well, it has been decided for sure, according to my friend Richard Brubaker who writes a terrific blog at All Roads Lead to China and has been covering this story. But the plant shut-downs are only one part of the story. As Richard points out, the other short term issue of great concern to anyone importing anything from Northern China is the trucks-off-the-road edict in and around Beijing. In short if you import metal products or finished goods containing metal products, you could be facing delays and/or plant shut downs, depending on a range of factors.

Rich discusses several risks with the new closures including: a possible expansion of the radius of closures if target pollution levels are not met, water rationing due to a continued drought and energy shortages could close additional manufacturing facilities. He is spot on. Our man on the ground in China offered up some additional perspectives:

  1. Coal plants were on the list of plants to be shut down. But coal is in huge demand in China which could exacerbate energy shortages. Any high energy consuming industries such as ferro alloys, pig iron and refineries will be greatly affected
  2. Most metal exports have already been greatly curbed, due to export tax changes (the exception is high precision machining)

Since Jason is based out of Tianjin, one of the cities affected by the plant closures, we asked  him to comment on the affect of the closures on metals manufacturers. He said it was likely  some plants may close forever whereas others will only close for the time being. The export duties have put some ferro alloy plants out of business already. When asked if the proposed provinces/regions will be sufficient to achieve cleaner air for the Olympics, Jason said we may hear of the  south delivering  water to the North (e.g. digging a canal from the Yangtzi River to Beijing). All high pollution emitting companies along the river have been forced to shut down already. And many in China feel this stricter policy is necessary to further reduce pollution.What is perhaps most interesting is the dramatic change all of these factors are having on trade between the US and China. Many textile plants, shoe making companies and clothing factories are no longer in business. Many outbound vessels are being shipped with dead freight (since Q4 ’07). There is now no problem getting vessel space for west bound goods and it is now possible to book containers out of China at the last minute. Imagine that! Stay tuned.

–Lisa Reisman

Shipping Lines use the same principles of supply and demand to judge freight rates as does any other business. Typically a
route in one direction is more popular than the reverse. For example containers travelling from China or Europe to the USA, bringing in finished goods, commanded a higher rate than the same containers being sent back to those overseas markets.

Shipping lines are keen just to re-position the container back to where the demand is greatest ready for the next load and
would happily take low value cargo (at low rates) like metal scrap just to cover the cost of returning the container. The US
demand for imports over the last 10 years has made this a steady one way bet, until about 12 months ago according to the the Wall Street Journal. Read more

With both global prices and sales of steel steaming away over the last twelve months, the sometimes overlooked stainless market has been quietly contracting. The market contracted by 2.9% in terms of production last year to 27.6 million tons according to the International Stainless Forum. But the reasons for the decline – a sharp fall in nickel prices, appears counter-intuitive to us. We expected the fall in stainless demand in the second half of 2007, due to the rise in nickel prices in the first half of the year, as manufacturers switched from stainless to other products. There is a lag in these situations and production is hit only 6-9 months after the price spike. Western Europe and Africa reported a 13.3% decrease in stainless steel production to 8.7 million tons during 2007 while the Americas reported a 15.2% decrease in production to 2.5 million tons.

Asia, on the other hand, saw stainless steel production rise 6.3% to 16 million tons in 2007. China is now the world’s largest producer. Its production rose 36% to 7.2 million tons. While at the same time, the Chinese government has actively tried to curb exports of semi finished steel products by adjusting the incentives and penalties for exports. The result has been a decrease in exports of semis and an increase in exports of stainless containing components and products. Read more

A few weeks ago we wrote about an anti-dumping petition for mattress innersprings brought by Leggett & Platt. Here is the five second overview: Leggett & Platt, along with these firms, Hickory, Sealy, Simmons, Spring Co., Symbol Mattress filed an anti-dumping petition alleging the US innerspring industry has been materially harmed by imports from China, Vietnam and South Africa. We heard from several of you and decided to do our own little investigation to better understand the petition, what those affected by the petition can do, and attempt to explain these anti-dumping petitions in greater detail.

You might stop reading this post because this specific anti-dumping case may have no relevance on you or your industry. But make no mistake about it the number of anti-dumping cases involving metal products is substantial. Of the 20 current cases in “Preliminary Phase Investigations” (which includes mattress innersprings), 50% relate to metal. You can check it out yourself here. But I digress. The point is, petitioning the USITC is a popular remedy for metals companies who feel they have been harmed. And, according to my trusted colleague and former global trade specialist Melissa Stephanou (I know her from my Deloitte Consulting days), these anti-dumping suits are on the rise. Read more

I won’t pretend that there aren’t times when the global metals markets perplex me. Take the last couple of months. The US has clearly been heading for a recession, mild or strong remains to be seen but certainly it’s going to get worse before it gets better. Europe or at least southern Europe is looking decidedly sick. That once famous construction led boom [bubble] does appear to be just that. And the economies of the Club Med region and Ireland are all showing signs of strain. The UK will not be far behind as a combination of rising tax levels and falling property prices takes their toll on consumer spending. Lastly Japan is on the brink of a recession as the rise of the yen chokes off whatever mild growth manifested itself last year. Only the BRIC countries are showing robust growth fuelled by rising living standards, young demographics and generally sound economic management (I’ll stay off my soap box on that one, so far so good). Yet, and here is the source of my frustration ” contrary to the sound logic of supply and demand, the metals markets, instead of a steady easing of prices as demand in the major economies slows, have been rising strongly during February when common sense suggests global growth will be much lower in 2008 than it was in 2007. It reminds me of one of those ore trains with an engine at both ends; one pushing, one pulling. In this case the engine of supply/demand fundamentals has decoupled and the only driver of the train is speculative. Read more

BHP Billiton, the world’s leading diversified mining company, tried to win over smaller rival Rio Tinto through a hostile bid last week to create the world’s third-largest corporation,  behind Exxon Mobil and General Electric. The proposed corporation would become  what Purchasing.com calls “a mining giant worth approximately $400 billion and possibly  … the world’s largest iron-ore supplier” — or, at the very least, a formidable opponent for Vale of Brazil, the current top supplier of iron-ore. A merger could also create the world’s largest producer of copper and aluminum. Despite a 3.4-to-1 takeover offer, however, Rio Tinto seems to have little interest in the deal at its current value. Rio Tinto chairman Paul Skinner wrote a letter to shareholders on Monday explaining the board’s view, noting that the current  unsolicited bid of $147.4 billion  undervalues the company and its stronghold. He stressed that no action is needed on behalf of the shareholders. A copy of the letter can be found online through various news outlets, but here are some quick excerpts:

— “BHP Billiton’s offers, while improved, still fail to recognize the underlying value of Rio Tinto’s assets and prospects.”
— “Our plans are unchanged and will remain so unless a proposal is made that fully reflects the value of Rio Tinto.”
— “BHP Billiton’s announcement is not a firm offer for your shares or ADRs (American Depository Receipts). There is currently no formal offer to consider. You do not need to take any action.”

BHP already increased their  bid to give Rio shareholders 44 percent  of the combined entity rather than the 36 percent  they offered in November. If  a mere half  of Rio shareholders endorse the bid, a hostile takeover could occur. Don Argus, BHP Billiton chairman, released his own letter this week, sending a forceful message to  his company’s shareholders. In the letter, he  told  BHP shareholders, “The offer we have made [to Rio Tinto] is both compelling and responsible and, very importantly, is value enhancing for you.”

The inner workings of the possible deal and legal arrangements between these dual-listed companies tend to be complicated, as the International Herald Tribune disclosed this week. The above-linked article describes a diverse assortment of separate legal arrangements in Australia, Great Britain, and the U.S., all of which will be necessary for these international companies to come to a complete agreement.

Earlier this month, China’s steel sector responded to fears of such an agreement. State-owned Aluminum Corp. of China (Chinalco) decided to purchase a hefty 12 percent of Rio Tinto’s London shares, accounting to nine percent of the entire company, with help from Alcoa Inc. Approximately $14 million was spent on this foothold, which Chinalco hopes will not only prevent the birth of an imposing super giant  — this will be no fledgling infant, as a combined BHP/Rio company could control more than a quarter of the world’s iron-ore  — and diversify Chinalco’s focus.

Similarly, the International Iron and Steel Institute  recently announced that a merger between Rio Tinto and BHP Billiton should not be allowed. The merger, they say, is not in the public interest and would likely create a monopoly.

London-based Rio Tinto will release its full-year earnings this morning at 6 a.m. local time. Bloomberg predicts that second-quarter earnings have amplified, estimating, “[Rio Tinto Group] may report second-half profit rose 9.4 percent because of record iron-ore production and its $38.1 billion acquisition of Alcan Inc.” The figures released today could have a dramatic  effect on the future of the company and its role with BHP Billiton.

Readers, what do you think? How will this play out? How should each company respond to the situation? As always, we would love to hear your thoughts in our comments section.

–Amy Edwards

Update: Rio Tinto Group earnings for 2007 are now available online. –AE

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. Read more

For any consumer of Cobalt metal or components with any significant Cobalt content the price pressures must have been nigh on unbearable this past year. Driven by consumer demand and an element of speculative buying in the face of tight supplies, Cobalt has increased from $13/lb at the beginning of 2006 to $27/lb at the beginning of 2007 and closing 2008 it stood at $40.25/lb.

The supply market is tight, apparently producer stocks are low, one of the world’s principal and traditional sources, the Democratic Republic of Congo (DRC) placed a moratorium on exports of cobalt concentrates and trickle sales form the US government stockpiles are finally coming to and end. The DRC was the world’s largest single supplier of Cobalt, often produced as a by-product from Copper production, in the days when DRC’s Gecamines was a major producer sitting on the world’s richest ore Copper and Cobalt ore bodies during the 1980’s. Even today many of the tailings dumps contain higher copper and cobalt levels than new rock projects in other parts of the world. But decades of mismanagement, corruption, war and under investment has brought production to 10% of what it was in its heyday.

Demand on the other hand has been driven both by China but more broadly by the strength of specific high tech industries for which Cobalt is a non substitutable material. Historically, cobalt has been in super alloys used in gas turbines and this still remains an important market, particularly with the strength of the aerospace and power generation markets. But more recently cobalt’s use in rechargeable batteries for cell phones, laptops and fuel efficient hybrid cars has created demand growth of 7% per annum. The Financial Times is quoted as saying a Toyota Prius contains 2.5 kg of cobalt in its batteries, production is currently 350,000 per annum and is set to reach over one million by 2012 . Read more

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