China

Aluminum Corporation of China (Chinalco), the country’s largest alumina and primary aluminum producer has not let the grass grow under its feet since losing the chance to increase its stake in Rio Tinto Alcan earlier this year. In the first ten months of the year, Chinalco added holdings of 53 million tons of bauxite reserves and 3 million tons of copper reserves. Chinalco’s primary alumina and aluminum capacity has gradually come back on stream as domestic demand has increased; the company is now running at 90% of alumina and 88% of aluminum capacity according to a report in Reuters. This is a dramatic improvement from August when the company stated it was operating just 67% of total alumina capacity and 83% of total primary aluminum capacity. It has about 11 million tons of annual alumina capacity and 4 million tons of primary aluminum capacity.

But Chinaclo is about a lot more than aluminum. According to the Peruvian Times Chinalco is to invest $2.15 bn in developing the Toromocho open pit copper mine in Peru’s central highlands, near Morococha in Junin. Production is set at 200,000 tons of copper per annum and is scheduled to begin in early 2012. Apparently Chinalco has aspirations for Toromocho to be the most advanced copper mine in Chile.

Nor are bridges with Rio completely burned, Rio themselves said just last week that they are keen to develop projects with Chinalco and the two firms have been in recent contact. In many ways the surprise during this recession is that Chinese companies like Chinalco have not been more acquisitive snapping up assets at discounted prices. The purchase of a sizable chunk of Rio’s assets would have been a major coup for Chinalco and explains their annoyance at being dumped when a better deal from BHP and Rio’s shareholders came along. But the failure is an example of a much bigger problem Chinese companies have had in buying into existing businesses. They have done moderately well investing in very high risk African green field sites but much less well trying to buy western assets on the cheap in that respect it has not been a good recession for China.

–Stuart Burns

After a largely useless attempt in March to control over capacity in the Chinese steel industry, the authorities are now using a twin track approach to try and reign in steel production capacity which only the most radical super-cycle supporter could believe is justified.

First, no doubt with one eye on the current Copenhagen summit, the Ministry of Industry and Information Technology is reported in a Bloomberg article as laying down maximum consumption and emission standards for steel makers in an effort to force closure of less efficient and/or more polluting production capacity. Steel plants should cap blast furnaces energy consumption  at 411 kgs (906 lbs) coal equivalent and fresh water use at 6 tons for each ton of steel they produce. Furthermore, steel plants should cap effluent discharge at 2 cubic meters (2 metric tons) and sulfur dioxide emission at 1.8 kgs (4lbs) for every ton of steel made. Banks should not give credit support and government departments must not issue iron ore import permits or supply the steel-making ingredient to mills failing to meet the new requirements, the Chinese ministry is reported as saying.

The second track is an effort to close smaller steel production plants and consolidate production among the larger mostly state owned enterprises. The proposal is for carbon steel mills to have a minimum production capacity of 1 million tons, and specialized steel makers such as stainless mills to have at least 500,000 tons. China is estimated to have between 300 and 400 carbon steel mills with individual capacity of less than 1 million tons.

Past attempts to control investments in the steel industry have come to nothing but reports suggest this time the government is keen to get to grips with the problem. China’s steel production could be 570 million tons this year but capacity is estimated to be up to 700 million tons or higher, the National Development and Reform Commission, the country’s top economic planner, said last week. Small mills may be easier to squeeze out of business but medium sized mills will prove more of a challenge. We have seen over the last year the steps regional governments are willing to go to support local employment. Steel mills and their support industries like coal are big employers in China and there will doubtless be much backtracking and manipulation at the regional level to closures. In the long run though, China has to get to grips with this situation and its encouraging to see they are having another go at it. Let’s hope for the health of steel mills in the west, the Chinese have more success this time around.

–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

A recent Bloomberg article suggested that although tin prices are currently strong they are expected to come off in the short term due to slowing domestic Chinese demand. The same article states half the tin  consumed in China is used in electronics soldering, a previously robust area of value add growth for Chinese companies. But a combination of rising wages costs, softening demand due to lower exports to the west and the appreciating RMB have significantly reduced growth prospects. China’s quarterly trade surplus shrank for the first time in more than three years from January to March due to falling exports. Many small electronics factories in the southern province of Guangdong were being closed after China’s new labor laws mandating minimum wages and setting limits on over time raised production costs.

China’s domestic tin prices are starting to drop lower than world prices as demand softens and rising production pushes the market into over supply. Although China became a net importer of tin this year, following the imposition of a 10% export tax this January, higher export prices could over come this and encourage exports again. Many say the retreat of China as a major exporter is the primary reason for the current high world prices.

Read more

Zinc is one of few commodities that appears to be bucking the trend of relentless price increases. The metal has come off from USD 4260/ton last year to below USD 2300/ton this year driven by a perception that supply exceeds demand. Where will it go from here?

Zinc consumption has been increasing at something like 3% globally although as you can imagine, demand has not been uniform. China, the world’s largest producer of concentrates (27%) and of refined Zinc (30%), has increased consumption by 15.2%, ahead of India at 7% and Europe 2.3% according to the International Lead & Zinc Study Group, more than off- setting a drop in demand from the USA, Japan, South Korea, Taiwan and Australia. At the same time, production has been rising at 5% wiping out a deficit of 352,000 tons in 2006. Consequently, world stocks have been steadily rising from 459,000 tons in 2007 to over 700,000 tons this year, according to www.abareconomics.com. Mirroring this, LME stocks have risen 46% year on year from 89,000 tons to 130,000 tons today.

New mines came on stream last year in Peru and old mines were re-started in the US. In addition, decisions were taken on new facilities in Finland and Mexico which will add another 200,000 tons per annum of production this year. New production facilities at Vedanta Resources, India and elsewhere have also come on stream this year. So production is up and consumption is slowing; does that mean prices have further to come off? Probably not, it looks like this supply balance has been factored into the current prices and all other things being equal (no general collapse in commodity prices, no flight of investment funds, major power shortages or strikes ” a big list!) prices will most likely stay around current levels for this year and well into next.

The China National Development and Reform Commission has set out a number of standards that facilities will be required to meet in the future which could reduce production in China and/or raise costs. Price support is seen more from production restraints and threats than a belief that demand is going to suddenly improve. Zinc is used in many applications but the principal ones, galvanizing steel and alloying with copper both have high exposure to the automotive and construction industries. No surprises then that demand is down in the West and up in Asia. We don’t see the situation improving this year in the West but there could be some cooling in the Chinese and Indian economies as demand softens in Europe and continues subdued in the US. Although we expect demand in China to remain robust it will most likely come off the highs seen last year and during the first quarter of this year. We expect Zinc to be trading in the USD 2200-3000/ton range this year rather than testing the USD 4000/ton levels of last.

–Stuart Burns

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

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

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