Aluminum

This past week we lost the opportunity to put a stainless producer in front of our MetalMiner audience (for a white paper sponsorship) because the producer felt that, “what we’re looking for is really specifiers over purchasers. The value proposition had to deal with looking at the project lifetime costs of stainless vs. carbon steel. The producer felt that decision belongs with the specifier. But as a sourcing professional, I know that many of you obsess over total cost of ownership, total landed cost and total project lifetime costs (or whatever you want to call them). In fact, we conducted a webinar with software company Zycus and Purchasing Magazine on the topic of total landed costs and hold a record for most attendees at a webinar (The bulk of that audience had the title of purchasing manager, category manager or some other sourcing title). So we get it in terms of the importance of these concepts. But what I don’t understand completely and would like very much to open this up to your feedback involves one concept and one concept only:

In 2010, who drives product selection and ultimately the buying decision? Is it engineering? Is it the specifiers? Is it purchasing or a combination thereof?

My hypothesis: Increasingly, the sourcing organization has taken over the role of examining total project costs, total cost of ownership and certainly total landed costs in the case of global sourcing.

Wait before you throw the tomatoes (you engineers and specifiers). Let me explain. Of course with new product development, engineers drive material selection. For major capital projects in the oil and gas industries, for example, specifiers and project managers definitely play a big role in specifying materials. But I would argue that we have seen a few shifts take place in recent years challenging the notion that specifiers/engineers make all of the material selection decisions.

Let’s start with the hot topic in 2009 of improving working capital. We can’t think of many organizations that did not feel the need to improve working capital. With a relentless focus on reducing inventory and moving toward leaner models, we saw for example, purchasing managers examining lead times for “special and non-standard parts and materials to work collaboratively with engineering and specifiers to identify alternative materials and parts in an effort to shorten lead times as part of an inventory reduction initiative.

We have seen plenty of examples of companies that regularly purchase die-castings, that continuously examine the trade-offs of making material changes from say zinc to aluminum (particularly when zinc costs more per pound and aluminum offers a second benefit of weight savings). Who leads those decisions? I would contend the purchasing/sourcing organization in every case drives those decisions.

Finally, during the commodity boom of 2008 (pre-crash) for the first time in a long time, we saw senior executives of major corporations turn to the purchasing organization to either help manage raw material price volatility and/or drive cost savings throughout all direct material purchases. We would contend that purchasing led their organizations to switch from high cost nickel containing stainless 300 series materials to lower cost 400 series alternatives. Of course engineering and the specifiers had a major role in those changeovers but the initiatives started with either the executive suite, operations or purchasing. They rarely if ever start with specifiers or engineers.

Of course, I speak only anecdotally based on my own consulting experience working with a broad range of organizations. Am I wrong? Who drives material selection decisions in your company? Tell us!

–Lisa Reisman

In a surprise move the London Metal Exchange (LME) announced an increase in both warehouse rents and the cost of taking material off the exchange. Maximum rents are to rise by 4.9% while the delivery charge is to go up by an average 2.7%. According to a report in Thomson Reuters since 2004 LME rents across the six main contracts have risen by 59.9%, but vary significantly by metal with tin up by 78.7% but copper up by only 48.5%. The following graph shows the rise in rents since 2004, courtesy of Reuters.

Nevertheless the 2.7% rise outstrips inflation at 1.4% last year and estimated at 2.0% this year.

The size and timing of the rises, to take effect from April 1, will have the biggest impact on aluminum which has seen a massive stock and sale play over the last year. Because the contango on aluminum has been high, typically $32/ton over 3 months and $100/ton over 12 months traders and banks have sold excess production forward on the exchange at a premium over spot. From that premium they have paid storage, insurance and financed the deal at historically low interest rates, after which the balance is profit. So attractive has the deal been that some 3.5 million tons of the 4.56 million tons of aluminum on the LME is tied up in such deals. The new rates will push the average cost of storage up to $32/ton over 3 months and $140/ton over 12 months making the future for such deals highly questionable.

Many of the current deals come up for expiry in the second quarter and early in the third of this year. The expectation is warrants will be canceled and metal will be taken out for financing in cheaper non LME warehouses, a trend that was already gathering pace particularly in the US where aluminum was said to be increasingly stored in auto makers empty warehouses. Apparently the cost can be 1/10th of the cost of rents in LME warehouses and accounts for the acceleration in metal leaving and in canceled warrants metal earmarked for leaving. Traders looking to remove metal could face a problem however because warehouse companies are moving metal out at a maximum rate of just 500-600 tons a day compared to a rate of 2,000-4,000 tons that they are prepared to bring metal in. Needless to say they do not want to see their livelihood disappear out the door and are making it as difficult as possible for traders to move metal under long-term finance deals off warrant. Uneconomical storage deals and the prospect of higher handling costs could cause traders to dump metal before the deadline. The flood of metal leaving the exchanges could be misinterpreted as physical demand when it is not. It could be a volatile time for aluminum. We suggest aluminum buyers track LME inventory movements by warehouse as well as physical premiums being paid for prompt delivery. Detroit has been very active this year.

–Stuart Burns

NON-FERROUS-METAL-PRICES_011810_02

Anyone familiar with life in China’s big cities will not be surprised by the report’s findings – atmospheric pollution has been a problem for years but the report highlights that water pollution is also a major problem.   More than 209bn tons of waste-water were discharged into rivers and lakes in 2007 twice the government’s earlier estimates. Fearing social unrest if environmental problems are not tackled, the authorities are discussing taxes and other forms of control to get to grips with the situation.

Zhang Lijun, vice-minister of environmental protection said in a China Mining report to be wary of industrial projects that involve heavy metals, such as lead, mercury, cadmium, chromium and arsenic, suggesting new projects may not be approved or require expensive control procedures. The census revealed six industries including power generation, heating, minerals and non-ferrous metal smelting account for 88.5% of total sulfur dioxide emissions. China discharged 23.2m tons of sulfur dioxide in 2007 compared to less than 9m tons in the US, and 19.21 m tons of nitrogen oxides, respectively causes of acid rain and global warming. The US halved sulfur dioxide emissions by instigating an extremely effective cap and trade program back in 1990 following the Clean Air Act and Acid Rain Program. It will be interesting to see if China relies on the markets by doing the same or whether they go for centralized control and issue targets and deadlines.

A China Daily report on the census further revealed industry discharged 49.15 m tons of industrial waste and 39,400 tons of hazardous industrial waste in 2007 along with 900 tons of heavy metals. The shock to the authorities has been the level of agricultural pollution caused by over and indiscriminate use of fertilizers and pesticides but the issue for the metals industries will come more as a result of air and water pollution curtailing production as it did last year with lead producers or in declining planning applications for new facilities. Non-ferrous metal smelting has already been identified as a major source of sulfur dioxide either directly from the smelting process or indirectly from the massive amounts of power needed for processes such as aluminum and zinc production. Most of that power is generated from coal-fired power stations and on the whole is dreadfully inefficient from an environmental standpoint. Taking data from the US Energy Information Administration as a framework where Co2 levels are measured for the US and China we can see that while the Co2 emissions per capita are high for the USA at 19.2 mt/person compared to 4.9 in China that is due to the majority of the population in China living at a subsistence level. But the Co2 intensity, measured as emissions per unit of GDP, are 880 mt Co2 per million dollars of GDP in China compared to 443 in the USA, illustrating how incredibly polluting Chinese industry is per unit of GDP produced. As the standard of living rises in China the emissions per capita will rise unless the authorities take action and they know that. This more than tightening of capital and bank loans could provide the brake to relentless Chinese investment in primary industries. With a new five-year plan (now termed guideline) about to start from 2011, expect pollution and the metals industry to appear much higher up the list of priorities than it has in the past.

–Stuart Burns

Every now and then the idea of airships comes around again. Someone comes up with a new development that seems to open the door to a return of the idea only for it to be dashed by the cold hard economics of competing with relatively low cost established air transport. The very idea of airships has an old world glamor about it that should, one feels, find a place in the modern world alongside the cruise ship industry where the journey is the experience not just a means to arrive at a destination.

So it is no surprise that the latest project has all the usual magic ingredients: elegance, space, serenity mixed with a few new ones excellent environmental credentials and speed. The Seymour Powell AirCruise “Clipper in the Skies is showcased in conceptual form on a YouTube clip and although the music is a little irritating and at 5mins the clip is rather long it certainly captures the potential of such a craft. Samsung has picked up the original concept and they have commissioned Seymour Powell to produce a detailed design. We think of Samsung as makers of TV’s and domestic electronics but they also have a heavy industries division and are one of the world’s major shipbuilders so they know a thing or two about bringing such projects to reality. The design allows for up to 100 passengers and 20 support staff and crew to be carried at up to 12,000 ft (it’s unpressurized) and at a cruise speed of 90mph. That allows for London to New York in 37 hours or Los Angeles to Shanghai in 90 hours. The craft would be 270 ft high and weigh about the same as an Airbus A380 super jumbo. Like an aircraft, it would be constructed of lightweight materials such as composites and lithium-aluminum and titanium alloys. Hydrogen would be used to create the lift held in four individual containers even though it has been passed over in favor of the not quite so efficient gas helium in airships ever since the loss of the Hindenburg in 1937. Power would be provided by fuel cells drawing hydrogen from a compressed reserve also used to replenish the main lifting chambers if required. The outside of the airship would be covered by photovoltaic cells to provide power and combined with the emissions from the fuel cell essentially just water vapor would create near zero emissions. For those that can afford what would probably be high-end luxury prices, the AirCruise would provide guilt free travel like no other.

Will it become a commercial reality? Sadly it is unlikely, but if it does it will certainly be on my top 20 list of must do’s.

–Stuart Burns

Various noted market commentators were interviewed at the 16th annual Mining Indaba in Cape Town this week and the sentiment appears to be largely bullish. Playing safe most predictions were pitched at the long term such as Kevin Norrish, Managing Director of commodities research at Barclays Capital who said he could see prices rising steadily in 2010 and through into 2011 due to demand from China and the “financialization of the metals sector. By which we take him to mean the flows of investment money into metals commodities. “China’s commodity demand has reached critical mass, with global demand for copper from China rising to 35% last year from 15% in 2001. China is the most important factor in copper and commodity production, he said in a local paper  www.businessday.co.za, “We expect price increases to hit fresh highs by 2012, driven especially by insatiable demand from China as well as an expected rise in demand from members of the OECD. Norrish went on to say he expected the copper market to be in deficit in the next couple of years and prices to reach US$8,000 per metric ton.

Iron ore was also singled out for attention, this time by Magnus Ericsson of Raw Metals Group who observed China’s steel demand would drive iron ore imports up by 10% this year and the new benchmark would be 10-15% higher than last year we would pitch it higher than that but we will see.

Guy Elliott, CFO of Rio Tinto was particularly bullish for the long term saying to Reuters economic growth in China would double global demand for aluminum, iron ore and copper over the next 15 years. Rio is said to be increasing iron ore production by 10% in 2010 over 2009 but interestingly still have some of their aluminum smelters running at below capacity.

Last, on precious metals Tom Kendal, a precious metals strategist at Mitsubishi said platinum would reach $1,700/ounce in H2 2010 on the back of a global recovery in vehicle manufacturing and increasing emissions regulations.

–Stuart Burns

Aluminum Corporation of China (Chinalco), China’s leading aluminum producer has shifted its investment emphasis to copper according to reports in the Telegraph newspaper. The reason given for the move is copper holds greater development potential said company Vice-President Lu Youqing in an interview with Reuters.

Chinalco is no stranger to copper; the company owns 49% of the country’s fourth largest copper smelter Yunnan Copper via an unlisted subsidiary China Copper Company. Although there are currently no plans to float the subsidiary that is clearly an option down the line and we could see a Chincoco to match the current Chinalco. Chincoco was set up last year and already has assets worth more than 60bn Yuan ($8.8bn). Copper prices have surged by 130% since the start of 2009 against aluminum prices that have risen only 44%. The disparity in performance is largely down to supply and demand fundamentals. The copper market is running a small surplus, and the aluminum market is running a massive surplus – which has weighed on aluminum prices. The company already owns the $2.2 billion Toromocho copper mining project in Peru but has said they do not intend to build a smelter at the mine. Building work on the Toromocho project will start this year and the mine is expected to produce 210,000 tons of copper in concentrate annually from 2012 onwards. Chinalco has said the world’s copper smelters are already battling over capacity and so the company intends to bring the copper in concentrate from Peru to Yunnan’s facilities in China for refining.

Mr Lu was being typically cagey about Chinalco’s intentions, not discussing any details of potential targets in the copper market. But Ivanhoe Mines’ copper-gold project in Mongolia has been mooted as a potential target. The Chinese are well placed geographically and historically to make the most of Mongolian projects so Oyu Tolgoi would be an obvious target. Yunnan Copper recently signed a deal to take over a smelter in Inner Mongolia called Chifeng Jinfeng Copper Co.

Chinalco also said yesterday that it had posted a profit in the second half of 2009, compared with a loss in the first half of 2009. No profit figure was revealed, but the company’s full-year sales rose 10% to 142bn Yuan ($21bn). In December, capacity utilization at its aluminum operations exceeded 90%, with production costs falling 17% over the year although no details of how that breaks down in alumina and power costs appear to be available. Nevertheless the company is unlikely to look at new smelter projects within China in the short term, the government has made it clear it does not want to encourage further high energy consuming aluminum smelters when the market is already over supplied and meeting rising power demands is challenging.

–Stuart Burns

NON-FERROUS-METAL-PRICES_011810_02

Hi everyone. I had no idea how much you all like quizzes! I’ll do them more often. Here’s another one…

I have to admit that I haven’t read one article on this whole Google showdown in China. I’m assuming we all agree it’s a showdown of sorts. But an article with a headline like this one “Why America and China Will Clash, just grabbed my attention. Whether one buys steel or aluminum, a zinc die-casting or a finished part from China, the relationship between the two countries forms the backbone of many of our posts (not to mention many of your businesses) and some of our behind-the-scenes research. You may have noticed I haven’t penned too many metals-only pieces these past few days, (with the exception of a molybdenum article I wrote last week). That’s because we have been spending our days writing our market forecasts and price predictions for the various metals many of you buy.

We look at dozens of reports, attend conferences, speak to contacts, conduct primary research, survey buying organizations, run spreadsheet models etc- all in an attempt to get our arms around metals markets and the myriad road signs for the metals covered on MetalMiner. And in nearly all of our research, we attempted to assess the Chinese economy analytically looking at risk, growth scenarios, projections, macro economic indicators etc. But this Google story suggested a far riskier scenario, one in which few if any of us have likely considered. In the Financial Times article, the author, Gideon Rachman suggests, “that the assumptions on which US policy to China have been based since the Tiananmen massacre of 1989 could be plain wrong.

The author goes on to suggest that the case against China will likely be made by labor activists, security hawks and politicians. But we see it also coming from various business sectors. The article goes on to suggest that President Obama may toughen up its China stance with, “an official decision to label China a “currency manipulator. Increasingly we have written about the case against China in the area of exchange rate setting. But make no mistake about it. The United States is caught in a classic Catch-22. We have this debt because we import more than we export (and we have for years now). Those dollars that flowed into China are funding our current stimulus and rescue plans. According to a webinar I recently attended, by 2015 over 34% of our GDP will go toward debt service. Our growth in recent years has been fueled by deficit spending.

I admire Google for pulling out of China. Now what we the masses do, and what we’ll do if the relationship turns icy, well, that’s an entirely different matter.

–Lisa Reisman

STEEL-PRICES_011810_02

“What’s sauce for the goose is sauce for the gander.”   I never did quite know what to make of that saying but somehow it sprung to mind when reviewing the Q4 trade statistics in a Financial Times article this week. The issue being that although the trade statistics show the trade gap has widened to 9.6% (not good) the underlying reason is positive, that is industrial and consumer growth is rising (is good). Manufacturing and consumer demand is coming back and sucking in goods and materials to feed a growing manufacturing sector and a recovering consumer market. The numbers are still modest and many are rightly treating them with caution not wanting to place too much faith on a few months of data but several pointers are trending toward a solid pick up in activity.

Economists at RDQ Economics were quoted in the article as saying that during the last three months of 2009, export volumes climbed at an annual rate of 36.2% and imports increased at an annual rate of 35.4%. In November, imports climbed by 2.6% to $174.6bn while exports ticked up by 0.9% to $137bn led by cars, parts and food. Higher industrial activity and consumer demand raised imports of industrial supplies and consumer goods but interestingly at the expense of China with whom the trade balance improved reducing the deficit from $22.7bn to $20.7bn.

Richmond Federal Reserve Bank president Jeffrey Lacker seemed to agree when he said he expected the economy to now expand at a decent clip and he saw the risk of inflation edging upwards renowned hawk that he is. Despite unemployment persistently sticking around the 10% number industrial production rose 0.6% in December and capacity utilization rose to 72% from 71.5% in November. That is still below the long term average and with gas prices rising slowing to 0.2%, the smallest gain in five months, it looks like inflation risks are still pretty low. While that remains the case for inflation, interest rates will remain low and consumer sentiment should steadily improve. Indeed the Reuters/University of Michigan Surveys of Consumers’ preliminary index quoted in a Reuters article of sentiment for January inched up to 72.8, from 72.5 in December. The reading was the highest in four months and suggests those in work are feeling less insecure and more comfortable about the future. In time that will feed through into more spending helping the economy to pick up and eventually bring down the unemployment rate.

Metals are one of the few inputs into the industrial cost structure that are showing inflationary elements. Many non ferrous metals doubled in price last year and although steel costs have recently eased they are likely to increase as the year unfolds. We could see factory gate prices rise this quarter for certain products where metal costs are a significant cost of goods sold. With the dollar still weak, imports have not been able to play much of a role in countering rising domestic costs and perversely some of the metal price increases have been as a direct result of the falling dollar fueling speculative investments in non ferrous metals and related commodities.

–Stuart Burns

NON-FERROUS-METAL-PRICES_011810_02

Don’t be fooled by the flood of new economical small cars being announced this year, of which those on display at the Detroit Motor Show are only the beginning. Whatever the manufacturers may tell us, they are not really aimed at the US buying public. Led by Ford and Toyota, long the visionary leaders in developing the concept of the world car, a model so ubiquitous it would appeal in its standard form to buyers from Shanghai to Seville to Seattle, manufacturers have poured billions into developing models that can be produced on the same platform in multiple locations around the world and in so doing save them millions in production and duplicated R&D costs. Ford’s new Focus is probably the pinnacle of this trend, widely anticipated to be a huge hit in the US following its release at the show and already a best seller in Europe. While the economics of a one world car are indisputable it raises the question of whether  the world is really ready for the concept. The desire for small, medium and large cars varies dramatically around the world and to pour all one’s resources into developing small cars, manufacturers are ignoring a still significant market for medium to large saloons.

In 2009, 89% of cars sold in China were for the compact and sub compact market, stimulated no doubt by the government’s financial incentives to buy sub 1.6ltr engines, but in the US, which was going through the worst recession in 70 years, numbers had only crawled up to 21%. Jim Hall, managing director of motor industry analysis firm 2953 Analytics is quoted in the  Telegraph as saying manufacturers are perhaps fooling themselves, as outside of major urban centers like Manhattan, Boston and San Francisco, there is little actual demand for compact cars, especially with petrol prices back at the $3-a-gallon mark compared to the $4-plus peak in the summer of 2008 when oil topped out at $147-a-barrel.

Sales in North America for these small cars are likely to disappoint compared to other parts of the world and a better solution may be to develop more fuel efficient engines to power larger sedans (the route Mercedes and BMW are taking with their E class and 3 & 5 series diesel saloons),  some  of which are now capable of over 50mpg. Part of the manufacturers need for smaller cars stems from new environmental standards, with cars expected to be able to return 35.5 miles per gallon by 2016 under new US guidelines, manufacturers are judged on the average efficiency of their fleet. American buyers are, on the whole, not interested in small cars or in paying high upfront costs even if the long term economics are more attractive. Witness the hybrid market. After 10 years of availability in America – the most affluent major car market in the world only 2.8% of US cars are hybrids.

This has implications for the metal supply industry. Where during the recession the temporary  trend to smaller car sales exacerbated the decline in steel and aluminum consumption, the migration back to larger saloons likely to result from a gradual improvement in the economy will see a larger per vehicle metal consumption adding incrementally to metals consumption in the reverse of the demand destruction we saw last year. All this hype about a new generation Prius, the Nissan Leaf and GM’s Chevy Volt will amount to nothing in metal consumption terms. At a likely sales price of $30k, even after a $7,500 per car green technology rebate, sales of the Volt will be a dismally small part of the anticipated 11.5 to 12.5 million production units predicted by the industry for this year. And what does Mr. Hall think sales will be for 2010? He is expecting a double dip due to the heavily indebted commercial property market and says sales as a result will be just 10.9m. Let’s hope he’s not right on that one.

–Stuart Burns

1 102 103 104 105 106