I’m not talking about a yummy pico de gallo sauce, though I have no objection to it. I’m talking about a new breed of company calling El Paso and perhaps other US border cities and towns home. A friend of mine who sources machined parts, plastics, fabrications etc in Mexico expressed some frustration when a potential US client of his decided to not move forward with a Mexico-sourcing initiative. The US buying company fears the growing violence in Mexico. My colleague acknowledged he could understand if a company had their own operations in Mexico but just sourcing parts?

Well sure, I told him these days companies pay close attention to supplier risk and supply assurance. They don’t want anything happening to themselves or their people while they travel in Mexico, hence the hesitation to start up a program there, even with compelling savings. Our discussion evolved into the fact that many small Mexican suppliers are selling their companies in Juarez, due to extortion by the drug lords or the Mexican Feds (yes, the Mexican Feds have numerous problems in terms of corruption). These old suppliers then re-establish themselves in cities like El Paso. And according to my friend, often times the cost structure appears more attractive than in Mexico! The real estate, electricity, natural gas, raw materials and now of course the transportation all create savings opportunities. These former Mexican smaller suppliers see an overall cost savings by doing business this side of the border! Read more

Although the forging presses to make parts for nuclear reactors can and do cater to other industries, the requirements for nuclear are not only unusual in terms of size but also in terms of the highest most exacting quality standards. Consequently the number of forging plants that currently carry the ASME N stamp accreditation are limited although as interest in nuclear power plants has grown, particularly in Asia, the number of plants with the capability is also growing. This will be good news not just for the nuclear industry which has inevitably been held hostage to the few suppliers with the relevant capability but it also has benefits for the turbine, pressure vessel, and oil and gas markets which occasionally have the need for such large forgings. Read more

Caterpillar may not see the world going into recession but John Deere ” the world’s largest maker of tractors and farm machinery is reported in the Financial Times as saying demand could drop 20% next year in emerging markets as farmers find it harder to access credit for new equipment. True Caterpillar and Deere while building machines with very similar cost structures are not selling into the same markets, Caterpillar like Volvo, JCB and Komatsu are focused on the mining and construction markets whereas Deere is a world leader in agricultural equipment.  But like the construction machinery manufacturers the company has been increasingly dependent on exports to emerging markets like Brazil and Russia where the credit crisis has hit most severely. Read more

Steel Price Drops Big in China

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Global Trade

Unfortunately because Metal Miner’s new IndX has only just been launched this week, subscribers have not been able to track global metal prices prior to today. But with the benefit of our data base, built up over many months of IndX development, we have been tracking the fall in steel prices in Asia since their peak in early July. Since then, steel prices have halved in China, moving much faster and more dramatically than prices in North America. Though the decline in stainless prices has been widely reported all year it has only hit the headlines in recent weeks that steel prices in China have also been falling, due to the credit crunch. But we believe the downturn started in China before the credit crunch, driven more by the fall in the stock markets hitting consumer demand for cars and housing. Prices have dropped by about 40% across the whole range of semi finished products from slab/billets through to CR coil/wire/beams/coated coil.

One wonders if Vale would have been so bullish in pushing for increases in iron ore prices just weeks ago if they had been tracking what was happening to steel prices in the local markets. If prices have been dropping so steadily and consistently in a market the size of China what does that tell you ” especially when raw material costs in the form of iron ore and coal were at historic all time highs, putting producers under immense pressure to keep prices up. It says that demand has dropped out of bed. Is that a good time to be pushing for further raw material price increases, just as the market is about to tank? Apart from the damage it does to the supplier-client relationship (never strong in the iron ore market admittedly) it means you have to back track within weeks or months of your price initiative. Vale should be subscribers to the MetalMiner IndX(SM), they would find, as many North American corporations are, that visibility into the local metal markets in Asia let you see the story unfolding instead of reading about it weeks later after it has happened.

–Stuart Burns

The answer to that question depends upon whom you ask. With the peso crashing because of declining oil revenues, and a grim economic outlook, the Mexican government finds itself in a somewhat familiar situation as it did in 1994-1995 during the “Tequila Crisis” back when the peso last collapsed. Ironically, it is Mexico that the US has turned to for guidance on handling the current economic crisis as reported in the Wall Street Journal. But the currency collapse of course makes imports into Mexico more expensive and Mexican exports more competitive.

Many of the Latin American economies have not diversified much beyond exporting commodities, according to this AP article. In a boom time for commodities markets, many Latin American countries reaped the benefits of high prices and saved their “pesos” in reserve funds. Those reserve funds are being used today to shore up confidence and boost currencies. But from a sourcing perspective, Mexico should appear more competitive to US buyers for products such as forgings, castings and machined parts, unless of course the raw material portion of the product does not contain much labor, as a percentage of the overall product value.

Here is what German Dominguez, a MetalMiner associate had to say on the subject:

US manufacturing is doing badly when you look at automotive and construction. One would expect the spill-over into other sectors to have had a severely negative impact. But, after a few months of dire warnings of recession, the Chicago PMI Index popped back up above 50 supporting a widespread belief that US manufacturing is continuing to confound the doomsayers in spite of the problems in certain sectors. But it is the problems in those certain sectors that are affecting the forgings and castings markets.

Though average lead-times have remained at 10 weeks, a sure sign that demand is holding up well, closer examination shows that certain areas within the metal parts market are doing better than others. Forgings had a record year in 2007 with demand up 10% over the prior year according to Commercial aviation, aerospace, military ordnance, railway equipment, oilfield machinery and power generation have all seen robust activity. Each are big consumers of forgings. But castings have declined in the automotive, garden machinery and marine markets.  Demand has declined for both captive cast houses and among casters serving the residential housing and construction markets. The different focus of forgings and castings explains why the two methods of metal forming are going in different directions.

As with all metals, raw material cost increases have caused finished component prices to rise rapidly this year and consumers of finished parts have been searching for means to control costs. We have written before on strategies to address such cost increases here,  here and here. And with most metal costs appearing to plateau after rises last year, now might be a good time to be reviewing both cast and forged parts.

–Stuart Burns

Comments from Detroit’s Big Three in the Financial Times appear obvious in the face of oil and fuel prices doubling. The Big Three and all U.S. car producers need to adjust the mix of vehicles from minivans and SUVs to smaller cars. Well, no surprise there. That has been obvious for the last year. Sales of small cars are rising in the U.S., while sales of pick-ups are declining. Car sales increased from 53 percent of all vehicle sales in April to 57 percent in May, the highest portion in 12 years. Small cars like the Yaris and Fit increased from 8 percent in May 2007 to 25 percent in May 2008.

The problem in Detroit is that they make an average $9000 pre-tax profit on a pick-up and only $3000 on the average car. The pick-up is a larger vehicle and costs more, so there is more room to pad the price. Buyers see a large vehicle and expect a large price (current massive discounts not withstanding), whereas buyers see a smaller vehicle and prices are intrinsically more competitive. Read more

Although our blog readership is steadily growing, we seem to be misperceived by many as being quite “niche”. It is true to say that we aren’t going to be writing about Britney Spears or Paris Hilton (unless they happen to don some new metalized bra or something) but to say that the metals industry is “niche” is just, well, downright idiotic. And I love to report the statistics because there are so many of them which show how our readers represent an absolutely massive industry. To wit, January and February imports of unfinished metals associated with durable goods output totaled $12 b (and yes, that is b for billion). The US imported $6 b of finished metals associated with durable goods output during those same two months. So that is $18b of metals related imports in the first two months of the year and I haven’t even counted the metal content associated with six other categories (such as automotive vehicles, parts and engines and durables, manufactured except automotive). Hmm… think there are metals in those categories? These are just a small glimpse at the import numbers — we’re talking over 100 billion dollars of imports annually in a lousy year for imports! Check out the numbers! I’ll cover the domestic numbers in another post. But please, whatever you tell me, don’t say that we are playing in a “niche” market.

–Lisa Reisman

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

Back in my Andersen days (yes, that Andersen), the firm had the motto “think straight, talk straight.” Not that we always did, but that certainly was the goal. My boss at Andersen, a wonderful guy named Jim Broering, had an even better motto: “Don’t make them yawn.” You laugh, but it had profound ramifications on what came out of people’s mouths or onto their powerpoint slides. Jim was the “so what” guy. What did the finding, the factoid, the news bit mean to the person receiving the information? That was the question he always pushed me to answer. And so I can’t help but feel that publishing New Year’s predictions, though perhaps helpful to some, may actually just be a yawn if there isn’t something more tangible for the reader.

So thinking of Jim’s words of wisdom, we thought we’d profer not predictions but our sense of different sourcing strategies companies have used in various markets (up, down, sideways etc). Of course there may be wildly different strategies for sourcing raw materials or semi-finished products (e.g. sheet, coil, plate, tube etc) vs. more finished products (fabricated parts, castings, forgings etc) which contain some of those metals we wrote about the other day. Read more