Stainless Steel

A recent Sydney Morning Herald article gave a very bullish prediction on global steel production saying production for the first calendar month of 2010 was a record 113.4 million tons, exceeding the previous record for the month of 112.9 million tons in 2008. Concerns were raised by Moody’s and have been mirrored elsewhere that so much is dependent on growth in China continuing. Concerns exist that either stimulus measures will be prematurely removed or rising inflation will force Beijing to reign in growth by tightening credit or raising interest rates. Reporting on the Japanese market, Reuters said this week that Japan’s crude steel output is expected to keep growing in the April-June quarter on strong exports of automotive sheet steel, although the recovery lacks strength due to weak U.S. demand, the Japanese Ministry of Economy, Trade and Industry said on Monday. Crude steel output in April-June, the first quarter of Japan’s financial year, is seen rising 37.1% from the same period last year to 26.17 million tons. According to the article, the world’s second-biggest steelmaker Nippon Steel Corp and sixth-ranked JFE Holdings Inc are raising production to meet demand from fast-growing Asian economies, particularly China.

If so much relies on the China market continuing to do well we thought a review of prices in the domestic steel market this quarter may give some early signs of possible weakness. If spot market prices have flat lined or worse are dropping it would suggest the market is in oversupply and optimism on the part of other Asian producers is misplaced.

The following graph is taken from the MetalMiner IndX that tracks a range of daily ferrous and non ferrous metal prices in China.

As we can see the trend has been for a gentle dip around the Chinese New Year in February when the markets were quiet either side of the holiday and the exchanges largely closed for a week. But since then prices have again been moving up particularly for billets a precursor for the production of bar and other long products, and rebar and H shaped beams both used in the construction industry.

This ongoing strength in spite of credit tightening supports reports elsewhere that the market is continuing to consume metals at a robust rate and although Beijing’s cautionary moves have spooked some investors they have not yet had any impact on the rate of growth.

Although it is unlikely growth in demand will significantly pick up in Europe this year and will be relatively slow to come back in the US, it is a fair probability prices will continue to rise due to rising raw material costs. This will likely impact China and Europe before the US where steel producers are more reliant on annual and spot priced iron ore imports from Brazil and Australia, and coking coal from South Africa and Australia both of which are set to roughly double this year. It will be interesting to see if the strength of the steel market allows producers to pass these costs on and still retain the volumes currently being produced.

–Stuart Burns

Brazil is the epitome of an emerging economy, a country in the process of rapid growth and industrialization. The economy is still heavily reliant on the export of basic products such as iron ore, steel, soy beans and beef, and may become a major oil exporter later this decade if recent deep-water offshore oil finds can be developed effectively. Yet at the same time the country is a modern manufacturer producing aircraft, electrical equipment and cars illustrating how its economy has matured in the last decade and hinting at the potential to come as growth further shifts from commodity exports to domestic consumer.

Spurred no doubt by the forthcoming presidential elections in October, the government has recently announced it’s PAC 2 program of infrastructure investments, following on from the poorly executed PAC 1 that ran from 2007 to 2010. The program states the country will commit to a R$958.9bn (US$534 bn) program of investments over the period 2011 to 2014. The biggest share of investment goes to energy, at R$465.5bn over the period. Second is support for a government program of subsidized popular housing, which will be a major boost to the construction industry, at R$278.2bn. Spending on transport gets R$104.5bn, with the remainder shared among areas such as urbanization, sanitation and electricity distribution according to an FT article.

In addition to laying out spending plans, PAC 2 makes projections for growth over the period. The government is forecasting growth of 5.5% over the four year period, not quite China or India but certainly better than OECD markets. Not all economists agree however, although some economists at Bradesco, a large private bank, are predicting 6% growth in 2010 others such as MB Associados in Sao Paulo are predicting 3.8% for the next two years. A growth rate of 6% would be close to the best Brazil has ever achieved in recent years and with the risk of inflation lurking in the background is hard to see. The central bank will decide next week whether or not to raise its target overnight interest rate from 8.75% a year. The rate, which fell from 13.75% between December 2008 and July 2009, is expected to rise to 11.25% by the end of this year.

Spending plans of this scale if fully implemented – and for a host of reasons not least of which could be insufficient tax revenues will in themselves act like China’s stimulus package channeling funds into metals intensive activities. Fortunately for those fearing a rise in inflation none are really consumption focused though, energy, housing and transportation are basic infrastructure areas needed by an industrializing country of Brazil’s size to meet growth ten years down the line. A large part of the energy investment may well go into off shore oil and gas fields benefiting both domestic and foreign oil firms but predominantly domestic steel producers. As always the devil is in the detail but setting broad spending plans is a first step. Brazil seems to be carrying their success in the last decade into the next with justifiable enthusiasm.

–Stuart Burns

Severstal, Russia’s biggest steelmaker, has just posted a $1.037 billion net loss in 2009 compared to a $2.03 billion net profit in 2008 but at the same time, announced plans to increase capital expenditure from $1bn in 2009 to $1.4bn in 2010. Alexei Mordashov, chief executive and with 82% of the stock the company’s main shareholder, said in an FT article, “I am optimistic that we will see a broad improvement in the industry this year. Most of the cash will go into improving steel quality and moving into new fields such as special steels for the automotive industry rather than increasing output.

Severstal’s position is typical of most global players certainly outside of China. Wteelmakers are focused on moving upstream to more value add products, in securing raw material supplies to insulate themselves against iron ore and coking coal price risk and in improving the quality and efficiency of what they do. They are not interested in significantly increasing capacity. Even Severstal who’s highly competitive Russian plants are running at 95% capacity utilization are only earmarking a portion of their capex to expanding mini mill capacity. According to an Alibaba News article some $685 million will be spent on key projects in the Russian Steel Division (some of which will be the mini mill enhancements), $356 million in the Resources Division (developing raw materials) and $413 million at the Dearborn, Michigan in North America, replacing outdated equipment.

Severstal’s sales for the year were $13.1bn, down 42% on the $22.4bn recorded in 2008. Last year, Severstal produced 16.7m tons of steel, just under 60% of it in Russia and the rest divided between five plants in the US and one each in France and Italy. In 2008, steel output was 19.2m tons, a drop of 13%. Clearly the rest of the drop in revenue came from the collapse in prices. In fact the company’s problem is not one of falling tonnage or of prices. With mostly captive iron ore and coking coal resources, the firm is well positioned to weather the current global steel market. Severstal’s problem is debt. After a spending spree in the last decade, the firm is saddled with $4.28bn of net debt and is looking to sell its loss making Italian operation Luccini SpA according to a Business Week article.

Still Severstal is better positioned than most to return to net profit in 2010 particularly if the US operations can be brought to break-even by gradually increasing capacity utilization and rising prices. The firm says it has no plans to scale down its US presence and is optimistic about the outlook for 2010.

–Stuart Burns

For any of you aluminum and stainless steel buyers out there, you will not want to miss MetalMiner’s first webinar given tomorrow, Wednesday March 10 at 9:00am CST. The webinar provides an in depth look at the global markets for aluminum and stainless steel and we will be joined by guest host, Tony Amabile from TW Metals who will cover domestic market trends for both metals. This webinar dovetails with MetalMiner’s new Price Perspectives Series, research that examines not just historical data but the drivers impacting prices looking forward through 2010.

As any metal market observer, buyer or analyst knows, the degree of commodity volatility occurring within the base metal, ferrous metal and precious group metal marketplace has never been greater. Forecasting, budgeting and planning have become more challenging as a result, forcing everyone to pay much closer attention to a broader range of factors impacting metals markets. We believe attendees of the event will walk away with the following:

  • a clear understanding of the drivers of current prices
  • the role and impact of China on both metals
  • cross-industry insight into where demand is coming from
  • tips, ideas and strategies for mitigating costs and reducing risk

The registration process takes less than 20 seconds. Please join us on Wednesday. If you have any comments or questions, please feel free to leave a comment here or drop us a line at lreisman (at) aptiumglobal (dot) com.

–Lisa Reisman

The slump in nickel prices predated the economic crisis of 2008/9 by nearly a year. LME prices peaked at just over US$52,000/t in May 2007, on the back of strong demand and low stocks, but had fallen by over 80% by the end of 2008, as demand collapsed. The collapse of nickel prices and the demand from the stainless steel industry that caused it wreaked havoc on the industry and caused some profound changes in the supply market. Since then prices have recovered to stand at over US$ 20,000/t today but the story doesn’t end there. In fact, stainless and nickel demand have remained nearly constant in some geographies and dropped in others. Likewise price and volume recovery will depend upon patterns changing in both supply and demand in various parts of the world.

Even so while both demand and production of nickel declined in 2009, nickel stocks at the LME built up steadily.   In January of this year, official stocks at LME warehouses totaled an excess of 160,000t.   To put this into perspective, when nickel prices surged to above US$50,000/t, LME stocks totaled just 4,700t.

Nickel demand is driven by stainless steel demand and in China after a brief dip at the beginning of last year stainless production resumed its upward trend during much of 2009 and finished the year on a high. Demand from the principal applications for stainless white goods, process industries, transport and construction have remained strong in China and are recovering well in the rest of SE Asia. But in the west, stainless production is being driven initially by re-stocking of the supply chain and that has been extremely cautious during 2009 with distributors and end-users buying only as much as they need. Nevertheless prices have gradually increased each month since the summer.

Where the price goes from here will depend on a number of factors that we cover in depth in our Nickel and Stainless Steel Price Predictions price forecasts.

To learn more about our price forecasts and research you can catch us on video at the Price Forecast section of the site.

–Stuart Burns

Last year we heard from dozens of MetalMiner readers that you would like to see a few metal market overviews via webinar. Based on the feedback we received, our audience appears split between the steel and nonferrous metal market updates. Therefore, we will split events up and stick to a one-hour format until you tell us otherwise. Initially, the webinar will include an approximate 20-minute overview of both aluminum and stainless steel markets. The market overviews will examine raw material costs, global supply and demand, with a special emphasis on Asian demand. Hosted by MetalMiner editors, Lisa Reisman and Stuart Burns the overview will set the stage for a deeper analysis of the US market led by Tony Amabile, Director of Marketing for TW Metals, a specialty metals market distributor and sponsor of the event.

The webinar is a no cost event for attendees and will appear live on Wednesday, March 10 at 9:00am CST. Readers can learn more about the event and register here MetalMiner Perspectives: Q2 Aluminum & Stainless Steel Market Update

About TW Metals: TW Metals has a leading position in the specialty metals market. TW stocks and processes pipe, tube, bar and rod in stainless, aluminum, alloy and carbon, as well as a variety of high alloys such as nickel and titanium. Headquartered in Exton, Pennsylvania, TW has a large distribution network in the U.S. as well as Europe and Asia.

We hope you can join us!

–Lisa Reisman

We have rarely (if ever) published any case studies let alone talked about the quality of various metal price indexes available in the market today. However, we recently received an email from a colleague, Doug Peterson, who wrote in asking if we were aware of any report or information examining the accuracy of any of the metal price indexes (we were not aware of any). Doug, who works for an industrial manufacturer, wanted to make the case to his business units that using an index (Doug’s company buys 304 stainless steel) provides a reasonably good means of understanding market changes such that the individual business units can hone their sourcing strategies based on index data. Doug set out to prove his case by comparing actual market data to the forecast data.

To that end he evaluated two different sample data sets one from 2008 and the other from 2009. His results suggested that the index he had chosen was within 4% of the actual price one month out and 10% of the actual price three months. Where the index fell down, however requires a bit more explanation. The index was not particularly accurate predicting 6 months out during the 10/08 3/09 period (but was fairly accurate in predicting the 7/09 1/10 period). We suspect the issue had more to do with the dramatic drop in stainless markets after the summer of 2008. Many forecasts examine multiple variables using three months of trailing or historic data to create the forecast. And nothing in the historical data would have predicted the dramatic drop in most metals markets during Sept/Oct 2008. But we don’t believe that serves as a reason (or excuse) for not using metals indexes.

Doug didn’t stop with that analysis. He also wanted to examine how well his company’s actual purchase prices correlated to index data. In this case, his company only did okay. 21 of the 37 times that his company’s prices changed, they were within 9% of the forecasted index price. All of the changes were directionally consistent with the index. For items purchased every month, the data had the best correlation to the index. Going forward, we would suggest Doug provide a “how to for the business units. The company can test Doug’s hypothesis by showing how one unit, using index data and adjusting sourcing strategies compares to a unit that doesn’t track to an index.

Why go through the efforts of such an analysis? Doug set out to prove two points to the business units. The first reason, according to Doug is to show the business units that using price indexes is a reasonably good tool to hone supply strategies, possibly on a quarterly basis.   The second reason to conduct this kind of analysis relates to results – the company achieves a better result by using the data than either doing nothing or expecting more out of the supply base.

If you are interested in learning more about how price indexes can help your organization manage price volatility, click here to download a free report on managing commodity volatility.

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–Lisa Reisman

Today, you may have noticed a few site changes. Back in January, we warned you that we might make a few. The biggest change involves MetalMiner moving into the world of ecommerce by providing metal market perspectives for the complete range of industrial metals products. You can find more information about those reports through the link here:

Price Forecasts New!

When we launched this blog site just over two years ago, we didn’t exactly have a clear direction as to what this site would become. But you have surprised us! And the world of analytics is one that fascinates me personally as it has given us an opportunity to fine tune the nature of the content we provide. You all have told us loud and clear that market changes, global economic trends and price direction are all things that are very important to you. So the price perspectives series really is just a natural extension of synthesizing all that we write on these virtual pages.

Now since we know most of you are in the sourcing/purchasing/procurement functions within your companies, we have tried to position the offering at price points that everyone can take advantage of and we hope that you will agree.

But now we thought we’d share with you a few tidbits about the reports so that our regular loyal readers will have some more insight as to what drove us to develop these reports and how we have structured them. First and foremost, we have structured them knowing you will probably not want to sit down and read a 100-page report aimed in the rearview mirror telling you all about last year. Instead, these reports (price perspectives as we have named them) examine just the basics nothing more and nothing less. Each report ranges in length from 7 13 pages. Wherever possible we have attempted to include MetalMiner IndX(SM) data, production cost models (you will find those in the aluminum and steel reports) as well as key road signs to watch as you coordinate this year’s purchases, and later in the year, your 2011 budgets.

Each report comes either as a single or as part of a yearly subscription in which you would receive one report per quarter. And of course, we offer volume discounts! Unfortunately, we will not launch with a few reports, namely tin, gold/silver, ferro alloys and aerospace metals. We will endeavor to get those reports completed inside of February.

And as always, please drop us a line with your feedback. We get a lot of great ideas from you!

–Lisa Reisman

Two days ago we posed a hypothesis and asked for our readers to share their points of view as to who drives the decisions around total project costs, total cost of ownership and even total landed costs in the case of global sourcing. Admittedly, we wrote the piece because we didn’t agree with the feedback we received from a large stainless steel producer who didn’t believe the MetalMiner audience would make for a ripe target for its products because the company wanted to get in front of specifiers, not purchasers. Specifically, the producer wanted to get in front of specifiers whom they believe drive product selection. We disagreed and so did Miles Free, Director of Technology and Industry Research for the PMPA (Precision Machined Products Association). We reprint, with permission, some comments he sent us in response to that post:

Specifiers have only technical authority, no power to implement

They are not held accountable for cost issues, only for performance of the product.

Purchasing personnel have both responsibility and authority for the bottom line of the project, and have power and authority to tell “specifiers to refigure, reconsider, redesign using latest market information.

Purchasing has the ear of true power in the organization because they impact the bottom line. Specifiers only are invited to depositions to explain why something they worked on  failed, and are considered burden by the true power in the organization. (Who did GM lay off first? Engineering, not purchasing!)

This has been a difficult to learn for me lesson as I started my career as a metallurgist, and so worshipped early at the altar of technical analysis. My lifetime experience however showed me that technical  boys are never invited to the meetings that really mattered; and so I got my MBA, and am now invited to the meetings that count.

Your potential customer erred if they thought that somehow they would get a tea party uprising started by the specifiers against the purchasing folks.    They may like the pretty horsey (specifiers) but the purchasing holds the reins and pays the rent on the stable.

The Specifiers were castrated at an early age. (Quick name a specifier who gets performance bonus!)

Purchasing has a lock on the Bonus bosom.

It’s really pretty clear.

Thanks Miles. We appreciate your comments.

–Lisa Reisman

ThyssenKrupp Back in Profit

by on
Ferrous Metals

ThyssenKrupp had a torrid 2009 but the last quarter showed an improving trend by posting a small net profit pre-tax of $323m. Those group figures however mask a worldwide stainless division loss of $80m and a steel North America loss of $5m.

2008/2009 2009/2010
Q1 Q2 Q3 Q4 Q5
Steel Europe -483 -153 -235 -372 142
Steel Americas -104 -30 -26 -135 -5
Stainless Global -331 -419 -213 -94 -80
Material Services 41 -145 -175 -26 42

Source: ThyssenKrupp 1st Quarter Results

Europe however managed to produce an adjusted surplus of $142m, a highly credible result considering the state of the European steel market and the performance in the prevailing four quarters. Material services is the metals distribution business. Although global, most of the revenue comes from Europe where in line with most distributors the business lost money in 2008/9 but came back into profit October to December on the back of rising metal prices if not strongly rising volumes.

Thyssen’s first quarter figures although well ahead of expectations should not been seen as a trend line upwards for 2010 the company said. Sales are expected to remain flat for much of 2010 trending upwards only towards the end of the year. Only hindsight will show whether Thyssen’s two most ambitious capital projects were timed well or not. Certainly in 2009 the company must have been wishing it wasn’t saddled with both a new slab mill in Brazil and a new steel and stainless mill at Calvert in Alabama. Even though both projects were scaled back in terms of completion dates by slowing the pace of work they still managed to suck up half of Thyssen’s US$1bn capital expenditure last year. In the long run, one would find it hard to argue against the logic of a low cost slab mill in Brazil and a high quality steel and stainless mill close to its buyers in North America but with sales and revenue collapsing last year the timing was unfortunate. Calvert is scheduled to produce a reduced output this year of some 200-300,000 tons but its questionable it if can make money as the slabs are being shipped in from Germany. Full production of some 500,000 tons will only be desirable once the Brazilian mill is on stream in 2011. In the meantime, capital spending, depreciation, interest and operating expenses from the two projects will continue to act as a drag on the firm’s results to the tune of some $680m per year.

–Stuart Burns

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