Steel

It never ceases to amaze me what a mess politicians can make of business issues. Often the implications have a global impact far outside the limited issue they were trying to address. For example, the Chinese government has been trying to curb exports of basic steel products with repeated changes to the VAT rebates and export tax regime for the last year or more. To their credit, the removal of incentives and application of additional taxes has had a significant effect on reducing exports if not actually curtailing new investment in steel mills ” the stated aim of the exercise. On the plus side, domestic consumers of basic steel products will have seen fewer prices rises in their raw material than they would otherwise and enjoy shorter lead-times compared to overseas consumers.

So far so good, no harm done you may say. Well not quite. In India, the emerging auto parts producers are facing their toughest time in years just when the auto parts market both domestically and regionally is booming. Why? Because of the changes in China. Read more

In a bizarre move driven by anticipated changes in Chinese export taxes, steel imports in the USA surged by nearly 35% as tonnage increased from 1.98m tons in December to 2.66m tons in January, according to the Precision Metalforming Association in Purchasing.com.  That is still some 18% below January 2007, and against a back drop of much reduced imports over the last 6 months as the weak dollar and rising world prices have made imports unattractive. This is bizarre in part because the changes in the 13% export rebate never actually happened at the year end, but also bizarre because much of the surge in process these last few months has been possible because of reduced imports. Read more

If you get a chance, go see the new movie In Bruge, starring Colin Farrel and Brendan Gleeson. There is a great scene when some American tourists ask Colin Farrel’s character how to get to the top of the Belfry Tower. I can’t tell you Farrel’s punchline, but suffice it to say that to reach the top of the Belfry Tower, one has to climb — and, well, these Americans were in less than perfect shape. Here at MetalMiner, Stuart and I like to discuss and debate various issues. I can’t say that I’m much different from a “stereotypical” American in that I think saving money or making money are two very noble reasons ‘to do something’. We debate this subject because green is one of those topics where the impetus for taking action may be a little different. Hey, it’s not that I’m all about pollution and he’s all about the greater good, but unless someone can show me the money, it’s not likely to get done.

So imagine my delight when I ran across this article in USA Today (of all places) on Subaru’s zero-landfill initiative. The stats are impressive. According to the article, Subaru has managed to recycle or reuse 99.8% of its plant’s garbage. Copper laden slag from welding processes is shipped to Spain for recycling. Steel waste was eliminated by purchasing in sizes that result in less scrap. That removed 102 pounds of steel waste per car! Now some marketing folks might want to emphasize the car maker’s altruistic tendancies….not ruining the earth, it’s desire to be a good corporate citizen. And they aren’t wrong by any means its just that if we were to peel back the onion on many American firms’ reasons for ‘going green’, I think we’d come up with a list that includes: eliminating waste, cost reduction, cutting costs, improving the bottom line, did I say cost reduction? Oh sorry, I’m starting to repeat myself.

Over on SpendMatters, an affiliate blog, I commented on how I think ‘green’ will play out in a recessionary environment. Simply put, green makes sense because it goes hand in hand with eliminating waste. And waste reduction usually equates to cost reduction. We’ve heard arguments against green in the metals industry because well, there is just so many places and things one can do with say slag. But thankfully, companies like Subaru are showing us the way. Heavy industry can ‘go green’ and also ‘lean’. What is also interesting is the play between the two. In the USA Today article, the author Chris Woodyard talks about how some of the JIT operations (a fundamental aspect of Lean), provide opportuntity for green intiatives. With daily deliveries of parts, Subaru takes advantage of empty trucks on the return trip to haul away waste for re-use.

But re-use and recycling will only get you part of the way there. The rest of the challenge involves not creating waste in the first place. Engineering teams today are going beyond ‘design for manufactureabiliy’ to ‘design for sustainability’. And they’ll save a few more dollars in that process as well.

–Lisa Reisman

Though Hamlet found himself in extremely dire circumstances, manufacturers throughout the world have faced a similar question, to raise prices or not? Certainly a few years ago, the answer to that question, in the automotive industry, was a resounding “no”. In other words, an OEM would never accept a price increase from his supplier, even if the supplier documented the cost increases from its suppliers. That began to change when steel surcharges really bit into supplier margins (and perhaps explains why so many automotive suppliers are no longer here today). We have personally seen many companies (both large and small) successfully implement price increases in rising commodity markets.

Reuters hosted a manufacturing summit in Chicago at the end of February. The summit featured the CEOs of many top manufacturing firms. They each spoke on various topics. We were most intrigued by the comments made about raw materials. In this audio file, Timken CEO Jim Griffith talks about how they finally did pass down cost increases to their automotive customers in the neighborhood of 10-20%. Griffith continued by saying that they live on both sides of the same coin, their company is profitable because of rising steel prices. But, they have not been getting adequate pricing for their products from automotive customers. If they don’t, “it’s the end of the road.” Read more

A handful of Indian farmers in the state of Orissa are holding up a $12b investment by Korea’s POSCO, Pohang Iron and Steel Works, presumably for a high displacement payout but officially protesting at having their agricultural land used for industrial development.

Posco is apparently looking for some 4000 acres of land, of which 90% is government owned and a further 300 acres is agricultural. Posco officials say even these 300 acres are barely worked and though they cover 8 villages, 7 have already given their consent. Many in the State of Orissa have long held Maoist sympathies. Out of a population of some 32 million, 87% live in villages and one third of the rural population does not even own the land on which they work work. There have been several other small localized protests to industrial development in India that has led to bloodshed. In particular, two projects of the Tata Group last year in Orissa and West Bengal. Like this one, apparently agitated by outside sources with a political agenda. Read more

The LME’s first steel contract made its “soft launch” this past Monday ahead of full service being introduced in April of this year. The contract allows for steel billets in 65 ton lots to be traded 6 months forward for delivery to either the Marmara region in Turkey or Dubai, UAE for the Mediterranean contract or to Johor Malaysia or Inchon South Korea for the Asian contract.

As expected, volumes were low and probably orchestrated by some of the larger players to start the trading. The LME, however, was satisfied with the first day’s $1m turnover. It is hoped the contracts will pick up quicker than a plastics contract launched three years ago which failed to attract much interest, or for the Dubai Gold & Commodities Exchange (DGCX) steel contract launched late last year and now averaging 75 contracts or 750 tons a day. The DGCX contract is for reinforcing bar (rebar) used in the construction industry; consequently it is very applicable to the local Dubai market which is booming. The LME contract on the other hand is for steel billets, one step back up the food chain from rebar (billets are considered the starter material for making not just rebar but wire rod and merchant bars too). Consequently, the LME is hoping that consumers of a wide range of steel long products will take up the contract to hedge their forward supply risks.

Certainly there is much to aim for; a total 636 million tons of billet were produced in 2006, more than 10 times the total 61.3 million tons of non-ferrous metals such as gold and aluminum in the same year. The steel billet market was valued at $310 billion in 2006, about 35% more than the $230 billion value for all of the LME’s non-ferrous metals products. How much and how quickly the LME’s contract is taken up remains to be seen. There has been considerable skepticism from the larger producers. They see a futures contract as increasing the probability of volatility and running counter to their own efforts to bring stability to the market by consolidation and production management. The main interest in the contract has come from the banks and from small to medium size suppliers and manufacturers. The banks see it as a potential route to hedge risk on loans to the industry and (here comes the major producers concern) as a vehicle to tap into another lucrative volatile commodity market. Interestingly none of the western steel producers have applied for their billets to be approved as a deliverable brand. All the accepted brands are East European (principally Russian and Ukrainian), Turkish, or Greek with one Asian exception from  Malaysia.

Of greater interest to US manufacturers is the eventual launch later this year of the much delayed Hot Rolled Steel Coil market by New York’s NYMEX exchange. This contract will allow consumers of steel sheet and plate to finally access a forward market. It will also allow buyers to arrange their physical purchase contracts accordingly, essentially locking in current pricing over a much longer term than producers are currently willing to offer. This is an issue for the steel goods market that we have seen time and again – the inability to create a national benchmark for steel pricing and to hedge the risk on the underlying metal component of semi finished and finished goods.

So it may have been a soft start but it’s likely to ring in some fundamental changes to the way steel is priced in the years ahead. We welcome the new contract and feel this will bring significant benefits especially if the LME’s lead encourages NYMEX to get their act together on the HR coil contract over the coming months.

–Stuart Burns

Editor’s Note: This is the second of a two part series. The first part appears here

So what can we expect in the years ahead, not so much from ArcelorMittal, Lakshmi Mittal himself is a young man and will no doubt continue on this path as long as the competition authorities will allow him. No I was thinking more of the steel industry in general. Last year’s US Steel acquisition of Stelco is an example of a trend that has been running for several years now as the industry has fought for the critical mass to stay in the big league by buying up the opposition. US Steel’s purchase makes pretty good strategic sense even if some thought the price a bit steep at the time. But it still leaves USS with only a third of the sales of ArcelorMittal and doesn’t rank them in the top 30 worldwide. The same process is happening in China which currently has some 260 iron and steel companies but is undergoing consolidation. Diana Chen, one of China’s richest women and known as the iron princess for her success in the steel industry is quoted as saying in five years China will be dominated by just a few mega steel producers.

It is these huge steel producers in the developing world that many of today’s western steel producers fear, and against the threat of which they are currently trying to position themselves through acquisition.

Should consumers be concerned by this? There was considerable anxiety when the Japanese and later the Korean steel industry grew at breakneck speed in the 70’s and 80’s but today they are generally seen as reliable and responsible suppliers of high quality material. The arrival of the Japanese can also be said to have created competition that lead to dramatically improved steel qualities and production methods worldwide, something all consumers should be grateful for. There is always the risk as a fragmented supply base becomes consolidated that control moves from the buyer to the seller as supply options are reduced. But as much as high prices the cyclical nature of the steel market has been a major headache for consumers and producers alike. Consolidation should in theory allow the producers to adjust production to meet demand more efficiently and effectively. To a certain extent we are seeing that in the market place today, demand has dropped off in certain product areas but mills have adjusted production and prices have remained firm. The telling time will be in the coming 12-18 months if demand drops off as predicted by some observers (us included) will the mills respond with a gentle easing in price and reduced supply? Let’s see. One thing is for sure though, the insatiable appetite to buy steel mills will continue.

–Stuart Burns

Big Steel – Getting Bigger

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Ferrous Metals, M&A Activity

Editor’s Note: This is the first of a two-part series

I was reading an interesting article the other day in that most informative of publications, the Economist, about the rise Lakshmi Mittal. Mittal has become the world’s fifth richest man worth some $37b principally through his 43% stake in the world’s largest steel maker ArcelorMittal. Mittal didn’t exactly start from scratch in building his global empire, daddy got him kick started with a new steel mill in Indonesia in 1975 but even so his rise has been spectacular. It’s more akin to a Silicon Valley business than a mature industry like steel making. Mittal really hit the big time in October 2004 when he purchased the consolidated steel assets of Wilbur L Ross’ International Steel Group for $4.5b and in the process became the largest steel maker in the world. A position enhanced further by the merger with Luxembourg based Arcelor in 2006 (can it only be 2006, it seems longer ago, so commonplace has the merged company’s name become in just 2 years). Typically such a rate of acquisition would be funded by massive debt but with AM’s that has not been the case. You may say $22b is a mountain of debt in anyone’s language but when taken in the context of $105b of sales and $19b of EBITDA profit it’s not excessive. So how has he done it?

Timing is in part the answer. When Wilbur Ross purchased the rusting assets of LTV, Bethlehem Steel and Weirton starting in 2002 it was after the US steel industry had gone through 35 bankruptcies in five years. He paid $2b for those assets, worked his magic reducing costs with the unions and offloading pension liabilities and two years later sold International Steel Group to Mittal doubling his money in the process. Since then the steel industry has been driven by unprecedented demand from China and all steel assets (and profits and cash flow) have been headed north. Even the UK’s sick man Corus has managed to make money during this time.

May be Mittal’s biggest achievement is getting all these disparate once individual and autonomous plants working as a single entity. Not just in the US but in Eastern Europe and later with Arcelor. In his own words part of that was down to the nature of the businesses he bought along the way, both ISG and Arcelor were themselves the product of earlier consolidations in the industry and by the time Mittal came along the plant managers and corporate bosses were used to change. Apparently it didn’t scare them like it so often does with well established mature industries. Even so the rapid re-branding and integration of these different companies deserves study as an example in successful change management as much as it does in entrepreneurial money making.

–Stuart Burns

My husband bought a box of cereal a few weeks ago promoting the fact that it was 75% organic. Never mind what the remaining content contained. Always the skeptic, I expect that a good percentage of these marketing claims are just that…”claims”. Over on SpendMatters editor Jason Busch joked that L’Oreal (the make-up company) had been planning some cost reduction strategies. I posted a comment joking that they are likely using re-cycled plastics (to lower costs of course) and then get to slap the “environmentally friendly, green label” to the product line and charge me more in the process.

But these ploys are just for consumer products right?

Apparently not. According to this Popular Science article, industrial products companies are praising the virtues of Titanium. But the substance does not appear to back up the hype. Steel doesn’t command a price premium. What kinds of items are we talking about? Master Lock locks and golf clubs, two products heavily associated with Titanium.

I got a chuckle out of the simple experiments the author deployed to check authenticity of said products. Essentially, “hold any genuine titanium metal object to a grinding wheel (even a little grindstone on a Dremel tool will do), and it gives off a shower of brilliant white sparks unlike any softer common metal” and you know you are dealing with the real thing. If however, you see shorter yellow sparks this may just be stainless steel. And no sparks may be aluminum. Next time you are at Home Depot thinking about a bike lock, you might just consider the house label.

–Lisa Reisman

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

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