Yesterday I had an opportunity to talk metals with Tracy Brynes and Chris Cotter on FoxBusiness.com. Back in my broadcast journalism days (well, that was one of my college majors if truth be told), every comment and every item was heavily scripted. Today, these internet interviews are a bit more refreshing as you have longer than 10 seconds to make a point. Of course no metal discussion would be complete without talking about the headliners: steel, copper, China, gold and of course rhodium.
Rhodium you may ask? Well, we have spent a good part of 2009 tracking various rare earth metals so rather than talk about neodymium (my other rare earth metal option for this year or lithium), I thought we’d give the low down on Rhodium. The interview runs about 6 minutes. I’d welcome your feedback:
In the coming weeks, MetalMiner will be rolling out two versions of price predictions. We’ll cover the high level directional trends on the blog and then integrate detailed price forecasts including data from our own proprietary MetalMiner IndX(SM) and specific sourcing strategies via a premium content section.
If you have a metal you would like to see covered, drop us a line at info (at) agmetalminer (dot) com.
Who would be a steel producer in India? Just as the market is showing signs of a decent recovery, your government is pouring millions into infrastructure projects and the demand is allowing you to raise prices, as the market strengthens you are raising prices in modest increments only to have the government make you reverse the increases according to the Hindu Times. Not something the steel industry in the US has to contend with but in India things are done differently and the government feared Steel Authority of India’s (SAIL) recent Rupee 1,500/metric ton increase (US$33/ton) would add to inflationary pressures and force the state owned steel producer to retract the announcements and compromise on the increase. Although SAIL had cited rising raw material costs as the reason for the price increase, the government reasonably pointed out that as SAIL owns most of their own coal and iron ore reserves, raw material costs hadn’t materially changed. The price increase was taking advantage of an increasingly tight domestic market. What the government didn’t add was the market is partially shielded by import duties, without which SAIL would be facing much stronger competition from China and the Ukraine.
The domestic Indian steel market is doing very nicely this year. Tata Steel, the world’s eighth-largest steelmaker and India’s second, said last week sales from its Indian operations rose 73% in December to 636,000 metric tons from a year earlier and sales for the third quarter rose 49% to 1.60 million metric tons. The Indian operations account for about a quarter of the group’s total annual global capacity of 30 million tons and no doubt helped the group nurse losses from their Corus subsidiary, Europe’s second-largest steelmaker. The breakdown of growth by product category illustrates that unlike China, the growth in India is coming more from consumption. Sales of flat products, used in automobiles and consumer durables, surged 90% in December, while sales of long products, primarily used in construction, rose “only 56%.
A recent Reuters headline said, “Metals power Indian shares to best close in 22 months says it all. In addition to Tata, JSW, India’s number 3 steel maker said its crude steel output jumped 88% to 1.47 million metric tons in the three months to December encouraging all the private steel mills to raise prices. And not just steel – aluminum producers Hindalco and Balco are also enjoying rising returns as demand remains strong and rising world commodity prices allow them to realize higher sales prices while enjoying fixed raw material costs.
So in answer to who would be a steel producer in India, right now I think the answer is anyone given half a chance would jump at it. Producers of a range of basic metal products look like the blend of partial protection from imports, largely fixed raw material costs and a robustly growing domestic market will provide a profitable formula for the year ahead. No wonder the government is keen not to choke off India’s competitiveness by allowing prices to rise un-sustainably.
What the global steel industry has gone through over the last 18 months is nothing to what it will go through over the next five years. To say the turmoil of the last 18 months has been good for the steel industry sounds ridiculous when the hardships it has created among steel communities and the losses in share values for investors is taken into account, but it has acted as a catalyst to hasten changes that otherwise would have taken the next decade to achieve. Increasingly, steel will only be made in high cost locations like North America or Western Europe by the most efficient of producers. The last 12 months has seen plants that were idled in late 2008 closed permanently by steel companies who have come to the realization that new investment should be focused on where the new demand is coming from. ArcelorMittal, the world’s largest steel producer and arguably one of the most dynamic in terms of its strategic thinking and long term ambitions has just permanently closed plants in Lackawana, N.Y. and Hennepin, IL while shifting investments to Brazil, India and eastern Europe. Arcelor sees growth in the next decade coming from these markets. Demand in India alone is growing at 9%, with the prospect of yet higher growth in the years ahead as long term infrastructure investments are rolled out. The steel company is planning to team up with the iron ore producer Vale in a US$5bn steel mill investment as its sees long term growth in Brazil as a better bet than established western markets. Both Arcelor and the India home grown steel giants like Tata are increasingly focusing investment decisions on the domestic Indian market rather than looking to take on more old world producers. Indeed old world facilities like Corus’ Teeside steel plant in the UK had closed in early December as applications for new plants in India were being submitted.
Not all emerging markets make solid investments though. China has benefited if that is the right word from massive state supported investment in their steel industry during the current decade. Business Standard reported China is now sitting on steel capacity of 610 million tons and will be commissioning another 50 million tons next year. A spokesperson for China Iron & Steel Association said at a recent conference in Beijing that the country would end the year with production of 565 million tons of crude steel. That will be a lot more than China’s domestic requirements, and because of the fragmented nature of China’s steel industry, difficult to control. This and a desire to clean up more polluting and less efficient steel plants is leading to ever more strident attempts by the authorities to effect in China what is happening elsewhere in the world namely the consolidation of production under a small number of ever larger steel companies. The Chinese Ministry of Industry and Information Technology (MIIT) published details of a new scheme this month for the restructuring and upgrading of raw-material industries in central China in the 2010-2011 period. The scheme is to cover nonferrous metals, steel, building materials, coal and chemical industries. The program requires forming several “super-large-scale and “large-scale enterprises in central China through mergers and acquisitions. MIIT is to encourage Wuhan Iron and Steel Corp., the parent company of Wu Steel to acquire the production capacities of smaller rivals in the central areas of China and Ma Steel, Taiyuan Iron & Steel Co., and Hunan VALIN are also encouraged to conduct mergers and to acquire smaller rivals to form one or two super sized steel companies able to operate on the world stage. As with Arcelor’s long term investment plans, the convulsions of the last 12-18 months have driven steel mills everywhere to look much more aggressively at where the growth in the coming decade is going to come from and divert investments to those markets at the expense of the old.
Copenhagen has failed and American workers should heave a sigh of relief. Not because global warming does not have any scientific basis we don’t have the evidence to refute or support the proposition that man-made emissions are impacting global temperatures, we have our doubts and hunches but truthfully they are nothing more. No the reason American workers should heave a sigh of relief is because signing up to Copenhagen would have obliged the administration to push for a European style Cap & Trade scheme at home and Europe has shown that is simply a transfer of wealth from the developed to the developing world. It aims to reduce carbon emissions in the west (though that is debatable) and increases them in the east.
The example of Corus’ Redcar plant is a case in point. The plant was closed because key clients reneged on long term contracts and the 3m ton facility was left without enough sales to cover its costs. European steel producers receive about 2 tons of carbon credits for every ton of steel produced. Closure of Redcar will mean Corus will reduce its carbon emission by the equivalent of 6m tons of carbon emissions. But Tata, Corus’s owners, are rapidly expanding steel production in India where it could receive hundreds of millions of dollars annually from the Clean Development Fund by building new plants that are less polluting than existing Indian plants (not less polluting than Redcar you understand, just less polluting than older plants in India). As we have written recently elsewhere, the Indian steel industry is set to more than double production to some 124 million tons a year by 2011-2012. Even environmentalists must see this is a disaster for the reduction of carbon emissions. It merely transfers production from western steel mills where steel is produced in a carbon constrained environment to a non constrained market India and China understand this, that is why they will not sign up to a Copenhagen accord.
As a Wall Street Journal article puts it, Cap and Trade is a scheme that would impose heavy carbon taxes and allowances on U.S. industries, which would then have an incentive to move overseas themselves, or to sell those allowances to overseas companies that could use them to become more competitive against U.S. companies. Like the 1,700 Brits at Redcar, American workers would be the big losers.
It is interesting how the dynamics of a protected market differ from those of an open market. State owned Steel Authority of India (SAIL), the country’s largest steel producer, is predicting rising steel prices in its domestic market from January 2010 largely on the basis that iron ore and coking coal costs have continued to rise. Ask a US steel producer if all they need is rising raw material costs to ensure their sales prices increase and they would laugh in your face. Steel prices here are based on what the market will bear, not because of any drop in raw material costs but simply because of market demand. But in India imported steel is in large part controlled through tariffs and as world prices have fallen, SAIL has asked the Finance Ministry to impose a 10% duty on Chinese and Ukrainian steel to allow them to maintain their profits in the domestic market. So far the ministry has resisted but they will probably give in, as they did earlier this year with duties on certain other Chinese steel products.
Driven by demand from China, prices for iron ore have gone up sharply over the past two months to $106 per ton from almost $81-$82 per ton just a few months ago. Coking coal prices have also gone up to $165-$170 per ton from $128 per ton. By playing hardball with the iron ore producers and not coming to an agreement, China’s negotiating position has steadily deteriorated as the spot price has risen. Meanwhile inventories of iron ore from all of China’s principal suppliers are reported to have increased in China’s major ports by 830,000 tons to a current 66.75 million tons, suggesting either Chinese importers were stocking up when prices were lower, or demand is slackening and the inventories are not being drawn down as quickly as they were.
Nevertheless SAIL is looking at these rising costs and saying steel mills must put up prices but the reality is even China’s sales prices are falling as excess capacity is struggling to find a home. Chinese and Ukrainian steel is being offered at $400 per ton into the Indian market when the domestic (and indeed world) price is more like $500-550 per ton. It’s hard to see how such levels from China and the Ukraine can truly reflect the cost of production plus transport and finance.
Whatever one may say of SAIL’s argument for higher domestic prices they are probably right in saying steel prices will rise next year. Analysts are predicting 10-20% increases, whether that proves right remains to be seen but recovery is gathering pace in North America and Europe will probably not be far behind. Mill capacity levels are creeping up although still a long way off the summer of 2008. As some western mills move to permanently close capacity that had been temporarily idled earlier this year, utilization rates will rise laying the ground for price rises in the event of supply chain re-stocking taking off. For the time being though SAIL will no doubt continue to push for import duties and Indian steel consuming industries will continue to struggle in export markets against competitors in lower cost locations.
Steel has had a very interesting year, ending nearly where it started but for steel producers, hope that an upward price trend will continue into 2010. And certainly, the price momentum for key raw material components used in steel-making indeed appear to suggest prices will increase. But demand has remained a persnickety little problem for producers as it has undergone more of a de-stocking/re-stocking run-up and run-down throughout the year as opposed to anything steady. Next year, according to some, based on demand for at least one key end market will look different. For one, the automotive sector, according to this post we ran last week suggesting an enormous pent-up demand. But that won’t help all producers, nor will it drive the entire market (most steel for automotive consumption is galvanized and produced by integrated mills with galvanizing lines).
Other stories came to the fore in 2009 involving steel and some with profound ramifications on end markets such as oil and gas. The OCTG and line pipe cases represent some of the largest domestic trade cases. Anti-dumping cases will likely continue in 2010 albeit at a slower pace.
Here are some of the key stories involving steel that may impact markets next year:
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.
We spend quite a bit of time talking about trends in two key steel making raw material sectors, iron ore and coking coal (we reported on both materials last week) but admittedly don’t track scrap markets as closely as we should, though we will endeavor to do so going forward because scrap markets provide as many price clues as some of these other raw material inputs. What trends should we watch in terms of scrap? As it turns out, quite a few, take for example the following:
80% of scrap supply comes from old household goods and cars which this year have not turned as quickly as in previous years due to the recession
According to the same article, Sims Metal Management, the world’s largest metals and electronics recycler sees a 79m ton decline in scrap consumption this year (of course this makes sense in relation to declining production volumes in 2009)
New mills coming on stream (with the exception of China mills) use electric arc furnace technology and hence require steel scrap. Since some of these countries have higher growth rates then the US, scrap demand has grown faster than in the US
A falling dollar makes US scrap exports more attractive in overseas markets. In particular, it has fallen against Australian and Brazilian currencies (those two countries account for a large percentage of iron ore) so the product substitution becomes attractive for steel producers thereby reducing scrap supply
Finally, when the markets went haywire during the summer of 2008, scrap became so “dear that much of the easy-to-get available scrap had been used leaving scrap inventories depressed.
Former Federal Reserve Chairman Alan Greenspan used to track No. 1 heavy melt steel scrap (he references that practice in his autobiography). He felt it served as a good proxy for manufacturing demand. When scrap prices increased, manufacturing demand followed. Whether or not that trend holds true today remains to be seen.
But according to MetalPrices.com, scrap steel prices, despite the ups and downs from one year ago, still trade within the same range as they did last year. But obviously any changes in availability could impact cost:
In addition to MetalMiner’s adaptation of an integrated steel production cost model, if you are interested in downloading the model, fill out the form here and you can download it for free:
We will endeavor to publish an electric arc furnace production cost model within the next two weeks. We use these models to help tell us the “should cost for various steel making operations.
It would seem the western world is not the only place where licensing and land acquisition hinder economic development. Contrary to what many supporters of trade barriers would have one believe, steel mills in some developing countries don’t all have land handed to them with licenses in place to build a steel or other kind of manufacturing plant. Quite the opposite in fact. Around 70 million tons of steel making capacity planned for production by 2012 in India is struggling to be realized as project after project is bogged down in planning issues and disputes with local land owners.
According to Bloomberg, India’s plans to raise steel production from the current approx 57m tons to 124m tons by 2012 are unlikely to be realized. In total, steelmakers aiming to set up 160m tons of capacity in the eastern states of Chhattisgarh, Jharkhand and Orissa have failed to win mining licenses from the state governments and acquire land from protesting farmers in recent years. These three states alone hold 70% of India’s coking coal and 55% of its iron ore according to this article.
South Korea’s Posco has announced plans to invest $12bn in a plant in Orissa. Arcelor is to invest $10bn in neighboring Jharkhand and Tata, India’s biggest domestic steel producer, plans to build two plants of $6bn each, one in Orissa and one in Chhattisgarh. Unfortunately the states where the iron ore and coal are situated are also the states with a history of opposition to development. The India business blog says 22 major steel projects in the country are being held up because of procedural delays in obtaining environmental impact assessment clearance and delays in land acquisition mainly due to public protests.
With gross domestic product growing at 6.1% in the first three quarters of this year and 7.9% in the last quarter, steel demand is rising fast. Steel Secretary Atul Chaturvedi is quoted as saying demand increased 7% in the first seven months but is expected to hit 10% by March of 2010. However, with current consumption running at about 57m tons it would be 2015 before consumption topped 100m tons never mind the 125m tons hoped for by the government. The reality consumption is unlikely to continue to grow at 10% but then neither are all these plants likely to be built, either way India will have a long way to go to match China’s approx 500m tons of capacity.
Besides perhaps the health care debate, no single policy issue has created as much controversy as the EPA’s recent Ëœendangerment’ declaration that greenhouse gas emissions cause people harm. And as my colleague Stuart posted last week, “whatever one may think of the whole concept of carbon trading and however flawed one believes existing trading systems are and believe me this site has frequently criticized both the fact remains that carbon trading is almost certainly here to stay and will have a major impact on business and our personal lives in the decade to come.
Stuart didn’t touch the hot potato of whether the science supports the argument behind the case for global warming (or if the best way to address it involves carbon cap and trade or just a plain old carbon tax or curbing emissions via the Clean Air Act or some other scientific means making its way around such as injecting sulfur dioxide into the stratosphere which by the way, a very prominent metals subject matter expert who has posted on MetalMiner subscribes to but for which we are not yet at liberty to discuss). We’ll steer clear of that one as well but the science behind global warming and the trail of hacked emails suggesting the science may not sit on as strong a foundation as some would like us to believe may very well turn out to be what will ultimately undermine the EPA’s ability to regulate greenhouse gases. In addition, the fact that the EPA made the ruling, whereas Congress failed to act, may place the entire issue squarely on President Obama and his administration. And therein lies the rub – Congress, instead of tackling this controversial issue, can punt it to the EPA and leave the implementation of the ruling to the lawyers (you can be sure there will be lawsuits) as well as the burden of proof to the EPA (the EPA has to prove greenhouse gases are harmful to human health). And that’s where those ugly leaked emails can get a little tricky for the EPA.
Prior to the EPA’s ruling last Monday, organizations like the American Iron and Steel Institute, “has made it known it wants to make sure energy-intensive imports such as steel bear the same climate-related costs as domestic products.”Â If the EPA sets policy, as opposed to Congress, the AISI concerns become very real. The EPA could only regulate domestic producers. A unilateral solution will have a devastating impact on US manufacturing. Consider the following:
A piece on manufacturer Quality Float Works a company that makes metal float balls used on flagpoles, weather vanes, plumbing and industrial devices raises concerns about how a middle market manufacturer will compete globally
Nucor has not made a decision on where to put a new plant (it is deciding between Louisiana and Brazil) pending the outcome of climate change legislation, Copenhagen etc.
Here is a list of a few of the trade associations who have come out against the EPA endangerment finding:
The American Forest and Paper Products Association
So here is my prediction: Congress will do nothing on carbon cap and trade because now it no longer needs to do anything. According to this Forbes article, “Around March, look for the EPA to finalize its ruling for the auto sector (editor’s note: to federally regulate automotive emissions). It will also put the finishing touches on its decision to tailor greenhouse gas regulation under the Clean Air Act. What happens then? Lawsuits.