Steel

The loss of 1,700 jobs is always a tragedy although in the steel industry unfortunately not an unusual story. Nor did Tata’s Corus come in for a huge amount of blame when they announced this week that they were closing the three million ton per year merchant bar plant at Teesside in the UK after four long term clients failed to honor their commitments to take product from the plant earlier in the year. Corus tried manfully to keep the plant going, losing some $130m over the intervening 7 months since the original announcement was made regarding the contracts, according to Bloomberg.

But there is another story doing the rounds following an article in the Times that detailed the windfall $1bn benefit ArcelorMittal are said to have secured from the European Union after intense lobbying by them and their trade body Eurofer. Arcelor have been granted the rights to 20.8 million surplus carbon emission allowances given to it free by the EU. With the carbon price at over $21, they are worth about $440 million. But, with additional surplus allowances up to 2012 and an increased carbon price expected to rise to over $45 – the company could have gained assets worth around $1.6 billion.

The next largest beneficiary of this largesse is none other than Corus, with ThyssenKrupp coming in third. The story suggests Corus stands to gain at the current carbon prices $165m and, with an increased carbon price and its additional allowances, the asset value of its cap and trade holdings could amount to over $600m. But that may not be the end of it. Closure of the plant will deliver further “savings” of over 6m tons of carbon dioxide, worth an additional $130 million per annum at current rates but around $330 million at expected market levels.

Meanwhile, producers like Arcelor and Corus are keen to build new production facilities in developing countries like India. New facilities are not only lower cost but under the UN’s Clean Development Mechanism the producer is paid up to $50 a ton for each ton of carbon dioxide “saved” by building a new plant, while the company which owns them also gets paid $50 for each ton of carbon dioxide not produced in its European plant, for which read Redcar.

I am sure this was not the intention of the European Union when it first dreamed up the Cap and Trade scheme, but like most politically driven initiatives, once the politicians have nailed their colors to the mast they stubbornly refuse to change course or admit they could be wrong. One can’t blame Corus. If the above scenario is correct they are merely responding to the business environment the politicos in Brussels have created.

–Stuart Burns

As many a consultant might say, the best way to rid oneself of high material cost is to not design it in, in the first place! Though MetalMiner frequently looks at the range of metals categories from a strategic sourcing perspective, it would behoove us not to discuss various metal product innovations particularly when they have (or claim to have) the ability to reduce costs. Last week, Carpenter Technology announced a new material, PremoMetâ„¢ Alloy that claims could serve as an alternative material to cobalt-containing steel alloys.

Judging by cobalt prices for the past year, identifying lower cost alternatives might make good business sense:

Courtesy of MetalPrices.com

The target applications for these materials include power train components in heavy-duty diesel engines (including on-highway over the road trucks), off-road (construction type vehicles) and large marine engines. The new EPA determination that greenhouse gas emissions causes people harm probably helps some of the buying communities as weight reduction and engine efficiency improvements help reduce such emissions. According to Mike Wilkes, Market Manager, Automotive at Carpenter, “Manufacturers will therefore need to specify higher strength metals for their light-weighting projects in order to achieve lighter weight. The lighter components will need to maintain performance requirements. Mike suggested life-cycle costs can be reduced by purchasing less material per part. In addition, the substitute material should allow for longer engine life and lower fuel consumption.

All of those arguments sound good on paper. But how do purchasing organizations reconcile the fact that specifying proprietary alloys and products can result in higher prices over the longer term? Simple, according to Carpenter enter into a long term supply agreements to allay concerns.

If you are a metal producer and have a new product on the market, drop us a line. We’d like to hear about it at lreisman(at)aptiumglobal (dot) com.

–Lisa Reisman

As my colleague Stuart reported earlier this morning, price increases for coking coal appear certain. Analysts believe iron ore prices will also increase in 2010 anywhere from 15-20%. Contract prices for iron ore during 2009 averaged $65/ton according to the Wall Street Journal and our own market research. Those prices could jump to $70-75/ton sometime in April, during the annul contract negotiation period. Though BHP would also like to sell iron ore on the spot market (they also wish to do so for coking coal), iron ore negotiations center around annual contract settlements with the other two key iron ore producers, Vale and Rio Tinto. The first contract that settles tends to form the “baseline for other countries and additional negotiations.

This past weekend included two key iron ore developments. First Chinese producer Baosteel will replace CISA (China Iron and Steel Association) as lead negotiator for iron ore contracts, according to Bloomberg quoting a website, QQ. As you may recall, CISA botched negotiations last year as many Chinese steel producers made end-runs around CISA to secure pricing for 2009. Several employees of Rio Tinto wound up in jail for allegedly leaking state secrets. That case remains unresolved.

BHP and Rio signed a definitive agreement to supply iron ore to steel producers around the world by combining Western Australian iron ore operations. The iron ore producers argue the joint-venture would allow each company to reduce operational costs. But steel producers will likely argue to European regulators that the proposed joint-venture will limit competition, even potentially creating a cartel (as if that isn’t what they face now).

MetalMiner developed an integrated steel production cost model adopted from Steelonthenet.com to help steel buyers better track raw material production costs. Readers can play around with the model plugging in both spot and contract pricing for coking coal and iron ore. We update these models quarterly so we can see price trends. Note: These models can’t predict actual demand but they can enable better planning and steel price forecasting.

If you are interested in downloading our latest integrated steel production cost model, fill out the form here and you can download the model for free


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All of this means steel producers will end up increasing the price of steel despite the fact that China has a glut of material and new production continues to come on-stream. MetalMiner will address that second point in a follow-up post.

In the meantime, mills continue to announce price increases for steel. AK Steel just announced surcharges for electrical and stainless steel and Severstal increased sheet prices. Finally, scrap may become a big issue in 2010, this time in the form of shortages, placing additional price pressure on mills. MetalMiner will publish its complete 2010 steel price forecast in early January.

–Lisa Reisman

BHP, the world’s largest supplier of coking coal used in steel making is pushing for annual contract pricing to be based on spot prices rather than the traditional annual fixed price contracts. If successful, costs for steel makers are likely to rise as spot prices are predicted to be higher in 2010/11 than now.

BHP is successfully moving iron ore pricing to the spot market and although it took some five years has also migrated thermal coal, used in power stations, onto spot pricing so the tide of history is running against steel producers clinging to the annual fixed price mechanism.

According to an FT article, coking coal spot prices have rallied in the past six months as China becomes a large importer owing to strong local demand and domestic mine closures. Traders said that prices had surged to about $175 per metric ton, the highest so far this year and more than 30% above the level at which annual contracts were settled for 2009-10. Moving to contracts linked to spot prices would enable BHP to obtain higher prices for its coking coal the firm believes as prices could reach $200 per metric ton in the first quarter of 2010. Prices reached a record of $300 per metric ton in 2008.

Demand from China has remained strong despite the industry reportedly running at only 72% capacity utilization and the Ministry of Industry and Information Technology’s announcement last August of a ban on all new capacity projects for the next three years. Since then, 32 new expansion projects have been announced at 27 different steel mills. Clearly economic priorities take precedence over government directives. In fact the scale of excess capacity in China is positively scary, at the end of 2008, China’s steel capacity was 660m tons against demand of 470m tons. This difference is much the same as the European Union’s total output. Yet, there are currently 58m tons of new capacity under construction in China further exacerbating the problem.

With demand running at these levels BHP is playing with a strong hand even if other Asian buyers are still struggling. Nevertheless it could be a year or two before the producer manages to move the whole market over to spot but as it does, providers of OTC coking coal contracts are likely to be the other major beneficiary to BHP.

–Stuart Burns

Gold has certainly had a roller coaster ride this last 12 months, up to a peak of $1030/ounce before falling back some $200. You’ve heard the popular saying: “When the dollar falls, gold rises.” In reality, the relationship between the euro, the dollar, and gold has been 94% accurate, according to a   Reuters report in Mineweb.

In that case,  what could the current fall in gold tell us about the direction of the euro and the dollar? If the dollar were to make a significant gain against the euro this year, from its current 1.55 towards 1.45 last seen in 2007, we could see a flood of cheaper imports, particularly steel, come into the market. The dollar won’t change the fundamentals of the world steel industry, but a combination of a stronger dollar and more imports could curtail price rises later this year if the assumed relationship between gold, the euro, and the dollar holds true.

–Stuart Burns

Contrary to expectations earlier this year that the weak dollar would boost exports and shield domestic producers from imports, it looks like US imports are set to rise again, according to the Steel Business Briefing. Sighting import license applications SBB says US applications for April came in at 2.64m metric tons, 16% higher than the March preliminary import count of 2.28m tons, which in turn was higher than February. Interestingly, this is despite a continued decline in steel imports from China, suggesting the export taxes imposed in January by the Chinese authorities are having the  desired effect. For April, China will likely fall to fifth place among the largest steel exporters to the US at 168,000 tons. That lags behind Canada at 646,000 tons, Mexico at 239,000 tons, Japan at 193,000 tons, and Korea at 172,000 tons  — based on the license applications.

So if imports are rising, does this mean increased competition for domestic producers and lower prices for consumers in the months ahead? Not yet, as strong global demand, still rising raw material costs and capacity issues mean prices will be high for the second and third quarter at least. Read more

There was a time when if the price of a metal doubled in a year it would be the stuff of headlines. Not only trade journals, but newspapers and even TV channels would post features on the dramatic price rise and the ensuing calamity that was likely to follow ” whether it be a crash in the price or consumers being forced out of business. Nowadays we appear hardened to trebling or even quadrupling of prices in a single year such is the bull market that has prevailed this decade. So as the price of manganese has doubled  in the  last 12 months maybe we can be forgiven for not having taken too much notice. Read more

Shipping Lines use the same principles of supply and demand to judge freight rates as does any other business. Typically a
route in one direction is more popular than the reverse. For example containers travelling from China or Europe to the USA, bringing in finished goods, commanded a higher rate than the same containers being sent back to those overseas markets.

Shipping lines are keen just to re-position the container back to where the demand is greatest ready for the next load and
would happily take low value cargo (at low rates) like metal scrap just to cover the cost of returning the container. The US
demand for imports over the last 10 years has made this a steady one way bet, until about 12 months ago according to the the Wall Street Journal. Read more

It was meant to come to market in 2006, then in 2007 and with much anticipation in Q1 2008. I speak of course of the NYMEX HR steel futures contract. But the start date has been put back yet again. Meanwhile the LME steel billet contract has got off to a quiet but solid start in London back in February. It will  go live later this month. Further shapes and grades are being added as the contract gains popularity but meanwhile North American buyers will have to wait a while longer for the proposed start date of their HR coil contract. Read more

Nothing seems to rattle the tail of a manufacturing organization quite like being asked to participate in a reverse auction. But it is our contention that reverse auctions within the manufacturing sector are way down according to a comment in this article which appeared over on Spend Matters a little while ago. There are several comments in the post worth reading. But I think in context of metals raw materials, semi-finished materials and possibly further worked products containing metals, auctions are down and possibly out but not necessarily for the reasons you might suspect. Read more

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