Steel

ThyssenKrupp Back in Profit

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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

Output in Germany’s engineering sector fell by nearly a quarter last year, worse than the industry’s most pessimistic forecast, and is not expected to rebound in 2010, the VDMA (Verband Deutscher Maschinen- und Anlagenbau – German Engineering Federation) industry association is reported in Forexyard.com. Orders for machinery, traditionally a strong export product for Germany fell at the fastest rate since statistics were first compiled in 1958. The economy as a whole shrank by 5% with mining and steel production equipment the only areas showing growth in the second half.

The one bright spot is large diameter welded steel pipe for gas transmission. Germany’s Europipe won the first contract for the Nordstream gas pipeline last year and has just won the auction for the second pipeline to run alongside the first according to the FT. Europipe will share the first contract with OMK of Russia and will share the second with OMK and Sumitomo of Japan, split 65/25/10 respectively. The 1220 kms (730 miles) project is to carry natural gas under the Baltic and is expected to make a significant contribution to meeting Europe’s gas needs over the next 40-50 years.

When both pipelines are completed, Nordstream is expected to carry 55 billion cubic meters of gas annually at a construction cost of over US$10bn. The pipes are to be 45 in diameter and have a wall thickness of between 1.06 and 1.61 depending on the depth and degree of protection needed at various points on the route. Each pipeline will require around one million tons of grade X-70 steel pipe coated on the inside with an epoxy layer and the outside with an anticorrosive finish. Norstream, a joint venture between various German and Dutch energy groups and Gazprom of Russia said the second contract was placed at much lower prices than the first, reflecting lower steel costs in 2009, and was over subscribed three times. The first pipeline should be completed in 2011 and the second by 2012.

Producers have been positioning themselves for some time for another project called South Stream which is expected to start later in the decade. South Stream will require similar volumes of steel pipe, although the sub-sea section is slightly shorter at 540 miles. It will drop to depths of 2km’s (1.2 miles) under the Black Sea. In addition, further onshore pipelines will be needed to distribute the gas north through Bulgaria and south through Serbia and into Italy.

Gazprom has been pushing these projects hard because the Europeans are looking at a competitive pipeline called Nabucco that would by-pass Russia altogether taking gas from the central Asian states such as Turkmenistan and running overland through Turkey into Europe. It would be cheaper than the South Stream project by some $3bn. It won’t escape the casual observer that all of these routes avoid Ukraine. It has been Russia’s arguments with Ukraine over transit fees that have caused temporary gas shutdowns to the pipeline system over the last two years and brought it home to the Europeans that the current system is too concentrated both in terms of source and transit route for their long-term best interests. The Russians also want to increase their options other than going through Ukraine but are lobbying strongly against Nabucco. For the European’s $7.9bn for Nabucco sounds like a good investment – too many eggs in one basket is the adage that springs to mind.

–Stuart Burns

This is a follow-up post covering China’s steel industry

Compared to the rest of the world, China’s steel industry is dreadfully fragmented, the top four mills took just 23.9% of the market compared to 60% in the European Union and 80% in Japan, S Korea and the USA. China’s steel industry suffers from this fragmentation in many ways.   Here are just a few examples of the problems they have identified in a report by www.steelhome.cn/en:

  • A fragmented structure means mills tend to invest blindly in market segments without the opportunity to coordinate with other producers. Consequently the market suffers from over investment in some sectors and occasionally under investment in others. Investment can be wasteful and sub optimized
  • In addition when the market is in contraction or even when production exceeds consumption a small number of large mills are better able to react to over supply by cutting production and maintaining a market balance. US mills are doing this very capably at the moment and although none of them like operating at 60-70% capacity they know it is better to make a margin on ever reduced ton of steel than to make a loss on full production
  • The larger the mill group the easier it is to access funding and technology. Larger producers tend to be able to borrow more cheaply and to invest more often in the latest technology making them more competitive in the longer term
  • Although market collusion is against the law and there are strict rules against the formation of cartels, the reality is if a few large producers dominate a market it is easier for them to act in tandem even if they are not actually talking to each other. This reduces competitive pressures and allows a more orderly marketplace at least for the producers

So if all or even some of the above holds true why haven’t China’s steel producers formed into larger firms by mergers and acquisitions as they have done in OECD markets? Well broadly the reasons fall into two challenges the Chinese market faces. The first is the strength of regional or local governments that consider their state steel plants to be local champions. Local governments derive many benefits from their local producers and would not want to lose that income to a neighboring state. Apart from a six month period after the start of the financial crisis, Chinese mills have been making a lot of money. When enterprises are strongly profitable there is less incentive to sell out to a competitor, nor are enough of the shares of enough of the small to medium mills on stock exchanges where a hostile takeover is a viable options. Consequentially shareholders prefer to hold onto their assets and continue to take their profits a sharp downturn may change that thinking, an eventuality some think we will see in the early part of this decade.

–Stuart Burns

China has rapidly become the largest steel producing country in the world, but it would be a mistake to look on it as a single entity even though we commonly refer to China’s steel producers in that way here on MetalMiner. According to the World Steel Association’s report dated January 22, global steel production contracted last year by 8% to some 1,220 million metric tons of which China produced 567.6 million tons or some 47% of global production. As this graph shows the headline figures don’t show the growing disparity in where steel is made and that is production has contracted in most markets but increased in China during the recession, down 21.1% in the rest of the world but up 13.5% in China.

Source: World Steel Association www.worldsteel.org

Under the pressure of repeated policy statements, government encouragement and downright coercion the major steel mills in China have undergone some consolidation over recent years. Although the industry has continued to grow in size, the number of steel mills has dropped from 500 in 2005 to something over 400 today according to steelhome, a Chinese domestic steel market website.

According to the chinese steel specialists www.steelhome.cn/en State owned steel mills while producing 55% of the nation’s output have lowered production capacity in recent years as private producers have expanded in size from just 10% of the market in 2000 to some 45% today. But there has been little or no mergers among the majors. Most mills prefer to expand organically building new greenfield plants encouraged by cheap bank loans, low cost land and minimal environmental or planning restrictions. The top four Chinese mills and the top 10 Chinese mills make up a lower percentage of total production today than they did in 2000, see chart below.

Comparison of steel output proportion of top steel mills in China and the world (excl. China)
Steel mills Proportion in 2000 % Proportion in 2008 % Up/down %
Top four (CR4) steel mills in China/national level 30 23.9 -6.1
Top ten (CR4) steel mills in China/national level 50 41 -9
Top four (CR4) steel mills in the world (excl. China)/global level 14.2 24.6 -10.4
Top four (CR4) steel mills in China/national level 28.6 39.8 -11.2

Source:www.steelhome.cn/en

In a follow-up post a little later this morning we’ll look at some of the problems fragmentation causes China’s steel industry.

–Stuart Burns

AT Kearney recently published a report called “Mining + Steel How Will M&A Play Out? The report raises some interesting points and theories on what M&A activity might look like for the steel and mining industries and perhaps of greatest interest, why those activities will take place. We’ll limit our discussion to what we consider the most interesting points.

Those points center on the following concepts. The first, though at first blush appears obvious may not appear as common knowledge to many sourcing professionals large global diversified conglomerates have larger market caps than their single commodity peers, within the mining industry. The second concept that we found intriguing centers on AT Kearney’s “Merger Endgame Theory which suggests, “all industries will consolidate globally over a roughly 25 year horizon in four stages. The third concept that supports much of what we have reported on MetalMiner, centers around the correlation between iron ore and steel prices (which according to AT Kearney that correlation has increased since 1998). Finally, the report suggests four M&A scenarios involving mining companies and steel mills with the likeliest scenarios involving mining consolidation and steel consolidation (vs. steel firms buying mining firms or mining firms buying steel firms).

What can we take from the first point that market cap increases when mining companies have diverse vs. less diverse portfolios? AT Kearney makes the point that global mining firms remain highly fragmented so plenty of consolidation opportunity exists. We’d go one step further by stating that the high stakes game for “shoring up raw material supplies in all metal supply chains will also play a role in these global M&A deals and we’ve just started seeing this for some of the rare earth and critical metals supply chains (see our recent post on Posco’s investment in PAL, a lithium project).

We won’t comment on the Merger Endgame Theory except to say it’s interesting and we’d encourage readers to click through to the report just to look at the theory.

The third point, suggesting iron ore prices and steel prices more tightly correlate then they did previously should not come as a surprise to anyone. As the Big 3 iron ore producers now have 70% of the iron ore market, we’d expect that to be true. Based on our own regression models, however, several other factors also tightly correlate to steel prices besides iron ore. Finally the four M&A scenarios outlined in the paper examine several rationales for the various scenarios. These include increased consumption, resource scarcity, improved technology, globalization and increased regulation. The report predicts an increase in M&A activity, “if these industries grow significantly, companies will have cash to invest and will face pressure to deliver better results, which means M&A will be the most logical strategy, the only damper to that scenario rests on the overall health of the global economy. But a weak economy will also drive more M&A deals as cash-rich firms search for discounts. So no matter which way things go, we can expect a lot more M&A in the mining and steel industries.

Now what that will do for price stability or volatility, well that’s a subject of another post!

–Lisa Reisman

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President Obama said many things this past Wednesday evening during his first State of the Union Address. Admittedly, I had fallen asleep during part of it, though I perked up at the small business initiatives he mentioned. But I missed something rather big pertaining to the nuclear industry. Specifically, President Obama reiterated his commitment to growing this country’s nuclear energy capability by increasing loan guarantees. According to this article, the loan guarantees, included in the Federal Budget scheduled for release on February 1 will include $54b to stimulate the investment in several new reactors. Four companies appear on the short list for the guarantees according to the story. Unfortunately, increasing America’s nuclear base will take more than $54b worth of loan guarantees. We discussed some of the obstacles to increasing the number of nuclear power plants in the United States in this controversial post last May.

First, we have the opposition to the use of nuclear power based on a taxpayer argument. But that argument, put forward by Michele Boyd of the Washington-based Physicians for Social Responsibility in this way, “Why are US taxpayers expected to promise to bail out the nuclear industry, wreaks of hypocrisy. After all, the entire wind industry rests on government mandates paid for by taxpayers (mandates such as the State of Illinois require power companies to source 20% of its energy from renewables paid for by yours truly, I can assure you) And shall we assume that wind and solar energy initiatives do not receive any tax-payer assistance?   The argument seems silly.

The real issue involves what to do with nuclear waste. According to this recent blog post, President Obama under an executive order, established a 15-person commission that will, “conduct a comprehensive review of policies for managing the back end of the nuclear fuel cycle. And according to Earth2Tech, “That report is meant to include advice on how to store, process and dispose of nuclear fuel and waste from both nuclear and civilian use. The preliminary report could come in June 2011 with the final report by the end of 2011.

With a single reactor costing $9b according to the Nuclear Energy Institute quoted in the Bloomberg article, metals make up a substantial portion of the total. Consider these figures for one nuclear power plant according to a Boston Globe article from last September, “¦.66,000 tons of steel, 44 miles of piping, 300 miles of electric wiring and 130,000 electrical components. We know the metals industry remains gaga for wind energy and the metals demand it supports. Unlike wind, however, nuclear has proven itself a viable, long term, low-cost and most important “always-on energy source burdened with the twin issues of spent nuclear waste and high capital costs (but the cheapest of all energy sources on an on-going basis) but without the massive storage, transport and Ëœwhat-happens-when-the-wind-doesn’t-blow’ issues befuddling the wind portion of the energy industry. We extend our kudos to the President for having set up a commission to investigate nuclear waste options.

And before you environmentalists start telling me about NIMBY (Not-In-My-Backyard) politics, I would like to point out I live 60 miles from this nuclear power plant.

–Lisa Reisman

METAL-PRICE-FORECASTS_011810_02

US Gross Domestic Product figures released by the Commerce Department last week suggested an economy returning strongly to growth. Expanding at the fastest rate in six years the economy surged by 5.7% in the fourth quarter beating many analysts prediction of 4.6%. However a closer look at the figures suggests the results are not quite as bullish as they seem.

First, where did the growth come from? Encouragingly a significant boost came from businesses investing in equipment and software, after living with a capex freeze for the last 12 months it would seem business is beginning to invest again. After rising at an annualized rate of 13.3% in Q4, investment contributed 0.8% points to overall growth according to an article in the NY Times. Consumer spending also increased at an annualized rate of 2% and because consumer spending contributes the largest proportion of GDP that rise was enough to raise overall GDP by 1.4%. Exports continued to benefit from the weaker dollar and imports continued to be restricted such that the 18.1% increase in exports netted out to a 0.5% increase in GDP.

On the downside it will come as no surprise that commercial real estate was negative as investment in commercial property fell at a rate of 15.4%. In addition, government spending actually reduced GDP as a 0.3% decrease in state spending and a 3.5% reduction in defense spending dragged down an 8.1% increase in non defense federal spending.

The real 800lb gorilla though is the change in inventory. Firms reduced inventory by “just $33.5bn in the fourth quarter compared to $139bn in the third quarter. That simple slowing in inventory reduction contributed a massive 3.4% of the overall 5.7% rise in GDP.

Which raises some serious questions about the strength of the underlying recovery and the possibility that the first and second quarters of 2010 will continue to grow at anything like this level. Several metrics suggest what we are seeing is a gradual return of manufacturers to buying for current demand rather than either a sustained restocking program or more importantly a rise in end-user demand. What we have seen is the tipping point where metals consumers like steel producer Nucor has worked scrap and pig iron stocks down to near zero and is now coming out into the market to buy raw material again, but not because their customer demands have increased. Capacity is still running at just 60-65% and end-user demand remains weak and is not showing much if any upward trend. Unemployment although traditionally a trailing indicator coming out of recession is a key metric in terms of a return of consumer confidence. Only when consumers feel secure in their jobs will they begin spending again. The nation shed 85,000 jobs in December and increasingly jobs that are created are part time reducing spending power.

An article by Steven Mufson in the Washington Post quotes James Young, chief executive of Union Pacific railroad. A year ago UP was scouring the country for places to park idle freight cars, about 60,000 of them Mr Young said. Today they still have 44,000 of them idle and 1,700 locomotives; with freight car loadings nearly 20% off the peak of two years ago. Clearly 44,000 idle cars is better than 60,000 but it suggests we have a long way to go, demand is not showing any evidence of coming back yet.

Electricity consumption has been falling consistently for 15 straight months according to the US Energy Information Administration suggesting industry is not significantly more active now than in previous months or this time last year.

While any good news is, well good news, metal producers and processors should not get carried away by the latest GDP figures. The fact remains end-user demand is showing only the first tentative signs of improving and the GDP figures are more a reflection of inventories hitting rock bottom than they are a return to growth. If the end-user market were to come steaming back then the lack of material in the supply chain would cause prices to spike and lead-times to extend sharply but the reality is with unemployment stubbornly high and the consumer focused stimulus measures coming to an end that is unlikely to happen. The year ahead is looking a lot more positive than this time last year but it will be a slow and volatile recovery.

–Stuart Burns

For those of you who missed it, the Wall Street Journal ran a fascinating supply chain management piece yesterday entitled, “Bullwhip Hits Firms as Growth Snaps Back. The notion of bullwhip refers to the effect of trying to determine inventory levels based on a forecast. The article, which I highly recommend reading, discusses how Caterpillar has worked with its key suppliers (the article cites 500 suppliers representing 80% of manufactured parts) to prepare them for the sudden onslaught of new purchase orders initiated by the heavy duty equipment manufacturer. Jason Busch of SpendMatters covered the supply risk management angle yesterday.

In addition to the points Jason made, one point that we’d like to call out and of particular concern to metal buying organizations involves the substantial price risk that occurs when a supply chain(s) undergoes a bullwhip effect. As we at MetalMiner have started to complete our price predictions for key metals for 2010, (we will publish these reports starting the end of next week) we know that some of these price jumps in certain metals relate to re-stocking activities (e.g. once a company has burned through its inventory it has nothing to do but purchase materials, parts and assemblies for production) and not necessarily underlying demand. We believe this activity helps explain what has happened to steel prices in the last 30-45 days the mills have raised prices because companies have to replenish inventories and re-stock. And as the Wall Street Journal article discussed, the challenge for Caterpillar and its suppliers involves having the labor, raw material inventory and finances to purchase these materials to meet the demand of a company like Caterpillar once the purchase orders start to increase.

But let’s return to how this relates to metal pricing. Based on my recent discussions with various steel industry participants, I can’t help but get the feeling that folks have a very bullish outlook in terms of steel prices. And whereas small upticks in demand can and will have profound impacts on pricing, (and we ourselves believe steel prices will increase this year), I remain rather cautious about the overall state of industrial demand. These re-stocking cycles will only go so far. Eventually, real demand will need to take over. In the meantime, get ready to ride the pricing roller coaster. We think it will be an up and down ride in 2010!

–Lisa Reisman

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I always get a chuckle when I read the mainstream press accounts on any company’s earnings announcements. Take a look at a few that came out no sooner than five minutes after Nucor’s announcement yesterday, “Nucor 4th Quarter Profit Drops 44%, Less Than Feared, Revenue Drops Off 29% or this one, “Steelmaker Nucor 4Q Profit Falls 44%. My boss from Arthur Andersen once had a very prolific phrase when somebody stated the obvious, “yawn. We couldn’t agree more. All the steelmakers and most metal producers came in with numbers showing declining profits, revenues etc. So instead, we think buying organizations ought to use these earnings announcements as opportunities to gain clues about the steel markets in general. We took away a few sound bites and thought we’d share them with you here:

  • Long products took the hardest hit and sheet mill sales carried the profits for Nucor in Q4
  • Margins declined from $459/ton average in 2008 to $290/ton for Q4 but raw material prices have started to increase
  • We heard demand will remain a long hard slog (our words, not theirs) but demand has increased in pockets. For example: power transmission, bridges, wind energy, and automotive
  • Certain industries remain flat such as commercial and residential construction; real demand (which refers to actual demand not counting stocking/re-stocking) will continue to struggle; growth will remain “arduous
  • Service center inventories have a 2.3 month supply (considered lean); Nucor sees more expedited orders, a strong order book for galvanized and galvanneal products
  • Nucor wants to grow its export sales from 11% of total sales to 15%. (AK Steel generates 19% of its total sales from exports) Exports have become a strategic growth initiative for at least a couple of domestic producers
  • Despite average capacity levels in the 60% range, Nucor has still invested in new plants including one for bar products, iron making, a galvanized line and several others
  • Nucor plant utilization rates will range from 60-65% in Q1. Will margins increase? Nucor didn’t completely answer that question but they did indicate that shipments are up, selling prices have increased and scrap prices have increased; margins will likely get healthier too

MetalMiner will release its 2010 steel price predictions within the next week to ten days. Click on the link below to receive notification when the report will be made available.

–Lisa Reisman

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Trying to read the Rune’s on the future oil market must be a tough proposition for North American oil refiners. They not only have to predict the direction of oil prices and of likely demand but also second guess the pace and direction of environmental legislation impacting their industry. That may seem like a no-brainer. It will get tougher you would say, but at the same time that President Obama is making pro environmental noises ultimately ineffective, at the failed Copenhagen summit his administration had already approved a 1000 mile pipeline to carry up to 800,000 barrels a day of oil from Canada’s oil sands deposits to American refineries. The project, likely to cost some USD 2bn, has faced tough opposition from environmental groups keen to keep Athabasca oil sands crude out of the US.

Meanwhile the refineries are making massive investments to accommodate the heavy high bitumen and sulfur containing crude from the oil sands in the belief this will be a long term feature of the refining mix in North America in the future. At least two proposals for new refineries and about a dozen expansions to process tar sands have been made in 2009 according to an article in the Financial Times. The article says many refinery expansions are already underway including those by BP, ConocoPhillips, Valero and Marathon. Analysts are quoted as estimating pipeline companies and refiners plans to invest more than USD 31bn by 2015 to export, process and distribute oil sands products creating a huge opportunity for stainless and steel suppliers to the industry. You can understand the refiners’ enthusiasm. The tar sands reserves are estimated at 175bn barrels of oil and they could see oil companies making plans to pour money into oil sands production as the oil price rose in 2007/8. But some of the steam has gone out of that market as environmental pressures have mounted. Shell is raising its tar sands production with the $14bn expansion of its 60% owned Athabasca Oil Sands Project to a capacity of 255,000 barrels a day due to be completed next year but have shelved earlier plans to raise production to 700,000 barrels a day. It’s not just the oil price either. Operators are reducing project cost estimates as post recession costs feed through and a switch to more conventional technologies is adopted. Husky Energy and BP have reduced their cost estimates at their Sunrise project to USD 2.5bn from an earlier USD 3.8bn. The scaling back of project plans has more to do with concerns over the medium to long term viability of tar sands extraction that emits high levels of green house gasses. In an increasingly carbon centric investment environment, oil companies worry that they should not over invest in a resource where producing a barrel of synthetic crude from oil sands results in greenhouse gas emissions three to five times greater than a barrel of conventional crude.

So although the Canadian tar sands are known to contain the second largest probable reserves after Saudi Arabia, unless a wholly new and much less polluting way of extracting them is developed they are likely to remain very much a marginal source for US oil supplies. The refining capacity may be in place and a new pipeline can move the raw material from source to market but if producers are not willing to pour the billions into developing the extraction facilities the Athabasca oil sands reserves will remain a sideshow.

–Stuart Burns

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