Steel

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

It may be illegal (and so is not even officially admitted) but it appears pretty obvious that the Chinese authorities are playing hard ball in their iron ore price negotiations with Rio Tinto and BHP Billiton. Vessels destined for the spot market require licences to discharge, not normally a problem in a country that imports some 40% of its iron ore requirements but only 35% of which are supplied at the long term contract price.

China concluded a contract price with Vale, the world’s largest producer from Brazil, of about USD 76/ton for this year but spot market prices are over USD 200/ton. Rio and BHP are holding out for higher contract prices in their annual round of negotiations on the grounds that it costs less for the Chinese to ship from Australia to China than it does for their Brazilian competitors shipments from Vale. Although the contracts are based on the FOB port of export, the Australians are trying to take advantage of the lower freight rate they know their clients pay when they buy Australian ore. Both Brazilian and Australian quality is much better than lower grade Chinese domestic or imported Indian iron ores, both of which trade for over $200/ton on the spot market in China. Read more

A friend and colleague of mine recently made a very interesting observation about global trading.

She said to me, “Lisa, if you think of importing as a privilege, it will be a lot easier to deal with the nonsense that our government subjects companies to.” My friend’s comment seems very poignant particularly after reading this article from Purchasing Magazine. The article talks about how U.S. Trade Representative Susan Schwab made some recent comments at the World Economic Forum claiming China was violating WTO rules because “Beijing, the world’s largest producer of many industrial commodities, is driving up costs for companies outside China by limiting its export of such key steel ingredients coke, tin, zinc and rare earths; such semiconductor materials as antimony and silicon; tungsten for mining and construction; and fluorspar, magnesium carbonate and talc.”

When China implemented a number of export reforms (as a response to US political pressure because of the trade imbalance) as we reported back in early January, Chinese exports slowed and according to Schwab, created an oversupply situation in China allowing other Chinese producers (such as ceramics and fiber optic producers) to buy these input materials cheaply. These export reforms were designed to steer Chinese companies away from low value-add manufacturing into higher value-add manufacturing. Good for the Chinese, right?

Well, now for the flip side. As many of you saw, and we have reported last week, there are a number of anti-dumping cases going on now (involving metals) in which the Chinese, among others, have been accused of selling “below fair market.” Voila! — one of these products, mattress innersprings, a value-add product, made of steel of all things, was targeted by a few US innerspring producers. The result is that Chinese mattress innerspring manufacturers are no longer exporting to the US and US mattress manufacturers are forced to buy from the “higher-priced” domestic suppliers. Remind me again how that helps the US economy?

So let’s see if I have this straight. Our government does not want China to limit certain exports used to make steel because that would mean US steel producers would have to pay more for key input materials, putting them at a disadvantage to other global steel producers. But US steel producers, in turn, sell steel wire to the mattress innerspring manufacturers, who can no longer be cost-competitive because Chinese-priced springs are coming in “under market value.” Hence the anti-dumping case. When I look through the list of anti-dumping investigations under review, I see a very mixed list of raw materials and value-add products. What message are we trying to make to the WTO? “We’ll decide which products are in violation of WTO rules”? “We’ll decide which industries in the US require the lower priced input materials”? In the meantime, if you feel you can’t sell competitively in the US, go ahead and file an anti-dumping petition. It’s a very mixed if not downright disconcerting message.

This comment from Spend Matters sums it up nicely: “I’m going to bet that if there is an anti-dumping duty on springs, there won’t be one on mattresses containing those springs. I remember once there was a 200% anti-dumping duty on laptop displays but not on laptops containing those displays. Guess what happened to the US laptop building industry?”

It’s quite a political game, these gyrations between WTO violations and anti-dumping petitions. Actually, it makes me wonder if “Big Steel” has got this administration by the short and — oh, I won’t go there…

–Lisa Reisman

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