Articles
Prospecting metals in 2005
More volatility, or stability and availability?
January 11, 2005
Turbulent 2004. For anyone in the metals industry, 2004 was a year for widened eyes, dropped jaws, and “The Year of the …” labels.
Fabricators looking to stand on solid ground after the lifting of the Section 201 tariffs felt it quaking and cracking instead, as prices erupted, lead-times expanded, and many types of metals were out of reach.
In September 2004 the $735-per-ton U.S. spot price of hot-rolled steel sheet was more than double its price in September 2003. Fabricators with contracts for hot-rolled at an average base price of $350 per ton began getting surcharge notices for the first time on carbon steel of up to $220 per ton, equivalent to a 63 percent increase. Relief finally came in the last quarter, but spot prices on U.S. hot-rolled sheet still hovered in the $610-per-ton range (see Figure 1).
One-year contract buyers have had to accept base prices for hot-rolled band $150 to $200 per ton higher in 2005 than in 2004, according to analyst Joe Innace, managing director, World Steel Dynamics. He forecasts U.S. spot prices will average $700 per tonne ($635 per short ton) for most of the first half (world export spot price at $600 per tonne), then will drop to approximately $460 per tonne the remainder of the year—to no lower than $330 per tonne.
In August 2004 the world export spot price of 304 stainless steel cold-rolled coil was 42 percent higher than its price one year before (see Figure 2). Although stainless supply is not in deficit, prices are expected to rise because of the spiked cost of its raw materials and increased demand for what CRU International called “the fastest-growing metal.”
Spot prices for aluminum on the London Metal Exchange (LME) hit an 81¼2-year high at $0.84 per lb.—that’s $1,845 per tonne—in April 2004, according to MEPS (International) Ltd. Aluminum prices probably will have averaged $0.84 per lb. (U.S. Midwest) and $0.77 per lb. (LME cash) in 2004, and are predicted to average 10 percent to 13 percent higher in 2005 (see Figure 3).
Copper prices rose 67 percent in the first half of 2004, when the copper market experienced a shortfall of more than half a million tonnes. Copper prices are expected to dip slightly in 2005 from 2004’s high levels of $1.40 per lb. (see Figure 4).
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Lead-times
Perhaps as roiling for fabricators as the mercural prices were the swelling lead-times that wreaked havoc on best-laid plans for just-in-time inventories, streamlined processes, and complete deliveries. Fabricators who had fine-tuned their work processes to the speed of light have had to wait for metal at the speed of glaciers. The July 15 issue of Purchasing reported 2.6-week average lead-times for hot- and cold-rolled sheet in June 2003. By April 2004 average lead-times had widened to seven weeks. Lead-times for aluminum sheet and plate, normally 30 to 60 days, were at six months or longer in the third quarter, and leads for stainless were six to 12 weeks; for copper, they were one-third longer (6.3 weeks).
What will lead-times be in 2005? The FABRICATOR®’s survey of 10 service centers yielded no answers. Not one service center queried would—or could—go on record predicting lead-times in 2005, perhaps a sign of the overall uncertainty that has plagued the metals industry for all of last year. Analyst Chris Plummer, managing director, Metal Strategies Inc., warned that 2005 will be “a year of transition,” and that six- to 12-week leads can be expected until service centers restock their record-low inventories.
Supply and Demand
Demand is likely to eclipse supply this year for most metals.
Carbon Steel. Global steel consumption in 2004 was about 950 million tonnes, according to the International Iron and Steel Institute (IISI). The institute estimates global steel consumption will grow to 993 million tonnes in 2005, a 4.5 percent increase. Global production is estimated to be as high as 1.05 billion tonnes in 2005 (see Figure 5). U.S. demand is expected to grow by 4 percent, to 132 million tons in 2005.
Steel supply and demand was the hot topic at the Metals Service Center Institute (MSCI) Economic Summit: Forecast 2005. MSCI forecast session moderator John Campo pointed out that 2004 was the first year since 1998 that North American shipments for both carbon and alloy plate will have exceeded 7 million tons. Global demand is forecast to increase by 5 percent, supported by the fact that half of the steel China consumes is for construction. U.S. demand for plate is forecast at 2 percent, having followed a 7 percent increase in 2004.
“Steel plants are increasing capacity to meet the increased demand,” said Jerry Nelson, International Steel Group vice president of sales and marketing, at the event. “Service center inventories will be restored in 2005. Panic buying will subside. Near term, supplies will be tight, but long term, supplies will get in line with demand.”
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Innace’s forecast confirms Nelson’s. “Shortage conditions for steel will continue through March or April, then a downturn will start in May or June. So the year will end up with a moderate price decline.”
Stainless Steel. Data from the International Stainless Steel Forum (ISSF) shows global production in 2004 was up by 6.8 percent and indicates a 6.2 percent increase in world production in 2005, to 25.8 million tonnes (see Figure 6). Charles Turack, vice president, Outokumpu Stainless Inc., an MSCI session presenter, estimated the U.S. demand for stainless was up by 14 percent in 2004 and projected 5 percent growth in 2005.
Aluminum. Global consumption of aluminum sheet and rolled plate was up 8.3 percent in 2004 and is forecast to grow by 5.7 percent in 2005 (see Figure 7). North American consumption grew 3.5 percent in 2004 and is forecast to grow 2.4 percent in 2005.
Aluminum supply may be scarcer in 2005 before it gets better in 2006 and 2007 when more mill capacity is realized. Global aluminum production is projected to grow by 3.5 percent, to 30.4 million tonnes, a 1.3-million-tonne shortfall of the 31.7 million tonnes projected demand.
Some blame the aluminum shortage on the loss of capacity in the U.S. In 1970 the U.S. had 34 smelters; in 2004 only 14 were operating. U.S. primary aluminum imports are projected to be around 32.6 million tonnes in 2004, up from 29.0 million tonnes in 2002.
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Copper. World refined copper usage in 2004 is estimated to have grown by about 6.1 percent, or 945,000 tonnes, to 16.51 million tonnes. Usage in 2005 is forecast to grow by an additional 4.3 percent, or 709,000 tonnes, to 17.22 million tonnes (see Figure 8).
Despite substantial increases of copper output in 2004, the deficit of refined production is expected to increase from 361,000 tonnes to 750,000 tonnes, as the growth in refined usage is outpacing the growth of refined production.
Still ...
Material prices and shortages are factors in their own pricing and supply cycles. They are both the cause and effect—themselves driving changes in the industry.
Higher prices have prompted metals producers to increase capacity. “The depletion of inventory ... and higher prices have brought out more production plans and a rapid buildup of inventory,” Plummer said.
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| Dramatic raw materials price increases are cited as the cause of metals price increases and surcharges. |
John Cross, vice president of marketing, American Institute of Steel Construction (AISC), expressed concern that the steep prices and price volatility snuffed out a significant number of structural steel projects in 2004 and may have the same effect in 2005. In turn, a lowered demand for structural steel may drive its price down.
Higher U.S. prices also have invited an increase in metal imports. The European Union currently is the U.S.’s largest steel importer, shipping 2.5 million tonnes to the U.S. in 2004, according to IISI. Midyear 2004, China reversed its status as a steel importer to an exporter, attracted to higher international prices. (See Below the Surface.)
Some fabricators have re-engineered their products to consolidate the material types they need to try to avoid shortages and long lead-times.
The Big Three automakers, as well as several other large OEMs, have assumed the materials procurement responsibility for some of their suppliers to achieve high-volume price advantages.
Some industry sectors are following trends in other sectors to incorporate more nonmetallic parts into their products. The aeronautics industry, for example, is using more nonmetallic and reduced-metallic composites.
Countries and producers are making moves toward self-reliance for raw materials. Many mills are inputting raw material substitutes such as direct reduced iron and HIsmelt. Perhaps they’ll seek energy alternatives also?
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| One of the factors driving up metals costs is the rising cost of energy. The price of natural gas, used in electric arc furnaces, more than doubled from 2002 to 2004. Integrated mills typically use fuel oil to make electricity for steam boilers and power generators. Thick, tarlike No. 6 heavy fuel oil is less expensive than the more refined No. 2, No. 4, and No. 5 fuel oils. The average cost of metallurgical coal, a necessity at a blast oxygen furnace operation, surged 58 percent from 2003 to 2004. |
In the meantime, metals consumers likely will have to look beyond 2005 for stability—probably toward the middle or end of 2006, when mill and mine production ramps up and service centers have restocked their inventories. This year, though, fabricators should brace themselves for another rocky ride ... and avoid stepping on the cracks.
Associate Editor Kate Bachman can be reached at kateb@thefabricator.com.
The FABRICATOR acknowledges the following sources used in preparing this article:
- Aluminum Association Inc., www.aluminum.org
- American Iron and Steel Institute, www.steel.org
- The Economist, www.economist.com
- Global Insight Inc., www.globalinsight.com
- International Iron and Steel Institute, www.worldsteel.org
- International Copper Study Group, www.icsg.org
- International Stainless Steel Forum, www.worldstainless.org
- International Steel Group Inc., www.intlsteel.com
- Ispat Inland Inc., www.ispat.com
- London Metal Exchange Ltd., www.lme.com
- MEPS, www.meps.co.uk
- Metal Strategies, www.metstrat.com
- Metals Service Center Institute, www.msci.org
- Nickel Institute, www.nickelinstitute.org
- Nucor, www.nucor.com
- Purchasing, www.purchasing.com
- Recycling Today, www.recyclingtoday.com
- Rio Tinto, www.riotinto.com
- U.S. International Trade Commission, www.usitc.gov
- World Steel Dynamics, www.worldsteeldynamics.com
- www.steelonthenet.com
- World Trade Organization, www.wto.org
Below the Surface
10 Dynamics Influencing Supply and Demand
Effervescing beneath this volatility is a molten layer of 10 influences, and an eruption along the fault lines threatens to pitch one continent against another.
1. Shift in Balance of Global Economic Power
“Should the era of U.S. economic hegemony be coming to an end and the centre of gravity of the global economy be shifting towards the commodity-hungry manufacturing countries of Asia, then this would indeed be a paradigm shift of huge importance ...” —David Humphreys, Rio Tinto’s chief economist, in the July 2004 issue of London Metal Exchange’s The Ringsider
Probably the most significant factor causing the tumultuous upset is the equilibrium imbalance that is occurring as economic power in the metals industry shifts from the U.S. to China. With 1.3 billion people, China has emerged as the new force tipping the global axis.
Balking? Say it isn’t so, Joe? Consider these statistics from the IISI:
• China will have consumed 263 million tonnes of steel by the end of 2004, making it the world’s largest steel consumer. By comparison, the U.S. consumed 127 million tonnes.
• China also is the world’s largest producer of crude steel. It made an estimated 170 million tonnes in the first eight months of 2004, a 21.1 percent increase over its 2003 numbers. China plans to increase capacity by 100 million tonnes—roughly equal to the U.S.’s total capacity.
• China is first in aluminum production. The U.S. was once first.
• Asia (Japan, Korea, and China) is now the largest stainless steel producer in the world.
• Now China is the largest copper consumer, consuming 35 percent more copper than the U.S. in 2003. Until 2002 the U.S. was the world’s largest copper consumer, according to The Economist.
• China is the world’s largest producer of coke. The U.S. is no longer a significant source of coke.
There are a few notable areas in which the U.S. still is the titleholder. It remains the world’s largest producer of scrap, although this may change as developing countries have more metal to harvest. The U.S. is still the largest consumer nation, and it consumes more steel per capita than any other country.
Japan’s steel demand is predicted to grow in 2005; South American countries’ appetites for metal are increasing; and populous India is expected to emerge as a seismic force in the future—but for now, it is China’s sneeze that has the potential to give the metals world a cold.
2. Raw Materials
“The world has finally woken up to the fact that there are not enough raw materials to go around.” —Oct. 11, 2004, issue of The Economist
Surcharges imposed on metals last year were a direct result of raw materials price increases and volatility, as consumers are expected to assume the risk for price fluctuations. Like most new fee inventions—think toll booths—now that surcharges are in place, they are not likely to go away.
At the Metals Service Center Institute forecast event, one service center owner asked a question of the steel mill representatives that has probably been on the minds of every steel fabricator: “What’s your definition of the functional differences between contract and spot prices—because as consumers, we don’t really see it?”
“Following this period of variability, the contract period has become blurred. This unusual situation requires a new approach. Flexibility and creativity are needed to deal with this,” replied Michael Rippey, executive vice president and CFO, Ispat Inland.
“A contract gets you a guaranteed base price, but more importantly, it gets you guaranteed steel,” said John Ferriola, executive vice president, Nucor.
“We don’t have a one-size-fits-all strategy for contracts, but ideally you’d like to have some recognition of raw material volatility and shortages,” ISG’s Nelson answered.
Carbon Steel. Scrap prices, which rose to record levels of $440 per tonne (auto bundles) in November 2004, will run around $240 per tonne (No. 1 heavy melt, U.S.) this year, dropping to about $150 in the fourth quarter, according to Innace (see Figure 9). Coke supplies are expected to continue to be tight this year. At $230 per tonne in November, coke prices nearly matched steel prices in the trough of 2001. After rising by almost 20 percent in 2004, iron ore is predicted to increase by 2.8 percent in 2005, to $38 per tonne.
Stainless Steel. The upwardly spiraling prices of nickel, chrome, and other stainless raw materials, including iron scrap, have brought stainless scrap out of reserve, said Simon Merrills, president of ELG Metals Inc., an MSCI conference presenter.
“The total reserve that we have is 280 million tonnes, enough to last for over 30 years at current usage rates. The only thing that is preventing it from coming out is the price.”
Merrills added that the scrap-melting ratio in the U.S. is more than 90 percent. In contrast, the scrap-melting ratio in China, which has a limited supply of domestic scrap, is 25 percent.
Grade 300 stainless steel contains at least 10 percent chromium, usually 18 percent; in austenitic stainless, 8 percent is nickel. Nickel still is in short supply. Two-thirds of the global supply of nickel goes into making stainless steel. Demand for nickel will go up 7.8 percent in 2005. Supply will increase, too, but nickel will be in deficit in 2005. Nickel prices are forecast to soften, but from one of the highest spikes in the decade. Costing $2 per lb. in the late ’90s, nickel peaked at $6.96 per lb. (LME) in April 2004.
Aluminum. Two tonnes of alumina are needed to produce one tonne of aluminum. Alumina supply reversed from a surplus in early 2000 to a shortage in 2004. The shortage is forecast to continue in 2005, which will keep aluminum prices high, but supplies are expected to align with demand by 2006.
3. Energy
"Today if you travel throughout China, the number of brownouts and blackouts is phenomenal. Basically, there are some towns where they have to decide if they’re going to produce steel or have lights that day."—John Ferriola, executive vice president, Nucor Corp.
Energy prices have become a prominent force in the cost of metals production. Power costs in 2004 rose for all types of energy used by mills—some as dramatically as 58 percent (see Figure 10). Indications are that energy costs will continue to rise in 2005.
As developing nations continue to industrialize and modernize, demand for energy is exploding, placing a greater strain on energy resources.
Mills are locating near power sources to reduce energy costs associated with production. For example, Alcoa is building a smelter in Trinidad to capitalize on the country’s large natural gas reserve.
High energy costs are blamed for driving aluminum production down in the U.S. Power shortages have stymied growth in China, and there is speculation that these shortages, as well as the underdeveloped infrastructure, will limit the country’s ability to produce and export.
“You have to remember that you need a hell of an infrastructure in place to produce steel,” Ferriola said. “Steel mills need a lot of power.”
4. Industries Driving Demand
“At the beginning of the fiscal year, we forecast our volume would go up at 9 percent. As of August, we forecast a 32 percent increase.”—James Elsey, John Deere & Co.’s global supply base manager, steel.
Carbon Sheet, Carbon and Alloy Plate. The construction and heavy equipment sectors’ double-digit demand in 2004 turned those segments topsy-turvy and drove the demand for carbon and alloy plate and carbon sheet to unexpectedly high levels.
Forecasts for 2005 of 5 percent to 7 percent growth in heavy equipment and 4 percent to 6 percent growth in construction may be conservative. However, low interest rates, which have been a catalyst for growth in the construction and housing segments, are rising and are predicted to continue to rise. Nonresidential construction is expected to show 6 percent to 8 percent growth, putting more demand on steel plate. The automotive segment is expected to grow by 2 percent in 2005, but high inventories from 2004’s -3.9 percent demand threaten that gain.
Stainless Steel. Stainless shows no cooling of its hot demand in appliances and new market sectors such as barbecue grills, although the appliance segment as a whole expects only a slight demand bump this year.
Currently stainless steel use in the automotive industry is limited to exhaust systems, but the ISSF predicts that use of stainless in cars could double over the next several years.
Aluminum. Residential construction is expected to coast after several years of high activity, slightly lowering the demand for aluminum for siding, doors, and windows. The existing trend for auto components to be fabricated from aluminum, as well as high-strength steel (HHS), to achieve environmental requirements for lower gas consumption is likely to drive more demand for those metals.
The aerospace industry, which took the brunt of the economic impact from the Sept. 11 tragedy, believes it hit bottom in 2003 and expects a moderate reawakening in 2005 and 2006. A 15 percent increase in the number of commercial jets is predicted in 2005 that may affect demand for aluminum and titanium superalloys, but nonmetallic composite materials will play a large role in those fabrications.
5. Currency Exchange Rates
“As a price indicator for The FABRICATOR’s readers to watch, the value of the dollar is a powerful force not to be overlooked. In the crazy economics of the steel business, the weaker the home currency, the better the outlook for steel mills, and the more worrisome for steel buyers.” —Joe Innace, managing director, World Steel Dynamics.
For fabricators, exchange rates are a double-edged sword: A weak dollar makes U.S.-fabricated products more cost-attractive outside the U.S., but it also makes domestic metals more expensive.
Innace advised following the dollar/euro exchange rate, which he said drives the world hot-rolled band export spot price. As of Nov. 30, 2004, the dollar was at its weakest point ever versus the euro—at about $1.33 per euro. Economists expect the dollar to strengthen in 2005.
6. Consolidation
Tough economic conditions in the 1980s and 1990s drove mills into bankruptcies, which have been followed by acquisitions. Today’s high prices may be the “hair of the dog,” driving more consolidation.
The effects of consolidation may be greater integration, which should improve availability, but also tighter pricing control, propping up prices.
7. Government Intervention
The Chinese government’s intervention continues, including currency pegging, tariffs, and, recently, a $100 export license fee on its coke. Recent tightening measures implemented by the Chinese government are intended to slow growth to keep demand from outpacing production.
The U.S. government-initiated 50 percent expensing allowance tax break—previously 30 percent—may have driven some of the U.S. demand for machinery and heavy equipment purchases. Spending by the Bush administration and Congress has transformed the former trillion-dollar budget surplus to a $422 billion budget deficit, which economists predict will lead to higher interest rates.
Subsidies in World Trade Organization (WTO) countries in the form of tax breaks, low interest loans, and other financial support have continued. The Organization for Economic Cooperation and Development (OECD) plans to reconvene this year to attempt to resolve these issues.
8. Geopolitical Forces
Increased spending by the military has increased the demand for carbon plate for retrofitting armored vehicles and for weaponry. The effects of the Sept. 11 attacks, which depressed the airlines industry and subsequent demand for aluminum, may have abated. Energy availability depends in part on several geopolitical factors, such as the outcomes of the Middle East wars and Russia’s stabilization.
9. Freight and Shipping Costs
Sharply rising costs have factored into production costs, and have given raw materials-producing countries a cost advantage.
10. Environmental Influences
Regulations and environmental concerns continue to drive the trend for lighter metals in the transportation segments.
Kate BachmanEditor, STAMPING Journal®,
FMA Communications Inc.
Kate Bachman covers all aspects of the metal stamping industry.
kateb@thefabricator.com
TAGS: 2005, forecast, kate bachman, steel
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