Commodity Blog

Commodity Prices – Steel

Analysts predict that soybeans imports in China may remain high in March as ”lower costs boost crushing margins”. The margin rose to $46 per metric ton by January 13th. Imports of soybeans in China are expected to reach 4.2 million tons in January causing concern about oversupply.

Some analysts forecast shortages for crude oil as supply is unable to catch up rebounding demand. Worldwide oil consumption will return to pre-crisis level at the third quarter of 2010, while projects for new oil sources are “still lagging as a result of the credit crunch”. Crude oil futures reached $78 per barrel level today in New York.

Demand for steel may drop with lending cuts in China, the biggest consumer in the world. Steel production in China increased 13 percent to 565 million tons in 2009 as demand from builders, home-appliance manufacturers and automakers was boosted by China’s $586 billion stimulus spending. China’s steel output may rise 5 to 10 percent exceeding 600 million metric tons in 2010.

Steel prices in the U.S. rose for the first time this year today. The decline of steel consumption reached a bottom for the current business cycle and should begin to restore gradually as distributors began restocking their severely depleted inventories. U.S. steel rose $1.12 (3 percent) to $38.61 yesterday in NYSE.

Dollar’s slide causes wheat gain today. Wheat prices increase as speculation that dollar decline will continue leads to expectations for increase in the U.S. grain export. But there is anxiety that if dollar would rebound exports can fall back. September futures for wheat gained $0.0525 (1 percent) to $5.215 per bushel by 10:41 on CBoT.

Rio Tinto Group, the world’s second- largest iron ore exporter, agreed to a 33 percent cut in contract prices with Japan’s Nippon Steel Corp., the first decline in seven years as the global recession slashes demand.

Nippon Steel, the world’s second-largest steelmaker, agreed to pay Rio 97 cents a dry metric ton unit for its benchmark product in the year started April 1, London-based Rio said today in a statement. That’s about $61 a ton and compares with last year’s record of 144.66 cents for Rio’s Pilbara Blend fines.

The accord, the first major settlement this year, may be resisted by Chinese mills, the biggest producers, who’ve called for price cuts of as much as 50 percent. The worst recession since World War II has slashed demand for autos and building materials, cutting profits for steelmakers and ore producers.

“What looks like a pretty good deal might end up being a bit tougher when they come across the Chinese,” said Mark Pervan, a senior commodity strategist at Australia & New Zealand Banking Group Ltd. in Melbourne. “Historically you could say this is a done deal, when Rio strikes with Nippon, well everyone follows, but I get a feeling maybe the Chinese have got something else in store.”

Global miner Rio Tinto expects 2009 to be a rough year in terms of both prices and volumes for key commodities, the firm’s chief economist said on Wednesday.
Vivek Tulpule, speaking to Reuters on the sidelines of a conference, said a pick-up was possible in 2010, though people should not be blind to the risk of a prolonged slowdown.
Rio Tinto’s major commodities are iron ore, aluminium and copper.
“2009 will be a very rough year for both prices and volumes and probably also for construction. A lot of people I talk to in the mining industry are suffering a crisis of confidence, they are putting a lot of projects on hold,” Mr Tulpule said.
“Our view is that it will be a slow year or two.”
Copper, zinc, nickel and other industrial staples have lost 50 per cent or more in value since last year’s collapse in commodities markets.
For iron ore, analysts predict benchmark prices could contract by as much as 60 per cent this year due to sharp drops in orders from steel mills.
Mr Tulpule said benefits flowing from China’s giant economic stimulus package, largely directed at infrastructure, were likely to show up midway through the year.
“It will take to time to offset the negative impact of a downturn in exports and construction, those areas have slowed very fast,” Mr Tulpule said.
He said the collapse in commodities flowed from two “crunches”: the global credit crunch and a crunch in China that had been induced by its attempts to slow the economy last year because of concerns it was overheating.
“The effect that had was way beyond their own expectations and certainly beyond the expectations of anyone else,” Mr Tupule said.
“That deceleration had a profound effect on our markets as when growth decelerates inventories build up, and when you’ve got lots of inventory you suddenly decide not to build things and then you don’t need to buy half as much copper and aluminium and iron ore.”

Steel companies must consider shelving all growth capex plans as soon as possible if the global steel industry is to have a sustainable future, Credit Suisse warned in a report Wednesday.
Warning of the dangers of oversupply in coming years, the bank added that failure to achieve this would ultimately lead to further forced plant closures, likely rounds of protectionism and subnormal returns for potentially the next decade at least.
Explaining the new dynamic driving steel markets in the wake of a 450 million mt drop in global steel demand, the bank said we have returned to supply-led cycles, like the 1980s and 1990s, where regardless of a potential 3–5% global demand growth trend once the cycle has normalized, the level of excess capacity means that supply fluctuations will drive the cycle for steel again, and not demand.
If the steel industry proceeds as it had planned with plant capacity additions, there is a real risk of far greater excess capacity than in the 1980s and 1990s and consequently utilization rates that are structurally too low to sustain the industry in its current form, CS warned.
To illustrate the magnitude of the likely oversupply problem, CS produced forecasts of new capacities, predicting 90 million mt of capacity would be added in 2009, 95 million mt in 2010, 89 million mt in 2011 and 76 million mt in 2012. In every year, China accounts for 40–60% of additional capacity, with India in second place.

Steel demand in China, the world’s largest user of the metal, may improve later this year as extra state spending kicks in, with more than 60 percent of mills losing money at present, the China Iron & Steel Association said.
“We are pinning our hopes on the government’s stimulus measures to revive domestic demand,” Vice Chairman Luo Bingsheng told reporters today in Beijing. “Hopefully the situation can improve in the second or third quarter.”
China is spending 4 trillion yuan ($585 billion) to stimulate the world’s third-largest economy and stave off the impact of the global recession, which has slashed exports. China’s cabinet on Jan. 14 approved guidelines to bolster the steel industry, including accelerated mergers and acquisitions.
“We haven’t seen obvious signs of demand recovering in the first quarter,” said Luo. The stimulus package will boost government spending on housing and transportation projects, such as upgrading railway links.
Still, Baoshan Iron & Steel Co., China’s second-biggest stainless steel producer, has said that the outlook has improved. Baoshan said on Feb. 16 that it was boosting stainless output as demand from some customers “is picking up.” The Shanghai-based company last month raised steel prices for March delivery.
‘Thin Profit’
“Only some privately owned steel mills may have begun to make thin profit due to lower production costs compared with state-run steelmakers,” said Qi Xiangdong, the association’s deputy secretary-general.
China’s steelmakers had an aggregate loss of 29.1 billion yuan in December after losing 12.8 billion yuan in November and 5.84 billion yuan in October, the China Business News said Feb. 20, citing Shan Shanghua, the association’s secretary-general.
Amid waning demand from builders and automakers, China had 660 million tons of steel-making capacity last year, about 160 million more than production of 500.5 million tons, the association said today. Crude steel output this year may be between 490 million and 500 million tons, Luo said.
The government may further adjust tax rebates on some steel products and remove so-called tolling, the association’s Qi said. Tolling refers to the tax-free import of goods that are processed for export.
China’s steel association represents the nation’s largest mills. The comments from Luo and Qi were made at a regular media briefing in Beijing.

Zinc and lead consumption in Europe and Japan fell to their lowest levels last year since at least 2005, according to the latest figures from the International Lead & Zinc Study Group (ILZSG). Consumption of refined zinc in Europe fell 232,000 tonnes — or 8.1% -to 2.62 million tonnes in 2008 from the previous year as the economic slowdown hit galvanizers and others that use zinc, the ILZSG’s figures show. Lead usage in Europe dropped 126,000 tonnes to 1.81 million tonnes, down 6.5% year-on-year, it said, as demand from the battery sector fell. Japanese users cut zinc consumption by 18,000 tonnes or 3.1% to 570,000 tonnes, while lead consumption in the country fell 11,000 tonnes or 3.9% to 268,000 tonnes.
Global lead usage rose 6.4% year-on-year to 8.71 million tonnes, powered by China, where it grew by 24.8% to 3.21 million tonnes. Refined lead production in China jumped 15% to 3.21 million tonnes last year. The country’s exports fell 209,000 tonnes in 2007 to 35,000 tonnes.
Net imports of lead in concentrate rose for the sixth consecutive year to a record 795,000 tonnes, the ILZSG said. Demand for lead recovered partially in the USA, climbing 4% year-on-year to 1.57 million tonnes. This was still below the level of 2006, though, when the USA consumed 1.62 million tonnes, the trade body said. But worldwide production grew to 8.73 million tonnes, creating a surplus of 19,000 tonnes, the ILZSG said. “This is the first time world production has exceeded usage since 2002,” the ILZSG said.
World refined zinc production rose 2.9% to 11.68 million tonnes, exceeding demand by 195,000 tonnes. “After peaking in June, monthly refined zinc metal output fell off during November and December as a consequence of a number of closures and cutbacks,” the trade body said. Canadian producers cut 41,000 tonnes of zinc output, or 5.1%, to 761,000 tonnes last year, it said. Producers in Europe slashed output by 1.7% to 2.47 million tonnes as refiners in China increased production by 170,000 tonnes, or 4.5%, to 3.91 million tonnes. The country’s imports of zinc metal exceeded exports by 111,000 tonnes in 2008. This is a reversal of 2007, when China’s exports were 127,000 tonnes higher than imports, the ILZSG said.

The US House of Representatives passed the $789-billion stimulus bill by a 246 to 183 vote on Friday, and the American Iron and Steel Institute praised Congress and President Obama. In a Friday statement, the Washington-based AISI pointed to key spending items included in the bill “and of note to the industry are spending on transportation and infrastructure–including industry-supported Buy America language.”
“We thank President Obama for his efforts, and Congress on their expedient action to pass this stimulus package, which will help to put Americans back to work and get America’s economy back on track,” said Thomas J. Gibson, president and CEO, AISI.
The steel trade group said included in the transportation and infrastructure spending in the bill are: $27.5 billion for highways and bridges; $8.4 billion for public transportation; $1.3 billion for aviation; $9.3 billion for high-speed rail and other rail investment; and $22 billion in school construction bonds.
The AISI also emphasized that funding for energy programs in the bill totals $37.5 billion and includes upgrading the energy grid, research into clean coal technology and $6 billion in loan guarantees for renewable energy projects. It includes a three-year extension of the production tax credit for wind energy.
In addition, AISI said the bill expands and extends Trade Adjustment Assistance benefits and includes language barring the Bureau of Customs and Border Protection from demanding repayment of duties collected under the Continued Dumping and Subsidy Offset Act on NAFTA goods between 2001–2005.

Last week’s furore over the controversial ‘Buy America’ clause included in the American Recovery and Reinvestment Act of 2009 — passed by the US House of Representatives on January 28 — ended the week with the White House promising to review the protectionist proposal.
This latest move, which came after outcry from industry bodies and governments across the globe, is likely to be unpopular among US steelmakers, many of which came out in support of the proposal during the week.
“We need to put Americans back to work,” Nucor ceo Dan DiMicco said at a Congressional Steel Caucus hearing last week.
“The best way to do that is with a strong stimulus package that focuses on rebuilding our nation’s infrastructure, including our roads, our bridges, our schools and our buildings, as well as our energy infrastructure, both conventional and alternative.”
“The ’Buy America’ laws are consistent, I repeat consistent, with our international obligations,” he added.
“They have not and will not start a trade war.”
Chairman of the Congressional Steel Caucus Representative Peter Visclosky, a champion of stronger provisions, agreed.
Bottom line
“The bottom line is that requiring American steel to be used in economic stimulus projects is a surefire way to quickly create American jobs, and the American taxpayers deserve to know that their hard-earned tax dollars are being used to revitalise the American economy and help Americans who want to work,” he said.
But others elsewhere were not so sure, and a number of foreign government bodies, including the European Commission, welcomed President Obama’s new tack on the proposed trade legislation, particularly when the US premier took a softer tone in an interview with Fox News.
“I’m encouraged by the words of President Obama,” European trade commissioner Baroness Ashton told MB. “He realises, like we do in Europe, that we need to trade our way out of the current economic difficulties. Trade is part of the solution as it acts as a stimulus.”
But the ’Buy America’ clause has ruffled feathers in more than one nation outside Europe, and Obama and his administration will have to tread carefully if they wish not to trigger further ire in these quarters.
“It’s trade protectionism, which is against the common practice of the World Trade Organisation, but then, so far, it has been more propaganda than reality, so it is still too early to make any formal protest,” said an official at China Iron & Steel Assn (Cisa).
“In a global economy, the market should be the decision- maker, not the government. Even China, a 500 million tpy steelmaker, has to import some products every year, how can the US be different?,” he continued. “The US triggered the financial crisis and global economic recession, which has hit Europe harder. All countries are making an effort to help each other out, and [if the US passes 'Buy America' provisions] it will turn all the other countries against the US,” he said.
And Serdar Kocturk, president of the Turkish Steel Exporters’ Assn, was similarly unimpressed.
“The law favours American producers in government tenders. In this act there are some countries called ‘designated countries’ which are treated like local suppliers. If there is a public interest, if the product is not available and if the cost is unreasonable, some products may be excluded with prior approval,” he told MB.
Trade barriers
“In the past, prices up to 6% higher were acceptable for local suppliers. I think that such protective laws are against free trade practices and it’s not fair. However, we are going through tough times and most nations are not respecting free trade rules — they’re applying trade barriers and tariff barriers,” he added.

A Japanese steel producer said Monday that metallurgical coal buyers have accepted that sagging global steel demand doesn’t warrant the cancellation of all unwanted contract tonnage in the current fiscal year, but they are still holding out for suppliers to cancel some high-priced fiscal 2008 term deliveries. The source also said 2009 contract prices may have to be settled higher than in 2007 to allow for long-term sustainability in met coal supplies.
Representatives of market leader, BHP Billiton-Mitsubishi Alliance, kicked off FY 2009 talks with their North Asian customers in late-January, and have told buyers that “a contract is a contract,” the Japanese source said. BMA is expected to resume talks in Japan later this month, the source added.
Previously, market sources said Asian steel mills are finding it difficult to take delivery of their outstanding contracted FY 2008 coal tonnages and buyers were hoping that the current situation could be considered a force majeure condition.
EARLY 2008 PROJECTIONS MISSED THE MARK
FY 2008 tonnages for annual contracts starting April 1 were procured at record-high prices in early 2008. Prime hard coking coals from Australia and Canada were priced at about $300/mt FOB, largely as a result of flooding in the main Australian metallurgical coal-producing state of Queensland in early 2008, and partly due to harsh winter conditions in Canada.
In early calendar 2008, the metallurgical coal supply situation was extremely tight, forcing steelmakers to cough up high annual prices for their FY 2008 coal supplies. Mills also entered into contracts for additional tonnages on top of projected requirements for FY 2008 in anticipation of events that could further constrict supply–such as mine accidents, weather disturbances and equipment failure.
Projections made in early 2008 were too optimistic and were overshadowed by the global financial meltdown, which started in mid-September and sent commodities pricing and freight rates on a downward spiral. For the mills, the financial crisis meant they had to cut down on their steel production. This put them in a quandary regarding how to deal with outstanding, high-priced, contracted 2008 tonnages that they no longer required.
BMA LIKELY TO FIND PROPOSAL HARD TO SWALLOW
In late January 2009, BMA informed its customers that FY 2008 contracts must be honored, the Japanese source said. However, buyers are still negotiating with their suppliers to reduce the delivery of a portion of their outstanding FY 2008 contracts.
“We know this kind of proposal will be very hard for BMA and other suppliers to accept,” the Japanese source said. “We want to talk to our suppliers on a commercial basis, not on a legal basis,” the source added. The Japanese coal buyer also said that the FY 2007 price of $98/mt FOB for prime hard coking coal “is too low” as a price settlement for FY 2009. He said he personally believes that FY 2009 prices should settle at between the FY 2007 and FY 2008 prices, suggesting a price of $120 to $150/mt FOB.
“We don’t want our suppliers to go under. We have to think of future availability of coking coal. Pressuring suppliers to agree to very low prices for 2009 will not be good for buyers in the long term,” the source said.