Commodity Blog

Posts Tagged ‘steel’

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.

Steel demand won’t recover before the second half and annual contract prices for iron ore will decline 20 to 40 percent, Fitch Ratings said.
Prices for steel and the raw materials used to make it may improve before then, Monica M. Bonar and Sean T. Sexton, analysts at Fitch in New York, wrote in a research note dated Jan. 2. Metallurgical-coal contract prices will fall about 20 percent, they said.
“Demand for steel should improve following the aggressive expansion of central bank liquidity provisions since early September,” the analysts wrote. A recovery would be led by China, they said.
Steelmakers are cutting output, jobs and investment as the world tips into recession. Luxembourg-based ArcelorMittal, the biggest steelmaker, plans to eliminate as many as 9,000 jobs and slash production by more than 30 percent.
“Earnings will generally be down substantially for the next 12 months from 2008, which benefited from a robust first- half,” the analysts said.

While TD Bank sees the commodities market starting to rebound in the second half of 2009, followed by more pronounced price increases in 2010, the World Bank believes that, over the long term, commodity prices will remain substantially below recent bull market highs.

“The commodity market boom has come to an end,” the World Bank says. This boom has been the most pronounced since 1900, and was caused by rapid demand growth which was not matched by supply growth. In a report entitled “Global economic prospects — commodities at the crossroads,” the bank says that the boom has ended because of slower GDP growth, increased supplies and revised expectations.

The World Bank does not agree with observers who say that the global economy is moving to a new era characterized by relative shortage and permanently higher commodity prices. Over the long run, commodity prices are expected to fall, but not to 1990’s levels, since such low prices will suppress exploration and new development in the resource sector.

Over the next two decades, GDP growth rates will slow down because of slowing population growth and moderating income growth, in turn putting a lid on commodity demand growth. Moreover, technological progress should improve the efficiency of both production and use of commodities, ensuring that supply keeps pace with demand.

The World Bank says that, while commodity prices are likely to be higher than they were in the 1990’s and early 2000’s, a period when prices were depressed by excess supply, “the recent peaks (in prices). .. are unlikely to be the new norms,” since demand is not expected to outstrip supply over the long term.

The World Bank sees a marked slowdown in growth rates in the coming year. The bank projects that in 2009, investment in developed economies will shrink 3.1%, while investment in developing economies will grow by 3.4% — a sharp pullback from the 13% growth seen in 2007. The bank forecasts that the global economy will grow by 0.9% in 2009. Developing economies are projected to grow by 4.5%, well below the 7.9% growth rate seen in 2007.

Phenomenal growth in China’s GDP has led to growth in metal intensity in the economy, defined as metal consumption per unit of GDP. This trend is explained by the boom in investment, manufacturing and exports in China. Currently, metal intensity in China is four times higher than in developed countries and twice that of other developing countries.

China’s metal intensity is expected to stabilize in coming years and then start falling as high investment rates in the economy moderate, and the movement of manufacturing capacity to China from the rest of the world likewise slows down. Another factor which will decrease metal intensity in China is the changing make-up of the economy, where the share of services will increase at the expense of construction and manufacturing.

If China’s metal intensity stabilizes and then falls in coming years, global demand growth for metals, which has exceeded GDP growth rates, should first decline to match GDP growth rates and then decline even further to below GDP growth. The World Bank forecasts that, between 2015 and 2030, the global demand growth rate for metals will be 2.7% per year.

Turning from metals to energy, the World Bank says that future energy demand growth depends heavily on the pace of technological innovation in the automotive sector. Energy efficiency in the transportation sector is key to moderating demand, since 75% of energy demand growth is projected to come from this sector.
The World Bank believes that the prospects for technological improvements in the automotive sector are good, using technologies such as flex-fuel, hybrid cars, plug-in hybrids, electric cars and hydrogen-powered vehicles. Together, these have the potential to double fuel efficiency. The bank believes that, by 2050, the market share of such innovative vehicles can reach 90% in the developed world and 75% in the developing world, which will help reduce dependence on oil.

The bank forecasts oil consumption to grow to 114 million barrels per day in 2030 from 87 million today. Energy consumption as a whole is projected to grow at a faster pace, since consumption of other energy forms (such as coal, natural gas etc.) will grow faster than oil demand.

“Over the next 20 years, supplies of extracted commodities are likely to remain ample,” the bank says. The pace at which supply in the oil and metals sector catches up with demand depends on how quickly the supply of labour and supply in the heavy and specialized equipment sector can be restored. Capacity in these sectors has been reduced by years of low prices and weak investment, leading to long delivery times and high costs.

Recent high prices have helped address these capacity constraints. With the current recession, and with lower commodity prices, investment demand has fallen, and demand for specialized and heavy equipment has fallen in tandem, as have equipment prices. Despite this, prices are projected to remain relatively high and there will be a backlog in equipment deliveries for the next several years.

Although more and more resources, both metals and energy, are extracted every year, which means that less and less remains, it is unlikely that resources will be exhausted anytime soon, the bank says. Historically, reserves of both oil and metals have tended to rise faster than the depletion rate through extraction. In the case of oil, reserves have tended to remain at 40 years of anticipated consumption. This is because, when companies tally reserves, they tend to include only resources that can be readily extracted, which excludes sizable known resources.

The bank expects that more resources will be discovered, even though they are likely to be lower grade or more remotely located, and therefore more difficult and costly to produce. Nevertheless, advances in extraction technology will likely offset these impediments. The long-term oil price is expected to be US$75 per barrel in real 2008 dollars, a level which will allow economic production from oil sands. The bank expects that the oil price will also average US$75 per barrel in 2009.

Even if the World Bank’s projection turns out to be partly wrong and certain resources do become scarce, the bank says that alternatives will start coming into play. For example, if the pace of oil discoveries declines, the rising oil price will make alternatives such as coal, nuclear, natural gas and renewable energy more attractive, as well as stimulate conservation and technological change. However in such circumstances alternative energy sources will also become more expensive.
The World Bank summarizes its forecast by saying that under reasonable assumptions the supply of commodities is likely to increase rapidly enough over the long run to meet anticipated increases in demand at prices that are lower than the current levels. (The report was issued on November 20, when commodity prices were somewhat higher than now.)

TD Bank economist Dina Cover focuses on short-term prospects for commodities. She has downgraded prospects for the global economy in 2009, projecting growth at a mere 0.5%. The U.S. economy will shrink by 2%, and growth in the Chinese economy will slow to 7.6%. Since the U.S. and China are the world’s largest consumers of many commodities, demand will be hit hard, particularly for oil, coal and industrial metals.

As a result, the TD commodity index is projected to fall by 15% from mid-December levels, for a 60% peak-to-trough decline, and it will bottom in the second quarter of 2009. This may drag the Canadian dollar further down, which should help cushion the effect of falling commodity prices on mining companies.

Energy and base metal prices will decline the most, since both consumer and industrial demand for these commodities will decline. Although some mining companies, notably zinc and nickel miners, have slashed production, demand has fallen much more, so prices will remain under pressure in the short term. For example, the oil price is now expected to bottom at US$30 per barrel.

As for gold, TD forecasts that fears about deflation and disinflation could put downward pressure on prices in the near term, but a projected drop in the U.S. dollar in 2009 will support the gold price.

The global economy will start firming toward the end of 2009 and into 2010, lifting commodity demand and prices. TD projects a 55% rebound in the TD commodity index by the end of 2010, led by more than doubling of the oil price to US$75 per barrel. Excluding energy, the index will rebound by only 22%. Commodity prices are not projected to reach their boom peaks, since global economic growth in 2010 is forecast at a lukewarm 3.2%, substantially below the 4–5% growth rates seen during the boom.

Another factor which will limit commodity price appreciation is lower investment demand, since other asset classes will also rebound, so they will compete for the same investment dollars.

TD projects that oil will cost US$45 per barrel in December 2009, rising to US$75 in December 2010. Thermal coal in Australia will cost US$65 in December 2009, rising to US$100 in December 2010. The silver price will be US$9.60 per oz. in 2009, rising to US$10.50 in 2010. Aluminum will cost US75¢ per lb. in 2009, rising to US$1 in 2010. Copper will cost US$1.50 per lb. in 2009, rising to US$1.80 in 2010. Nickel will cost US$5.15 per lb. in 2009, rising to US$6.50 in 2010. The zinc price is projected at US48¢ per lb. in 2009 and US70¢ in 2010. Uranium oxide is projected at US$52 per lb. in December 2009, and US$65 in December 2010.

TD forecasts that the only commodities which will see price falls between 2009 and 2010 will be gold and newsprint. The gold price is projected at US$815 per oz. in December 2009, falling to US$700 in December 2010.

Reduced global steelmaking in 2009 will cut demand, push supply into surplus and halve the price of coking coal, forecast analysts Alan Heap and Alex Tonka at Citigroup Global Markets. They forecast that global steel production will fall 4.2% next year-to an estimated 1.403 billion metric tons-as mills continue to cut production in the face of weakening demand.

Under such a scenario, Heap and Tonka expect coking coal prices to fall 50% to an annual average $150/metric ton next year. “Spot prices had gone to the moon, to record levels, before the financial meltdown,” says Jim Thompson, editor of Coal & Energy Price Report, an industry newsletter, who expects 2009 prices to settle around $200.

Spot prices for metallurgical coking coal used to make steel increased as high as $300/metric ton throughout Asia in the first half of 2008 (depending on supplier and buyer), up from an average $120 in 2007. The price was due to strong first-half steel demand in India, China and some other Asian nations-and to numerous supply problems. The regional disruption hasn’t affected prices in the European Union or North America, where the delivered price of $110 was only slightly above the 2007 average of $95.

Steelmakers in China already have begun lobbying for calendar-year pricing for iron ore, rather than fiscal-year contracts-and some analysts expect the same to happen in the coal contracts. “Many U.S. steelmakers already have settled on 2009 prices, which were phenomenally high,” says Thompson of the Coal & Energy Price Report. “I doubt those settlements will sit now and suspect they will be renegotiated.”
Heap and Tonka add that “this cycle has seen an unprecedented level of steel production cuts,” so the Citigroup analysts believe that continuing curtailments in production are likely to result in delays to price settlements. “Neither producers nor consumers see it in their interest to settle annual prices in such a turbulent market,” Heap and Tonka write.