Description
In economics, a commodity is a marketable item produced to satisfy wants or needs
COMMODITY REPORTS
The IPD COMMODITY REPORTS are prepared by the members of the IPD Executive Council.
JUNE 2008
VALVES
Over the last decade or so, the prices of valves have remained surprisingly steady, despite dramatic increases in copper, iron and other materials. The secret...productivity increases in North American and European factories and a shift to lower cost locations, most notably China. As described in this report earlier, the investment by some firms in new high-end facilities and equipment, and parallel commitment to quality has made it impossible to dismiss a nation or a region as a source of quality products. Further, the move into these nations by recognized industry leaders to source parts, complete valves, open joint ventures or establish Wholly Owned Foreign Enterprises (WOFE) has given credibility to regions where previously price was the only advantage. So as we have said many times, “Know your vendor,” are the watchwords. The barrier to entry provided by AML’s in the industrial market, and engineering spec approval in mechanical and PHCC, has tempered the effect of pure imports without brand acceptance, in a way that has been less definitive for pipe and fittings. But price differential; the use of resurrected brands from the past; and distributors’ in-house brand names; have had an impact on the market. In the last half year, some major developments have caused a seismic shift which is affecting valve suppliers as much as pipe, fittings or other more volatile products. Raw Materials The rise in copper, iron, and steel has been well reported. Because of the higher machining and assembly proportion in valves, the effect of these increases has not been as dramatic or immediate as other commodities. As well, the nature of the market with approvals of design and brand has lead to a pricing model that is built on published price lists in most cases, as opposed to the price per buy that pervades some commodities. Generally, the manufacturers (and quasi-manufacturers) have tended to leave prices and discounts static for as long as possible using efficiency and purchasing gains (including offshore sourcing) to offset much of the increased costs. However, a 60% increase in iron ore, 35% plus in pig iron and the resultant effect on steel has caused a situation where increases are inevitable and will be larger and more frequent than in recent years. Other factors are playing a large role as well. Demand While the US housing and mechanical market has softened recently, the industrial market lead by oil and gas is very bullish with 7 refinery projects over $1 Billion on the books- expansions not new locations but very substantial. This is a situation we have not seen in decades. But the demand globally for valves is growing with urbanization of India and China and other large populations clamoring for a better way of life. Just the additional cars and trucks that will be added to the fleets of these two countries will add significant demand to gasoline and oil products.
1 IPD Commodity Reports
And $130 oil has driven major expansion in other producing areas in the Middle East and Africa that dwarf our plans. Saudi Aramco alone has $125 Billion in capital expenditures over the next 5 years. Transportation We are all watching with horrified fascination as gasoline tops $4.00 a gallon, and the resulting effect on trucking costs to move material. But the same is true of oil for cargo ships- the cost of moving a 40 foot container from Shanghai to the US east coast is now $8000 against $3000 in 2000, and would be as much as $15,000 if oil hits $200 a barrel and stays. That’s the kind of input cost change that can have significant impact. Tariff and Tax Measures China has already removed some export tax subsidies and it is expected that another change to the valve position could be expected later this year with more than 10% increase in outbound pricing. The tariff issues have been more on pipe so far, but we seem to be in a protectionist mode and that could also impact other imported material. Supply Disruption The severe winter storms in China caused power outages and transportation blocks that screwed up supply pretty well, but are a minor inconvenience compared to the recent earthquakes that killed thousands and destroyed factories and roads. And the resulting diversion of power, water supplies and resources has further reduced the output of a large part of China’s industrial heartland. Production has been diverted from export to reconstruction, and rolling brownouts have hurt schedules at casting and forging plants throughout the country. What Does It All Mean? Remarkably, published pricing on bronze has increased less than 10%, cast and forged steel around 10%, with only iron over 10% in the face of all of these cost increases. This is a testament to the stability and competitiveness of the market. But we would suggest that the 3-5% increases of the last few years may be a thing of the past, with double digit cost increases on valves becoming as common as other commodities. It means that the advice to “Know your supplier,” and stay close to them is more vital to your success than ever; it might mean a paradigm shift in sourcing with North American manufacturers as the beneficiary. One thing for certain- it won’t be boring!
CARBON STEEL PIPE
We are in a steel market that continues to amaze and confound us all. Last fall most were concerned with demand for 2008 and then along came a strong winter in the Midwest and a huge drawdown in natural gas supply. The drilling side started to become more active in December and then the raw material cost increases started to occur. The factors causing the rise in steel prices are many and when mixed together are giving very unpredictable results. 1. 2. 3. 4. Scrap and raw materials Iron Ore (price increase of 65% - 80%). Coke up 200%. The Decline of the US $ over the past year. China policy changes on tax rebates/new export taxes & demand inside China (GDP stays above 10%)
2 IPD Commodity Reports
5. Higher Freight Rates due to lack of ships and rising fuel costs. 6. Trade Suits and the threat thereof against China (USA,Canada,EU) 7. China consumption of raw materials. 8. Demand for Pipelines, E&P activity, & Plant expansions 9. India’s conservation of steel policies 10. The Olympics & the Earthquake in China Developing Asia is now consuming about 17 million barrels of oil a day -- only about 20 percent of global consumption -- but that is rising by about a million barrels a year. Asian economies account for some two thirds of the annual rise in international oil demand Below are the largest steel producing countries in million metric tons (MMT). As you can see, China basically added the Russian production in 2007. China is expected to produce 550 MMT in 2008 which will be as much as the next 9 in the top ten. We continue to watch the increases from Brazil, Russia, India, and China (BRIC). Country China Japan USA Russia India S. Korea Germany Ukraine Brazil Italy Rank 1 2 3 4 5 6 7 8 9 10 2007 489 120 97 72 53 52 49 43 34 32 2006 423 116 98 71 49 49 47 41 31 31 % Inc 15.7 3.4 -1.4 2.0 7.3 6.0 2.8 4.7 9.3 1.2
This continued dramatic rise in steel production continues to cause a strain on the raw material supply chain. The scrap price has risen to historic levels both in the USA and Internationally. Scrap recently went over Euro 500/MT ($800) in Europe. In Europe, scrap is defined as waste and not as a raw material which involves many other regulatory costs in handling waste.
3 IPD Commodity Reports
There now is a large difference between industrial scrap (busheling) and other types of scrap with the price difference of approx. $200/ton. This difference was always small and typically less than $50 per ton. You can see in the chart above the run up in prices from one year ago. Busheling is typically used for flat roll steel and lower grade scrap used for long products (bar, rebar, etc). Scrap exports from the USA are up 20% over last year with S. Korea, Thailand, Taiwan, and Turkey being the strong buyers. The factory automobile bundle auction was recently held in June and a change was made that all bids are to remain confidential. This was a leading indicator of where scrap prices were heading but it appears that we will not have this indicator going forward.
The price of hot roll coil has risen also to historic levels shattering the prices we saw back in 2004. The Chinese price is on the rise and could go up by $150 to $200 per ton.
Pipe & Steel Mergers & Acquisitions continue and with numerous others occurring within China. The ones most relevant to the North American market were: • Ipsco was purchased by Evraz, a large Russian steel consortium (purchaser of Oregon Steel), who then sold the USA operations to TMK, another large Russian tubular company. This agreement was finalized on June 13th. • Unicon (formerly Conduven) was sold to Arcelor Mittal. • Sidor (the Venezuelan steel mill) owned by the Tenaris group was nationalized by Venezuela (Chavez). China & India Effects China Tax Rebates – There continue to be rumors on more changes to the China tax rebates so offers often contain clauses for the recovery of such changes should they occur.
4 IPD Commodity Reports
India Tax on Exports – India’s government withdrew export taxes of 5% to 15% on hot roll coils, galvanized products, and pipe & tube. Export taxes were imposed on iron ore (15%) and raised on long products to 15%. China Olympics – There is much discussion about the shutdown of heavy industry within 200 kilometers of Beijing starting in June and lasting until end of August. We have heard talks that 5% to 40% of the steel output in China could be affected by limiting production in order to decrease the pollution. Coke and coal mining would also be suspended. Steel mills have also redirected their production to the earthquake affected area in order to provide support. China Labor – A new labor law took affect Jan 1st which resulted in a 45% increase in cost. Chinese Earthquake – The massive earthquake in Sichuan province will require a massive re-building effort. Steel mills have pledged to speed steel supply deliveries to the affected area. Tragically over 70,000 people lost their lives. It is estimated that this rebuilding project alone could use 50 MMT of steel. Currency Impact – The dollar has stabilized against the Euro in recent weeks. The chart illustrates the dollar decline against major currencies since the beginning of 2007. The exception is the Korean Won.
Currency Change
13.0% 12.0% 11.0% 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%10.0%11.0%12.0%13.0%14.0%15.0%16.0%17.0%18.0%19.0%20.0%21.0%22.0%-
Korea Won
Indian Rupee
China Yuan
Japan Yen
Canada Dollar
Seamless Pipe – There has been an increase per month with very large increases in the last few months. Tenaris has announced 7 increases for 2008 totaling $1,000/ton on 16” and below. On April 25th, US Steel enacted a $250/ton surcharge on all outstanding purchase order shipments on or after May 1st without regard as to when delivery was promised. This surcharge is set to end June 30th but was replaced with an record $800/ton increase effective July 1st. Below are the Tenaris price increase notices:
5 IPD Commodity Reports
8 00 2 8 9/ 00 6/ 2 / 8 25 0 5/ /20 8 10 0 5/ /20 25 08 0 4/ /2 8 10 0 4/ /20 8 26 00 3/ 2 / 8 11 00 3/ 2 / 8 25 0 2/ /20 8 10 0 2/ /20 8 26 0 1/ /20 7 11 00 1/ /2 7 7 /2 00 12 2/2 7 /1 00 12 7/2 7 /2 00 11 2/2 7 /1 00 11 8/2 7 /2 00 10 3/2 /1 07 10 /20 28 07 0 9/ /2 7 13 0 9/ 20 / 7 29 0 8/ /20 7 14 00 8/ 2 / 7 30 0 7/ 20 / 7 15 0 7/ /20 7 30 0 6/ /20 15 07 6/ 20 / 7 31 0 5/ /20 16 7 5/ 00 2 7 1/ 0 5/ /20 16 7 4/ 00 2 7 1/ 0 4/ /20 17 7 3/ 00 2 2/ 07 0 3/ /2 7 15 0 2/ /20 7 31 0 1/ /20 16 7 1/ 00 2 1/ 1/
Euro
Effective Date Jan 1 Feb 15 Mar 15 April 1 April 9 May 1 June 1 Total
Increase/ton $ 75 $100 ($200 on 18 – 24”) $ 75 $100 $200 $250 $225 $1,000 ($1,200 on 18 – 24”)
US Steel changed their basis for implementing price increases. Below are the US Steel Price Increase Notices: Effective Date Jan 1 Mar 1 Apr 1 Apr 16 Apr 25 July 1 Total Increase/ton $75 $100 ($200 on 18-24”) $150 $250 $250 $800 $1,375 ($1,575 on 18-24”) Condition New Orders New Orders New Orders & all shipments regardless of order date New Orders Surcharge on all existing orders shipping after May 1st and before June 30. Price in effect at time of shipment for new orders Minimum increase for all shipments
The $800/ton was announced June18th and is the largest increase ever seen in tubular. It covered all products. The $250 surcharge rolls off June 30th so this is effectively a $550/ton increase. A new problem for 2008 with seamless from the major mills (USS, Tenaris, V&M) has been availability. All have restricted what can be purchased making the market very tight for those products. The same tightness is also being seen from the EU, China, and other pipe producers. The mills are simply booking to capacity each time they come out for orders. The raw material situation has impacted the mills along with a strong demand for OCTG for the exploration and production side. Lead-times have not extended very far as the mills are concerned about their costs and do not want to book long. Pressure Tubing – Pricing here follows the seamless and are up 30% so far this year. Deliveries are still reasonable but demand is strong. Look for this to rise with the recent US Steel announcement. Welded ERW Pipe Standard Pipe Dumping Suit Update Current – Complaint filed with ITC for Standard ERW pipe from China alleging both countervailing duty (country subsidies called CVD) be imposed and dumping duties (export sales below the home market price called AD) be imposed (by manufacturer) Dates – Final determination of rates by Dept of Commerce were announced: – For CVD – all 37.22% except for three that were 615.92%, 29.57% and 44.86% respectively. – For AD – Three mills were 85.55% and all others were 69.20%. – This makes the date Nov. 13, 2007 to start collection of CVD and Jan 15th, 2008 for AD.
6 IPD Commodity Reports
–
Final determination vote by International Trade Commission was held on June 20th. The vote was 5 – 0 in favor of enacting these tariffs and was negative on critical circumstances that would have made duties retroactive back to Aug 2007.
Importers were required to have a bond for the amount of the duties which will now be liquidated. The decision marked the first time a U.S. industry has prevailed in winning a decision to impose tariffs on a Chinese product based on the argument that the Chinese government was unfairly subsidizing a Chinese industry. With the price of Hot Roll Coil escalating and the dumping suits being filed, prices have been on the rise from both domestic and import. Domestic prices have increased $700 to $800 per ton this year of which $500 plus can be directly related to the price of coil. Import has risen about the same.
Standard Pipe 2002-2007 Imports from China in 1,000s of Net Tons
900 800 700 600 500 400 300 200 100 0 2002 2003 2004 2005 2006 2007* 96 14 274 379 680 856
*Projected The Co mmittee on Pipe and Tube Imports (202) 223-1700 May 2007
Line Pipe (API) Dumping Suit - On April 3rd, Trade Suits were filed on ERW Line Pipe against China and Korea for 16” and under pipe. China was filed on for CVD and AD and Korea was only AD. The ITC made affirmative determinations in May for the suit to move forward. China and Korea account for 40% of the import market share and 25% of the total US market for 16” and under. The next step is the determination of rates for both AD and CVD. The Line Pipe companies that have 2002-2007 petitioned for the Imports from China in 1,000s of Net Tons dumping actions are: Tenaris (Maverick), 900 845 800 US Steel, Tex Tube, 700 and AFL-CIO-CFC 600 500 414 unions. The decision 400 300 on the standard pipe 200 case does not bode 89 60 100 49 36 0 well for the Chinese 2002 2003 2004 2005 2006 2007* in this line pipe case.
*Projected The Committee on Pipe and Tube Imports (202) 223-1700 May 2007
7 IPD Commodity Reports
Here are the Maverick (Tenaris) announced price increases for ERW line pipe
Effective Date Jan 1 Feb 15 Mar 15 Apr 1 Apr 9 May 1 June 1 Total
Increase per Ton $ 50 $ 75 $ 75 $100 $200 $250 $225 $1,025
US Steel announced Increases were:
Effective Date Jan 1 Mar 1 Apr 1 Apr 16 Apr 25 July 1 Total
Increase per Ton $ 50 $ 75 $ 150 $ 250 $ 250 $ 800 $1,325
Comments New Orders New Orders New Orders & all shipments regardless of order date New Orders Surcharge on all existing orders shipping after May 1st and before June 30. Price in effect at time of shipment for new orders Minimum increase for all shipments
CW Pipe – Wheatland has raised prices 5 times this year totaling 44%. The import side is up even more due to the Chinese not being in the market due to the standard pipe dumping suit. Welded DSAW/Spiral Pipe – Plate prices have soared with Arcelor Mittal even imposing a surcharge on outstanding orders of plate of $200/tonne. Demand is very strong but new production of HSAW (Helican Seam Arc Welded) should be in production for next year with PSL and Berg beginning trial orders this year. This should begin to relieve some of the supply pressure on DSAW straight seam pipe. Below is an excellent chart issued by Ipsco which shows the new mills and when the tonnage comes on line.
8 IPD Commodity Reports
CARBON STEEL/IRON FITTINGS & FLANGES
2008 has seen unprecedented price increases in virtually all carbon steel commodity products. In addition to the price increases we are seeing price in effect at time of shipment policies become more prevalent. This comes as no surprise with the cost of raw materials increasing every month this year. Here is an overview by commodity product of the first half of 2008. Carbon Steel Weld Fittings and Flanges We have seen multiple list price increases in the first six months of 2008 from domestic suppliers. The accumulative total of these increases has been 25-50% on the most popular sizes of fittings and flanges, with the average increase of approximately 40%. In addition to the problems created by this many increases, the supply of product has also become a problem with fill rates below 50% and long lead times on the back orders. Some of the factors contributing to the price and availability problems include; a shortage of seamless pipe for the weld fittings, increasing scrap prices, the softness of the U.S. dollar, fuel prices, and strong demand in energy related markets. Imported product has followed the pricing patterns of the domestic items and availability is becoming a concern. A large manufacturer in India has stopped quoting material and this has put additional strain on product availability. While the media continues to talk about a recession the demand for industrial products remain strong. Carbon Forged Steel Fittings Forged steel fittings prices have continued to lag the other carbon pvf products. It has only been recently that there have been import fsf price announcements effective in June and July. This follows a 4th quarter 2007 industry wide average increase of 5 percent. It has also been reported that approved forged steel fittings import indent buy prices have increased to the point that most distributors are re-evaluating their long term strategy. The days of three inventories of domestic approved and import approved and import non-approved are no longer feasible. Asia import forged steel fittings continue to be a factor. Carbon Welded and Seamless Pipe Nipples Pipe nipple prices have seen significant increases in the first half of 2008, but at a lesser extent than weld fittings and flanges. Pipe nipples have continued to follow the increases of welded and seamless pipe. Demand continues to be strong for these products with signs of some supply tightening of seamless pipe.
STAINLESS STEEL PIPE, FITTINGS & FLANGES
The laws of supply and demand largely govern price moves of all commodities. Many experts have caused themselves to look foolish before and throughout the base metals Supercycle, which began - depending on the specific metal - roughly 3 to 5 years ago. The primary catalysts to the huge price increases of most metals have been inadequate supplies pitted against increasing world demand, and the fact that none of this has been lost on speculators. The impact of the growth of investment money into base metals throughout the Supercycle cannot be overstated. The multitude of long positions taken by a variety of funds and institutions in all metals should provide some measure of support to prices (against historical averages) over the long term. However, it’s important to consider the impact that the weak U.S. dollar has had on price levels of the dollar-denominated LME and examine a “what if?” scenario of pricing them in euros, yen or yuans. The U.S. Federal Reserve has addressed widespread credit market turbulence by cutting interest rates seven times
9 IPD Commodity Reports
since last September; a sustained change in monetary policy in support of a stronger dollar would negatively affect many commodities, including metals. Nickel, at less than half its cyclical peak, begs one to question whether the recent correction is overdone. Perhaps it is, but so was the meteoric rise from April 2006 through May of 2007. Since nickel is the most thinly traded base metal, its price levels are susceptible to extreme volatility based on flows of funds from investors. This makes the direction for nickel and stainless steel PVF prices anything but clear. A careful examination of all of the supply, demand, and cost driving factors only serves to augment the confusion. In addition, the residual effect of mine ownership consolidation is another dynamic that bears close scrutiny when evaluating future price directions for the entire base metals complex. Much of the current impetus for continued consolidation appears to be related to the increasing and uncertain cost structures involved with starting new operations. The difficult considerations include, but are not limited to, projecting costs for and acquiring adequate levels of energy and skilled labor. The varying reports on the current and future costs of mining nickel bring a complicated dimension to projecting future supply levels. Investment concentration by important mining concerns in each of the two processes – traditional costly/difficult to mine, simple to refine sulphides and cheap/easy to mine, very tricky to refine laterites – clouds their forward price risk equations exponentially. If all of this isn’t complicated enough to digest, then consider how the abundant availability of low grade nickel ore (pig iron) against a backdrop of spiraling energy costs and increasing anti-pollution concerns in China are providing a ceiling and a floor to international prices of refined nickel. Anecdotal evidence suggests that nickel pig iron now serves 60% of the demand for nickel in China and that there is presently a large surplus due mainly to the government’s money tightening policy, which continues to persist even in the aftermath of the Sichuan earthquake. China continues to be the world’s driving force in the production, supply and consumption of stainless steels. However, those of us in the PVF business need to be mindful of their government’s intent to reduce China’s reliance on high energy consuming/environmentally damaging products in favor of more value-added goods and services and the resultant effects on costs and availability. Virtually all nickel players are worried about lower demand levels and the prospect of rising supplies. Major stainless mills are continuing to substantially reduce production output in an effort to stabilize market price levels for their products. But, distributors and end users continue to reduce inventories in anticipation of lower, future prices which only adds to the intrigue. A specific product line that may be a considered a notable exception to this trend and requires a detailed update is welded stainless steel pipe: 1. The U.S. Department of Commerce is conducting an Antidumping Duty (AD) and Countervailing Duty (CVD) investigation involving austenitic stainless steel welded pipe from China, where a decisive amount of U.S.-destined imports had been coming from. 2. A preliminary antidumping determination was anticipated by July 8th, but following a formal request for an extension by the petitioners, the preliminary determination is now postponed until August 27th. 3. The deadline for the final determination is now November 10th but is subject to potential extensions. 4. If critical circumstances are alleged and found to exist, suspension of liquidation is normally ordered retroactively around 90 days before the publication date of the preliminary antidumping duty determination, or in this case, on or about June 1, 2008. 5. The preliminary Countervailing Duty determination date in this investigation was earlier extended by the Department of Commerce until June 30, 2008. If critical circumstances are found to exist, the suspension of liquidation with respect to countervailing duties would be effective on or about April 4, 2008. Asian stainless steel producers continue to grapple with major inflationary pressures including higher labor costs, higher oil and electricity, higher transportation costs, strengthening of their currencies against the U.S. dollar, higher and more stringent import and export taxes and tighter and higher credit costs. 70% of the
10 IPD Commodity Reports
current global demand growth for oil is reportedly coming from Asia; much of the increases in cost have been subsidized by their various governments. As credit markets tighten, certain governments (e.g. Malaysia, Indonesia, Thailand) are beginning to modify their policies. Although no action was expected from China until after the Olympics, (at the very earliest) the government suddenly increased fuel prices on June 18th. Although the current lower nickel levels are indeed causing stainless steel material prices to trend down, finished product costs and alloy surcharges are also being somewhat offset by higher chromium and manganese costs which are a consequence of continued substitution from high nickel bearing austenitic grades to ferritic grades. Ferritics had been favored for stable prices but the increase in its cost volatility may ironically lead to greater demand for nickel in the future. In 2006, the breakdown of global stainless production by type was as follows: • Austenitic (300 series) – 65.5% • Ferritic (400 series) – 23% • Chrome/Manganese (200 series) – 9.4% The breakdown of global stainless production by type changed significantly in 2007: • Austenitic (300 series) – 58.3% • Ferritic (400 series) – 30.1% • Chrome/Manganese (200 series) – 11.6%
11 IPD Commodity Reports
COPPER TUBE & FITTINGS
The U S economy continues to be a drag on the world economy. Residential construction continues to contract, and the oversupply of unsold new homes remains significant. Until the housing market, and home prices, shows clearer signs of stabilization, growth risks will lean to the downside for the economy. There may still be blood in the street as the write downs of real estate loans continue to provide risk to the financial markets. Homebuilding in the U.S. fell at an annual rate of about 25 percent in the first part of 2008, the most since 1981, according to the Commerce Department. Factoid: Home builders are the biggest copper consumers, using about 400 pounds in the average U.S. home. In addition to homebuilding in the United States, manufacturing has declined for the majority of the first half of 2008 also, although the pace of contraction has slowed recently. People have gradually become more pessimistic on the growth outlook -the United States is in a terrible situation and it is spreading to other regions. There is increased awareness that supporting growth needs to be tempered with a need to control the rise in raw material prices. Talk of the R word (recession) looms big on the horizon. Of all the industrial metals, copper has the strongest fundamentals, but trying to predict commodity prices is a no win situation. There is some school of thought that can support $5+ copper and others that make a case for $2.50 or $2 copper. There are a lot of push-pull dynamics working on copper – the bellwether of all industrial metals – currently. Copper, nickel and other industrial metals decline on efforts to support the dollar and curb inflation which will slow economic growth. Recently, Officials from the seven wealthiest nations including the U.S., U.K. and Japan signaled concern over the dollar's slide for the first time in 13 years. Copper has gained nearly 15 percent since the U.S. Federal Reserve began lowering interest rates back in September to buoy growth in the world's biggest economy. The era of benign neglect for the dollar and rising inflation is over or at least drawing to a close in the near term. Dollar versus fundamentals: Dollar: A weak dollar makes dollar priced commodities cheaper for holders of stronger currencies. Also, a weak dollar and fears over rising inflation are promoting buying of commodities as a hedge. A falling dollar mathematically implies a higher copper price. The world may fear an economic slowdown – something the international monetary fund now believes is likely – but the fact remains copper is still in short supply. The correlation between the dollar and commodities has become much more significant given the lack of news about market fundamentals, investors are focusing on dollar movements, which have an inverse relation with industrial metals prices. Dollar weakness will support metal prices for the short term. The Euro may become the pricing currency of choice for certain commodities state tuned. Fundamentals: Supply Side issues: Inventories sitting in London Metals Exchange warehouses across the globe, suggests that any sort of supply disruption at any mine production will send the world into a sudden shortage. These low levels of inventory signal a tight market that offers support for copper. What has been proven in early 2008 is that the record amounts of exploration great hurry to open, reopen or gear up mines of any description across the world map have resulted in the overextension of worn-out equipment, transportation infrastructure issues, inadequate power supply problems, and the out of control costs involved in all of the above. The mining industries of China and South Africa all but shut down earlier in the year, due to a general lack of power, and in China’s case due to a large extent extreme weather. Similar problems are being experienced in Chile, a major copper producer, and Australia, where power is fine but infrastructure costs have skyrocketed. Recently, in Peru, unions have delayed a nationwide strike by around two weeks to June 30, to give Congress more time to debate a bill to lift caps on profit sharing. Factoid: Currently, as a reference point, approximately 150,000 tonnes of inventory represent about three day global consumption supply. So as far as the supply side is concerned, it wouldn't take much for copper to suddenly become
12 IPD Commodity Reports
scarce. Based on supply side fundamentals the futures market is suggesting high copper prices are here to stay for a while. The key indicator to watch will be Global copper production amounts which are predicted to outpace demand this year and next as consumption growth slows. The surplus will be 85,000 metric tons this year and 429,000 tons in 2009, the group said. Output fell short of demand by 37,000 tons in 2007. A growing surplus may lead to a decline in the price next year. But, remember supply disruptions are still lurking and looming that could change the whole outlook. Demand Issues: Returning to the recession story, we can then address the subject of demand. Current predictions are forecasting copper demand to fall in the US by 5.5% in 2008, Western Europe to fall by 2.2% and Japan by 1.0%, representing the world's three largest economic zones. But economic zone number four with a projectile is China, and it is forecast to have an increase in copper demand of 15%. Throw in increases for Russia (8%), Eastern Europe (5%), and Other Asia (4%), and the stage is set for demand to still potentially outstrip supply by some margin. China's demand on copper imports is a key catalyst for rising prices. Chinese demand for copper and other metals could surprise on the upside this year after an earthquake hit the Sichuan region on May 12, leaving more than 80,000 dead or missing. If China is going to have to rebuild a whole province presumable they are going to need more copper and steel. While early 2008 demand from China out paced its local sources, recently copper imports to China, the world's biggest consumer, have slowed as local sources of the metal have become cheaper than the price in London. Chinese demand not picking up is a key factor which caps copper prices. It appears that China is not much of a buyer above $8,000 a ton. The Chinese story can be a significant negative to copper pricing. The underlining sentiment has always been that the price should not rally as long as Chinese demand is absent. From an investment banking perspective, Goldman Sachs analysts have the title of "copper bulls" proudly painted on their chest. Goldman Sachs was the first major house to suggest a commodity super-cycle, or as the analysts refer to it, “the stronger for longer" theme. Their resolve has not wavered in the big picture. What they also recognize is that a pure-play on copper stocks tend to outperform the price of copper on the way up, and underperform it on the way down (meaning falling further). That's one reason why metal pureplays can be very volatile, particularly now that metal prices are a lot more volatile than they used to be. When copper was on the up prior to the credit crunch, copper stocks were running up hard. When recession talk hit, they fell harder than the metal did. Now that we appear to be reaching a level of consolidation once more, Goldman Sachs believes copper is set to break up again. Demand is still an easy story -- demand is healthy across Asia, but global economic slowdown/recession will squelch demand. Supply is more difficult to assess. Outlook: Copper prices this year should average 15 percent higher than in 2007 based just on mine disruptions and delays to new projects. The benchmark three-month contract will average $8,200 a metric ton, up from approximately $7,100 a ton last year. Fundamentally, there is no catalyst to move significantly higher. Copper would stay in a range between $7,600 and $8,500 for the next six months with few catalysts seen for the metal to break out from the levels established in mid-2006. The bullish sentiment is on the supply side disruption fundamentals. A lack of mine output will force smelters, especially in China, to curtail production this year. Mine production lagged behind demand in the past two years as China expanded smelting and refining capacity to become the largest refined copper producer in 2006, overtaking Chile.
13 IPD Commodity Reports
The conditions are there for an extended cycle in the copper industry, mainly driven by industrial growth in China which has gone from consuming 10 percent of world's copper in 2003 to 25 percent today. The only thing that might upset the cycle would be some sort of event or political situation in China that disrupted things significantly. China, Brazil, India and Russia, making up 35 percent of world usage, will drive global demand for refined metal that's expected to increase 3.7 percent this year. China absorbs about 25 percent of the metal, mainly used in the construction and power industries. As a reference point, the U.S. consumes around 15 percent of global copper production at an estimated 18 million tonnes per year. Global economic growth will probably slow to 2.7 percent this year from 3.7 percent in 2007, checked by spiraling food and energy prices and the subprime credit crisis. Expectations are that slower economic expansion will curb consumption growth in industrial metals. Finally, there is some thought that the world's biggest economy may avoid a recession. It is that belief, in part, that has strengthened the dollar but also lifted demand prospects for most metals. Industrial commodities, like oil and metals, tend to trade counter to the dollar in short term trading as they are seen as alternative assets. However, they also trade in line with rising equity markets and as economic sentiment picks up because the demand prospects improve. We will just have to wait and see.
GROOVED/MALLEABLE IRON FITTINGS
Grooved Fittings and Valves Overall construction activity in the commercial market in 2008 is stable as compared to 2007 with planned projects in the following three major sectors; Health Care 79% of 2007 contract dollars, Education 112% of the 2007 contract dollars, and Commercial Office Buildings 94% of 2007 contract dollars. The massive flooding in the Midwest will have a softening effect in this area for the remainder of 2008. The most recent price increase went into effect in early June of approximately 10-1/2%; however escalating material and fuel costs continue to rise at a very rapid pace. Domestic Malleable Fittings The volume of business for domestic manufacturers in 2008 is up slightly in the U.S. market due primarily to the demand in the Oil and Gas market. Due to continued increases in world scrap prices, energy, labor, fuel, and freight costs, there is likely to be another increase in the third or fourth quarter of 2008. Import Malleable Fittings The volume level in 2008 of import malleable fittings in the U.S. continues to decline compared to their volume peak in 2005. Since that time, the Commerce Department reports a decrease of more than 28% while pricing has escalated more than 36%. This trend is likely to continue. China continues to face more challenges in exporting the United States. Container costs are expected to reach $5,600 by July as the oil demand continues to rise. While costs of iron and steel raw materials continue to increase, the government instituted wage increase has raised wages nearly 50% in two years. Also, the government removed the 17% export credit on pipe fittings. The internal growth surge of construction within the country of China has caused a dramatic change and effect on the demand of domestic consumption of products from their plants vs. exporting to other countries. Some of the smaller steel and iron foundries are being shut down as the government rationalizes the industry.
14 IPD Commodity Reports
PLASTICS
Margins for those throughout the supply chain are loosening up. Costs such as Oil, NG and Resin continue to remain high, so price increases are now rolling out with more regularity and tolerance. Exports continue to help the Resin Mfgs but the rate is beginning to level off. Energy prices continue what has become a wild ride with more peaks than valleys to date. The harsh reality of increases being thrust upon every sector down through end user is now an accepted reality. The Pipe Mfgs are fighting to balance their supply/demand issues and as yet have not fallen into the service level traps that their carbon steel counterparts have in recent months. The anticipated “X” factor of how geopolitical factors can and will affect energy prices (and Plastics) has become a firm reality with only the occasional “band-aid” measures used to quell market anxieties. Residential construction continues to be a large part of PVC’s endowment and that market demand remains tenuous at best. Conventional wisdom and forward view would suggest that some leveling off will now take place for the third quarter barring any hurricanes, or significant base ingredient spikes that would re-ignite suppressed anxieties and/or panic in this particular market.
This report is published as a member service of the American Supply Association’s Industrial Piping Division. Its contents are solely for informational purposes, and any use thereof or reliance thereon is at the sole and independent discretion and responsibility of the reader. While the information contained in this report is believed to be accurate as of the date of publication, ASA, its IPD and the authors disclaim any and all warranties, express or implied, as to its accuracy and completeness.
Industrial Piping Division 222 Merchandise Mart Plaza Suite 1400 Chicago, IL 60654
Tel: 312.464.0090 Fax: 312.464.0091 Web: asa.net e-mail: [email protected]
15 IPD Commodity Reports
doc_919415167.pdf
In economics, a commodity is a marketable item produced to satisfy wants or needs
COMMODITY REPORTS
The IPD COMMODITY REPORTS are prepared by the members of the IPD Executive Council.
JUNE 2008
VALVES
Over the last decade or so, the prices of valves have remained surprisingly steady, despite dramatic increases in copper, iron and other materials. The secret...productivity increases in North American and European factories and a shift to lower cost locations, most notably China. As described in this report earlier, the investment by some firms in new high-end facilities and equipment, and parallel commitment to quality has made it impossible to dismiss a nation or a region as a source of quality products. Further, the move into these nations by recognized industry leaders to source parts, complete valves, open joint ventures or establish Wholly Owned Foreign Enterprises (WOFE) has given credibility to regions where previously price was the only advantage. So as we have said many times, “Know your vendor,” are the watchwords. The barrier to entry provided by AML’s in the industrial market, and engineering spec approval in mechanical and PHCC, has tempered the effect of pure imports without brand acceptance, in a way that has been less definitive for pipe and fittings. But price differential; the use of resurrected brands from the past; and distributors’ in-house brand names; have had an impact on the market. In the last half year, some major developments have caused a seismic shift which is affecting valve suppliers as much as pipe, fittings or other more volatile products. Raw Materials The rise in copper, iron, and steel has been well reported. Because of the higher machining and assembly proportion in valves, the effect of these increases has not been as dramatic or immediate as other commodities. As well, the nature of the market with approvals of design and brand has lead to a pricing model that is built on published price lists in most cases, as opposed to the price per buy that pervades some commodities. Generally, the manufacturers (and quasi-manufacturers) have tended to leave prices and discounts static for as long as possible using efficiency and purchasing gains (including offshore sourcing) to offset much of the increased costs. However, a 60% increase in iron ore, 35% plus in pig iron and the resultant effect on steel has caused a situation where increases are inevitable and will be larger and more frequent than in recent years. Other factors are playing a large role as well. Demand While the US housing and mechanical market has softened recently, the industrial market lead by oil and gas is very bullish with 7 refinery projects over $1 Billion on the books- expansions not new locations but very substantial. This is a situation we have not seen in decades. But the demand globally for valves is growing with urbanization of India and China and other large populations clamoring for a better way of life. Just the additional cars and trucks that will be added to the fleets of these two countries will add significant demand to gasoline and oil products.
1 IPD Commodity Reports
And $130 oil has driven major expansion in other producing areas in the Middle East and Africa that dwarf our plans. Saudi Aramco alone has $125 Billion in capital expenditures over the next 5 years. Transportation We are all watching with horrified fascination as gasoline tops $4.00 a gallon, and the resulting effect on trucking costs to move material. But the same is true of oil for cargo ships- the cost of moving a 40 foot container from Shanghai to the US east coast is now $8000 against $3000 in 2000, and would be as much as $15,000 if oil hits $200 a barrel and stays. That’s the kind of input cost change that can have significant impact. Tariff and Tax Measures China has already removed some export tax subsidies and it is expected that another change to the valve position could be expected later this year with more than 10% increase in outbound pricing. The tariff issues have been more on pipe so far, but we seem to be in a protectionist mode and that could also impact other imported material. Supply Disruption The severe winter storms in China caused power outages and transportation blocks that screwed up supply pretty well, but are a minor inconvenience compared to the recent earthquakes that killed thousands and destroyed factories and roads. And the resulting diversion of power, water supplies and resources has further reduced the output of a large part of China’s industrial heartland. Production has been diverted from export to reconstruction, and rolling brownouts have hurt schedules at casting and forging plants throughout the country. What Does It All Mean? Remarkably, published pricing on bronze has increased less than 10%, cast and forged steel around 10%, with only iron over 10% in the face of all of these cost increases. This is a testament to the stability and competitiveness of the market. But we would suggest that the 3-5% increases of the last few years may be a thing of the past, with double digit cost increases on valves becoming as common as other commodities. It means that the advice to “Know your supplier,” and stay close to them is more vital to your success than ever; it might mean a paradigm shift in sourcing with North American manufacturers as the beneficiary. One thing for certain- it won’t be boring!
CARBON STEEL PIPE
We are in a steel market that continues to amaze and confound us all. Last fall most were concerned with demand for 2008 and then along came a strong winter in the Midwest and a huge drawdown in natural gas supply. The drilling side started to become more active in December and then the raw material cost increases started to occur. The factors causing the rise in steel prices are many and when mixed together are giving very unpredictable results. 1. 2. 3. 4. Scrap and raw materials Iron Ore (price increase of 65% - 80%). Coke up 200%. The Decline of the US $ over the past year. China policy changes on tax rebates/new export taxes & demand inside China (GDP stays above 10%)
2 IPD Commodity Reports
5. Higher Freight Rates due to lack of ships and rising fuel costs. 6. Trade Suits and the threat thereof against China (USA,Canada,EU) 7. China consumption of raw materials. 8. Demand for Pipelines, E&P activity, & Plant expansions 9. India’s conservation of steel policies 10. The Olympics & the Earthquake in China Developing Asia is now consuming about 17 million barrels of oil a day -- only about 20 percent of global consumption -- but that is rising by about a million barrels a year. Asian economies account for some two thirds of the annual rise in international oil demand Below are the largest steel producing countries in million metric tons (MMT). As you can see, China basically added the Russian production in 2007. China is expected to produce 550 MMT in 2008 which will be as much as the next 9 in the top ten. We continue to watch the increases from Brazil, Russia, India, and China (BRIC). Country China Japan USA Russia India S. Korea Germany Ukraine Brazil Italy Rank 1 2 3 4 5 6 7 8 9 10 2007 489 120 97 72 53 52 49 43 34 32 2006 423 116 98 71 49 49 47 41 31 31 % Inc 15.7 3.4 -1.4 2.0 7.3 6.0 2.8 4.7 9.3 1.2
This continued dramatic rise in steel production continues to cause a strain on the raw material supply chain. The scrap price has risen to historic levels both in the USA and Internationally. Scrap recently went over Euro 500/MT ($800) in Europe. In Europe, scrap is defined as waste and not as a raw material which involves many other regulatory costs in handling waste.
3 IPD Commodity Reports
There now is a large difference between industrial scrap (busheling) and other types of scrap with the price difference of approx. $200/ton. This difference was always small and typically less than $50 per ton. You can see in the chart above the run up in prices from one year ago. Busheling is typically used for flat roll steel and lower grade scrap used for long products (bar, rebar, etc). Scrap exports from the USA are up 20% over last year with S. Korea, Thailand, Taiwan, and Turkey being the strong buyers. The factory automobile bundle auction was recently held in June and a change was made that all bids are to remain confidential. This was a leading indicator of where scrap prices were heading but it appears that we will not have this indicator going forward.
The price of hot roll coil has risen also to historic levels shattering the prices we saw back in 2004. The Chinese price is on the rise and could go up by $150 to $200 per ton.
Pipe & Steel Mergers & Acquisitions continue and with numerous others occurring within China. The ones most relevant to the North American market were: • Ipsco was purchased by Evraz, a large Russian steel consortium (purchaser of Oregon Steel), who then sold the USA operations to TMK, another large Russian tubular company. This agreement was finalized on June 13th. • Unicon (formerly Conduven) was sold to Arcelor Mittal. • Sidor (the Venezuelan steel mill) owned by the Tenaris group was nationalized by Venezuela (Chavez). China & India Effects China Tax Rebates – There continue to be rumors on more changes to the China tax rebates so offers often contain clauses for the recovery of such changes should they occur.
4 IPD Commodity Reports
India Tax on Exports – India’s government withdrew export taxes of 5% to 15% on hot roll coils, galvanized products, and pipe & tube. Export taxes were imposed on iron ore (15%) and raised on long products to 15%. China Olympics – There is much discussion about the shutdown of heavy industry within 200 kilometers of Beijing starting in June and lasting until end of August. We have heard talks that 5% to 40% of the steel output in China could be affected by limiting production in order to decrease the pollution. Coke and coal mining would also be suspended. Steel mills have also redirected their production to the earthquake affected area in order to provide support. China Labor – A new labor law took affect Jan 1st which resulted in a 45% increase in cost. Chinese Earthquake – The massive earthquake in Sichuan province will require a massive re-building effort. Steel mills have pledged to speed steel supply deliveries to the affected area. Tragically over 70,000 people lost their lives. It is estimated that this rebuilding project alone could use 50 MMT of steel. Currency Impact – The dollar has stabilized against the Euro in recent weeks. The chart illustrates the dollar decline against major currencies since the beginning of 2007. The exception is the Korean Won.
Currency Change
13.0% 12.0% 11.0% 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%10.0%11.0%12.0%13.0%14.0%15.0%16.0%17.0%18.0%19.0%20.0%21.0%22.0%-
Korea Won
Indian Rupee
China Yuan
Japan Yen
Canada Dollar
Seamless Pipe – There has been an increase per month with very large increases in the last few months. Tenaris has announced 7 increases for 2008 totaling $1,000/ton on 16” and below. On April 25th, US Steel enacted a $250/ton surcharge on all outstanding purchase order shipments on or after May 1st without regard as to when delivery was promised. This surcharge is set to end June 30th but was replaced with an record $800/ton increase effective July 1st. Below are the Tenaris price increase notices:
5 IPD Commodity Reports
8 00 2 8 9/ 00 6/ 2 / 8 25 0 5/ /20 8 10 0 5/ /20 25 08 0 4/ /2 8 10 0 4/ /20 8 26 00 3/ 2 / 8 11 00 3/ 2 / 8 25 0 2/ /20 8 10 0 2/ /20 8 26 0 1/ /20 7 11 00 1/ /2 7 7 /2 00 12 2/2 7 /1 00 12 7/2 7 /2 00 11 2/2 7 /1 00 11 8/2 7 /2 00 10 3/2 /1 07 10 /20 28 07 0 9/ /2 7 13 0 9/ 20 / 7 29 0 8/ /20 7 14 00 8/ 2 / 7 30 0 7/ 20 / 7 15 0 7/ /20 7 30 0 6/ /20 15 07 6/ 20 / 7 31 0 5/ /20 16 7 5/ 00 2 7 1/ 0 5/ /20 16 7 4/ 00 2 7 1/ 0 4/ /20 17 7 3/ 00 2 2/ 07 0 3/ /2 7 15 0 2/ /20 7 31 0 1/ /20 16 7 1/ 00 2 1/ 1/
Euro
Effective Date Jan 1 Feb 15 Mar 15 April 1 April 9 May 1 June 1 Total
Increase/ton $ 75 $100 ($200 on 18 – 24”) $ 75 $100 $200 $250 $225 $1,000 ($1,200 on 18 – 24”)
US Steel changed their basis for implementing price increases. Below are the US Steel Price Increase Notices: Effective Date Jan 1 Mar 1 Apr 1 Apr 16 Apr 25 July 1 Total Increase/ton $75 $100 ($200 on 18-24”) $150 $250 $250 $800 $1,375 ($1,575 on 18-24”) Condition New Orders New Orders New Orders & all shipments regardless of order date New Orders Surcharge on all existing orders shipping after May 1st and before June 30. Price in effect at time of shipment for new orders Minimum increase for all shipments
The $800/ton was announced June18th and is the largest increase ever seen in tubular. It covered all products. The $250 surcharge rolls off June 30th so this is effectively a $550/ton increase. A new problem for 2008 with seamless from the major mills (USS, Tenaris, V&M) has been availability. All have restricted what can be purchased making the market very tight for those products. The same tightness is also being seen from the EU, China, and other pipe producers. The mills are simply booking to capacity each time they come out for orders. The raw material situation has impacted the mills along with a strong demand for OCTG for the exploration and production side. Lead-times have not extended very far as the mills are concerned about their costs and do not want to book long. Pressure Tubing – Pricing here follows the seamless and are up 30% so far this year. Deliveries are still reasonable but demand is strong. Look for this to rise with the recent US Steel announcement. Welded ERW Pipe Standard Pipe Dumping Suit Update Current – Complaint filed with ITC for Standard ERW pipe from China alleging both countervailing duty (country subsidies called CVD) be imposed and dumping duties (export sales below the home market price called AD) be imposed (by manufacturer) Dates – Final determination of rates by Dept of Commerce were announced: – For CVD – all 37.22% except for three that were 615.92%, 29.57% and 44.86% respectively. – For AD – Three mills were 85.55% and all others were 69.20%. – This makes the date Nov. 13, 2007 to start collection of CVD and Jan 15th, 2008 for AD.
6 IPD Commodity Reports
–
Final determination vote by International Trade Commission was held on June 20th. The vote was 5 – 0 in favor of enacting these tariffs and was negative on critical circumstances that would have made duties retroactive back to Aug 2007.
Importers were required to have a bond for the amount of the duties which will now be liquidated. The decision marked the first time a U.S. industry has prevailed in winning a decision to impose tariffs on a Chinese product based on the argument that the Chinese government was unfairly subsidizing a Chinese industry. With the price of Hot Roll Coil escalating and the dumping suits being filed, prices have been on the rise from both domestic and import. Domestic prices have increased $700 to $800 per ton this year of which $500 plus can be directly related to the price of coil. Import has risen about the same.
Standard Pipe 2002-2007 Imports from China in 1,000s of Net Tons
900 800 700 600 500 400 300 200 100 0 2002 2003 2004 2005 2006 2007* 96 14 274 379 680 856
*Projected The Co mmittee on Pipe and Tube Imports (202) 223-1700 May 2007
Line Pipe (API) Dumping Suit - On April 3rd, Trade Suits were filed on ERW Line Pipe against China and Korea for 16” and under pipe. China was filed on for CVD and AD and Korea was only AD. The ITC made affirmative determinations in May for the suit to move forward. China and Korea account for 40% of the import market share and 25% of the total US market for 16” and under. The next step is the determination of rates for both AD and CVD. The Line Pipe companies that have 2002-2007 petitioned for the Imports from China in 1,000s of Net Tons dumping actions are: Tenaris (Maverick), 900 845 800 US Steel, Tex Tube, 700 and AFL-CIO-CFC 600 500 414 unions. The decision 400 300 on the standard pipe 200 case does not bode 89 60 100 49 36 0 well for the Chinese 2002 2003 2004 2005 2006 2007* in this line pipe case.
*Projected The Committee on Pipe and Tube Imports (202) 223-1700 May 2007
7 IPD Commodity Reports
Here are the Maverick (Tenaris) announced price increases for ERW line pipe
Effective Date Jan 1 Feb 15 Mar 15 Apr 1 Apr 9 May 1 June 1 Total
Increase per Ton $ 50 $ 75 $ 75 $100 $200 $250 $225 $1,025
US Steel announced Increases were:
Effective Date Jan 1 Mar 1 Apr 1 Apr 16 Apr 25 July 1 Total
Increase per Ton $ 50 $ 75 $ 150 $ 250 $ 250 $ 800 $1,325
Comments New Orders New Orders New Orders & all shipments regardless of order date New Orders Surcharge on all existing orders shipping after May 1st and before June 30. Price in effect at time of shipment for new orders Minimum increase for all shipments
CW Pipe – Wheatland has raised prices 5 times this year totaling 44%. The import side is up even more due to the Chinese not being in the market due to the standard pipe dumping suit. Welded DSAW/Spiral Pipe – Plate prices have soared with Arcelor Mittal even imposing a surcharge on outstanding orders of plate of $200/tonne. Demand is very strong but new production of HSAW (Helican Seam Arc Welded) should be in production for next year with PSL and Berg beginning trial orders this year. This should begin to relieve some of the supply pressure on DSAW straight seam pipe. Below is an excellent chart issued by Ipsco which shows the new mills and when the tonnage comes on line.
8 IPD Commodity Reports
CARBON STEEL/IRON FITTINGS & FLANGES
2008 has seen unprecedented price increases in virtually all carbon steel commodity products. In addition to the price increases we are seeing price in effect at time of shipment policies become more prevalent. This comes as no surprise with the cost of raw materials increasing every month this year. Here is an overview by commodity product of the first half of 2008. Carbon Steel Weld Fittings and Flanges We have seen multiple list price increases in the first six months of 2008 from domestic suppliers. The accumulative total of these increases has been 25-50% on the most popular sizes of fittings and flanges, with the average increase of approximately 40%. In addition to the problems created by this many increases, the supply of product has also become a problem with fill rates below 50% and long lead times on the back orders. Some of the factors contributing to the price and availability problems include; a shortage of seamless pipe for the weld fittings, increasing scrap prices, the softness of the U.S. dollar, fuel prices, and strong demand in energy related markets. Imported product has followed the pricing patterns of the domestic items and availability is becoming a concern. A large manufacturer in India has stopped quoting material and this has put additional strain on product availability. While the media continues to talk about a recession the demand for industrial products remain strong. Carbon Forged Steel Fittings Forged steel fittings prices have continued to lag the other carbon pvf products. It has only been recently that there have been import fsf price announcements effective in June and July. This follows a 4th quarter 2007 industry wide average increase of 5 percent. It has also been reported that approved forged steel fittings import indent buy prices have increased to the point that most distributors are re-evaluating their long term strategy. The days of three inventories of domestic approved and import approved and import non-approved are no longer feasible. Asia import forged steel fittings continue to be a factor. Carbon Welded and Seamless Pipe Nipples Pipe nipple prices have seen significant increases in the first half of 2008, but at a lesser extent than weld fittings and flanges. Pipe nipples have continued to follow the increases of welded and seamless pipe. Demand continues to be strong for these products with signs of some supply tightening of seamless pipe.
STAINLESS STEEL PIPE, FITTINGS & FLANGES
The laws of supply and demand largely govern price moves of all commodities. Many experts have caused themselves to look foolish before and throughout the base metals Supercycle, which began - depending on the specific metal - roughly 3 to 5 years ago. The primary catalysts to the huge price increases of most metals have been inadequate supplies pitted against increasing world demand, and the fact that none of this has been lost on speculators. The impact of the growth of investment money into base metals throughout the Supercycle cannot be overstated. The multitude of long positions taken by a variety of funds and institutions in all metals should provide some measure of support to prices (against historical averages) over the long term. However, it’s important to consider the impact that the weak U.S. dollar has had on price levels of the dollar-denominated LME and examine a “what if?” scenario of pricing them in euros, yen or yuans. The U.S. Federal Reserve has addressed widespread credit market turbulence by cutting interest rates seven times
9 IPD Commodity Reports
since last September; a sustained change in monetary policy in support of a stronger dollar would negatively affect many commodities, including metals. Nickel, at less than half its cyclical peak, begs one to question whether the recent correction is overdone. Perhaps it is, but so was the meteoric rise from April 2006 through May of 2007. Since nickel is the most thinly traded base metal, its price levels are susceptible to extreme volatility based on flows of funds from investors. This makes the direction for nickel and stainless steel PVF prices anything but clear. A careful examination of all of the supply, demand, and cost driving factors only serves to augment the confusion. In addition, the residual effect of mine ownership consolidation is another dynamic that bears close scrutiny when evaluating future price directions for the entire base metals complex. Much of the current impetus for continued consolidation appears to be related to the increasing and uncertain cost structures involved with starting new operations. The difficult considerations include, but are not limited to, projecting costs for and acquiring adequate levels of energy and skilled labor. The varying reports on the current and future costs of mining nickel bring a complicated dimension to projecting future supply levels. Investment concentration by important mining concerns in each of the two processes – traditional costly/difficult to mine, simple to refine sulphides and cheap/easy to mine, very tricky to refine laterites – clouds their forward price risk equations exponentially. If all of this isn’t complicated enough to digest, then consider how the abundant availability of low grade nickel ore (pig iron) against a backdrop of spiraling energy costs and increasing anti-pollution concerns in China are providing a ceiling and a floor to international prices of refined nickel. Anecdotal evidence suggests that nickel pig iron now serves 60% of the demand for nickel in China and that there is presently a large surplus due mainly to the government’s money tightening policy, which continues to persist even in the aftermath of the Sichuan earthquake. China continues to be the world’s driving force in the production, supply and consumption of stainless steels. However, those of us in the PVF business need to be mindful of their government’s intent to reduce China’s reliance on high energy consuming/environmentally damaging products in favor of more value-added goods and services and the resultant effects on costs and availability. Virtually all nickel players are worried about lower demand levels and the prospect of rising supplies. Major stainless mills are continuing to substantially reduce production output in an effort to stabilize market price levels for their products. But, distributors and end users continue to reduce inventories in anticipation of lower, future prices which only adds to the intrigue. A specific product line that may be a considered a notable exception to this trend and requires a detailed update is welded stainless steel pipe: 1. The U.S. Department of Commerce is conducting an Antidumping Duty (AD) and Countervailing Duty (CVD) investigation involving austenitic stainless steel welded pipe from China, where a decisive amount of U.S.-destined imports had been coming from. 2. A preliminary antidumping determination was anticipated by July 8th, but following a formal request for an extension by the petitioners, the preliminary determination is now postponed until August 27th. 3. The deadline for the final determination is now November 10th but is subject to potential extensions. 4. If critical circumstances are alleged and found to exist, suspension of liquidation is normally ordered retroactively around 90 days before the publication date of the preliminary antidumping duty determination, or in this case, on or about June 1, 2008. 5. The preliminary Countervailing Duty determination date in this investigation was earlier extended by the Department of Commerce until June 30, 2008. If critical circumstances are found to exist, the suspension of liquidation with respect to countervailing duties would be effective on or about April 4, 2008. Asian stainless steel producers continue to grapple with major inflationary pressures including higher labor costs, higher oil and electricity, higher transportation costs, strengthening of their currencies against the U.S. dollar, higher and more stringent import and export taxes and tighter and higher credit costs. 70% of the
10 IPD Commodity Reports
current global demand growth for oil is reportedly coming from Asia; much of the increases in cost have been subsidized by their various governments. As credit markets tighten, certain governments (e.g. Malaysia, Indonesia, Thailand) are beginning to modify their policies. Although no action was expected from China until after the Olympics, (at the very earliest) the government suddenly increased fuel prices on June 18th. Although the current lower nickel levels are indeed causing stainless steel material prices to trend down, finished product costs and alloy surcharges are also being somewhat offset by higher chromium and manganese costs which are a consequence of continued substitution from high nickel bearing austenitic grades to ferritic grades. Ferritics had been favored for stable prices but the increase in its cost volatility may ironically lead to greater demand for nickel in the future. In 2006, the breakdown of global stainless production by type was as follows: • Austenitic (300 series) – 65.5% • Ferritic (400 series) – 23% • Chrome/Manganese (200 series) – 9.4% The breakdown of global stainless production by type changed significantly in 2007: • Austenitic (300 series) – 58.3% • Ferritic (400 series) – 30.1% • Chrome/Manganese (200 series) – 11.6%
11 IPD Commodity Reports
COPPER TUBE & FITTINGS
The U S economy continues to be a drag on the world economy. Residential construction continues to contract, and the oversupply of unsold new homes remains significant. Until the housing market, and home prices, shows clearer signs of stabilization, growth risks will lean to the downside for the economy. There may still be blood in the street as the write downs of real estate loans continue to provide risk to the financial markets. Homebuilding in the U.S. fell at an annual rate of about 25 percent in the first part of 2008, the most since 1981, according to the Commerce Department. Factoid: Home builders are the biggest copper consumers, using about 400 pounds in the average U.S. home. In addition to homebuilding in the United States, manufacturing has declined for the majority of the first half of 2008 also, although the pace of contraction has slowed recently. People have gradually become more pessimistic on the growth outlook -the United States is in a terrible situation and it is spreading to other regions. There is increased awareness that supporting growth needs to be tempered with a need to control the rise in raw material prices. Talk of the R word (recession) looms big on the horizon. Of all the industrial metals, copper has the strongest fundamentals, but trying to predict commodity prices is a no win situation. There is some school of thought that can support $5+ copper and others that make a case for $2.50 or $2 copper. There are a lot of push-pull dynamics working on copper – the bellwether of all industrial metals – currently. Copper, nickel and other industrial metals decline on efforts to support the dollar and curb inflation which will slow economic growth. Recently, Officials from the seven wealthiest nations including the U.S., U.K. and Japan signaled concern over the dollar's slide for the first time in 13 years. Copper has gained nearly 15 percent since the U.S. Federal Reserve began lowering interest rates back in September to buoy growth in the world's biggest economy. The era of benign neglect for the dollar and rising inflation is over or at least drawing to a close in the near term. Dollar versus fundamentals: Dollar: A weak dollar makes dollar priced commodities cheaper for holders of stronger currencies. Also, a weak dollar and fears over rising inflation are promoting buying of commodities as a hedge. A falling dollar mathematically implies a higher copper price. The world may fear an economic slowdown – something the international monetary fund now believes is likely – but the fact remains copper is still in short supply. The correlation between the dollar and commodities has become much more significant given the lack of news about market fundamentals, investors are focusing on dollar movements, which have an inverse relation with industrial metals prices. Dollar weakness will support metal prices for the short term. The Euro may become the pricing currency of choice for certain commodities state tuned. Fundamentals: Supply Side issues: Inventories sitting in London Metals Exchange warehouses across the globe, suggests that any sort of supply disruption at any mine production will send the world into a sudden shortage. These low levels of inventory signal a tight market that offers support for copper. What has been proven in early 2008 is that the record amounts of exploration great hurry to open, reopen or gear up mines of any description across the world map have resulted in the overextension of worn-out equipment, transportation infrastructure issues, inadequate power supply problems, and the out of control costs involved in all of the above. The mining industries of China and South Africa all but shut down earlier in the year, due to a general lack of power, and in China’s case due to a large extent extreme weather. Similar problems are being experienced in Chile, a major copper producer, and Australia, where power is fine but infrastructure costs have skyrocketed. Recently, in Peru, unions have delayed a nationwide strike by around two weeks to June 30, to give Congress more time to debate a bill to lift caps on profit sharing. Factoid: Currently, as a reference point, approximately 150,000 tonnes of inventory represent about three day global consumption supply. So as far as the supply side is concerned, it wouldn't take much for copper to suddenly become
12 IPD Commodity Reports
scarce. Based on supply side fundamentals the futures market is suggesting high copper prices are here to stay for a while. The key indicator to watch will be Global copper production amounts which are predicted to outpace demand this year and next as consumption growth slows. The surplus will be 85,000 metric tons this year and 429,000 tons in 2009, the group said. Output fell short of demand by 37,000 tons in 2007. A growing surplus may lead to a decline in the price next year. But, remember supply disruptions are still lurking and looming that could change the whole outlook. Demand Issues: Returning to the recession story, we can then address the subject of demand. Current predictions are forecasting copper demand to fall in the US by 5.5% in 2008, Western Europe to fall by 2.2% and Japan by 1.0%, representing the world's three largest economic zones. But economic zone number four with a projectile is China, and it is forecast to have an increase in copper demand of 15%. Throw in increases for Russia (8%), Eastern Europe (5%), and Other Asia (4%), and the stage is set for demand to still potentially outstrip supply by some margin. China's demand on copper imports is a key catalyst for rising prices. Chinese demand for copper and other metals could surprise on the upside this year after an earthquake hit the Sichuan region on May 12, leaving more than 80,000 dead or missing. If China is going to have to rebuild a whole province presumable they are going to need more copper and steel. While early 2008 demand from China out paced its local sources, recently copper imports to China, the world's biggest consumer, have slowed as local sources of the metal have become cheaper than the price in London. Chinese demand not picking up is a key factor which caps copper prices. It appears that China is not much of a buyer above $8,000 a ton. The Chinese story can be a significant negative to copper pricing. The underlining sentiment has always been that the price should not rally as long as Chinese demand is absent. From an investment banking perspective, Goldman Sachs analysts have the title of "copper bulls" proudly painted on their chest. Goldman Sachs was the first major house to suggest a commodity super-cycle, or as the analysts refer to it, “the stronger for longer" theme. Their resolve has not wavered in the big picture. What they also recognize is that a pure-play on copper stocks tend to outperform the price of copper on the way up, and underperform it on the way down (meaning falling further). That's one reason why metal pureplays can be very volatile, particularly now that metal prices are a lot more volatile than they used to be. When copper was on the up prior to the credit crunch, copper stocks were running up hard. When recession talk hit, they fell harder than the metal did. Now that we appear to be reaching a level of consolidation once more, Goldman Sachs believes copper is set to break up again. Demand is still an easy story -- demand is healthy across Asia, but global economic slowdown/recession will squelch demand. Supply is more difficult to assess. Outlook: Copper prices this year should average 15 percent higher than in 2007 based just on mine disruptions and delays to new projects. The benchmark three-month contract will average $8,200 a metric ton, up from approximately $7,100 a ton last year. Fundamentally, there is no catalyst to move significantly higher. Copper would stay in a range between $7,600 and $8,500 for the next six months with few catalysts seen for the metal to break out from the levels established in mid-2006. The bullish sentiment is on the supply side disruption fundamentals. A lack of mine output will force smelters, especially in China, to curtail production this year. Mine production lagged behind demand in the past two years as China expanded smelting and refining capacity to become the largest refined copper producer in 2006, overtaking Chile.
13 IPD Commodity Reports
The conditions are there for an extended cycle in the copper industry, mainly driven by industrial growth in China which has gone from consuming 10 percent of world's copper in 2003 to 25 percent today. The only thing that might upset the cycle would be some sort of event or political situation in China that disrupted things significantly. China, Brazil, India and Russia, making up 35 percent of world usage, will drive global demand for refined metal that's expected to increase 3.7 percent this year. China absorbs about 25 percent of the metal, mainly used in the construction and power industries. As a reference point, the U.S. consumes around 15 percent of global copper production at an estimated 18 million tonnes per year. Global economic growth will probably slow to 2.7 percent this year from 3.7 percent in 2007, checked by spiraling food and energy prices and the subprime credit crisis. Expectations are that slower economic expansion will curb consumption growth in industrial metals. Finally, there is some thought that the world's biggest economy may avoid a recession. It is that belief, in part, that has strengthened the dollar but also lifted demand prospects for most metals. Industrial commodities, like oil and metals, tend to trade counter to the dollar in short term trading as they are seen as alternative assets. However, they also trade in line with rising equity markets and as economic sentiment picks up because the demand prospects improve. We will just have to wait and see.
GROOVED/MALLEABLE IRON FITTINGS
Grooved Fittings and Valves Overall construction activity in the commercial market in 2008 is stable as compared to 2007 with planned projects in the following three major sectors; Health Care 79% of 2007 contract dollars, Education 112% of the 2007 contract dollars, and Commercial Office Buildings 94% of 2007 contract dollars. The massive flooding in the Midwest will have a softening effect in this area for the remainder of 2008. The most recent price increase went into effect in early June of approximately 10-1/2%; however escalating material and fuel costs continue to rise at a very rapid pace. Domestic Malleable Fittings The volume of business for domestic manufacturers in 2008 is up slightly in the U.S. market due primarily to the demand in the Oil and Gas market. Due to continued increases in world scrap prices, energy, labor, fuel, and freight costs, there is likely to be another increase in the third or fourth quarter of 2008. Import Malleable Fittings The volume level in 2008 of import malleable fittings in the U.S. continues to decline compared to their volume peak in 2005. Since that time, the Commerce Department reports a decrease of more than 28% while pricing has escalated more than 36%. This trend is likely to continue. China continues to face more challenges in exporting the United States. Container costs are expected to reach $5,600 by July as the oil demand continues to rise. While costs of iron and steel raw materials continue to increase, the government instituted wage increase has raised wages nearly 50% in two years. Also, the government removed the 17% export credit on pipe fittings. The internal growth surge of construction within the country of China has caused a dramatic change and effect on the demand of domestic consumption of products from their plants vs. exporting to other countries. Some of the smaller steel and iron foundries are being shut down as the government rationalizes the industry.
14 IPD Commodity Reports
PLASTICS
Margins for those throughout the supply chain are loosening up. Costs such as Oil, NG and Resin continue to remain high, so price increases are now rolling out with more regularity and tolerance. Exports continue to help the Resin Mfgs but the rate is beginning to level off. Energy prices continue what has become a wild ride with more peaks than valleys to date. The harsh reality of increases being thrust upon every sector down through end user is now an accepted reality. The Pipe Mfgs are fighting to balance their supply/demand issues and as yet have not fallen into the service level traps that their carbon steel counterparts have in recent months. The anticipated “X” factor of how geopolitical factors can and will affect energy prices (and Plastics) has become a firm reality with only the occasional “band-aid” measures used to quell market anxieties. Residential construction continues to be a large part of PVC’s endowment and that market demand remains tenuous at best. Conventional wisdom and forward view would suggest that some leveling off will now take place for the third quarter barring any hurricanes, or significant base ingredient spikes that would re-ignite suppressed anxieties and/or panic in this particular market.
This report is published as a member service of the American Supply Association’s Industrial Piping Division. Its contents are solely for informational purposes, and any use thereof or reliance thereon is at the sole and independent discretion and responsibility of the reader. While the information contained in this report is believed to be accurate as of the date of publication, ASA, its IPD and the authors disclaim any and all warranties, express or implied, as to its accuracy and completeness.
Industrial Piping Division 222 Merchandise Mart Plaza Suite 1400 Chicago, IL 60654
Tel: 312.464.0090 Fax: 312.464.0091 Web: asa.net e-mail: [email protected]
15 IPD Commodity Reports
doc_919415167.pdf