LA FORMACIÓN DEL INVENTARIO 1. CONSIDERACIONES GENERALES

those commodity steels it plans to trade, was the second steel and ferroalloys conference organised by Platts. REPORT BY DR HANS MUELLER*

The methodology was regularly reviewed through internal audits to achieve maximum transparency. As an example of a company having confidence in the Platts assessments, Poole cited Carpenter Technology which uses Platts to determine its Ti surcharge on the prices of certain special steels. He also provided further details concerning the announcement that the LME had made Platts its partner for assessing the price of selected steel products, including semifinished grades, HR coils and rebars. The step was taken, he added, in response to steel producers seeking more price transparency and steel users wishing to reduce their price-risk exposure through the use of financial instruments. He attributed the LME choice to the company’s experience with ‘non- commoditicised’ markets featuring industrial users, complex products and regional specifications/logistics.

FERROALLOYS

Manganese: Mr K Golovko of CRU looked at the role that CIS countries, Eastern Europe and China played in manganese alloys markets, specifically silico- manganese, high-carbon (HC) ferroalloys and refined ferromanganese. All three had seen prices soar in 2004 (to $1800/t for HC FeMn), fall abruptly in 2005 ($600) and then rise again in the current year ($800

May; $1050 July1_{). The most widely used,}

SiMn, was again moving toward a market surplus, whereas HC FeMn was in tight supply and refined FeMn in such short supply that additional price increases were inevitable (Fig 2).

China produced enough Mn alloys to spare some for exports, although these might soon be restricted by the central government as the country is now the world’s largest consumer of ferro alloys (Table 1). Ukraine and Kazakhstan, the world’s low-cost producers of both SiMn and HC FeMn, would remain large exporters of these alloys, Golovko predicted. Most high-cost capacity in Poland, Romania and Slovakia was idled following the ’05 decline in global prices but might be restarted if warranted by higher global prices.

Titanium: Ti consumption by the commercial aerospace industry was likely to rise by leaps and bounds, Mr R Borowski of Titanium Metals Corporation told the audience. Although passenger aircraft orders would remain at present levels, Ti consumption per plane was rapidly growing. For example, whereas a Boeing 747 contained 45t of the metal, the 787 would use 91t because Ti is more compatible than aluminium with the composites widely used in the newer aircraft. Airbus models showed a similar trend, though at a less intensive pace.

Prices have been moving up, reaching $8/lb by the end of Q1 2006 for ingot chips and nearly twice as much for Ti in ‘bulk weldable’ form. Not surprisingly, Ti-sponge producers in many countries plan capacity expansions, especially in Russia (Avisma), Japan (Sumitomo and Toho) and the USA (Timet and ATI). Borowski looked forward to an expansion of global Ti sponge capacity from 108kt in 2005 to more than 160kt by 2010-2011 (Table 2).

Ferrochrome: The global stainless steel industry consumed 84% of ferrochrome, most of which is purchased as high-carbon (HC) rather than the more costly low- carbon (LC), explained Ms J Ward, owner of Pennsylvania-based metals dealer Reward Raw Materials. She noted that global FeCr demand was relatively weak last year despite a surge in China’s requirements. Efforts made by major suppliers

SiMn HC FeMn Ref FeMn

2000 2007 2000 2007 2000 2007 China 15 45 24 37 11 29 CIS 13 9 14 8 2 4 E. Europe 3 2 4 2 0 2 W. World 69 44 58 53 87 65 World demand mln tonnes 3.6 7.4 3.2 3.9 0.7 15

2 Fe-Mn and Si-Mn price index (2000 = 1)

K Golovko CRU London

Table 1 China is now the world’s largest consumer of ferro-alloys

K Golovko CRU London

1 Monitoring of US ferrochrome price range by Platts

FERROALLOYS

57Steel Times International October 2006 to restrict capacity use were

inadequate to sustain the mid- ’05 high price of 76 cents/lb and prices soon fell to 60 cents. By now they had recovered to 71 cents and Ward gave three reasons why she expected further increases during the next several years:

(1)...estimated growth of global

stainless steel consumption at 5%/y;

(2)...cost pressures in South

Africa, the world’s largest FeCr producer; and

(3)...continuation of cross-border

consolidation of the FeCr industry, which would probably be reinforced by alliances and partnerships between large producers and consumers.

South African producers in particular would see their profits decrease due to the appreciating rand (vs the US$), rising wages, badly needed environmental and infrastructure investments, and enforcement of the black economic empowerment law requiring a 15% equity transfer to black groups by 2009 and a 26% transfer by 2014. But how much cost increases in S Africa would push up global prices was not certain considering that rivals in Kazakhstan and Russia did not experience similar cost pressures. Furthermore, global price increases would be slowed by ambitious capacity expansion plans undertaken by large producers in several countries and, in the USA, the continuing sell-off by the government’s Defense Logistics Agency of large hoards of HC and LC FeCr amassed during the Cold-War period and no longer deemed necessary (Figs 4 & 5).

Industry consolidation began in 2003, when a relatively small company, Kermas, acquired the Russian producer Serov and in 2005 bought the Samancor Chrome division from Billiton and

AngloAmerican2_{. Kermas then sold a}

third of Samancor Chrome to International Mineral Resources (IMR), linked to the giant Kazakhstan producer Kazchrome, which in turn is buying 50% of the Kermas share in Serov.

Molybdenum: M Magyar, of the United States Geological Survey, talked about molybdenum (Mo or Moly), how and where it was produced and its applications. Extraction from porphyry ores in the form of

Molybdonite (MoS2), often as a by-

product of copper mining, was followed by beneficiation and roasting to obtain

MoO3, part of which was converted to

FeMo. Worldwide, about 80% of the metal was consumed by the iron and steel industry to impart greater heat and corrosion resistance as well as hardenability to stainless, alloy and tool steels. Stainless steel and superalloys claimed 30% of the total, alloyed steels another 30%, tool steels 10% and foundries 10%, with the remainder going to industries producing catalysts, electrodes, filaments and chemicals.

Magyar noted that, before 1890, Mo was little more than a laboratory curiosity. It then served as a substitute for tungsten in the production of armour plate and now

was widely used in nuclear energy plants, aircraft parts and other demanding applications. According to his data, global output in 2004 was 141kt, the USA and Chile each producing 41.5kt, followed by China with 29kt, Peru with 9.6kt and Canada with 5.7kt. He limited his discussion of prices to the US market,

where MoO3rose sharply from $5/lb in Q3

2003 to $35 by Q2 2005, fell to $29 in Q4 and was now about $27. Hardly mentioned

was international trade in MoO3and FeMo

which must be intensive, considering that

almost half of the metal was consumed in Western Europe

and Japan3_{while virtually all the}

production occurred elsewhere. (One disconcerting feature of this presentation was the switching of units from kilotons to million pounds for global output and from $/lb to $/kg for US price movements).

THE STEEL INDUSTRY

The remaining presentations all dealt with steel-related topics. Consolidation: F McGrew of Morgan Joseph, a financial company, took a broad view of the steel industry and talked less about consolidation of steelmaking itself than about structural change downstream and upstream from steel, specifically the service centre and scrap industries. While the description of mergers and acquisitions (M&A) in those industries is not without interest, it was not very relevant to the main theme of that concentration in the steel industry facilitated price leadership which led to more stable prices at an elevated level, boosting the earnings of leading steelmakers and attracting the attention of financial companies. Only three rather unequal examples were given for M&A in steel: Mittal/Arcelor, (still unresolved at the time of the presentation but since completed) Arcelor/Dofasco and Steel Dynamics/Roanoke.

Mr McGrew’s prediction that vertical integration attempts would fail is hardly applicable to all sectors of the industry. Several leading steelmakers are seeking long-term access to iron ore by investing in offshore mines, slab projects in ore- rich countries, or steel companies with large mining interests (eg, Dofasco and Krivorozhstal). Steel companies have also opened new distribution and processing centers at home and abroad. Finally, McGrew’s mention of Baosteel and China Steel as examples of industry concentration in China raises a few questions.

China: J Zambelli, now heading Zambelli Technology International, emphasised how important it was for foreign entrepreneurs to foster connections, or guanxi, with private partners and government officials in China. Without such efforts, the playing field there would be anything but level.

To underscore his impression of that country’s growth momentum, Mr Zambelli noted that China graduated more PhDs and engineers than any other nation and operated 80% of the world’s construction cranes. However, his data about China’s steel industry was spotty and not always accurate. For 2005 he put steel production at 352Mt, adding that this had led to an oversupply situation. He then followed up with a consumption estimate of 402Mt for the same year. Data released by the National Statistics Bureau of China give the same 352Mt figure for output but a marginally smaller (by 120kt) figure for consumption, both in crude steel

terms4_{. The IISI number for 2005}

consumption of finished steel products for

China is 315Mt5_{. Nevertheless, Mr}

Zambelli boldly predicted China’s steel Producer Country 2005 capacity Future capacity Completion

kt/y kt/y Date

ATI USA 0 3.5-5 2006-2007 AVISMA Russia 27 44 2010 FUSHUN China 2 5-10 2006-2010 SUMITOMO Japan 18 24 2006 TIMET USA 9 13 2007 TOHO Japan 15 22 2011 UKTMK Kazakhstan 22 22 - ZTMK Ukraine 8 13.5 2008 ZUNYI China 7 10 2010 TOTAL 108 157-163.5 +50%

Table 2 Major producers of titanium (kt/y) R Borowski TIMET USA

5 Production capacities of ferro-chrome

J Ward Reward Raw Materials USA

3 FeTi and Ti chip prices R Borowski TIMET USA

4 Major world reserves of chrome ore

J Ward Reward Raw Materials USA

43% 43% 16% 9% 7% 9% 16% 18% 17% 22%

Platts Metals Week US Chip/FeTi Price

58Steel Times International October 2006

STI consumption to reach 440Mt in the

current year and 560-620Mt by 2010, again without indicating whether crude or finished steel.

India: V Kochar of Universal Steel, an exporter of stainless steel and stainless steel scrap, provided plenty of evidence that India was rapidly moving onto the global stage, attracting more foreign investment than the USA, developing a booming high-tech service industry, and – according to a Goldman Sachs study – destined to be the fastest-growing economy over the next 50 years due to its stable democracy and young population pyramid (whereas China, with its one-child policy, would become old before it got rich). Changes in government tax, tariff, monetary and fiscal policy as well as reforms of the financial and public sectors would help overcome such roadblocks as a crumbling infrastructure, a heavily-layered bureaucracy, corruption, illiteracy, over 200M people suffering from malnutrition and the economic boom so far having had little impact on two thirds of the population.

Kochar’s forecast that, in 5-7 years, India’s steel consumption would rise by 160Mt is far higher than even the most optimistic predictions made by Indian

experts6_{. Furthermore, his observation that}

China covered 70% of its stainless steel needs with imports from India is obviously incorrect. China consumed about 6.3Mt of stainless products last year, 2.6Mt of which consisted of net imports. India’s total

stainless exports were about 0.5Mt7_{, just a}

fraction of the volume imported by China. Finally, Kochar started out by saying that India was the world’s 12th largest economy; shortly afterwards he ranked India’s GDP as the 4th largest in the world. This inconsistency probably arises from the application of different measurements – exchange rates in the first instance and purchasing power parity in the second (pricing Indian goods and services as if they were sold in an advanced economy).

Steel Recycling, Transportation: J Redden of OmniSource discussed the problems facing American scrap dealers, especially in the areas of environmental rules and bulk transportation. More inspectors had to be hired to check shredded-car scrap for such non-compliance material as mercury and, to make certain its transportation needs would be met, the company was operating a private fleet of trucks, trailers and railway gondola cars. It has also invested in a de-zincing facility that yields pure zinc and ‘black scrap’ for remelting. Another speaker, M Wastchak of Memco Barge line, contrasted the rising demand for barge transportation with the shrinking of barge fleets and the mounting problems caused by insufficient funding of infrastructure maintenance, especially regarding the locks along the Ohio River.

Automotive industry: R Schulz, of Standard & Poor’s, discussed the state of Detroit-based automakers (formerly known as ‘the Big Three’), covering both US and foreign operations. In many ways, the US auto industry is

dogged by the same problems as steel a few years back, especially generous pensions and health insurance for a large number of retired workers (Figs 7 & 8). Additionally, increased fuel prices sharply reduced the sale of trucks and SUVs (from which US companies derived most of their profits), while it accelerated sales of more fuel- efficient vehicles made by Asian competitors. GM and Ford also did poorly in Europe and only slightly better in South America. Schulz supported his well-told story of the Big Three’s still unfinished struggle with a wealth of facts and tables.

Platts had invited Dr Hans Müller to talk about the likely development of demand, supply and prices in the North American steel market. Due to a lack of adequate data regarding the NAFTA steel market, most of the discussion focused on the steel market of the USA and, where relevant, the global market.

The most outstanding feature of the US market is a domestic supply deficit fluctuating around 25% of apparent consumption, consisting of about 20Mt of finished steel mill products and 10Mt – mostly slabs plus some billets and HR band – imported directly by US steel mills and re-rollers. The irony is that the mills have claimed protection for the entire market, forcing American steel users to pay penalty

tariffs on steel products that are not available from domestic suppliers.

Heavy pension and healthcare obligations for tens of thousands of retired workers, as well as the cumbersome work rules, had pushed many integrated US steelmakers to the wall by 2000. Bankruptcy allowed them to shed these costs along with most of their debt. It also motivated labour unions to give ground on work rules, wages and benefits. As a result, high-cost marginal mills were transformed into low-cost producers, which were quickly bundled into a giant new company or absorbed by other large steel producers. A sharp reduction in the number of sellers was a basic requirement for stabilising prices. However, to make this condition last over the longer term, the remaining dominant firms also had to develop a spirit of solidarity in tackling the difficult job of constantly adjusting joint sales volume to fluctuating market demand. Raising prices in lockstep during 2004 proved easy but, except for Mittal, the firms were slow to cut output in response to falling sales in the first half of 2005. Only by mid-year did they develop the solidarity of action that was crucial to achieve stable prices. In fact, they may have done their job too well, pushing US domestic prices well above European and Asian prices for the principal steel categories.

What of the future for cross-border steel industry consolidation? For instance, will a small group of 100-200Mt steel giants manage to impose price discipline on international markets by suppressing disruptive surges in trade volume? How will they react to trade cases affecting their far- flung affiliates? Will they be able to avoid getting entangled in regional protectionism? Finally, will they jointly muster sufficient clout and bargaining power to stand up to the exorbitant demands of highly-concentrated raw material suppliers?

As to the Chinese expansion, its main impact on the global steel market has been a significant boost of resource prices, particularly iron ore. As a consequence, there is a distinct shift in the comparative advantage of steel production, at least at the hot end, toward locations promising secure access to large iron ore deposits. This shift has already spawned a number of integrated slab projects in Brazil and India.

Footnotes

1 Platts Metal Week, July 10, 2006, p20 2 Mineweb, 17 Feb. 2005; see also Competition Tribunal, Republic of South Africa, cases no. 22/LM/Mar05 and 03//LMJan06.

3 Goldman Sachs JBWere, Molybdenum Market Update, 16 Jan. 2006

4 4th China International Steel Congress, Beijing, April 2006, p45.

5 IISI, World Steel in Figures 2006. P20. 6 See eg. Steel Times International, April 2006, p41, Dr Amit Chatterjee cited in “A report on the 12th annual steel conference held in Kolkata, India” by Dr Tim Smith, STI editor.

7 Steel Times International May/June 2006 p19, K. Prasad, “Stainless & special steel production in India”. Mr Prasad’s 2004 estimates were updated to 2005 from various internet websites citing H. Pariser, a stainless steel expert and Jindal executives.

6 Uses of molybdenum

M Magyar, of the United States Geological Survey

30% 20%

10% 10%

30%

7 GM’s unfunded retiree medical liability ($bn)

R Schulz, Standard & Poor

8 Ford’s unfunded retiree medical liability ($bn)