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issue: January 2004 APPLIANCE Magazine

2004 Materials Forecasts
Metals - A New World Order


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by David Simpson, Contributing Editor

Increasing Chinese demand has squeezed commodity supplies and boosted prices even as high energy costs are affecting the market.

2004 Materials Forecasts
Look out world, China is here. Traditionally, the U.S. has been considered the bellwether in global economics. When the U.S. economy is going strong, it bodes well for the countries that supply it. While this is still true, increasingly the U.S. is sharing its lead role. The European Union (EU), for one, continues to integrate its diverse parts into a more unified economic whole. More recently, it has been China that has moved up.

While most countries have seen limited and spotty growth in the last year or more, China's economy has boomed. Its manufacturing sector has been driven both by exports and by increased domestic consumption. To feed its manufacturing industries, it has imported more commodities. Steel scrap, for instance, is being brought in from the U.S. and elsewhere, raising worldwide prices. One result: U.S. producer Nucor Corporation (Mt. Pleasant, SC, U.S.) attributed a 59-percent third-quarter profit drop partly to increased scrap prices. China has boosted its imports of scrap copper, which can be used in air-conditioner production, by 40 percent in the first 8 months of 2003. In the energy area, Chinese crude oil imports are up 30 percent for the first 3 quarters.

 

Shown is the No. 3 cold strip mill from steel producer Ispat Inland (Chicago, IL, U.S.).
For 2004 and beyond, China could absorb even more commodities. For some, such as scrap steel, analysts are anticipating that this demand may contribute to continuing global shortages and price pressures. For others, supply may be ramped up to meet the higher demand levels.

While the burgeoning Chinese economy has garnered considerable attention the last few years, the U.S. economy now seems to be making a strong positive move. The U.S. gross domestic product (GDP) reportedly grew at a 3.3-percent annualized rate in the second quarter, and at a greater-than 6-percent annualized rate in the third quarter. If the U.S. economy is indeed out of the doldrums and sails into 2004 with a fair wind in its sails, look for more pressure on commodity supply and prices.

Globally, economists anticipate a better year. According to a report from the International Iron and Steel Institute (IISI), global GDP is expected to increase 3.1 percent. This compares to 2.2 percent in 2003, 1.9 percent in 2002, 1.2 percent in 2001, and 4.0 percent in 2000.

In the energy area, oil prices are up compared to a year ago, hovering just below U.S. $30 a barrel. And natural gas prices in the U.S. have stayed at a fairly high level for the last year. Depending on winter temperatures, these prices could increase. U.S. glass suppliers have been imposing natural gas-price linked surcharges, and some plastics suppliers that use fossil fuels as raw materials have passed on increases.

A new consideration is that, as China has imported more raw materials for its industries, it has created a huge demand for ships to deliver the goods. This has resulted in a ship shortage and has helped sharply boost shipping rates. Commodities such as metals and coal, which are shipped in bulk, may be most affected. One analyst expects shipping increases to add 3 percent to bulk commodity costs. Relief may not come for years, after more bulk ships are built and delivered.

More Chinese Clout

Perhaps the largest ongoing story in the international steel industry is the growing presence of China. As of September 2003, its year-to-date crude steel production stood at 160 million metric tons, which is 21.6-percent higher than in the same period in 2002. In comparison, reports the IISI, EU 9-month production was 119 million metric tons, up 0.2 percent over the same period of 2002. U.S. 9-month production was 68 million metric tons, a 1.3-percent drop compared to 2002.

In addition to importing scrap steel and other materials, such as iron ore, used in making steel, China serves as a market for finished steel imports. Some steel products have been bringing higher prices there than in the U.S. China's role as a steel importer may effectively reduce steel imports into the U.S. market.

In the U.S., steel imports have also been affected by tariffs imposed by President Bush in March 2002. These were put in place to give the U.S. steel industry a chance to restructure and become more competitive. The tariffs continue for now, but will decline to a maximum of 18 percent in March, and are scheduled to end a year later. The tariffs have come under criticism by the EU and other steel producing countries. A World Trade Organization decision last November backed the EU's position. The EU and other countries have threatened retaliatory duties on U.S. imports if the tariffs are not lifted. At press time, the U.S. had not made a decision on retaining the tariffs.

Many in the U.S. steel industry have argued that the full 3-year period is required to make the needed changes. But already significant changes have taken place. International Steel Group Inc. (Cleveland, OH, U.S.) has emerged with the assets of several liquidated producers, including Bethlehem Steel, formerly the third largest producer, and LTV, the fourth largest. U.S. Steel (Pittsburgh, PA, U.S.) acquired National Steel Corporation last May, while Nucor has acquired Birmingham Steel. Even so, producers such as Weirton Steel Corporation (Weirton, WV, U.S.) and WCI Steel Inc. (Warren, OH, U.S.) are in bankruptcy, and many companies continue to face high benefit and pension costs.

 


The U.S. steel industry has experienced some recent gyrations, with consolidations, tariffs, falling and rising prices, and imports all playing a role. Photo courtesy of Atlas Steel Products Co. (Twinsburg, OH, U.S.).

Lawrence J. Burr, president of Atlas Steel Products Co. (Twinsburg, OH, U.S.), tells APPLIANCE that his steel service center is faced with strong pressures from both steel suppliers and customers. "On the steel producer side, U.S. companies have losses as prices have declined part of this year (2003). Mills are making a strong effort to reverse this with price increases in the first quarter. But even with consolidation, there is a question whether capacity has been reined in enough to make higher prices prevail. The big price spike a year-and-a-half ago took place when LTV closed and tariffs went into effect. But with International Steel Group on stream, capacity is not significantly down.

"From the customers' side, pressures to reduce costs haven't diminished in any way," he adds. "Competition from Asia especially remains extremely compelling, and at times overwhelming. Customers can't arbitrarily accept higher pricing. While there is no question that steel producers need higher prices, appliance and other domestic manufacturers need lower prices due to the Chinese competition.

"Regarding supply, we don't foresee any shortages, even though there are signs the economy will strengthen going into 2004," he concludes. "Supply should be helped by the decline in the import tariffs, which will take place in March."

For 2004, the story will be pressure on costs from metallics such as iron scrap and pig iron, says Charles Belanger, marketing manager for integrated producer Ispat Inland Inc. (Chicago, IL, U.S.). "As China ramps up, demand for raw metallics has gone up and has affected all steel producers. In addition, natural gas prices are up. I think this metallics issue is going to be long term. It's been bandied about that with higher scrap prices, integrated mills may get a cost advantage over the mini mills that use scrap," Mr. Belanger notes.

"From a demand standpoint, we look for a mixed picture," he adds. "Consumer goods such as appliances, as well as housing and automobiles, will likely stay at or near their high levels. We anticipate the business segment to be the real driver in 2004. There will be a lot of companies reinvesting, especially in computers and software. Of course, we'd like to see major manufacturing plant expansions, but we don't expect that.

"I don't foresee any shortages of cold-rolled or coated steel," he concludes. "However, hot-rolled [steel] could be a little tight if there is strong demand."


"For the last year, consolidation and absorption and pretty poor demand from business was the story."
Charles Belanger of Ispat Inland Inc.


An adequate supply of electrical steel and steel for porcelain enameling is foreseen by Gary Hamity, president of steel service center Mapes & Sprowl Steel Limited (Elk Grove Village, IL, U.S.). "For enameling steels, capacity utilization rates have been going up, while imports have been going down the last year or so. Nonetheless, only if there is a spike in demand in the beginning of the year might there be a temporary problem. Overall, market demand seems pretty consistent and is tied to housing trends.

"Consolidation at the mill and service center levels should give a better opportunity for growth for the survivors," he observes. "While productivity is a given, the steel producer survivors will focus on quality and materials at reasonable costs, and appliance companies will benefit. But consolidation is far from over."

Growing demand from China has pushed global stainless steel production to an estimated growth rate of 5.8 percent for the full year 2003, says the International Stainless Steel Forum (ISSF). For 2004, an expected recovery in the global economy may result in a sharp rebound in demand for stainless steel, especially in the capital goods sector. Demand is also expected to increase as stockers and fabricators replenish their supplies at the beginning of the new year.

Metals Supplies Pressured

 


Metal injection molding forms very fine metal powders into complex shapes impossible to form by other metalworking processes. This complex net-shape part is formed via a multi-cavity injection mold, with four slides, three cores, and 15 seal-off surfaces per cavity. The blade clamp is used in a Black & Decker DeWalt DW303MK professional reciprocating saw. The keyless blade clamp holds the saw blade in place, securing it to the power head. Photo courtesy of the Metal Powder Industries Federation.
In October 2002, The Wall Street Journal reported that metal inventories worldwide were at their lowest levels ever. Many metal suppliers had reduced capacity due to slack demand in North America, Europe, and Japan. The suppliers did not fully anticipate the rapidly rising demand from China, which has depleted existing stocks. Not surprisingly, prices for such commodities as aluminum, copper, and zinc are up. Copper prices are at a 6-year high, while alumina, the basic ingredient to produce aluminum, is at nearly twice its price of a year ago.

For copper tubes, there should be a more-than adequate supply in the U.S. and elsewhere. "However, copper prices have been on the rise," points out Geoffrey Palmer, president of Outucompu Copper Franklin (Franklin, KY, U.S.). "Recently one of our suppliers told us of a $25 per ton increase, which translates to more than a $0.1-increase per pound. Overall, copper pricing of late has been more than $0.90 a pound. This is about $0.20-more than a year ago. Copper supply is adequate, but with a lot of copper scrap going to China, distribution patterns have been disrupted. This has added costs, such as freight charges, into the copper price," Mr. Palmer adds.

The powder metallurgy area in North America, which deals with both ferrous and non-ferrous metals, experienced strong growth in 2002. "Growth carried over through the first quarter of 2003 and then stabilized after that," says Peter Johnson, spokesman for the Metal Powder Industries Federation. "Although the automotive market is P/M's best customer, appliances, power tools, and lawn and garden equipment also take advantage of P/M's cost savings, unique properties, reliability, special materials, and design capabilities."

 

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