Stan Hankowski, a seasoned Buyer with a major American retailer tells an intriguing story that shows how Purchasers can help themselves by helping their suppliers.
The Chinese authorities have led to the creation of a new state-owned rare-earth company combining the activities of Ganzhou Rare Earth Mineral Industry Company, and a number of smaller local companies including Longnan Wanbao Rare Earth.
The red clay hills of Ganzhou in Jiangxi are home to an estimated 36 per cent of China’s rare earth reserves, and China provides about 95 per cent of the world’s rare earth shipments. Now the only company in the area, Ganzhou Rare Earth Group will be present at all stages of the rare earth production process: mining, smelting, separation and trading. “From now on, Ganzhou will step up efforts to facilitate the merging and restructuring of the rare earth industry,” said Liu Jianping, vice mayor of Ganzhou.
The steel sector still shows a significant global over-capacity according to Ernst & Young’s report, Global steel: A new world, a new strategy, highlighting the issues and challenges facing the sector.
The planet will still produce too much steel this year. Europe may well have closed many furnaces last year, emerging markets have not cut their production and instead increased it! China has an overcapacity of around 40 million tons of steel: its economy can not absorb all this metal since construction as well as the automobile industry slowed down and will only gradually start picking up.
At $80 in September 2012, the iron ore price was at its lowest for the past 3 years. In 3 months, it surged to a current price around $150 a tonne, a 80% increase! But will it last? As it is often the case, China is the reason for the soaring price of the metal required to produce steel.
Chinese steelmakers absorb 60% of the global iron ore and are doing all they can to put their hands on any available cargo. It is true that at this time of year, China needs to import more since Chinese iron refining factories are typically idling in winter. China also imports more at the beginning of the year in order not suffer from supply disruptions in case the iron ore mines in Australia and Brazil get flooded as it is the beginning of the rainy season in these two countries. However, the current rush exceeds the usual seasonal increase.
Worldwide steel mills have reached a total estimated supply capacity of 1.8 billion tons, vs. a steel global demand of only 1.5 billion tons. Like Europe, China produces too much steel and it must restructure its industry.
Over the last 10 years, when steel production increased by 20% in Europe, it went up by 534% in China which now produces nearly half the world’s steel vs. 18% in 2001. The growth of the Chinese steel industry corresponds to the rapid development of the construction and infrastructure industry. Since 2008, the sector has also been heavily subsidized by the Chinese public banks.
The trillion-dollar-a-year global steel industry is expected to remain, for the foreseeable future, the most fractured of major industries. The worlds top five steel companies control only 18.2% of global steel supply.
Global steel has big problems: It’s too big; it’s getting bigger; and because it’s so fractured, putting the brakes on seems unlikely.
“Overnight there were 200 companies suddenly marketing rare earths, from just five in 2009,” he said. “While large projects like Lynas‘s will still be viable, smaller projects will struggle, and a lot of those 200 companies will go away again.”
“In the light rare earths market, supply growth is plentiful and there is an immediate concern about what that supply does to pricing,” said Tim Schroeders, a fund manager at Melbourne-based Pengana Capital.
Some rare earths are falling out of favor faster than others. A kilogram of lanthanum oxide—used in oil refining and hybrid vehicles—now fetches just US$13 a kilo, compared with an average US$104 a kilo last year.
Plunging prices have turned the U.S. into one of the most profitable places in the world to make chemicals and fertilizer, industries that use gas as both a feedstock and an energy source. And they have slashed costs for makers of energy-intensive products such as aluminum, steel and glass.
“The U.S. is now going to be the low-cost industrialized country for energy,” the energy economist Philip Verleger says. “This creates a base for stronger economic growth in the United States than the rest of the industrialized world.
According to MetalMiner IndX℠ data, grain-oriented electrical steel coil prices and electrical steel coil surcharges per metric ton have both been consistently declining over the past half-year, and the GOES coil price per ton as of September 2012 is the lowest it’s been since June 2006.
The Worldsteel Association, which includes almost all of the global steel producers, released its October 2012 Short Range Outlook (SRO) for 2012 and 2013. Steel demand will slow down further in 2013: it will only be 2% in 2012, 3, 2% in 2013, against 6% over last year.
What strikes first is the slowdown in emerging countries: 3% additional steel consumption in 2012, a little more next year. It is far from the 10% growth a year for the last ten years. Among these countries, it’s in China that the growth will slow down most. Steel demand in China is expected to increase by 2.5% to 639.5 Mt in 2012 after 6.2% growth in 2011. In 2013, Government stimulus measures are likely to moderately improve the economic situation. This follows sluggish exports resulting from the global economic slowdown. Thus China’s apparent steel use is expected to rise by 3.1% and will reach 659.2 Mt in 2013.