Alexei Mordashov prepares Severstal for future

Transcription

July-August 2014 | Leading for over 100 years
Alexei Mordashov
prepares Severstal
for future growth
ERM: profit from
risk management
Zinc supply and
demand rebalance
Lead batteries
resist competition
Backed by our dedicated workforce, commitment to operational performance and
passion to excel, we have consistently surpassed our production records. Poised to
grow, we will continue to deliver the highest value to our employees, customers,
suppliers and shareholders globally.
We are a plus-912,000 metric tonne aluminium producer, and we aim higher.
Since 1971, making Bahrain proud.
albasmelter.com
July-August
Features
18
34
Lead and zinc
38
Credit covered
Insuring against possible
Zinc turns a corner
defaults by customers is
After many years
an increasingly important
of supply-demand
aspect of global trade
imbalance, the zinc
market is reviving and
prices have improved
Tools and services
accordingly
Three tools available for
severstal
Cover story
Alexei Mordashov
The majority owner
and ceo of Severstal
discusses the global steel
business and the Russian
steelmaker’s own
strategy within it
18
36
Enterprise risk
management
evaluating specific risks
include CTRM software,
plant monitoring systems
and actuarial analysis
24
Risk and reward
What is enterprise risk
management, and how
is it evolving to cope with
today’s complex markets?
25
42
The power of lead
Some studies have
concluded that demand
for lead in batteries
is assured for the
foreseeable future
29
Commodity trade
insurance
Traders have become
more sophisticated
about arranging bespoke
insurance
32
Hedging options widen
Competition between
exchanges is giving
price risk managers an
expanding choice for
hedging
Visit the website
metalbulletin.com
42
Download the app
Join the Metal
Bulletin Group
Follow
@metalbulletin
ILA
Financing steel trading
Diversity is key to
minimising risks in
arranging finance
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30
July-August 2014 | Metal Bulletin Magazine | 3
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Metal Bulletin Research
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and steel raw materials
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Supply chain
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Investments made
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44
48
4 | Metal Bulletin Magazine | July-August 2014
Events
Forthcoming conferences
and exhibitions
Innovations
New developments
in metals technology,
processes and products
Prices
49
June averages
45
Rusal
8
50
44
FLSmidth
Chartist
Will the World Cup or
Olympics spur growth
in Brazil?
47
People moves
New appointments
around the global
industry
15
Regional review
Correspondents in
Europe, North America,
Latin America, Asia,
Africa and the Middle
East discuss topical
developments in their
regions
rio tinto
Comment
Risk management runs
through it
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Comment
Risk management runs through it
he notion that you need to speculate to
accumulate encapsulates the idea that to
profit from any activity it is essential to
embrace a degree of risk. In that context,
risk is ‘good’ in the sense that it offers
‘upside potential’.
Conversely, weak understanding of the risks being
taken or poor judgement about those that are worth
taking – often combined in complex and dynamic ways
– can clearly have bad consequences, or serious
‘downside potential’.
The top-level process of identifying, measuring,
analysing, controlling and mitigating risks in a business,
considered as a whole, is the stuff of Enterprise Risk
Management (ERM) – the major special feature topic in
this combined July-August issue of the magazine.
Within it we look at trends in the process and its aims;
some examples of the major types of risk faced, with a few
of the approaches used to reduce them; the latest
developments in price risk management and insurance;
together with a small selection of some of the key tools
and services used for risk management.
Overall, ERM is undergoing a transformation to make
it a more integrated part of the ways companies run and
manage their business, while at the same time extracting
additional value from a process that in itself takes
significant resources to work well.
Alexei Mordashov, majority owner and ceo of
Severstal, discusses some of the risks facing global steel
producers in this month’s cover profile. He stresses that
the steel sector worldwide has an implied risk in the
industry, brought about by global excess steelmaking
capacity, requiring more discipline on the supply side.
Disruptive technologies in the form of alternative
battery designs are sometimes seen as a threat to
conventional lead-based batteries – particularly in their
key automotive markets. However, as an article
reviewing the sector points out, advanced lead battery
designs, coupled with an efficient recycling system, are
sustaining demand well and offsetting that risk.
Meanwhile, sister metal zinc is seeing a price
resurgence as mine supply is temporarily restrained and
demand remains healthy. The inherent risks of deficit or
surplus remain over the long term as ever.
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Newsreview:non-ferrous
extract zinc, and the second in
North America, after Torontobased HudBay Minerals, to use
cell house technology. Solvent
extraction is used because it is a
technology that can cut out the
impurities from the feedstock,
which is dust derived from
steelmaking electric arc furnaces.
Alcoa takes major stride
into aerospace
Alcoa has acquired the UK-based
aerospace components
manufacturers Firth Rixson for
$2.85 billion. Firth Rixson is a
producer of seamless rolled jet
engine rings and vacuum-melted
aerospace superalloys, and is a
major supplier of jet engine
forgings. Its revenues are
expected to grow by 60% over
the next three years to $1.6
billion, around 70% of which is
secured by long-term
agreements. Alcoa’s annual
aerospace revenues will grow by
20% to $4.8 billion as a result of
the acquisition.
“This transaction will bring
together some of the greatest
innovators in jet engine
component technology; it will
significantly expand our market
leadership and growth
potential,” said Alcoa ceo Klaus
Kleinfeld. Alcoa recently broke
ground on a $100 million
aerospace expansion in La Porte,
Indiana, USA, where it will
produce nickel-based superalloy
parts for jet engines.
Ernest Henry to double
copper output
Glencore’s Ernest Henry Mining
operation in Queensland,
Australia, is set to ramp up
copper ore production from 3
million tpy to 6 million tpy in
2015. This will raise annual
production to 50,000 tpy of
copper and 70,000 oz/year of
gold in concentrate over an
exended mine life to 2026.
Glencore is investing A$589
million ($554 million) in Ernest
Henry Mining to transition from
open-pit to underground
operations. On June 25 the
project started operations from a
new, 1km-deep hoisting shaft.
The investment has added 14
years to the mine life, to 2026,
said Glencore. As of December
2013 Ernest Henry had
underground ore reserves of 74
million tonnes at 1.04% copper
and 0.53 g/tonne of gold.
Horsehead Holding has begun
zinc metal production at its new
Mooresboro, North Carolina,
smelter in the USA. The
ramp-up to the plant’s initial
capacity of 155,000 tpy is
expected to take up to six
months, the company said. The
plant will initially produce
special high-grade (SHG) zinc in
slab form, and then focus on
continuous-galvanizing grade
and Prime Western grade in both
slab and jumbo form later. While
the extraction technology at its
Monaca, Pennsylvania, facility
(which closed in May) restricted
Horsehead to producing only the
Prime Western grade, the
Mooresboro plant will give it
access to the full North
American market, said president
and ceo James Hensler.
The company is the first to use
the solvent extraction process to
Bolivia’s Karachipampa smelter
is in the final production phase
with the operation of its oxygen
plant, and is expected to
commence commercial output of
lead and silver from September
2014, the president of the
country’s state-owned Comibol
said on July 4. Karachipampa was
constructed in the 1980s, but has
never operated due to a lack of
local concentrates. The site is
expected to produce 21,063 tpy
of lead and 163 tpy of silver.
Karachipampa’s management
was transferred in 2009 to the
state through Comibol, after
previously being owned by Atlas
Precious Metals of Canada and
the Bolivian government in a
joint venture.
Molybdenum production
and use at record highs
Global production of
molybdenum in 2013 reached a
new high of 539.2 million lb
(244,581 tonnes), up from the
previous year’s record of 535.2
million lb. Full year figures from
the International Molybdenum
Association (IMOA) also show
global molybdenum use at 537.7
million lb, breaking the previous
year’s record high of 522.5
million lb.
The greatest usage of
molybdenum in 2013 was in
China, where use increased from
188.4 million lb in 2012 to 196.2
million lb in 2013. Europe
recorded the second biggest
share with 140.4 million lb, up
from 135.9 million lb in 2012.
Japan and USA were the third
and fourth largest users of
molybdenum by region,
recording 57.4 and 56.1million
lb, respectively. Demand in the
CIS was 23 million lb, with other
countries together totalling 64.6
million lb.
Emal completes its
start-up of the world’s
longest potline
Emirates Aluminium (Emal),
now an operating subsidiary of
Emirates Global Aluminium
(EGA), has started up the last of
the 444 cells of the Emal phase II
potline expansion, raising the
company’s production capacity
to 1.32 million tpy. It is expected
to produce 1.2 million tonnes
this year.
The milestone was reached
some three months ahead of
Horsehead Holding
New US zinc smelter
starts up
Bolivia’s
Karachimpampa to start
up in September
Horsehead’s Mooresboro facility will be able to produce all commercial zinc grades for the North
American market by using the solvent extraction process
Get the latest metals news at
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wood, and its promise for
sustainable development, the
company said.
company’s ilmenite comes from
Ukrainian suppliers, including
Volnogorsk and Irshansk. For
now, supplies from Ukrainian
plants remains uninterrupted.
However, in case of severe
supply disruptions, the company
could also look to alternative
sources of material in Vietnam or
Africa. Russia also has deposits of
titanium ore, which have slightly
poorer metal content than those
in Ukraine, but there is enough
to guarantee full independence
from any foreign suppliers for
the company, the company said.
Rusal
China cancels antimony
restrictions; raises rare
earth quotas
Krasnoyarsk, as well as other Rusal smelters, will be focusing
more on higher-value products, including the auto sector
Rusal to build a new
casting line
Rusal will invest $45 million in a
new casting line at its
Krasnoyarsk aluminium smelter
in Russia, which will produce
large-diameter extrusion billets
at a capacity of 120,000 tpy. It is
expected to be complete in 2016.
“Our consumers in construction,
packaging and automotive
industries will all benefit from
the new alloys produced at
KrAZ,” Evgeny Nikitin, director
of Rusal’s aluminium division,
said in a statement; “Largediameter billets are in particular
demand in the automotive
industry, which are used to
produce wheels for pickups and
small trucks.” Rusal said in
September that it will convert
some of its Russian aluminium
smelters to the production of
vehicle components as well as
rolled and cable products.
FerroAtlántica to set up
silicon metal plant
in Canada
Spain’s FerroAtlántica plans to
set up a 100,000 tpy silicon
metal plant in Port-Cartier,
Quebec, which is expected to be
fully operational by December
2017. The environmental
impact study (which started in
June) will cost $215 million, and
the whole project will require a
total of $382 million.
FerroAtlántica chose
Port-Cartier as the site for the
project because of its
accessibility by boat, train and
truck, the ready availability of
LME ring to stay ‘as long
as market needs it’
The London Metal Exchange
will keep the open-outcry
trading ring open “for as long as
the market needs it”, ceo Garry
Jones announced on June 23.
After a six-month internal
review, the LME has decided to
keep the ring open beyond
January 2015, and invest
£1 million in new technology to
enhance the price-discovery
process on the floor. When it
acquired the LME, Hong Kong
Exchanges and Clearing pledged
to keep the ring open until at
least January 2015, which
created uncertainty about its
future beyond that date.
VSMPO stockpiles
ilmenite as precaution
Russian titanium producer
VSMPO Avisma has stockpiled
up to eight months of ilmenite
titanium ore supply in case of
disruptions in Ukraine, the
company has said. At the
moment, almost 100% of the
Antofagasta integrates
mines in Chile
LME
schedule, the company said. At
1.7km long, the new potline is
the longest in the global
aluminium industry. Emal says
that it is also home to the world’s
largest gas treatment centre, the
world’s biggest anode baking
furnace, the biggest single-site
captive power station, and the
largest single-site casthouse.
China will cancel its production
quota for antimony this year, the
ministry of land and resources
said on June 8. The government
also plans to increase its
production of rare earth
materials by about 12%
year-on-year to 105,000 tonnes,
from 93,800 tonnes in 2013. It
will keep the tungsten quota flat
at 89,000 tonnes.
The cancellation of the
antimony mining quota is the first
time the Chinese government has
removed controls over the
metal’s production since the
quota was first introduced in
2009. However, the low
antimony price levels have
already driven some producers to
halt operations earlier this year
rather than sell at a loss.
The Ring: secured beyond 2015 - and for as long as necessary
Antofagasta Minerals has
announced the integration of its
El Tesoro and Esperanza copper
operations in Chile, leading to
the creation of a new company,
Minera Centinela. The Londonlisted miner aims to increase
synergies and economies of scale
with the move, since both
operations are located in the
Chilean region of Antofagasta.
“Minera Centinela will be one of
the biggest mining operations in
the country and it will be in a
position to better address the
challenges the mining industry
faces,” Antofagasta Minerals ceo
Diego Hernández said in a
statement.
Newsreview:steel
immediate plans to introduce
ferrous contracts.
ArcelorMittal Tubular
Products Shelby in Ohio, USA,
is to invest $30 million to
increase drawn-over-mandrel
(DOM) output to meet high
demand for the products in the
USA. It currently makes about
250,000 tpy of welded and
precision seamless tube for a
range of industries, but the
company has declined to
comment on how much the
capacity would increase. The
investment will remove
bottlenecks and allow the
facility to more fully utilise
existing upstream tubemaking
capacities, says the company.
The expansion, which will
create another 45 jobs, is due to
begin in the third quarter and
take about 18 months.
EU cracks down on the
theft of scrap
Saudi Steel Pipe (SSP) has
started production of OCTG
pipe in diameters as large as
20in (508 mm), having received
a request for such materials
from the country’s national oil
producers, Aramco. SSP also
said that a pipe coating line able
to accommodate pipes up to
30in diameter is about 90%
complete, with planned trial
production in the third quarter
of 2014 and commercial
production due in the last
quarter. Another plant for tube
and pipe up to 8in diameter is
80% complete, and commercial
production should start in early
2015. SSP produces 240,000
tpy of welded steel pipe.
Shipbuilding capacity
likely to be cut
Global shipbuilding capacity is
likely to be cut again by
2017-18 as new ship orders fall,
according to Mark Jenkins of
shipbroking firm Simpson
Spence & Young. The slump in
new orders has led to much
capacity being idled after the
crisis of 2008, although this
Ship orders have fallen since peaking in 2007
may not be permanent closure.
Ship orders worldwide peaked
in 2007, with a steep fall seen
thereafter. Overall volumes of
new orders and completions
have been very volatile since
2010.
Jenkins noted that the profile
of new shipbuilding by region is
changing rapidly, with China
taking a greater market share.
However, the Chinese
government is seeking to
balance the advantages of high
levels of shipyard capacity
against the negative risks of
over-supplied markets, he said.
Baosteel scales back
Zhanjiang project
Baosteel has slashed 20 billion
yuan ($3.2 billion) off the
planned investment in its new
steelworks in Guangdong’s
Zhanjiang city, cutting the total
spend to 50 billion yuan. The
steelwork’s capacity will be
reduced to 9 million tpy from
the original 10 million tpy. The
project, which started
construction in 2012, is on
schedule to begin operating its
No. 1 blast furnace in October
2015, with hot and cold rolling
mills starting the following
year.
The plant is aimed at tapping
into the southern Chinese and
Southeast Asian markets,
especially those in the
automotive and home
appliances sectors. Guangdong
province has 11.65 million tpy
of obsolete crude steel capacity
phased out to accommodate
the Zhanjiang steelworks,
Chinese media reported.
LME to launch scrap and
rebar contracts
The London Metal Exchange
plans to launch cash-settled
futures contracts for ferrous
scrap and rebar. The exchange
is consulting with the industry
and has yet to decide which
indices or prices it would base
the contracts on, said head of
business development
Matthew Chamberlain, but
further details will be
announced later this year. After
the initial launch of these
contracts, the LME plans to roll
out coking coal, iron ore and
stainless steel cash-settled
contracts at a later date, he
added. Hong Kong Exchanges
& Clearing, which bought the
LME in 2012, has no
EU police agency Europol has
led a crackdown on illicit scrap
dealers in a two-day operation
which yielded 271 arrests and
identified 146 cases of theft
across Europe. Law
enforcement teams checked
8,300 scrap metal dealers in 20
European countries. Police also
checked border roads, railway
tracks and construction sites,
with specific scrapyards
suspected of handling stolen
goods getting special attention.
Information gathered during
this operation will be further
analysed by Europol to clarify
the methods used to steal,
distribute and sell scrap, as well
as the individual criminals and
gangs involved in this illegal
trade. The operation “sent a
strong signal to the gangs of
organised metal thieves who
operate all over Europe, and
the many scrapyards that
accept all kinds of metal with
‘no questions asked’,” Europol
said.
EC launches trade case
on CR stainless
The European Commission has
launched an investigation into
cold-rolled (CR) stainless steel
imported into the European
Union from China and Taiwan,
the European steel association
ISRI
Saudi Steel
Pipe launches
large-diameter OCTG
SHUTTERSTOCK
ArcelorMittal expands
US tube capacity
Ferrous scrap is the next target for LME futures contracts
Get the latest metals news at
Iron ore prices forecast
to fall further
Australia’s Bureau of Resources
and Energy Economics (BREE)
has revised downwards its
forecast for iron ore prices in
2014 on continued supply
pressure. Average spot iron ore
prices will fall to $105 per
tonne fob this year, down 17%
from year-earlier levels, BREE
said in its latest quarterly report
on June 25. The new prediction
is 4.5% lower than the initial
price target of $110 per tonne
fob for the year that the
industry body announced in
March.
BREE attributed the price
drop to “a surge in the
availability of supply coming
from Australia”, combined with
high iron ore port stocks and
low steel prices, although
China’s steel production
remains historically high.
BREE also forecast a further
year-on-year decrease of 7.6%
to $97 fob in 2015 (in 2014 US
dollars), due to increasing
competition among iron ore
exporters.
Evraz starts Kazakh
rebar mill
Russian steelmaker and miner
Evraz has started producing
rebar at its 450,000 tpy
Kostanay mill in the north of
BHP Billiton
Eurofer said on June 26.
Eurofer confirmed it had filed a
complaint, against alleged
dumping of the material by
Chinese and Taiwanese
exporters, in mid-May, on
behalf of a “major portion” of
producers in Europe. Increased
production in China and
Taiwan has led to overcapacity
and higher exports, Gordon
Moffat, director general of
Eurofer said. “Their increased
output cannot be absorbed
domestically. As a result they
are flooding the markets that
are still unprotected like the
EU,” he added, noting that the
complaint indicates a dumping
margin from these two
countries of 20%.
A surge in supply coming from Australia is depressing iron ore prices globally
Kazakhstan. The first batch of
rebar, which already has all the
necessary certificates, has been
delivered to customers, Evraz
said. Kostanay, which can
produce rebar in 10-40mm
diameters, currently makes
hardened A500S rebar in
14mm, 18mm and 25mm
diameters and A3 rebar of
grade 25G2S steel in 18mm
and 25mm diameters. The
billet feedstock for rebar
production is supplied from
Evraz’s West Siberian Iron &
Steel Plant (ZSMK). The mill’s
launch is expected to add
pressure on the already
oversupplied Russian long steel
market, as Evraz is planning to
redirect the rebar it has been
exporting to Kazakhstan from
its Russian facilities.
Guinea ratifies
$20 billion Simandou
investment plan
Guinea’s parliament has
approved the $20 billion
investment plan proposed by
Rio Tinto and Chinalco to
develop the Simandou deposit,
one of the world’s largest
untapped iron ore reserves.
The finalisation of the
investment agreement comes
after years of discussion
between the Government of
Guinea, Rio Tinto and its
project partners Chinalco and
the International Finance
Corporation (IFC). The project
cost includes a 650 km railway
connecting Simandou to ports
on Guinea’s Atlantic coast. Rio
Tinto has admitted that the
project will miss the first planned
production deadlines in 2015,
which were published in the
company’s 2011 settlement
agreement with the
government.
Mobarakeh inaugurates
second DRI megamodule
Iran’s Mobarakeh Steel
launched pre-commissioning
operations at its second DRI
mega-module in June, with a
capacity of 1.5 million tpy. The
company’s first mega-module
was commissioned in July
2012. The plant has been set up
through an engineering,
procurement and construction
(EPC) contract worth 2.34
trillion rials (about $91 million)
with Iritec, a major Iranian
contractor, according to the
company. About 80% of the
plant’s equipment has been
supplied by local
manufacturers, says a company
spokesman.
SteelAsia to double
rebar capacity in
Philippines
SteelAsia Manufacturing, the
Philippines’ biggest
steelmaker, plans to double its
production capacity to
4 million tpy by 2016 to meet a
projected increase in demand
for rebar in the country. In the
pipeline are two rebar rolling
mills: the 1.2 million tpy
Plaridel Works in Luzon region
and the 800,000 tpy Cebu
Works in the Visayan region,
Roberto Cola, SteelAsia’s vp
for industry affairs, told MB
sister title Steel First in early
June. SteelAsia, which caters to
some 70% of the Philippines’
demand for construction steel,
currently operates five rebar
works across the archipelago
with a total installed capacity of
2 million tpy.
Apparent steel consumption
in the Philippines in 2013
totalled 6.6 million tonnes, up
9.2% year-on-year. Long
products accounted for 66%
of that total, at 4.3 million
tonnes.
MBR analysis
Lead
Price forecasts revised higher
The ugly sister again
MBR has recently changed its
forecast for the Q3 2014 cash
price, from $1,800/tonne to
$1,843/tonne, and the 3M
price from $1,840/tonne to
$1,877/tonne. We attribute this
to the pick-up in investment
sentiment across the base metals
complex on the back of stronger
general fundamentals and
reassuring demand indicators of
late in the USA and China. In
addition, tighter fundamentals
in the aluminium market itself,
as falling stocks and the
perception of a swing to a
genuine supply deficit after six
years of annual surpluses, have
been supporting a growing bull
case for this metal.
However, we need to bear in
mind that marginal producers
Although lead prices have
picked up over the past month,
this market’s performance is
still being overshadowed by
sister metal zinc.
The battery metal is
perceived by investors to have
the least-convincing story of
the two, both on the charts and
in the physical market.
The latest ILZSG data
played into the hands of the
zinc bulls too, as it showed a
headline supply-demand
deficit of 107,000 tonnes in the
year to April for zinc, versus
lead’s deficit of 12,000 tonnes.
And compared with the same
period last year, zinc has swung
into its large deficit from a
position of oversupply while
lead’s deficit has shrunk,
LME cash price, $/t
1,900
1,775
LME/MBR
Aug 13
Sep 13
Oct 13
Nov 13
Dec 13
Jan 14
Feb 14
Mar 14
Apr 14
May 14
Jun 14
Jul 14f
1,650
have been keen to hedge sell into
price strength recently and this
activity might cap upside price
potential. So we are not getting
overly bullish on aluminium yet.
In addition, stocks are still high
and the market is still suffering
from overcapacity, and we
should be aware that higher
prices are already starting to
contribute to capacity restarts in
some regions, especially China.
LME cash price, $/t
2,200
2,120
LME/MBR
2,040
Aug 13
Sep 13
Oct 13
Nov 13
Dec 13
Jan 14
Feb 14
Mar 14
Apr 14
May 14
Jun 14
Jul 14f
Aluminium
creating the perception that
zinc is a market tightening up
whereas lead appears to be
loosening.
We have already seen lead’s
previously well-established
premium over zinc evaporate
over the past month and it does
not look like regaining it any
time soon. Our price forecast
for lead in Q3 has been revised
down to $2,180/tonne.
Copper
Nickel
Back to pre-Qingdao price levels
Fundamentals must catch up with prices
7,400
7,000
LME/MBR
6,600
MBR has long been expecting
higher prices in Q3 – our
$7,000/tonne forecast for the
period felt a long way off when
prices were plunging into the
mid-$6,000s throughout Q2 and
as recently as June, but suddenly
this forecast has begun to feel a
little low. We are leaving it
unchanged for now, but clearly
the risks to prices have shifted to
the upside.
Nickel prices are consolidating,
and this may last a while given
the speed and scale of the rally
that preceded it. Prices peaked
around $21,000/tonne in May
and have been as low as
$18,000/tonne during this
consolidation phase. For the
nickel bulls, the medium-term
upward trend on the technical
charts remains intact, so there is
still the expectation that price
gains beyond the May peak will
resume in time. Our view
remains that the rally had run
ahead of itself and that the
fundamentals now need time to
catch up with these higher price
levels. In other words, the
market priced in tightness from
the Indonesian ore export ban
and now we must wait for that
LME cash price, $/t
25,000
17,500
LME/MBR
10,000
Aug 13
Sep 13
Oct 13
Nov 13
Dec 13
Jan 14
Feb 14
Mar 14
Apr 14
May 14
Jun 14
Jul 14f
LME cash price, $/t
Aug 13
Sep 13
Oct 13
Nov 13
Dec 13
Jan 14
Feb 14
Mar 14
Apr 14
May 14
Jun 14
Jul 14f
The potential fallout from the
Qingdao port probe was the main
concern of the copper market in
early June, but that has blown
over. At the time of writing, prices
have not only regained
pre-Qingdao levels but are back
where they were before the big
March sell-off. Macroeconomic
indicators in China and the USA
have improved over the past
month, the refined market
surplus remains elusive, there are
dominant position-holders
around on the LME exacerbating
tightness, TC/RCs are slipping
and scrap shortages persist. These
supportive factors are
underpinning the price recovery
and encouraging speculators and
investors that were previously
bearish.
tightness to start being felt in
the refined market. The
one-day delivery of over 19,000
tonnes into LME warehouses in
June served as a reminder that
there is still ample spare metal
around and, until it starts
getting tighter, price
consolidation will continue,
though it seems that this will be
happening above $18,000/
tonne.
In this regular section, MBR’s base metals team summarise their
in-depth reports to highlight key factors driving the markets and
short-term price forecasts. MBR’s Base Metals Weekly Tracker service
World leading market analysis
www.metalbulletinresearch.com
Tin
Good supply from China and Indonesia
LME cash price, $/t
24,000
22,750
LME/MBR
21,500
Aug 13
Sep 13
Oct 13
Nov 13
Dec 13
Jan 14
Feb 14
Mar 14
Apr 14
May 14
Jun 14
Jul 14f
Destocking in China seems to
have ended, with apparent
consumption up 11.5% over
January-May by our estimates,
after a 4-5% contraction in
2013. Stronger domestic
production – up 12.7% so far
this year – is the main driver,
which in turn is being fuelled by
high concentrate import
volumes from Myanmar. This
should translate into stronger
and more sustained growth in
Chinese refined output than
we’ve seen in some time. Plenty
of metal is coming out of
Indonesia again now, and
perhaps this is evident in the
way LME stocks have risen
steadily since February’s low.
As a result, the tin market does
not feel as tight as it was
expected to be this year, which
is capping the upside to prices.
Meanwhile, the likes of PT
Timah are effectively
protecting the downside given
their temporary export halt
announced after prices
dropped to $22,000/tonne.
Overall, the tin market has
traded in a narrow range for
nearly a year, and this looks
likely to continue.
Zinc
Beware the ‘known unknowns’
LME cash price, $/t
2,200
2,000
LME/MBR
1,800
Aug 13
Sep 13
Oct 13
Nov 13
Dec 13
Jan 14
Feb 14
Mar 14
Apr 14
May 14
Jun 14
Jul 14f
Base metal investors continue to
embrace the improving
fundamental and technical
outlook for zinc, with prices
continuing to run upwards in
early July and extending a
year-long uptrend, which still
has further to run. The
perceived zinc bull story has two
parts. The first is shorter term,
represented by falling exchange
stocks and an emerging supply
deficit after six years of surplus.
The second part is medium/
longer term and relates to a
series of mine closures and
start-up delays beginning last
year and stretching out to about
2016. These will lead to
concentrate shortages outside
China and in theory feed into
tightness in the refined market,
exacerbating the deficits. We
agree that this scenario is
possible and that prices could
rally further as a result.
However, there are some major
‘known unknowns’ – namely
the large stock overhang and the
potential for a Chinese mine
supply surge – that could derail
the emerging bull market before
it reaches the critical take-off
point some time in 2015/2016.
Analysis by Andy Cole, base metals analyst and editor of MBR’s Base
Metals Weekly Market Tracker. Email: [email protected]
provides independent, detailed and timely analysis on the latest data,
price movements and developments that impact the market conditions
and outlook for LME-traded base metals.
Ask an analyst
Why have chrome prices diverged?
Chrome ore and ferro-chrome
prices have been contradictory,
moving up and down depending
on which market and product
you choose to look at. Prices of
comparatively cheap South
African UG2 (upper ground)
chrome ore have increased, for
example, while higher ore prices
from Turkey have remained
relatively stable. In the ferrochrome market, meanwhile,
contract and spot market prices
in Europe, Japan and the USA
have steadily increased, while
those in China have fallen to
record lows.
For chrome ore, the
divergence in prices can
partially be explained by the
five-month strike to the end of
June by members of the
Association of Mineworkers
and Construction Union
(AMCU) working in South
Africa’s platinum mines. The
strike also caused the supply of
by-product UG2 and related
exports to China to decline too.
Customs data for the first five
months of the year reveal that
Chinese chrome ore imports
overall fell 12.5% year-on-year.
Supplies from South Africa,
somewhat surprisingly, fell by
only 9.4%. Volumes from
Turkey and elsewhere had
retreated at a greater speed,
suggesting that Chinese
demand levels have also been
much weaker than a year ago.
One of the causes of falling
ore demand/lower ferrochrome production in China
relates not so much to
weakening stainless steel
demand, but heightened and
competitively-priced imports of
ferro-chrome, which jumped
40% year-on-year through the
first five months of 2014.
Producers outside China
have succeeded in negotiating
higher prices, as stainless steel
mills in both Europe and the
USA have increased their
inflows of ferro-chrome.
Looking forward, which pricing
direction, that of China, or that
seen in the rest of the world, is
likely to dominate?
In each of the past four years,
ferro-chrome spot market
prices in both Europe and the
USA have typically moved
upward during the early months
of the year until May, at which
point they traditionally stall and
decline thereafter. The trend is
particularly pronounced in
Europe, where stainless steel
production typically drops by
some 10-20% during July and
August.
In the USA, stainless steel
production patterns are slightly
different, with typical output
falls of 10-15% in June. MBR
understands that spot market
ferro-chrome prices in Europe
are stabilising, downward
pressure has been less than
normal according to producers,
but will that mean that 2014 will
not repeat the downward
patterns seen in recent years?
The purchasing departments
at stainless mills are currently
more worried that surplus
ferro-chrome supply conditions
will spread from China over the
summer, slackening the supply/
demand balance elsewhere.
Analysis by The MBR Steel Team.
www.metalbulletinresearch.com
Every month an MBR analyst answers a question raised by
readers. If you have a question for our analysts, please email:
[email protected]
For free samples of MBR’s reports, please call Joshua Tait
(tel: +44 (0)20 7779 8000) or access
www.metalbulletinresearch.com/freesample.aspx
MBR analysis
Steel
Steel raw materials
Iraqi situation may hit rebar prices
Chinese indicators on the rebound
During the past month, both
long and flat-rolled steel prices
have trended downwards.
Flat-rolled steel prices had been
faring better previously, due to
the USA, which had seen rising
flat-rolled prices since
mid-March. US prices were
unsustainably high, however,
due to winter disruptions and a
brief slowdown in imports, and
thus they started to fall at the
end of May and continued to
trend downwards through
June.
As expected, Turkish long
products prices remained
under pressure in June and
signs of a collapse in
construction activity, and
therefore long products
demand, in Iraq are adding to
the impact on external
suppliers of previously rising
Iraqi demand. Normally, the
second half of the year is the
better half for Turkish
exporters, largely because of
seasonal strength in Iraq and
other export markets including
the USA and Europe. Margins
are also bolstered by the
traditional decline in scrap
prices that we expect to see
again during the third quarter
when demand in the USA and
Europe temporarily falls. This
year, however, if Iraqi import
demand were to
uncharacteristically fall further,
which seems likely, it is difficult
to see to which markets
Turkish, or for that matter
Ukrainian, exporters can divert
supply.
The relative cost positions in
both countries, however, give
exporters here a notable
advantage over their
international peers and as such
MBR’s Raw Materials Index
continued to retreat into July.
On a weekly basis, the index
started to find support from
rebounding iron ore
benchmarks in late June but not
enough to overcome the wider,
negative trend. Weakening
freight rates, Chinese coke
export and Turkish scrap import
prices drove the index
fractionally lower in the first
week of July. In that week,
Chinese 63.5% fines import
prices inched up to $95.00/
tonne cfr, still below the $100/
tonne cfr level they breached at
the beginning of June.
The outlook for iron ore
prices in China has become
marginally more positive, if
mainly because the extent of the
downturn proved unsustainably
acute. Mixed signals and
consequently high volatility in
the spot trades continue to
characterise our indices but two
things have stood out for us. The
first was Steelhome’s reported
calculation of iron ore port
stocks at the end of June. They
saw the biggest week-on-week
decline since the middle of
August, the period which was
just prior to the necessary
replenishment and subsequent
– unnecessary as it turned out
– stock building phase that has
characterised the market ever
since.
MBR believes that market
fundamentals in China have
finally stopped slackening or
weakening. Whether June
marks a so-called ‘inflexion
point’ or change in iron ore
market fundamentals is by no
means clear but the last week of
the month also marked the first
time all year that the state of the
100
80
Jan 12
Mar 12
May 12
Jul 12
Sep 12
Nov 12
Jan 13
Mar 13
May 13
Jul 13
Sep 13
Nov 13
Jan 14
Mar 14
May 14
Jul 14
90
Global flat products index
Global long products index
Steel price index
Jan 2012 = 100
MBR
we suspect that at least some of
the reduced demand to come
from Iraq will be diverted
elsewhere, potentially
impacting rebar prices in the
USA and Europe and also
production in these markets,
regardless of what happens to
the price of scrap.
‘At least some of the
reduced demand to
come from Iraq will be
diverted elsewhere,
potentially impacting
rebar prices’
Turkey was on course to
export more than 700,000
tonnes of rebar to Iraq in the
second half, assuming the 18%
year-on-year decline in trade
seen so far this year continues,
while in Ukraine the volume
would be almost identical, as
the Turkish reductions have so
far been filled by new Ukrainian
supply. Whether Turkish and
Ukrainian mills, or their
international peers, are forced
to reduce production, the
overall impact is clearly
negative for international rebar
prices.
Steel analysis by Alistair Ramsay,
research manager. Aramsay@
metalbulletinresearch.com
110
90
70
50
Jan 12
Mar 12
May 12
Jul 12
Sep 12
Nov 12
Jan 13
Mar 13
May 13
Jul 13
Sep 13
Nov 13
Jan 14
Mar 14
May 14
Jul 14
110
Chinese HMS No. 1&2 (80:20) import from USA cfr
Fines 63.5% cfr main China ports ($/tonne)
Australian hard coking spot fob price (metric)
manufacturing industry was
considered to be improving by
both the Chinese Federation of
Logistics and Purchasing
(CFLP) and HSBC, as both
agencies published Purchasing
Managers Index (PMI) readings
above 50.0 for June.
‘It is of no surprise to
us in the circumstances
that steel market
fundamentals in China
continue to tighten’
Of course the trend in the
steel market is quite removed
from the PMI but it is of no
surprise to us in the
circumstances that steel market
fundamentals in China continue
to tighten, judging by the
ongoing retreat in end-month
mill and traders’ stocks. The
latter, also published by
Steelhome, fell by 3% monthon-month for flat products and
9% for long products in June and
by as much as 17% and 21%
year-on-year, respectively. As
stockists run out of surplus
supplies, so-called “fire sales”
will not be available and
purchasing, not selling, will
become a priority.
Steel analysis by Alistair Ramsay,
research manager. Aramsay@
metalbulletinresearch.com
For access to MBR’s detailed product and regional price, supply and demand forecasts or for a free sample of MBR’s Steel
or Steel Raw Materials Market Trackers: www.metalbulletinresearch.com/freesample.aspx
In this section, MBR’s steel and steel raw materials team summarise their in-depth reports to highlight key
factors driving the markets and short-term price forecasts. MBR is a leading independent supplier of product and
regional price, supply and demand forecasts for steel and raw materials. For free samples of MBR’s reports, call
Joshua Tait (+44 (0)20 7779 8000) or access www.metalbulletinresearch.com/freesample
Regional review
Keep up with all our
correspondents at
North America
Myra Pinkham
Europe
Richard Barrett
Trade cases expected to hot up
ThyssenKrupp challenges EU energy policy
Even though
major US steel
trade cases filed
recently have
resulted in
preliminary rulings by the US
Commerce Department that fell
short of the petitioners’
expectations, more
anti-dumping and
countervailing duty filings are
expected shortly.
In his recent testimony before
the US Senate Committee on
Finance, Mario Longhi,
president and ceo of United
States Steel, observed that there
are currently 56 pending
anti-dumping and countervailing
duty cases in the USA of which
73% involve steel products.
In the OCTG trade case filed
last year against South Korea and
eight other countries, the US
Commerce Department’s
International Trade
Administration (ITA) decided
during its preliminary ruling not
to impose anti-dumping duties
against South Korea even though
its OCTG shipments accounted
for 894,000 net tons of the 1.6
million tons that the nine
countries exported to the USA
last year.
Remarks made
by the senior
management of
ThyssenKrupp
Steel Europe to
Sigmar Gabriel, Germany’s
Federal Minister for Economic
Affairs and Energy, when he
visited the company in
Duisburg in late June, typify the
concerns of Europe’s steel
producers.
According to ThyssenKrupp’s
own account of the meeting, ceo
Andreas Goss stressed: “If
energy prices in Germany
continue to increase, we will not
be competitive on a European
and international scale for much
longer.”
On potential extra burdens
for in-house electricity
production due to the
Renewable Energy Sources Act
(EEG), Goss said: “For decades
we have been converting the
process gases that occur
unavoidably in steel production
into electricity in our power
plants in Duisburg, thereby also
protecting the environment.
This sensible use of resources
must not be burdened with
additional costs.”
“Our steel plants operate with
high energy efficiency and under
severe price pressure. We
cannot afford further burdens
– whether from the EEG or the
upcoming reform of the
emissions trading system,”
added Dr. Herbert Eichelkraut,
Chief Operating Officer of
ThyssenKrupp Steel Europe.
Goss also pointed to the
importance of the steel industry
as the basis for industrial value
chains : “Without the steel
industry’s numerous
innovations, some of which
come about through close
cooperation with other sectors,
the successes of the German
automobile and engineering
industries, for example, would
not be possible.”
On the question of energy
prices, Gabriel commented:
“The amendment of the EEG
creates a dependable and
ambitious expansion path for
renewable energies. At the same
time we have succeeded in
maintaining cost relief for
energy-intensive industries,
giving businesses planning and
investment certainty. Germany
is showing that it is possible to
combine climate protection and
economic success.”
million related to aluminium
ownership in Qingdao.
For the commodities market,
the early signs were that this
could escalate into a widespread
investigation accompanied by
severe restrictions on the metals
trade into China. Holders of
metal sought to shift material
wherever possible to warehouses
– principally in Shanghai but also
outside China – where
regulation is more robust.
The effects overall have not
been quite so catastrophic as first
feared, at least on the market
itself. Copper premiums have
returned to previous levels, and it
became clear that this event was
more isolated than first
presumed, not involving enough
metal to truly disrupt any
particular market.
But the episode is likely to have
several longer-term effects, most
importantly making banks much
more rigorous in how they handle
and assess counterparties for
metals financing.
On the warehousing front, it
should speed up moves to
toughen regulation and oversight
in China’s warehousing sector.
This is the something the London
Metal Exchange nodded to when
it unveiled its own suggestions to
China’s government for
commodities warehousing
regulations in the Shanghai Free
Trade Zone, during a visit to the
UK by Chinese premier Li
Keqiang during June.
John J. Ferriola, chairman and
ceo of Nucor, says that this was
due the failure of the ITA to take
into account all of the information
supplied by the domestic industry
prior to issuing a preliminary
determination.
Longhi says it is not surprising
that in advance of the final
decision, due for mid-July, total
OCTG imports in May were up
77.4% year-on-year to 431,866
tons, including 214,000 tons
from South Korea. “They are
trying to dump as much product
as they can before the final ruling,”
he maintains.
Petitioners also voiced
disappointment in the preliminary
finding in a rebar trade case that
was filed last year. Ferriola asserts
that the Commerce Dept’s
determination that Turkey is
providing its industry with energy
subsidies but that those subsidies
were inconsequential to the value
of their exports, “flies in the face of
logic and good common sense”.
Should, as many suspect, the
final determination in these three
cases be more favourable to the
petitioners than the preliminary
findings, especially in the OCTG
case, traders say that further trade
action is likely.
Asia
Asia office
Qingdao fraud should tighten regulation
For the Chinese
commodities
sector, there was
no bigger recent
piece of news than
revelations about
warehousing shenanigans in
Qingdao. The Qingdao crisis
erupted in early June, when
traders and banks were alerted to
the fact that some metal in
Qingdao Port was being held
while the authorities investigated
fraud using warehousing receipts.
For example, some 400,000
tonnes of alumina was said to be
pledged in Qingdao, with only a
fraction of that actually existing,
some people familiar with the
matter said.
For individual companies, this
threatened exposure to the alleged
fraud amounted to hundreds of
millions of dollars. China’s Citic
Resources Holdings, for example,
admitted that it was missing some
100,000 tonnes of alumina,
worth about $38.5 million. More
recently, Standard Bank said it
had exposure of about $170
Regional review
Keep up with all our
correspondents at
Latin America
Ana Paula Camargo
Middle East
Serife Durmus
Low iron ore prices take their toll
Iraq casts shadow over regional market
Falling iron ore
prices are
causing
problems in
Latin America.
Brazilian mining company
MMX announced in late June
that it is having difficulty in
finding a partner to jointly
develop its Serra Azul iron ore
project in the country’s
south-eastern Minas Gerais
state.
“The deterioration in market
prices undermined discussions,”
ceo Carlos Gonzalez said. MMX
expected to find a partner by
June, but potential investors
have backed down due to the
slump in iron ore prices. Metal
Bulletin’s Iron Ore Index for
62% Fe material reached $94.02
on June 30, down from $134.89
on Thursday January 2.
In December last year, MMX
hired two financial advisers,
Credit Suisse and XP
Investimentos, to help it find a
partner to develop Serra Azul’s
expansion project. The
company decided to scale back
its expansion plans at that time,
as it depended on finding a
partner to secure the necessary
investment.
Aside from the
annual slowdown
due to Ramadan,
the region is also
suffering from a
further slowdown because in
northern Iraq the jihadist group
known as the Islamic State of Iraq
and the Levant (ISIS) seized
Mosul and the surrounding
region on June 10. Turkey’s longs
market was severely affected by
the seizure, as Iraq is the
country’s biggest export market.
Rebar trade between Turkey and
Iraq came to a complete stop. In
April, by contrast, Iraq imported
292,881 tonnes of rebar from
Turkey.
Local producers in Iraq have
also been affected by the crisis.
Iraqi steelmaker Al Anma’a Steel
cut production volumes in
mid-June in response to the
growing political unrest in the
country. The Basra-based
mini-mill has a capacity of
435,000 tpy of billet and 300,000
tpy of rebar. The management of
the company is closely
monitoring developments and
will scale up production volumes
once relative stability is foreseen.
Nevertheless, several
companies in the Middle East are
continuing to widen their
product range, in line with the
region’s main target of reducing
import dependency.
Rebar and sections producer
Star Steel of the UAE added six
new varieties of universal beams
(UB) to its list of available
products mid-June. The
company also plans to start
production of angles and
channels before the end of 2014.
UAE-based United Iron &
Steel is building a 250,000 tpy
steel galvanizing plant in Abu
Dhabi to cater to strong demand
for galvanized products in the
Gulf Co-operation Council
(GCC) countries. Production
should begin in 2016. The GCC
region currently imports about
70% of its galvanized steel.
Dammam-based Saudi Steel
Pipe (SSP) has started
production of oil country
tubular goods (OCTG) in
diameters as large as 20in (508
mm). The company had
received a request for such
products from the country’s
national oil producer, Aramco,
in April. SSP also said that its
pipe-coating line able to
accommodate pipes as wide as
30in is 90% complete.
analysts say that it would take
workers many years to make
back their lost wages.
On the other side of the fence,
employers are responding to
the cost of having low or no
output as a result of protracted
strike action. Anglo Platinum,
which estimated that it had lost
about ZAR11 billion due to the
strike, is now looking at selling
its problematic Rustenburg
mines. The platinum producer
is also believed to be moving to
mechanise 80% of its operations
in the next 10 years.
Other strikes continue. A
strike by members of National
Union of Metalworkers of
South Africa (Numsa) started
on July 1. The strike has shut
down foundries, as well as
automotive assembly plants.
But most concerning for the
country is the fact that among
the more than 220,000 strikers
are workers from power utility
Eskom. However, Eskom
received a court interdict
prohibiting its workers from
striking under the provision
that Eskom provides an
essential national service.
However, the union wants to
secure a wage deal providing a
10% increase each year for the
next three years. Negotiations
continue.
According to a July 14 report
by the SABC, Numsa says it will
accept a 10% wage increase
offered by employers.
MMX intends to expand
capacity at Serra Azul to 15
million tpy from the current
8.6 million tpy. The previous 29
million tpy forecast has been set
aside. The start-up time for the
expansion is unknown,
however.
The company also said in
September last year that it was
in talks to sell assets and mining
rights at its Corumbá operation
to local miner Vetria Mineração,
but no deal has yet been
announced. The 2.1 million-tpy
Corumbá iron ore unit, in
Brazil’s mid-western Mato
Grosso do Sul state, has been
idled since July 2013.
MMX is 59.3% controlled by
the Brazilian entrepreneur Eike
Batista, who has already
expressed his intention of
reducing his stake in the miner.
The fortunes of the EBX group,
controlled by Batista, took a
sharp downward turn in 2013.
EBX, which controls MMX, oil
firm OGX, coal company CCX,
shipbuilder OSX, among others,
has been going through a
debt-restructuring process as a
result of financing issues and a
big decrease in the share value of
the group’s companies.
South Africa
Bianca Markram
Strike disruption continues
Strikes in South
Africa continue
to be a major
issue. After
holding out for
more than five
months, workers in platinum
mines who belong to the
Association of Mining and
Construction Union (Amcu)
gained a ZAR1,000 ($93.5) per
year hike in wages for workers
on the two lowest levels for the
next three years, a ZAR3,000
bonus for each worker for
returning to work, and an
increase in other mineworkers’
wages by 7.5-8%.
It is estimated that the strike
cost South Africa more than
ZAR30 billion ($2.8 billion) in
lost revenue and wages. With
these numbers, some question
whether the outcome was
worth the sacrifice. The
mineworkers say yes. One
worker said that he will finally
earn more than ZAR5,000 per
month after 14 years of service
to the same company. However,
People moves
Find the best jobs in the
metals industry at
www.metalbulletinjobs.com
Barrios is new aluminium
ceo for Rio Tinto
rio tinto
Voestalpine appoints
management board
Alfredo Barrios
iwcc
Rio Tinto has appointed Alfredo
Barrios as ceo of its aluminium
business, effective from June 1. He
also joins the executive committee.
He succeeds Jacynthe Cote, who is
leaving for personal reasons. Barrios
joins Rio Tinto after a wide-ranging
career in leadership positions with
BP since 1992. He was most
recently executive director and
executive vp downstream of the
joint venture TNK-BP in Russia.
Barrios has a first-class degree in
physics from Imperial College,
London, a PhD in energy economics
from the University of Cambridge
and an MSc in management from
Stanford University.
Rio Tinto has also appointed
Michael L’Estrange to its board as a
non-executive director, effective
September 1. He has held senior
roles in the Australian government,
including head of the cabinet policy
unit and secretary of the
department of foreign affairs and
trade.
held senior financial positions at
several multinational and
SGX-listed companies.
Stefan Boel
Medeiros named as
TK CSA ceo
thyssenkrupp
IWCC elects Boel as
chairman
Stefan Boel, a member of the
executive board of German copper
producer Aurubis, has been elected
chairman of the International
Wrought Copper Council (IWCC).
He succeeds Masayoshi
Matsumoto, president and ceo of
Sumitiomo Electric Industries, who
retires after a two-year term. Boel
has been vice-chairman of the
IWCC since 2011. Riccardo Garrè,
ceo of KME Group, and Li
Changjie, chairman and ceo of
Golden Dragon Precise Copper
Tube Group, have been appointed
as IWCC vice-chairmen.
Andreas Goss
MSC names non-executive
director
ThyssenKrupp appointed Walter
Medeiros as ceo of its Brazilian
subsidiary Companhia Siderúrgica
do Atlântico (CSA) from June 1,
taking over from Jorge Luiz Ribeiro
de Oliveira. Medeiros joined the
group in 1988 and in his last
position was chief operating officer
of the Forged & Machined
Components unit of
ThyssenKrupp.
Andreas Goss became the ceo of
ThyssenKrupp’s Steel Europe and
Steel Americas business areas from
June 1. He will continue to be the cfo
on the boards of both of these
business areas, which he has been
since October 2012. Klaus Keysberg
will take on the role of group cfo
from 1 October 2014, in place of the
retiring Gerd Krasshöfer.
AK Steel assigns new
executive officers
Norsk Hydro
Malaysia Smelting Corporation
(MSC) has named Thai Kum Foon
as a new non-executive director on
its board, replacing Mark Greaves,
who resigned on May 31 to pursue
other commitments. Thai is cfo of
Straits Trading Company with
overall responsibility for finance
and IT functions. Before that, she
Voestalpine has named a
management board of six members
with effect from October 1, an
increase from the previous five.
Wolfgang Eder is chairman and ceo,
and Robert Ottel is cfo. The other
members are the heads of the four
divisions: Herbert Eibensteiner
(steel division), Franz Kainersdorfer
(metal engineering division), Franz
Rotter (special steel division) and
Peter Schwab (metal forming
division). From this date, Wolfgang
Eder – head of the steel division
since 1999 – will be exclusively
responsible for group activities and
increasingly focus on strategic
development. The terms of office
for management board members
end on 31 March 2019.
Dag Mejdell
AK Steel has approved the
promotion of several executive
officers, effective from May 30:
David C Horn is the executive vp,
chief legal administration officer
and secretary; Roger K Newport is
the senior vp, finance, and cfo; Kirk
W Reich is the senior vp,
manufacturing; Joseph C Alter is vp,
general counsel and chief
compliance officer; Renee S
Filiatraut is vp, litigation, labour and
external affairs. David Horn will
also be responsible for human
resources, communications, public
relations and government affairs.
Kaiser promotes Bunin
and Harvey
Kaiser Aluminum has promoted
Peter S Bunin to executive vp of
strategy, and Keith A Harvey to
executive vp of the fabricated
products division. Bunin will focus
on developing new initiatives to
achieve breakthroughs in
conversion cost, quality, capacity
and capability, while Harvey will
now have full responsibility for the
sales, marketing, manufacturing and
advanced engineering functions.
Mejdell is new Hydro
chairman
Norsk Hydro has named Dag
Mejdell as the new chairman of the
board of directors. He is president
and ceo of Nordic mail and logistics
group Posten Norge, and has been
on Hydro’s board since 2012. The
company has also appointed one
new member of the board, Irene
Rummelhoff, replacing Victoire de
Margerie. Board members are
elected for a period of two years.
Slivchenko is cfo of Mechel
Russia’s Mechel has appointed
Andrei Slivchenko as chief financial
officer, replacing Stanislav
Ploschenko who has left the
company. Slivchenko was the ceo of
Russia’s largest pharmacy chain in
2011-12, and was the vp of
corporate finance at Russia’s
state-owned United Aircraft
Corporation from 2007 to 2011.
Paranapanema elects
Oliveira as cfo
Brazil’s Paranapanema has elected
Thiago Alonso de Oliveira as its new
financial and investor relations
director for 2014-15. He replaces
Mario Luiz Lorencatto who had
been in this position since 2012.
Profile
Alexei Mordashov
“Now is not the
best, nor the worst,
time for steel”
Alexei Mordashov, majority owner and ceo of Severstal, Russia’s
second-largest steelmaker, which also holds steel, coal and iron
ore assets in the USA, Liberia and Brazil, discusses global steel
business and strategy with Nadia Popova
Alexei Mordashov, Russia’s 12th
richest man in Forbes’ ranking
with a net worth of $10.3 billion, is
no stranger to being in the
limelight.
Back in 2006, he might have
prevented the merger of Arcelor
and Mittal Steel, which formed the
world’s largest steelmaker. After
Mittal Steel approached Arcelor
with what the latter perceived as a
hostile takeover bid early that year,
Arcelor tried a variety of methods
to repel the unwanted suitor.
Those included a tie-up with
Severstal, which was then Russia’s
largest steel company. Arcelor’s shareholders,
however, ultimately accepted
Mittal Steel’s €26.9 billion ($36.7
billion) bid.
Mordashov, whose mother
worked at Severstal’s flagship mill
in Cherepovets, did not wish to
give up his global ambitions after
the company failed to merge with
Arcelor.
Later in 2006, he organised
Severstal’s public listing in London,
in which he sold a 9.1% stake in
shares in the company for $1.06
billion. “The offering has given us
access to capital which we will use...
to be a leader in the consolidating
global steel industry,’’ the
Severstal’s ceo said at the time.
And Mordashov stuck to his
word. In 2008 alone, he spent over
$2.1 billion on buying assets in the
USA, which included the Sparrows
Point mill, which Severstal bought
from ArcelorMittal, and PBS
Coals, a coking coal producer
based in Pennsylvania. And in
hindsight, he now says: “The
situation with Arcelor has shown
that life changes, and what was
once very attractive does not look
that attractive later on.”
But as steel demand slumped in
the next two years, during the
global economic crisis,
international ambition had to be
scaled down.
severstal
In 2011, Severstal sold three of
its five US-based steel mills,
including those at Sparrows Point,
Maryland, Warren, Ohio, and
Wheeling, West Virginia, in a deal
totalling $1.2 billion.
The company kept its other two
plants – the integrated mill in
Dearborn, Michigan, and a
mini-mill in Columbus,
Mississippi – calling them “some
of the most modern and efficient
in North America.” However, the
company started to think about
selling them as soon as just two
years later, in 2013.
More bids than expected
Metal Bulletin sister publication
American Metal Market is closely
following the bidding process for
Severstal North America, which it
reported started in May. The
assets were expected to attract
bids in the range $2-3 billion, with
most estimates actually falling in a
tighter range of $2.5-2.8 billion,
according to AMM.
Severstal’s Dearborn plant has
an annual capacity of 3.6 million
net tonnes of hot rolled (HR) steel,
2.1 million tonnes of cold-rolled
(CR) and 1.1 million tonnes of
galvanized and galvannealed
sheet, according to the company’s
own data. Columbus has an annual
capacity of 3.4 million net tonnes
of HR steel, 1.5 million tonnes of
CR and 1.1 million tonnes of
galvanized and galvannealed
sheet.
“We have got very ambitious
expectations about the price – and
we do believe that our assets are
very valuable,” Mordashov said in
an interview on the sidelines of a
recent industry event in Moscow.
“Our assets can be very important
for the potential consolidators in
the US market.”
Four bidders are thought to be
in the running: a joint bid by Fort
Wayne, Indiana-based Steel
Dynamics Inc (SDI) and West
Chester, Ohio-based AK Steel; US
Steel; Japan’s JFE Steel; and São
Paulo-based Cia. Siderúrgica
Nacional SA (CSN), which
confirmed it is interested in
acquiring Severstal North
America in June.
Mordashov said he saw “a
strong interest” in the assets, and
‘Our assets
can be very
important for
the potential
consolidators in
the US market.’
“a good number” of participants
in the bidding process – “even
more than we expected.” But he
says there is currently no
frontrunner.
Iron ore uncertainties
Severstal put some of its global
raw material projects on ice last
year to limit risks to its financial
health amid bleak prospects for
iron ore prices. Mordashov said in
March last year that the company
might seek a partner to develop its
Liberia-based Putu iron ore
deposit, as it saw a “limitation of
the profitability of the project”
and aimed “not to endanger its
balance sheet”. There has been no
news on the potential suitors since
then.
Putu, a 13 km iron-rich ridge in
south-eastern Liberia, has an
estimated resource of 4.4 billion
tonnes of iron ore at 34% Fe
content and is fully controlled by
Severstal.
The steelmaker said earlier in
July that it has received the mining
licence for the project from the
Liberian government, which
followed its approval of the Putu
feasibility study.
“We do believe that our raw
material projects, including Putu,
have a great potential by the nature
of the deposits,” Mordashov says,
“But they should be developed at
the right moment for the market
and in the right combination of
participants. Probably, for Putu,
we could organise a consortium of
investors. But it is not an
immediate plan.”
Severstal said in August last
year that it was selling its 25%
stake in the Amapa iron ore
project in Brazil. The project has a
resource potential estimated to be
in the 0.5-1.5 billion tonne range
with 40-45% Fe content. “We
have nothing to announce on the
process of the Amapa sale yet,”
Mordashov says.
“Speaking about the new
projects, of course, we have to be
very prudent, because of the
supply-demand balance, because
of a lot of potential supply coming
to the market, especially in iron
ore,” he adds. “And that is why we
have seen a decline in iron ore
prices recently.”
Metal Bulletin’s Iron Ore Index
for 62% Fe material hit the lowest
point since November 2009 at
$89.48 per tonne cfr Qingdao on
June 16, down from $134.69 at
the start of the year.
“The “big four” iron ore
producers – BHP Billiton, Rio
Tinto, Vale and Fortescue – are
planning significant growth of new
capacities that will start affecting
the market as early as this and next
year,” Mordashov says. “This will
be coupled with the risk of
suspension of steel production,
with the slowing growth in China.
So, there is an implied risk of
continuous pressure on the iron
ore price.”
Worldsteel in Moscow
Severstal’s ceo, 48, built his career
at the company’s flagship mill in
Cherepovets, about 500 km to the
north of Moscow, which he joined
in 1988 as a senior shop economist
after graduating from the
Leningrad Institute of
Engineering and Economics.
Mordashov also now holds an
MBA from the UK’s University of
Northumbria. Mordashov worked
his way up to the position of cfo of
the mill four years on and the ceo
post in 1996 . He bought up most
of the Severstal shares he owns
today in the course of the
company’s privatisation in the
1990s.
While in some ways
de-globalizing his company now,
Mordashov’s global ambition is
still reflected in what he does.
In October 2012, he was elected
as chairman of the World Steel
Association (worldsteel) – a
one-year rotating post which he
held until October last year. This
October, worldsteel’s annual
conference will be held in
Moscow, for the first time in the
association’s 47-year history.
“My biggest concern, and I’m
sure for other executives in the
steel industry as well, is that we
don’t have a sustainable situation
in the sector worldwide,”
Mordashov says. “There is a
permanent implied risk in the
industry.”
“So, I believe the steel
producers should sit at the table
with the representatives of the
governments, World Trade
Organisation, the Organisation
for Economic Co-operation and
Development, experts and discuss
the current situation,” Mordashov
suggests.
“Probably, I’m a bit too naive,
thinking that this can happen,” the
Severstal’s ceo smiles wryly. “At
least so far, there has been a lot of
scepticism about the likelihood of
these discussions. And there are a
lot of legal requirements for this
talk, including respect of the
anti-trust regulations.”
“But I still believe it’s
worthwhile to try.”
The answer to the challenge of
global excess steelmaking capacity
may “at the end of the day be
found not in the closure of the
excessive production volumes,
but in bringing more discipline on
the supply side,” according to
Mordashov.
“We have recently seen the
Chinese government introducing
a ban on new capacities, and also
announcing the plan to close some
obsolete facilities,” he notes. “This
all should contribute positively to
the overcapacity problem
solution.”
According to the Chinese
government’s plan released last
October, 15 million tpy of steel
capacity needs to be phased out by
the end of 2015. This is in addition
to the country’s earlier target set
for the period of 2011-2015,
which is 48 million tpy of capacity
for steel production.
Beijing is also urging greater
consolidation in the country’s
major steelmaking provinces,
aiming to cut a total of more than
80 million tpy of steel capacity in
those regions over the next five
years. This figure includes the
above-mentioned target numbers.
The government will also take
other measures, which include
blocking of administrative
approval, land supply and bank
financing for new steel projects, to
help curb capacity expansion.
The Ukraine crisis
“So far, Severstal has felt no effect
of the sanctions introduced by the
West against Russia,” Mordashov
says, which were brought in
following Russian intervention in
Ukraine. “We have seen no
decline in our sales in the US –
both for the locally-made products
and those that we import into the
country from Russia.”
Severstal exports hot-rolled and
cold-rolled coil, as well as plate,
from its flagship Cherepovetsbased mill to the USA, as well as
Europe.
In April the USA and Europe
imposed asset freezes and travel
bans on selected Russian officials
and businessmen, as well as on
companies believed to be close to
the allies of the country’s
president Vladimir Putin, or to be
linked to the unrest in Ukraine
that started late last year.
The sanctions were the West’s
response to Moscow’s annexation
of Ukraine’s Crimea region in
March, which followed Ukraine’s
Russia-backed president, Viktor
Yanukovich, leaving the country
in February after months of street
protests in Kiev.
The EU threatened to broaden
the sanctions against Russia unless
it reins in pro-Moscow separatists
in eastern Ukraine, but the
Kremlin denies supporting them.
“Of course, we’ve received
some questions there from our US
customers on whether they can
still rely on our supplies,”
Mordashov says. “The answer is:
‘Of course they can!’”
“The sanctions haven’t been
designed to address specific
industries,” he adds. “And I hope
that it will not happen at all.”
“I wouldn’t say that Severstal
sees any big impact of the current
Ukrainian situation,” Mordashov
says. “The real problem with the
Ukrainian steel producers now is
their reliability,” he says.
“The buyers are simply afraid of
making prepayment as they may
not get the steel product they’ve
ordered from Ukraine,”
Mordashov said. “And with the
current supply-demand situation
in Russia, as well as that in the
other parts of the world, it is quite
easy to replace the Ukrainian steel
products with other suppliers’
material.”
Russian steelmakers mainly
compete with the Ukrainian mills
in their domestic market. Metal
Bulletin’s sister publication Steel
First has heard some Russian and
international buyers voicing their
concerns about the reliability of
Ukraine-origin steel products
supply, but such complaints have
not been widespread. Dmitriy
Nikolaenko, head of sales for
Ukraine’s largest steelmaker
Metinvest, told Steel First in a
recent interview that the company
“was fulfilling all of its obligations
before its customers on all the
markets where it exports.”
Mordashov, says that Russian
steelmakers, including Severstal,
have benefited from the Ukraine
crisis to some degree, “As we are
seeing smaller volumes of the
Ukrainian material on the Russian
market,” he says.
The Ukrainian national
currency, hryvnia, lost 58%
against the dollar between the
start of 2014 and mid-April, amid
the political and social crisis in the
country. By contrast, the Russian
rouble only lost 12% against the
dollar over the same period.
This imbalance prompted
Ukrainian steelmakers to opt for
dollar-denominated sales outside
Russia. However, as export
markets for some steel products
made in Ukraine, such as rebar
and wire rod, have started to
weaken, while the rouble regained
some of its strength, Ukrainian
material has started to appear on
the Russian market again.
Russian steel demand rises
‘We expect
a significant
growth of steel
consumption in
pipe business
in Russia this
year’
Mordashov expects steel demand
in Russia to grow at between 2.6%
and 3% this year, up from 1.7%
growth in 2013.
Such growth rates would exceed
the expected rise in GDP in the
country, which the Ministry of
Economy forecasts at 0.5% this
year, down from 1.3% in 2013. So why does Severstal still see
such a rise in demand?
“We expect a significant growth
of steel consumption in pipe
business in Russia this year
because of the start of
construction of South Stream and
Power of Siberia pipelines, among
other energy projects,” the
company’s ceo says.
“The consumption growth
number is also expected to be
Profile
high due to the relatively low base
of the last year.”
The Russian large-diameter
linepipe (LDP) market saw total
consumption fall by 6% in 2013 as
the state-run gas monopoly
Gazprom, the country’s largest
LDP consumer, had finished its
previous projects and had not
started the new ones.
Earlier this year Severstal,
which runs a 600,000 tpy pipe
mill in Russia’s St. Petersburg
region, won tenders to ship about
260,000 tonnes of LDP for the
offshore stage of South Stream.
The pipeline, half-owned by
Gazprom, will start pumping
Russian gas to Europe in late
2015.
Russian tube & pipe producer
ChelPipe said in June that it
shipped its first batch of LDP for
the fully Gazprom-owned Power
of Siberia pipeline, construction
of which started after the gas
company signed a $400 billion
supply deal with China National
Petroleum Corp in May.
The pipeline will transport gas
to China from the Chayanda
deposit in Russia’s Far East,
starting in 2018, and from the
Kovykta deposit in Eastern
Siberia in 2020.
Residential construction in
Russia is also seen as giving a
boost to the country’s steel
consumption, Mordashov says. Russian carmakers decelerate
The slowdown in Russia’s new car
sales numbers in the early months
of 2014 is likely to be reflected in
general steel consumption
volumes for automotive steel this
year, Mordashov concedes.
Severstal, however, expects a
“relatively stable” demand for the
auto steel it makes.
In the first half of 2014, new car
and light commercial vehicle sales
in Russia declined by 8% to 1.23
million units, according to the
Association of European
Businesses (AEB). The fall was
due to the slowing economy and
weaker rouble. The association
expects full-year sales to drop by
12% to 2.45 million units. Only a
fifth of the total sales in the first
half of the year came from
domestic producers, while the
‘The world
needs steel and
I’m happy to
stay in steel, for
sure’
rest were either made locally by
foreign carmakers or were
imported by them.
International auto-manufacturers have set up their factories in
Russia in the past ten years,
betting on the potential growth in
the market where car ownership
still significantly lags behind
Western levels.
Severstal has said that it
increased its steel supplies to
international carmakers with
facilities in Russia or other CIS
countries by 20% in the JanuaryMay period, reaching about
85,000 tonnes.
“We are constantly improving
the quality of our products, which
enables us to compete against
imported material for the
international carmakers,”
Mordashov says.
Severstal has invested €180
million ($254.5 million) together
with Spain’s auto component
producer Gestamp in its stamping
facility in the Russia’s Kaluga
region, which can make around 22
million car body components
annually.
The facility is supplied with
blanks by the 240,000 tpy
Severstal-Gonvarri-Kaluga
group, another joint venture of
the Russian and Spanish
companies, which also supplies
Gestamp-Severstal-Vsevolzhsk
stamping facility, in Russia’s St.
Petersburg region.
The end-products of the
stamping centres are used to
make vehicle parts at the Russian
plants of Volkswagen and the
Renault Nissan alliance, among
others.
Mordashov ardently defends
the use of steel in car-making
against aluminium. “The demand
for the cars with low fuel
consumption is stimulating the
usage of lighter materials,” he
agrees. “But steel has got a
number of advantages compared
to the substitutes – including the
fact that it can be recycled, as well
as its relatively low price due to
the low production costs.”
“There is a potential for a
further improvement in the
quality of steel that will allow us to
compete with aluminium and
other materials that are trying to
become a substitute for steel,”
Mordashov says.
“We will be producing a
lighter, a more durable steel,
whose share is expected to rise to
38% in the global auto-makers
consumption in 2030 from 15%
in 2010,” he adds, quoting
consulting company McKinsey
data. What’s next?
To secure a rising steel demand in
Russia, the government should
create a better business climate in
the country, Mordashov says.
“This would prompt both
Russian and foreign investors to
spend more money on
construction, energy and other
industrial projects and would
support steel consumption,”
Severstal’s ceo explains.
The company expects a boost in
demand from state investments in
infrastructure. “The state-funded
projects such as the World Cup
championship to be held in Russia
in 2018 are going to drive
consumption,” Mordashov says.
Besides holding a 79%-stake in
Severstal, Mordashov also has
interests in gold, energy,
machine-building, wood
processing, telecoms, tourism,
the retail sector and venture
capital investments.
With the end of the booming
years in the commodities markets,
does he still see the focus of his
interest in steel – say 5-10 years
on?
“Definitely, now is not the best
time for steel,” Mordashov
concedes. “But it’s not the worst
time for steel either. Steel has its
own potential, and we see a lot of
players in the industry who have
demonstrated success in the last
few years despite the economic
turmoil – like the USA’s Nucor
and Europe’s Voestalpine.”
“My business is native from
steel and my wealth is native from
steel,” Mordashov says. “The
world needs steel and I’m happy
to stay in steel, for sure.”
“But I’m also happy to pick up
the opportunities that life brings,
and we’ll see what will be out
there ten years from now,”
Severstal’s ceo concludes, smiling
enigmatically.
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Metal Bulletin Magazine | July-August 2014 | 23
Enterprise risk management
Risk and reward
“Enterprise risk management means
different things to different people,”
is a remark that Metal Bulletin
Magazine heard from several
different observers and experts
discussing the subject. That is true in
two main senses.
First, the exact descriptions used
to define ERM vary. Nevertheless,
there is broad consensus that in
essence it is about identifying,
monitoring, measuring, analysing,
off-setting and controlling all of the
many – interacting and often rapidly
changing – risks run by a business in a
‘holistic’ way.
Secondly, the spectrum of risks
taken by a given business will differ in
detail from other members of its peer
group, depending on its size and
exact range of activities. And it will
differ in general shape from the
typical spectrum of a business
operating in a different industry or
trade sector.
Consequently, the fact that the
specific details of one company’s
ERM programme will differ
significantly from others – and its
influence on the daily operations
from one company division and
department to another will be
different – is another way in which it
can vary from one person’s
perspective to another.
However, the underlying generic
principles of ERM are universally
applicable and should be commonly
understood by the top tier of
company management. Effective
control of a company’s risks is clearly
essential both to profit from the
choices its directors, managers and
staff make, while at the same time
guarding against taking risks beyond
the company’s ‘risk appetite’ which,
at best, might temporarily reduce its
profitability or, at worst, result in
catastrophic failures.
In this introductory overview of
ERM, we summarise the latest
thinking about developments in risk
management and the ways in which it
is evolving to provide additional
value to enterprises that integrate it
well within their broader
management and operational
structures.
We also look at trends in some of
the key risks faced by the mining,
metals and steel industries and trade,
together with a few examples of the
ways in which those can be effectively
managed. We call upon senior
experts with international business
advisory, legal, risk assessment and
insurance roles for their perspectives
on risk management.
In addition, we broaden the value
of our ERM feature section as a
whole by following this overview
with three separate complementary
articles looking in further detail at
trends in price risk management
options, credit risk insurance and a
small selection of the many tools and
services available to assist businesses
seeking the rewards that effective risk
management systems and strategies
can bring.
shutterstock
Enterprise risk management is changing to bring
further advantages to businesses integrating it
effectively, reports Richard Barrett
The range of
corporate risks has
widened and become
more dynamic
A new vision
Brief history
At its core, ERM as a discipline
means identifying, quantifying,
mitigating, reporting and analysing
the risk of an event or condition that
could impede a business objective,
explains Deloitte UK risk partner
Hans-Kristian Bryn.
In the UK and USA in particular,
organisations desired better and
effective ways to talk and think about
risk. Historically, however, ERM
turned into a compliance process and
was used for company reporting and
disclosures, Bryn recalls.
In part, ERM grew from efforts in
the 1990s to clarify companies’
systems of internal financial control
and risk management – plus the links
between them – boards’
responsibilities for them, and
auditing requirements. For many
businesses, ERM came to be
interpreted as a process for setting
standards for company reports at
regular, for example quarterly,
intervals. In other words it evolved
into a compliance process,
summarises Bryn.
Corporate risk officers (CROs)
became central to risk management,
but interest in the topic at board level
has now become stronger. A Deloitte
report produced in 2011, The myth
and reality of the corporate CRO,
identified the perceived
shortcomings of ERM. While ERM
has proved useful for process
compliance and control, and to some
extent for operational and project
risk, the linkage to strategic decisionmaking has not been so strong. Some
risks simply did not make it on to
company risk registers.
The responsibility for ERM has
also shifted to end up in different
hands, including chief financial
officers (CFOs), treasury, or with the
heads of insurance, via the CFO. In
some companies it has been placed in
the hands of general counsel.
‘There is broad
consensus that
ERM is about
managing
the many
interacting
risks run by a
business in a
holistic way’
“We are at an interesting point now.
The picture is about to change. Now
companies are asking ‘How can it add
value to how we run our business?’”
says Bryn. Companies have
recognised that treating ERM as a
compliance-only exercise does not
offer value for the resources it takes to
achieve it.
“It needs to move from being a
compliance-only process to being
embedded into other processes, such
as financial planning, strategy and
decisions about capital allocation and
investments,” Bryn explains.
While risk management is more
complex the larger and more
international an enterprise is, the
fundamental generic risk
Commodity trade insurance
Richard Miller, of Miller Insurance
Services’ structured credit and political risk
team, says that traders are doing much more
due diligence of their counterparties since
the 2008-9 financial crisis, which insurance
underwriters like to see before agreeing to
provide insurance.
Miller Insurance Services LLP is a
specialist in arranging insurance for trading
in commodities. International chartered
insurance brokers, they provide insurance
for a wide range of risks, including physical
cover for metals and materials at any point
along their supply chains, as well as
terrorism, political risks or trade disruption
and delays. It places about $2.5 billion of
premium on behalf of clients each year.
“A lot of smaller traders are doing more
due diligence than before, driven not only by
the need to protect their own balance sheets,
but also to get finance,” says Miller.
He also notes a tendency for traders to
look for several potentially interested
counterparties at a port of delivery for, say, a
consignment of iron ore, in order to have
other options available if a problem arises
with one of them.
Smaller traders are also quicker to
diversify into related products across a
supply chain – nickel, scrap, coking coal, hot
rolled coil, for example – sometimes
supplying one commodity while buying
downstream products made from them
from the same counterparty.
To find such new opportunities – and the
finance and insurance needed to take them
– makes due diligence that much more
important. Checking on counterparty
status and reliability can be difficult in
nations like China, Miller concedes, but he
notes that traders that do the leg work to
meet their potential and actual clients in
person, and which obtain the necessary
company financial and directorship data,
are best placed to get insurance cover when,
as broker, Miller submits transaction data
and a ‘due diligence pack’ to an underwriter.
“It’s all about knowing your customer. If
traders know when they will get paid, assess
the probability of repeat business and go in
with their eyes open, underwriters will look
favourably on that,” says Miller. The
pre-credit-crunch days, when business
might have been waived through with credit
limits based on two-year-old financial data,
are long gone, he stresses.
It is the nature of trade to want to make
quick decisions, to seize chances and beat
competitors, but Miller confirms the need
for a good overview: “You have to look at the
big picture and keep asking the basic
questions: How risky is the country of
delivery? Will that vessel be the right one
for the load? Might that product be
confiscated or expropriated? Has legal
opinion been sought on the contracts? Will
we definitely be paid?” Watertight
agreements on weight and quality
tolerances are also essential to avoid dispute
of course.
The fact that the answers to those
questions may well be in different hands,
underscores the need to have strong
management in place both to assess whether
factors carrying higher risks are sufficiently
offset, or mitigated, by those carrying lower
ones; or whether the aggregate risk is simply
too high to proceed.
Better due diligence
“People are getting better at due diligence,”
says Miller. He identifies three key drivers:
banks demanding better risk management
before providing or extending finance;
pressures from shareholders to get a good
return; and wider stakeholders looking for
good corporate social responsibility.
He explains that while banks might be
willing to negotiate a minority percentage
risk exposure themselves, they will usually
want to ensure a significant proportion is
covered by insurance. “Banks will rely
heavily on insurance now,” he says.
Miller actively encourages dialogue
between insurance buyers and its group of
underwriters to enable the latter group to
understand more fully the dynamic risks
that the broker’s clients are looking to
transfer through insurance, and the systems
they have in place to manage them.
The supply chain is actually often outside
a trader’s direct control. Restricted routes,
volatile international governments,
regulatory intervention, intellectual
property vulnerability and Force Majeure
are just some of the potential disruptions to
the supply chain and trade. Citing flooding,
typhoons and earthquakes as other risks,
Miller points out that effective risk
management supply chain tools can cover
extra costs, help find other routes, cover lost
revenue and preserve traders’ reputation
and customer relationships.
Risk management benefits
Companies are taking risk management
more seriously now, says Miller. “But they
want to know what value it offers them to
get more business, save costs or make
money,” he stresses. “How much will an
ERM team achieve? How much will they
save? How much will they make?”
Answering those questions exactly is
virtually impossible without the hypothetical
experiment of running the same company
for the same year with or without an ERM
team, but consideration of the monetary,
reputational or credit risks a company runs
with slack risk management is sufficient
stimulus for some action.
Credit risk is relatively straightforward to
manage, notes Miller, with generally well
established methods and systems in place
now. A reputational risk, if say a corporation
is found to have been sanction breaking, is
much harder to price. Miller says that he still
encounters some businesses where the risk
manager is simply known within their
business as the individual who buys that
firm’s insurance, and others where
everything is very regimented and
controlled and individuals and teams are
clear about their responsibilities for risk.
“Ultimately, everyone within the business
is responsible for risk management,” Miller
concludes. At Miller, that includes dedicated
risk, compliance and legal teams.
While past experience, intuition and ‘gut
feeling’ will influence a trader’s view on the
risks and rewards entailed in a specific deal or
with a particular counterparty, it is a fact that
without an adequate bank report and a
satisfactory due diligence pack, an insurance
broker will not find an underwriter willing to
write an insurance policy to transfer the risk
for their client.
Partners in risk management
What the uninitiated might think of simply
as ‘blanket insurance’ for a respected trader
doing business with multiple counterparties
does not really exist. While policy wording
for repeat business and similar transactions
and counterparties might be similar for any
given trader – and familiar names will lend
confidence to banks, clients, brokers and
underwriters alike – there are often small but
important variations from one to the next on
points of detail, such as the time allowed for a
claim to be made.
In addition to their role in helping their
clients to buy insurance, intervening to assist
in the claims process if necessary is another
broker role. “Brokers can be seen as part of a
company’s risk management team,” says
Miller. “Traders have become more
sophisticated and savvy,” he says. “While ‘off
the shelf’ insurance products are available,
many now want bespoke products,” Miller
concludes.
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principles are the same regardless of
the size of operation.
Strategic risk has upside and
downside potential in offering
opportunities for value protection
and value creation. Similarly, credit,
interest and foreign exchange
fluctuations offer upside and
downside risks. A company’s
operational and event risks almost
exclusively have downside potential.
However, from public interest and
regulators’ perspectives, it is large
companies, such as those in the
FTSE 100/FTSE250 in the UK, and
large public organisations that are in
the “front line” of risk management
trends, with shareholder, investor
and public money at stake, notes
Bryn. “Quality, management and
governance concerns are to the fore
for these.”
“The UK’s Financial Reporting
Council is raising the bar of what they
expect.” They regard conventional,
rather anodyne, risk disclosures as
what might be called ‘boilerplate’,
Bryn recalls: “They want clearer
articulation of the principal risks and
they want quantitative assessments
of them.”
The trend is towards risk
modelling: “Larger companies will
need their principal risks better
shutterstock
A bad choice of
ship runs risks
of legal dispute,
cargo damage and
insurance claims
defined and their potential aggregate
impact related to the financial
resources of the firm.” In other
words, the effects of a principal risk
becoming a reality will need to be
assessed in terms of what impacts it
may have on a company’s share price
and its ability to pay dividends, he
explains.
That is a nascent trend: “More
quantitative approaches are
becoming more common for
principal risks.”
While computer and software
advances have helped with the
‘mechanics’ of modelling, computing
capacity is not the driver and nor is
Risks of legal dispute
Client attitude
A partner at international law firm
Clyde & Co, Michael Swangard says
that an early approach to a lawyer
when the first signs of a trading
dispute arise can avoid prolonged
disputes later and save the costs and
time those disputes will require to
resolve. Maintaining good long-term
relationships and goodwill between
trading counterparties can also pay
dividends if and when some leeway
is needed in kind.
Conversely, he recognises that
some traders are aggressively
litigious by nature, working to a
belief that even former adversaries
will return to them for further
business if they offer the best prices
in the trade.
Sanctions
Traders need to have clear policies
about which countries they can deal
with and what legal sanctions will or
will not apply to particular deals.
Swangard recalls a dispute in
which a German company due to
deliver a load to Bandar Abbas,
Iran, on behalf of a European steel
trader, decided – after the
shipment had already left port in
Rotterdam – that the shipment
contravened US sanctions on trade
with Iran and delivered the load to
Jebel Ali in the UAE instead.
It was successfully established
through the German courts that
US sanctions did not apply to the
European-Iranian trade concerned
and they found in favour of the
European trader.
Price volatility impacts
on dispute volume
Commodity price volatility has a
bearing on the volume of legal
disputes embarked on. Volatile
prices stimulate trade and margins,
but also heighten the risk of
disputes about price. “Many
disputes are really about the price ‘a
trader’ paid three months ago,”
notes Swangard, although those
often manifest themselves as
disputes about the quality and
condition of the goods delivered.
A practical safeguard in such
circumstances is to have a good
grasp on traceability, since
providing firm evidence of source,
delivery and ownership is relevant
if disputes arise. “It’s important to
track the flow of material.”
Potentially hazardous cargoes
Another practical risk is the care
and handling of potentially
hazardous cargoes. The classic
example which many traders will be
familiar with is the need to keep
iron ore fines shipments dry by
transporting them under an inert
gas to prevent the potential for fire
or explosion as well as having the
right procedures in place to load
and unload them. Liquefaction of
mineral ores is another hazard to
guard against.
Managing cumulative risk
Swangard gives a good example of
how individual trading risks that
might be considered acceptable
singly can interact to create a
‘The lesson
is to have
a system in
place to avoid
individual
decisions made
in isolation’
cumulative level of risk that
comfortably exceeds an
appropriate limit.
He recalls a trader selling a
consignment of steel for export to a
counterparty with whom he had
already built a well-established
relationship. It was sold on a c&f
basis and without a Letter of Credit,
leaving the buyer with the
responsibility of arranging
insurance.
Arrangement of a charter vessel
for the load was left to the trader’s
logistics team which, working
under pressure to minimise freight
costs, chartered the cheapest vessel
available, which actually proved to
be unseaworthy.
The ship took on water and half
of the steel in the consignment was
damaged. The buyer received the
bill of lading, but had failed to
arrange insurance and had not paid
for the steel when the ship carrying
it started sinking.
Charter Party Risk insurance
might have provided cover, but
since the ship turned out not to
have the necessary international
certification needed under its
terms, any claim against it was
invalidated.
With the aid of Clyde & Co
intervention, the ship was towed to
a port in Brazil, seized and sold, and
some residual value of the steel was
recovered, but clearly this was not
the original deal envisaged!
“The lesson is to have a system in
place to avoid individual decisions
made in isolation,” says Swangard.
Insurance
There is also a corporate cultural
element to consider. “How do we
enable managers to be open and
transparent in discussions about
upside and downside risks?” asks
Bryn.
Many organisations make the
point internally that although there
are no penalties for talking about
risks, there will be if any of them
crystallise without prior
consideration and, if necessary,
precautionary steps such as hedging,
insurance or outsourcing taken. It is
often said that: “Good risk
management is good business
management,” says Bryn.
While there may be some benefit
in the pricing of premiums for
insurable risks by undertaking good
ERM, some key risks are not
insurable: “So it’s important that
corporates don’t think that they can
insure their risk away,” Bryn stresses.
While there is clearly a link
between managing and insuring
risks, it needs quantitative
underpinning: “If you want to take
individual or aggregate risk to
market, it requires more risk
modelling,” Bryn concludes.
Building advantages
EY partner Craig Faris says that, for
the most part, ERM programmes in
the past have focused primarily on
protecting the business and have
been about compliance, but that the
key changes in risk management
strategy now are to build on the
existing advantages it brings while
also supporting business growth and
optimisation.
The introduction to a white paper
published by EY in May this year,
Political risk
For many clients with sophisticated ERM
programmes, such as the international banks and
the largest corporates, risk ratings data such as
those developed by the World Risk Review can be
tied into existing ERM programmes as a
secondary ‘check’ on where the company views its
political risk exposure, says Matthew Strong,
Partner at JLT CPS, which publishes the review Since the ratings by JLT CPS are driven by
algorithms and then refined by its analysts, this
due diligence check on the company’s ERM
outputs can be a valuable method of identifying
potential shortfalls in analysis or gaps in
knowledge, which can then be addressed to
improve the ERM, Strong explains. It also helps
those new to political risk to highlight areas where
questions need to be asked.
Ratings data for political risk also help
underwriters when they consider where to price a
risk, but there are many other drivers that have
much more of an influence on determining
premium rates, says Strong. Underwriters also
consider their own experience of an industry and
country – if political risks insurance is being
requested – and their experiences of the
counterparty in question (if it is non-payment/
credit insurance that is requested), loss histories,
potential country capacity shortages, potential
over-aggregations of risk for a country and
crucially, the identity of the insured.
Political risk is client and project specific, notes
Strong. Underwriters know which clients are
more sophisticated at building robust ERM
programmes and which have a track-record of
effective management of political risks. If the deal
is right, underwriters will write business for even
the riskiest territories for the best clients.
The management of political risks in particular
via an ERM programme is no longer just a box
ticking exercise, says Strong. “Over the last five
years we have seen more and more company
executives ask questions about political risk as it
has moved up the corporate agenda. These
executives want to know what risks they face in
each territory and what their company is doing to
mitigate those risks.”
Strong stresses that executives now understand
that political risk is not generic – rather it is
specific to each country, asset, project or
investment. This has partly occurred due to the
fact that political risks have been hitting the
headlines more frequently since the financial crisis
and, also partly because key events during the
crisis, such as the Arab Spring, forced companies
to look at, and stress test, their own risk
management strategies, he explains.
Often political risks were an element that had
been overlooked in the past by ERM, or, in some
cases, the risks had been highlighted, but were
considered to be relatively low frequency, but high
shutterstock
ERM a technology challenge, Bryn
stresses; rather “It is about the
willingness of corporates to go the
extra mile in better understanding
their risk-return profile.”
Energy & resources and metals &
mining sectors, with their
commodity price exposures and
measurements of volumetric risk,
were at the forefront of risk
modelling in having the data needed
that lend themselves more easily to
quantitative techniques. Connecting
those up with the financial aspects of
a business and strategic planning are
now the foundations of ERM.
ERM should consider politics, security and
economics, as a change in any one of these
aspects can change a country’s risk environment
severity and also, to some extent, there was little
that could be done about them.
Companies that are investing abroad now
recognise that they are not necessarily just
‘victims’ in a risk environment – they are
participants too – and it is that change of mentality
that has led to more effective and robust
management strategies for political risks.
A solid ERM programme can assist a company
to secure opportunity. ERM could help underpin
corporate strategy on investments abroad,
acquisition plans, management of employees or a
move into a new sector or product line.
“In short, ERM should remove uncertainty
around corporate strategy and enable a company
to carry out its plans with a clear process in place
for managing, mitigating or transferring the risks
highlighted by the ERM,” summarises Strong.
Over the next 2-3 years, in respect of political
risks, ERM is likely to become progressively
data-driven. Qualitative analysis is no longer
enough to help companies really compare country
risk and today’s executives do not always have the
time to read pages of country risk analysis to keep
up to date with potential risks to the company
portfolio.
A quantitative approach, as employed with
World Risk Review, allows corporate decisionmakers to quickly compare and contrast country
risk, and to also benchmark what is an acceptable
level of risk. Qualitative analysis should
complement the data and give it context and
depth. Greater granularity and separation of perils
is also crucial for management of today’s political
risks, which are generally highly interconnected
and quick to evolve, Strong stresses.
It is no longer enough just to assign a single
rating for a country (or indeed region). ERM
should consider politics, security and economics,
as a change in any one of these aspects can change a
country’s risk environment far more broadly as a
consequence, says Strong. Equally, each of these
areas of risk should be broken down into their
constituent parts to truly assess risk and to allow
ERM programmes to plan accordingly.
Reducing risk in the financing of steel trading
Large steel traders have often successfully
raised trade finance through a combination
of uncommitted bilateral lending and
syndicated bank loans that typically
provide ‘one-year money’ on an annual
renewable basis.
Such syndicated arrangements can run
smoothly for years, but if steel markets –
or any other commodity trading financed
by revolving credit facilities – turn sour, it
takes a very small number of a banking
syndicate’s members, then worrying about
their exposure to commodity price risk, to
call in their loans for the overall
arrangements to unravel quickly.
How serious a difficulty that will become
for the trading company depends in part
on the countries in which it is dealing, and
therefore the jurisdictions to which it is
subject. Philip Prowse, partner at
international law firm Clyde & Co, points
out that English law offers more flexibility
for businesses to trade their way out of
trouble than many other legal systems. By
contrast, some countries oblige company
directors to file for insolvency almost at the
first sign of cash flow or liquidity issues,
with severe penalties for directors failing
to file in that situation.
Other factors can exacerbate the
problem. Commodity finance on a bilateral
basis is often provided as ‘uncommitted’,
meaning that banks provide a ‘firm
intention’ rather than a commitment to
advance money, in a similar way to an
overdraft for an individual account. When
trouble hits that commitment will be
severely tested. This can be exacerbated as
many pieces of the debt in a syndicated
loan will typically be sold on to others
outside the original syndicate, leaving the
borrowing company with an additional
challenge of renegotiating with, in some
instances, a much higher number of
lenders than when it originally arranged
the trade finance, and with many of whom
it may have no relationship.
Since, in theory at least, decisions on
new arrangements require unanimous
support from all members of a syndicate,
which for substantial financing can
number over 100, this creates difficulties
for any borrowing company looking to
reschedule.
In this situation, yet more difficulties can
arise if – as has been increasingly common
in recent years – traders venture upstream
and make purchases of physical
commodity production facilities within
the supply chains in which they operate.
While healthy market conditions can make
such purchases or stakes extremely
profitable, securing supply, when banks
look to retrieve their money quickly in a
downturn, the task of achieving
appropriate value for such long-term
investments cannot be underestimated.
Options for traders
Where they are feasible to arrange, traders
can sometimes be better off with a “club”
loan agreement. These loans are more
flexible for the borrower and are more
relationship-based. They are however
naturally more limited in terms of the size
of loans available, which limits their value
for large commodity traders needing to
raise hundreds of millions of dollars in
finance, particularly in the energy sector.
In increasingly tough regulatory
frameworks in which banks have to
manage their own risk profiles more
closely than ever, spreading the risk of a
loan between them via a syndicate may be
the only acceptable route to lending on
that scale.
Negotiating a ‘committed’ facility is
certainly advantageous. “For ‘committed’
money, the banks have to lend unless there
is a condition which has not been met, or a
default, so that is a more resolute
commitment,” explains Prowse.
It was the basis, for example, on which
the big steel trader Stemcor was lent
money after a debt restructuring process
successfully completed in March this year.
“We now have significantly increased
liquidity and a strong platform from which
we can increase our trading capability,” the
company stated at that time. Under the
new $1.15 billion syndicated trade finance
and borrowing base facility, the banks have
contractually agreed to provide financing
on a committed, rather than uncommitted,
basis. “This is a ground-breaking structure
as, traditionally, lenders to the commodity
trade sector have only provided funding on
an uncommitted basis,” Stemcor CEO
Julian Verden, told Metal Bulletin sister
title Steel First when the new arrangements
were confirmed. Prowse certainly sees this
committed syndicated lending as
attractive for Stemcor so as to enable it to
emerge successfully from its restructuring.
Sanctions: forbidden partners
Another topical trading risk is that of
sanctions laws and regulations, and the
wider internal restrictions that many
banks impose upon their customers in
their dealings in certain jurisdictions.
Banks are increasingly attaching
conditions to their lending arrangements
to limit trading by their borrowers in
nations carrying high political risk.
Zimbabwe, Myanmar, North Korea,
Egypt, Belarus, Sudan, Iran, Syria and
Cuba are among a group of nations which
Prowse has seen targeted in various credit
agreements. While some traders might
think twice about doing business within
certain jurisdictions, many traders look to
these countries as good places in which to
do business and the potential closing down
of these markets for them is another factor
for the trader to take into account when
securing its overall financing package.
‘Do not rely on just one form
of finance. Have variouslysourced money wherever
possible, and look towards
a return to relationship or
club-based lending’
Funding solutions
Traders should also look to ensure that a
mismatch does not arise in which a trading
business modelled on fairly short-term
trade finance evolves to include significant
physical assets that need alternative
long-term forms of financial backing. Any
trader should consider how diverse its
activities and investments should or could
become. In some instances, and given the
sanctions issues, perhaps smaller margin,
but high-volume trading business in
countries with lower risk profiles may offer
the best strategy.
In any event, and notwithstanding the
platform that a bank syndicated
committed finance can provide, Prowse
recommends having a ‘plan B’ for securing
trade finance: “Do not rely on just one
form of finance. Have variously-sourced
money wherever possible, and look
towards a return to relationship or
club-based lending. Diversify your
financial options through bilateral or club
finance, with documentation that offers
greater flexibility than LMA-based
syndicated loans. Explore non-bank
lending opportunities, the commercial
markets and/or do not discount the
securitisation of trade receivables, as well
as the positive impact of invoice
discounting. A diverse funding portfolio
should prove to be a strong one. ”
finding oil in any given prospect
area, but by efficiently harnessing
past experiences and understanding
of how to limit or reduce those
uncertainties, an oil company can
significantly increase its probability
of success at a new site.
That example also underscores
the trend for ERM to become more
quantitative, rather than the
qualitative approaches used in the
past. A decision to drill an additional
exploration hole and/or obtain an
extra core sample may significantly
reduce uncertainty. Quantitative
analysis helps indicate by how much
and provides a much more informed
and effective decision process.
Such quantitative analysis on
physical operations combined with
established financial tools for risk
management aid an integrated risk
management approach. “Risk
management is a tool for helping
achieve business objectives. It’s that
focus on performance rather than
focusing on risk itself that we see
happening,” says Faris, in what he
says is a paradigm shift.
Organizations are moving toward
an insight-driven and performanceoriented approach to risk
management, one that becomes
intrinsic to the business and is
embedded in key business
processes. “We’re evolving from
ERM to what we call risk-enabled
performance management
(REPM),” Faris explains.
“REPM is about creating tangible
value. It can drive more robust
analysis of investment decisions,
helping improve returns on capital
investments, as well as identifying
opportunities to reduce uncertainty
and improve project economics,”
EY’s white paper elaborates.
Through embedding risk
management directly into the
processes themselves, organizations
can derive additional value from
their risk management
programmes; for many, they will no
longer be measuring risk
management effectiveness by
activity levels, but instead by
enhanced business results, it
summarises.
The most important changes in
moving from a more “traditional”
ERM approach toward REPM are,
first, the movement from value
protection to the additional focus on
shutterstock
Expecting more from risk
management, stresses that point:
“Organizations need to continually
advance their risk management
practices, building on the strong
foundation of protection and
compliance into an expanded focus
on risk factors that impact strategic
decision-making and operational
performance.”
It also points out that many
organizations continue to operate
using risk management
programmes that have not evolved
and may not adequately protect
them from today’s risks. For a large
number of global organizations, risk
management is still seen as a
high-level compliance exercise to
educate the board and audit
committee, it notes.
Faris explains that, to be most
effective, ERM needs to change
from being a “bolt-on” concept to
becoming a directly integrated part
of the business processes
themselves, permeating them
throughout.
“Operations people deal with
risks every day,” but while they may
well be dealing with their own ‘local’
risks now, taking into account wider
corporate risks in an integrated way
“will affect them and illuminate risk
management in a different way,”
Faris adds.
Significant additional benefit can
be derived by connecting risk
management to profit and loss and/
or cash flow – two areas that offer
value creation. EY says that many
companies are now recognizing the
growth and performance
improvement opportunities that an
expanded approach to risk
management can provide. “The
situation is changing dramatically,”
says Faris.
He adds the new thought that it is
helpful for businesses to think
initially about “uncertainties” rather
than risk. Uncertainty becomes risk
when it is calibrated against vested
interests: that is, how much a
company or individual stands to
gain or lose, and what the variables
are that affect possible outcome
ranges.
Faris gives the example of oil
exploration, which is inherently
“fraught with uncertainties.” There
may be, say, 15 primary uncertainty
factors defining the likelihood of
By understanding
how to reduce
uncertainties, oil or
mining companies
increase their
probability of sucess
at new exploration
sites
value creation and, secondly, an
expansion from an emphasis on
reporting to integration with
business performance parameters.
EY says that a key question for
companies is how much is it worth
to understand and reduce
uncertainty? In other words: “What
if you could increase the
predictability of your business
outcomes?” And, importantly, how
can you move those outcomes to
capturing more and more of the
upside part of that uncertainty?
This is the “new paradigm” Faris
identifies: moving away from the
status quo or informational and
compliance-focused risk
management to a new level that is
directly linked to performance,
based on harnessing uncertainty.
By associating performance
targets and value drivers with
relevant risks, the organization is
able to develop an optimized and
cost-effective response to risk. And
through integration of risk
management into strategic and
operational planning processes, the
organization is able to optimize
investment strategies, capital
allocations, and identify and drive
process improvement
opportunities.
A “risk-enabled” business needs
to bring insights to the flow of
strategic and business planning,
operations, oversight and
monitoring that runs from the board
to the production line in order to
understand and manage the
uncertainty that affects results.
Steps to achieve REPM
‘Risk
management
is a tool for
helping achieve
business
objectives. It’s
that focus on
performance
rather than
focusing on risk
itself that we
see happening’
Developing REPM is a three-step
process: determining key
uncertainties and potential impacts;
aligning your risk profile with your
risk appetite; embedding
risk-enabled decision-making into
the rhythm of the business.
Faris says that he is speaking
primarily with CFOs about the new
concept, but that COOs, and CROs
who are already responsible for
broad-based strategic risk, are also
embracing the strategy.
REPM is the future of risk
management and a better pathway
to improved business performance
and competitiveness in a changing
business world, EY’s white paper
concludes.
Hedging options widen
International competition between exchanges in
the east and west to attract liquidity to their new
and existing ferrous and non-ferrous products is
giving price risk managers an expanding choice to
hedge. Dan Smith outlines changing times for
price risk management
The world has become a lot tougher
for the metals industry when it comes
to managing commodity price risks
in today’s market place. In the late
1990s and early 2000s iron ore and
base metal prices used to slowly
meander higher or lower and annual
price ranges of 20% were not
uncommon. The life of price risk
professionals and analysts was a
relatively easy one and few, if any,
would have guessed at the dramatic
changes to come. Nowadays the
market is different in at least three
significant ways.
First, there has been a long term
uptrend in volatility, which has been
dramatic. Daily price moves of
10-15% through 2008 and 2009
were not that uncommon, signalling
that a new challenging phase had
arrived for the industry and for those
trying to manage price risk.
Nobody knows with certainty
what the future will hold of course,
but the low level of market volatility
through much of this year so far –
and complacency across a large
number of financial markets – means
that buying ‘insurance’ through
options has become very cheap
compared with the recent past,
potentially representing a golden
opportunity for consumers to lock in
attractive prices and margins. With
the global macroeconomic cycle also
turning slowly higher, long-dated
LME prices also look attractively
priced for buyers.
Secondly, commodity
fundamentals have become
increasingly difficult to analyse.
China now dominates both supply
and demand in markets from gold to
copper and iron ore. It has opaque
markets at the best of times.
The rise in the use of base metals
and iron ore as financing tools in the
past five years has added to the
confusion, with Chinese imports
often a misleading guide to the
underlying state of local demand.
Investor flows have also become far
more important in the past decade,
with the dramatic upswing in
commodity index investing and
ETFs creating new market
participants, who often have
different motivations to traditional
industry players.
Link broken
Thirdly, the inverse link between
base metal prices and headline LME
inventory levels has broken down,
with super-low interest rates
encouraging large-scale inventory
financing activity, as investors seek
out a yield. While this is not a new
development for the aluminium
industry, the size and scale of this
activity is unprecedented and
markets like copper and zinc are now
embroiled in debates and legal
disputes about warehouse queues
and off-warrant inventory more than
ever before.
All this leaves even experienced
market analysts struggling to
understand many daily and weekly
price movements across the metals
space. In an era of confused signals
from commodity markets and
widespread intervention by world
central banks in financial markets,
the challenges ahead for risk
professionals are likely to be
significant.
The landscape of metal exchanges
is also likely to alter, with the West
facing increasing competition from
the East. In the base metals world,
‘There has
been a long
term uptrend
in volatility,
which has been
dramatic’
London and New York have tended
to dominate global futures trading,
but there are an increasing number of
alternative exchanges that offer both
options and futures contracts.
However, despite the steady
movement of the physical metals
world from West to East, difficulties
surrounding LME warehousing, and
record high premiums in many
markets, the LME as a hub of the
metals trading world has retained its
enduring success to date. The LME
still accounts for 80% of global
non-ferrous metals trading and
trading volumes. Moreover, the
traditional major LME contracts are
growing rapidly – copper futures
volumes were up by 13% in 2013,
while primary aluminium futures
volumes grew by 8% in 2013.
Hong Kong, Shanghai and
Singapore all hope to become more
dominant metal exchanges in the
future, but there are some obstacles
to their growth. Trust needs to be
built in China, both in terms of the
rule of law as well as regulation and
the institutions supporting contracts.
London has suffered some loss of
confidence due to a large number of
banking scandals, and traditional
ways of conducting fixes in markets
such as gold and silver are facing
change. China has its own problems
though, with recent fraudulent
activity at Qingdao port flagging up
some weak points in its own system.
Overall, foreign investors still see
London as a relatively safe-haven,
despite the current climate, and trust
remains intact.
A lack of currency convertibility is
another obstacle that needs to be
overcome in China. The boom in
trading volumes on the Shanghai
Futures Exchange is a significant
success story, but the exchange is
mainly a location for domestic
players. The ability for those outside
China to participate is limited, as the
RMB is not yet fully convertible, and
this will take some time to achieve.
Hong Kong certainly has the
advantage of currency convertibility,
but potentially it would need to
develop a warehouse system to
80,000
200,000
70,000
60,000
150,000
50,000
40,000
100,000
30,000
50,000
20,000
14
0
7/
1/
13
12
Shanghai 1-month copper prices (LHS, RMB/tonne)
7/
1/
7/
1/
7/
1/
11
10
7/
1/
09
07
08
7/
1/
7/
1/
7/
1/
06
7/
1/
7/
1/
0
05
10,000
Volume (Contracts, RHS)
LME 3 month copper volumes
600,000
12,000
500,000
10,000
400,000
8,000
300,000
6,000
200,000
4,000
100,000
LME 3-month copper price (LHS, USD/tonne)
2009 and since then volumes have
soared to around 30 million tonnes/
month. A futures contract launched
more recently has added significant
volumes on top of this.
The success of SGX was driven by
a number of related factors coming
together. First, iron ore demand
plummeted in the financial crisis and
spot prices became very volatile, with
a large differential opening up
between spot and contract prices.
Secondly, this encouraged some
counterparties caught on the wrong
side of an annual contract settlement
to walk away and default.
Increased volatility combined with
a severe credit crunch and helped to
break down the system of annual
contract negotiation between iron
ore consumers and producers. This
shift in iron ore pricing shows how
when the right factors come together
change can take place rapidly, despite
resistance from entrenched
positions.
Asia reshapes markets
Thus a big battle lies ahead in the base
metals world, where London and
New York are facing a stiff challenge
from exchanges in the East. HKEx
appears to have made significant
progress with its purchase of the
LME in 2012 and certainly the new
owners have ambitious plans to
4
1/1
6/
3
1/1
6/
2
1/1
6/
1
1/1
6/
0
1/1
6/
9
1/0
6/
6/
1/0
7
1/0
6/
0
8
2,000
6
The metals trading world does
appear to be on the cusp of some
dramatic changes driven by multiple
factors including the recent financial
crisis, heightened volatility, increased
regulation, banking scandals, the
upswing in the importance of China
and the takeover of the LME by the
Hong Kong Exchanges & Clearing
(HKEx).
Some key changes coming up for
the metals world include:
– HKEx is to launch
RMB-denominated mini futures
contracts in aluminium, copper, zinc
and thermal coal before the end of
this year
– SHFE is to launch the first China
commodity index on non-ferrous
metals
– LME plans to launch a cash-settled
futures contract for steel scrap and
rebar
– LME plans to launch an
aluminium-premium contract to
allow the industry to hedge record
high premiums in Asia, Europe and
North America
– London silver fix to end on August
14 to be replaced by a new price
discovery methodology
– London gold fix to be restructured
and price discovery process to be
made more transparent.
The iron ore market has already
undergone a dramatic shift, with
Singapore having tremendous
success with its SGX iron ore swaps
contract. This was first launched in
250,000
90,000
1/0
Dramatic changes
Volumes traded on Shanghai have surged
6/
support its contracts for physical
delivery.
A final obstacle for new exchange
products to overcome is to capture
good levels of liquidity. Commodity
contracts are notorious for their low
initial levels of volume, particularly on
longer-dated contracts. Thin liquidity
increases trading costs and makes it
difficult to enter and exit positions.
Banks and investors therefore seek
out exchanges with narrow bid-offer
spreads and good liquidity as an
important starting point. To a large
extent, volumes drive success in a
contract and success encourages
additional volume. The London
LME community certainly cannot be
complacent, but it has first-mover
advantage for now, which has helped
to maintain its dominance as the
physical world has shifted east.
Volume (Contracts,RHS)
0
expand. The most significant change
coming will probably be the launch of
RMB-denominated mini futures for
aluminium, copper and zinc
expected towards the end of this year.
These new contracts are still being
developed, but so far they appear to
have several key advantages. Trading
will of course take place in the Asian
time zone, which is the heart of the
physical trading world. Western
investors will be able to connect to a
wide range of clients in China by
trading metals directly in RMB. The
contracts will provide some direct
overlap between LME members and
China (17 HKEx members are also
members of the LME).
One potential problem with the
new mini contracts being developed
by HKEx is that they will be traded in
CNH, which is the offshore RMB
currency available in Hong Kong. At
present there are quotas for
conversion between CNH and CNY
(the onshore RMB currency), so
limited convertibility could deter
some trading. Also the new contracts
will be cash-settled only, rather than
having the option for physical
settlement. Cash settled contracts
can diverge from the physical market,
but HKEx plans to anchor its prices
through using the LME, in order to
avoid a disconnect between paper
and physical markets.
A key question is whether a critical
mass of LME members and major
industry players can be persuaded to
trade in Hong Kong to create the
necessary liquidity. HKEx certainly
seems keen to extract more value
from its investment and the LME’s
members will certainly be keeping an
eye on the costs of their membership.
Perhaps these developments will
be the starting point for a realignment
of trading volumes in the base metals
world and banks and risk professionals
may find their attention steadily
moving eastwards as time moves on.
The Asian exchanges need to
prove their worth to the metals
trading world and, as always, the
devil will be in the detail when it
comes to winning new business and
diverting volumes away from the
established exchanges in the West.
Change is inevitable, but the pace of
change remains a big unknown.
The author is ceo of Dan Smith
Commodities Research Ltd
Credit covered
One of the biggest risks to company cash flow
is a default by a customer. Insuring against this
has become an important aspect of global
trade, reports Steve Karpel
The economies of nations and the
world as a whole depend on the
smooth functioning of trade, which
in turn depends on well-functioning
national and international payment
systems. While prepayment for
goods is sometimes the norm, in the
metals sector payment more often
lags behind the transfer of goods. In
this and many other industries, the
provision of insurance to cover
possible losses in case of a default by
the buyer has become almost as
important as the provision of credit
itself, increasing confidence in the
system and allowing trading to
proceed without the need for
prepayment.
In fact, the credit terms for metal
purchases are longer than in many
other sectors, notes Arwel Roberts,
senior underwriter, metals and
transport, UK, for credit insurance
specialist Atradius. “The metals
sector has lengthy credit terms as a
norm: 90 to 150 days, for example.
This increases the perception of risk,
as there is a long period when the
buyer could go insolvent. As a result,
there is a high penetration of credit
insurance in metals trading,” he says.
Credit insurance has become an
important factor in global trade, and
it is expected to substantially grow in
Asia, in particular, where, in spite of
its world-leading economic growth in
recent years, the penetration of credit
insurance has been quite low up to
now, says Robert Nijhout, executive
director of the International Credit
Insurance and Surety Association
(ICISA), based in the Netherlands.
ICISA was founded in 1928 with
eight companies, and it now has over
50 members which account for about
95% of the global credit insurance
market. Last year, its members were
responsible for a total insured trade
credit exposure of nearly 2 trillion
euros ($2.72 trillion), a 2.7% increase
from 2012. In spite of this increased
exposure, the total premiums paid to
insurers fell by 4% to €5.89 billion
($8.11 billion). This fall in premium
income is a result of a combination of
ample insurance capacity and
increased competition in the sector,
according to ICISA.
Shannon Murphy, assistant head
of risk underwriting for Euler
Hermes UK confirms this:
“Premiums remain under pressure,
because this is a competitive field.”
Globalisation of the sector
A marked change in the sector
occurred in the late 1990s, says
Nijhout, when the globalisation of the
industry then got under way, paving
the way for the major multinational
players that exist today: Euler
Hermes, Atradius and Coface are
three of the biggest.
Credit insurers have amassed, and
continue to amass, an enormous
quantity of data on the world’s
companies, which are regularly
checked and updated in order to give
as complete a picture as possible on
their creditworthiness.
The aim of the industry is to have
up-to-date information on just about
every company in the world, says
Nijhout. This is one factor that makes
it difficult for newcomers to enter this
field. Ratings agencies do a similar
task, but they tend to concentrate on
the larger companies, he adds,
whereas for credit insurers, small and
medium enterprises (SMEs) are the
most important part of the market.
The information collected by
insurers on creditworthiness is
available to policyholders, and this
data can often be as important as the
insurance itself, Nijhout adds,
particularly when a company is
exporting on open credit terms to a
‘The 2008 crisis
emphasised
the need for a
more regular
assessment
of company
balance sheets
and risks’
customer of which they have little
knowledge or past experience.
Credit insurers also emphasise the
other services that they offer their
customers, including credit
management, collections and advice.
In cases of insolvency, they also carry
out the often prolonged process of
trying to recover any debts, explains
Lucien Hofmann, Atradius country
director, Switzerland.
Although credit insurance may be
thought as being more important for
international trade, in fact overall the
global balance of coverage slightly
favours domestic transactions, says
Nijhout: “Coverage averages about
40% for exports and 60% for
domestic trade, but this varies
considerably between countries.
Germany and China, for example,
are very export oriented. In domestic
trades, the parties may know each
other well, but third-party vetting of
[possible risks] is still regarded as
important.”
When the Chinese or Koreans
export steel to Europe, they use their
domestic insurers, says one
European steel trader. These tend to
be more flexible in terms of coverage
than European-based insurers, he
contends.
Open account trading is the
backbone of the credit insurance
market, notes Nijhout, although
letters of credit (LCs) are still
common in developing markets. As
LCs are a guarantee of payment by a
bank, they are not usually
underwritten by a credit insurer, but
sometimes this is requested, as the
solidity of banks is no longer taken for
granted following the crash of 2008.
For a typical metals trader, says
Hofmann, about 50% of trades may
be covered by letters of credit, 40%
by open account and 10% by
prepayment or cash against
documents. A UK aluminium trader
says that prepayment is a “significant
portion” of the market, although it
will vary considerably month by
month. For the buyer, he adds, “it
avoids the cost of the credit insurance,
which is passed on to the customer.”
If a credit insurer reduces the
amount of cover over a given period,
it may be necessary to adjust
payment terms in order to maintain
the same cash flow for the seller, says
the trader. If the cover is cut by half,
for example, then the payment terms
Shock to the system
A glance at the global picture for
trade credit premiums and claims
during this century shows the shock
to the system as a result of the
financial crisis of 2008. Claims shot
up to a level of about 85% of the total
premiums paid in 2008 and 2009,
although the claims ratio quickly fell
to a more normal level of under 40%
in 2010. Last year it rose to 48.8% –
“on the high side,” remarks Nijhout
(see charts).
The total insured exposure by
ICISA members, having dipped to
€1.5 trillion in 2009, has been rising
steadily each year and was nearly €2
trillion in 2013, a new record.
How has the 2008 crisis affected
the credit insurance sector, and what
Trade credit insurance: premiums and claims
¤ (million)
7,000
Premiums
Claims
100
Claims ratio (%)
90
6,000
80
5,000
70
60
4,000
50
40
3,000
30
2,000
20
1,000
20
13
20
11
20
12
20
10
20
09
20
07
20
08
20
05
0
20
06
20
04
20
03
20
01
10
20
02
0
Claims ratio (%)
Source: ICISA, for total ICISA members, excluding reinsurers
Trade credit insurance: total exposure
2,000
1,500
¤ (billion)
1,000
13
20
12
20
11
20
10
20
09
20
08
20
07
20
06
20
0
05
500
20
for a buyer may also have to be halved
in order to maintain turnover.
Domestic trade in China is often
covered by prepayments or open
accounts, but LCs are mainly used for
exports, confirms Chris Chen,
Atradius head of risk for China.
There are various types of bank in
China, she explains, such as state,
private and provincial (or rural)
banks, and it is necessary to look at
their balance sheets to see if there is
any risk involved.
This is not too difficult as listed
banks in China have to submit
accounts quarterly. But the
examination of other companies in
the country is about to get more
difficult, says Chen. Up to March
2014, every listed company has had
to submit annual accounts to the
Administration of Industry and
Commerce by the end of June each
year. But following a change in the
new Company Law in March, this
will no longer be mandatory.
“There is also increasing demand
for prepayment in China’s steel
sector, because steelmakers need
more working capital,” says Chen. A
prepayment from 20% up to 100%
can be negotiated depending on their
bargaining power, she adds.
Credit insurance is of course
another potential cost for steel mills,
and Chen confirms that it is a
relatively new market in China with a
low take-up so far. Western insurance
companies do not have licence to
operate independently in China, but
only in partnership with state-owned
entities, she adds.
Source: ICISA, for total ICISA members, excluding reinsurers
changes have come about? “Since
2008, two main things have emerged
for the industry: the need for more
transparency, and more reliability,”
says Nijhout. Customers naturally
want to know why premiums or
cover change, and as a result, “There
has been a huge increase in
discussions with policyholders,” he
observes.
Insurers now act in a more
predictive mode and look ahead for a
few months or up to a year in order to
warn policyholders about possible
changes that may be afoot, helping
them to make contingency plans.
Forward planning has also been
assisted by the introduction of
non-cancellable limits, says Nijhout,
where there is a guarantee that a
credit limit will not change for a given
period.
In terms of greater efficiency, there
has been a “leap in automation” in the
industry. When a claim arises, there
are efforts to pay as soon as possible,
as policyholders may need the money
quickly, he adds.
The 2008 crisis emphasised the
need for a more regular assessment of
company balance sheets and risks,
says Atradius’s Roberts. Formerly, all
filed accounts were examined once
per year, but recent events showed
that a lot could change in 12 months.
“After 2008, we had to review
company accounts more regularly –
quarterly if possible. This meant
developing closer relationships with
buyers; we have some 10,000 metal
buyers in the UK,” he explains.
“We have had good cooperation
from steel stockholders in providing
more regular commercial
information,” says Murphy. The
companies appreciate that it is in
their best interests, and could result
in better cover and hence better
credit lines from banks, he points
out.
Another important result of the
2008 events – from the
underwriters’ standpoint – was the
demonstrated importance of credit
insurance and the role of
underwriters, Roberts contends:
“The value of the industry was
greatly enhanced.”
Premiums come down
The cost of insurance has, in general,
now come down to pre-crisis levels
– typically 0.1-0.2% of transaction
value – and it remains a “relatively
cheap product”, Roberts remarks,
with typical coverage of 75-90% of
losses. And in the UK, for example,
the total level of cover in the metals
sector is now 50% greater than it was
in 2009, even though metals demand
in the UK and across the EU has
generally fallen over this period.
Some companies decline to pay
insurance premiums and simply put
aside reserves that are deemed to be
sufficient to cover any possible losses
– the practice of self-insurance. Is
this a growing phenomenon?
“Self-insurance is not increasing,
in my experience,” Roberts
comments: “Our retention rates are
at record highs – we would expect
these to drop off if it were having any
effect.” Edwin Kuhlman, Atradius
senior manager, risk services, in the
Netherlands, notes that there may be
a trend to self-insurance in the
Netherlands but only in the largest
companies with a large capital base.
For the future, Nijhout sees credit
insurance growing exponentially in
regions where it has had low
penetration so far, such as Asia and
Latin America, and there will be a
greater regional focus by
underwriters in order to understand
and deal with local issues more
effectively.
Tools and services
Amongst the broad range of tools and services
available for risk management, CTRM software,
plant condition monitoring systems and actuarial
science are three key examples
CTRM systems
Commodity trading and risk
management (CTRM) systems
enable trades to be executed and
trading positions monitored and
recorded, while their risk
management functions are designed
to give a clear picture of the levels of
potential risk those positions
represent.
For the risk management parts of
its systems, the metals group at major
CTRM supplier Brady is mainly
focused on price risk management,
and particularly market risk. In
testing how its CTRM systems will
respond in exceptional events, the
group looks at what might happen
and what the consequences would be
for users in assessing the events’
impacts.
Value at Risk (VAR) is one tool
used to make assessments, within
which theoretical models, such as a
Monte Carlo simulation or a
historical model, can be used.
“We evaluate the consequences,
make a full portfolio evaluation and
then look at what the user would
make or lose in that event. The VAR
model enables a huge number of
simulations to provide an aggregate
view,” explains Harry Knott, Brady
head of metals.
What if..?
The CTRM user can choose inputs to
answer ‘what if..?’ questions and to
stress-test their position. For
example, if the copper price rapidly
rises or falls by $200/tonne, the
system answers the basic question:
“How will that affect my portfolio?”
CTRM systems become
particularly valuable in assessing and
managing risk when a complex set of
interacting variables needs to be
considered. For example, options
trading is affected by price and
volatility in a non-linear relationship,
so asking the software to provide
answers to queries about what will
happen over particular ranges of
price and/or volatility, and how
movements will affect both profit &
loss or a hedge position, delivers a
picture of whether and when the user
will be long or short, and what needs
to be done to re-hedge.
For those on the buy side of
transactions – potentially using a
half-dozen different brokers to
spread risk – one big market move
might push them into a margin call
from a particular broker, with
potential knock-on effects for credit
and ultimately the market rates they
will pay for it. The CTRM system
generates reports to enable traders to
monitor and control such risks.
Frequency and type of access
Flexible and quicker access to CTRM
data can be provided by
web-browser-based screens.
The collection of risks faced by
banks or by metal producers and
fabricators, hedging by using futures
contracts, differ. So does the nature,
depth and frequency of information
needed.
An options trader undertaking
proprietary trading needs live,
real-time information constantly
updated after every trade. A
concentrate trader calculating
various escalators at different price
levels is more likely to need to make
occasional off-line assessments of the
effects of planned new contracts, and
to consider the hedging adjustments
needed as a consequence.
“Options traders will
automatically assume that such
functionalities will be there, but
physical or buy-side traders are less
conscious of them as of now. The goal
is to have lots of capability from
deterministic and risk management
functionality,” says Knott.
P & L report from
Brady’s CTRM solution
Traditionally, physical trading
platforms handled a lot of data on
logistics and administration, but
they’ve now come together to
provide a ‘combined portfolio’ of
value to both physical and derivative
commodity trades, Knott explains.
CTRM systems are good for
handling market, credit and liquidity
risks. Operational and reputational
risks are harder to quantify and
measure in a straightforward way,
but they hold the potential for
catastrophe. “Some systems will help
you to quantify those, but I’m a little
bit sceptical about them,” says Knott.
He explains that while the copper
price is an exact number that enables
risk to be calculated and hedged very
accurately to within half a lot,
operational risk is far more nebulous.
It could be that even more risk is
introduced if calculations are based
on numbers attached to risks that are
really unknowable.
CTRM systems reduce
operational risks by shifting from
old-fashioned records kept on
spreadsheets where inaccurate data
or incorrect contract information
might be included – mistakes such as
a ‘buy’ registered as a ‘sell’ – but left
undetected until it is too late to
prevent a potential loss arising.
Automated reconciliation checks
that records match up and that
everything is in line, flagging up
problems, preventing losses and
wasted time.
CTRM systems like Brady’s are
also equipped to deal with new
regulatory requirements such as
reporting trades to a central
repository under European Market
Infrastructure Regulations (EMIR).
Internal management reports can
also be generated on demand, but
Knott warns that siphoning off data
produced by CTRM systems into
other unrelated software packages
for ERM could only be done with
caution, in case they are not in exact
alignment with the parameters
needed. “Brady’s VAR suite of
functions is tied in with the other
parts of the system,” he stresses. “If
data are fed into another ‘black box’,
you need to ask what that is
achieving.”
Brady’s stress tests, profit and loss
and VAR data all feed into integrated
models, he notes. Between them they
provide integrated risk management
tools for physical traders, producers
and people hedging and trading in
derivatives. Companies with a
number of operations, plants and
offices in a range of locations globally
can also calculate their aggregated
risk by bringing together all their data
in one place.
Cloud-based solutions offer access
from multiple locations and CTRM
‘software as a service’ provides users
with full system functionality while
the provider takes care of the
software and any upgrades and
updates applied to it.
“Signing in for remote access is
something companies are
increasingly willing to do,” says Knott,
“Some don’t want to administer
systems for themselves.” Others
prefer still to hold their systems and
software on their premises.
Brady supplies systems either way
according to their clients’ own
policies and preferences – and their
customers’ own due diligence about
the respective merits of on-site or
remote access regarding data
security – Knott explains.
Plant condition
monitoring
To the extent that the smooth
running of a company as a whole can
be compared with that of efficiently
operating all the components of and
processes at a steelworks, some
parallels can be drawn and basic
lessons learnt about managing risk
from the technology developed to
monitor the condition of a plant’s
components.
Limiting the risk of a works’ failure
to perform properly, or worse still
unexpectedly stop running
altogether, is the aim. For a steel
producer, the smooth and efficient
running of its works is directly linked
to its overall enterprise risk
management (ERM) strategy in the
sense that unplanned shutdowns
have direct consequences for
production and profits.
Identification of the most critical
components – and an understanding
of what happens if they fail – is a
crucial analysis for a plant. If it is of a
similar design to ones built and run
earlier, the experience of its
predecessors can be drawn on from
failure mode cause and effect analysis
(FMCEA). Systematic digital
The actuarial angle
The Illinois, USA-based Society of Actuaries, defines ERM as a process of
coordinated risk management that places a greater emphasis on
cooperation between departments to manage an organisation’s full range
of risks as a whole. It also says that the concept of ERM embodies the
perspective that risk analysis cuts across the entire organisation. “The goal
of ERM is to better understand the shock resistance of an enterprise to its
key risks and to better manage enterprise risk exposure to the level desired
by senior management,” it states.
Since actuaries specialise in assessing the financial consequences of risk
– traditionally in areas such as insurance, pensions and investments – it is
not surprising that they have become involved in ERM. An illustration of
the solid foundation of this relatively new concept is the development of a
professional qualification in this field. The Society of Actuaries has
introduced a qualification of CERA: Chartered (or Certified, depending on
the signatory body) Enterprise Risk Actuary (or Analyst) which is stated to
be a rigorous demonstration of expertise in this area. The qualification is
recognised by 15 actuarial member associations in 14 countries. It was
inaugurated in August 2007, and over 2,000 have since been awarded.
record-keeping of its own
performance for later reference is
also useful.
The results highlight which parts of
a plant especially merit the
installation of condition monitoring
sensors – measuring parameters such
as torque, flow rate, temperature,
power, wear and vibration – to assist
in the formulation of regular
maintenance checks and schedules,
as well as providing alarms if anything
out-of-the-ordinary is detected.
Avoiding the risk of serious
equipment damage due to
overloading is another aim.
Crucial parts in a rolling mill, for
example, include gears and spindles
on particular rolling stands. For a
steelworks converter, the tilting drive
for the vessel is a particularly critical
component since its failure could
leave the works crippled with 100
tonnes or more of molten steel stuck
inside!
Traffic lights
Simple warnings for operators when
things could, or are about to, go
wrong by a simple ‘traffic light’
system of green for ‘okay’, yellow for a
problem looming and red for ‘stop
running’ have proved effective in
condition monitoring systems such
as SMS Siemag’s ‘Genius CM’
condition monitoring system.
Integrating condition monitoring
with a plant’s existing automation
and control system enables data and
trend analysis via web software used
in the enterprise network.
The ability to then switch to an
‘expert view’ providing more data
that might result in a local solution is
the next step, which is backed up by
remote human advice if needed. That
support is particularly valuable for an
operator working a night shift and/or
based in a plant far from local
expertise, notes Christoph Häusler,
in SMS Siemag’s Technical
Customer Support department.
Such systems are modular and can
often be retrofitted to existing plants.
They are well established in Europe
and North America, while interest is
growing in Brazil and South Africa,
says Häusler. SMS Siemag has also
supplied condition monitoring
systems for several plants in India.
The cost of a few hours of unplanned
shutdown can exceed the price of
installing a condition monitoring
system, he notes.
Historically, Chinese steelmakers
have been less inclined to install
condition monitoring equipment up
to now – partly on grounds of cost
– but suppliers like SMS Siemag are
additionally working on smarter and
less expensive basic systems. Häusler
sees a future where condition
monitoring will increasingly be
provided as a service as much as, if
not more than, a system.
Expertise is needed to interpret
the signals generated by as many as
350 sensors in some condition
monitoring systems, which is
something that plantmakers such as
the SMS group can provide as
‘on-going condition monitoring’.
Lead and zinc
Zinc turns a corner
The fundmentals for zinc finally seem to be
shifting after several years of supply surpluses,
although a wide range of factors are impacting
its price, reports Myra Pinkham
Traditionally the global zinc
market is driven more by supply
than demand and that has
definitely been the case this year as
prices slowly march upwards in
tandem with the market’s newly
found position of slight deficit.
“The zinc market is becoming
increasingly bullish” and could
become more so, Eugen Weinberg,
head of commodity research for
Commerzbank, Germany, asserts,
noting that not only has demand
growth outstripped any increases
in production capacity, but it will
not be easy for companies to
increase zinc supply levels
significantly in the near term.
Robin Bhar, head of metals
research at Société Générale, says
that one of the reasons for the
“very interesting” supply situation
is that to date Chinese zinc
smelters have not been
incentivised to boost their
production output. “That could
happen if zinc prices go up
further,” he says.
Given current market dynamics,
zinc prices have already caught up
with lead prices, attracting more
fund activity to the zinc market,
Weinberg observes. That could, in
turn, could result in greater price
increases. Yuri Belinsky, an analyst
with Toronto’s CHF Capital
Markets, says that zinc is one of the
“hottest” metals today, with a
price increasing more than 12% in
the past three months to a
16-month high.
Andrew Cole, a senior metals
analyst for Metal Bulletin
Research, notes that zinc prices
had four consecutive “up” weeks
in June and early July, including a
2.5% jump that allowed it to cross
the technical resistance hurdle of
$2,200 per tonne. He says that the
next target in the sights of “zinc
bulls” is for prices to rise further,
first to $2,300 per tonne and
possibly over the longer term to
$2,500 to $2,600 per tonne.
There are two parts to the
perceived zinc bull story driving
this price rally. Cole says the first is
a shorter term component that
includes falling exchange stocks
and an emerging supply deficit
after six years of surplus.
According to preliminary data
compiled by the International
Lead and Zinc Study Group
(ILZSG), as of April there was a
small deficit of 107,000 tonnes in
the global zinc market while at the
same time there was a 123,000
tonne drawdown in reported zinc
stocks at the LME and Shanghai
exchanges.
Mines closed or delayed
Cole says that a second
component, in what could have a
medium- to longer-term impact
upon the concentrates market –
especially outside China – is a
series of closures of older zinc
mines as well as start-up delays of
new or expanded mining capacity
starting last year and stretching
out to about 2016. This could
result in even greater deficits for
the next several years.
“Globally there has been very
little mine output growth,”
Weinberg says, adding that he
believes that there will continue to
be below-average increases going
forward. Zinc is always a supply
story, according to Michael
Widmer, a metals strategist for
Bank of America Merrill Lynch,
who notes that with a number of
operations reaching the end of
their lives it has helped to
rebalance the zinc market.
“There are still only a few zinc
mines in the development
pipeline,” Widmer says,
maintaining that prices need to
improve further before that
changes. This, according to K.C.
Chang, a senior economist at IHS,
has helped to fuel fears that there
could be a zinc supply crunch
beginning in 2015.
Paul White, ILZSG’s director of
market research and statistics,
observes that January-April global
zinc mine production is up a slight
0.4% year-on-year to 4,210,000
tonnes of zinc content with the
opening and expansions of such
mines as Bracemac-McLeod in
Canada, Valardena in Mexico and
Santander and Cerro Lindo in
Peru, countering last year’s closure
of two major Canadian zinc mines
– Brunswick, which had a 240,000
tpy production capacity, and
Perseverance, which had a
115,000 tpy capacity.
Also, open pit production of
Glencore’s new Perkoa mine in
Burkina Faso was suspended in
March, there has been lower than
expected output at Vedanta’s
Rampura Agucha Mine in India
during its switch from open pit to
underground operations, Finland’s
Talvivaara faced financial problems
and suspended mining, and the
startup of MMG’s Dugald River
mine in Australia has been delayed.
And further zinc mine closures
are expected, most notably
MMG’s large Century mine in
Australia, which, with an annual
production capacity of 510,000
tpy, is due to close in 2015. This
year Vedanta’s 175,000 tpy
Lisheen mine in Ireland is expected
to be shut down and in 2016
several other zinc mines are also
being closed, including the
154,000 tpy Skorpion mine in
Namibia and the 70,000 tpy
Bukowno Olkusz mine in Poland.
Widmer says the impact of these
closures has been somewhat offset
by some increases in capacity
scheduled to come onstream
between 2014 and 2017, such as
plans by Teck Resources to restart
its Pend Oreille mine in the USA in
2015, which could add about
44,000 tonnes of zinc output.
White says there are also a
number of new mine projects
under consideration that could
begin producing zinc as early as
2016. “It remains a big question,
however, as to what will happen in
the next few years,” he says.
It is possible that China, whose
zinc industry is structured
differently and consists of more
than 850 small mines – which
could be brought on more quickly
– in addition to its 20 or so
medium-sized mines, could fill in
some of the demand the gap until
additional zinc mining capacity
elsewhere in the world comes
on-stream, assuming that
environmental regulations in
China have not become too
restrictive.
Cole notes that while Chinese
zinc concentrate production
declined 4.1% year-to-date
through May, according to the
China Nonferrous Metals Industry
Association, at 518,608 tonnes
May was still its third highest
month on record. That, he says,
indicates that Chinese miners are
raising their zinc output.
“This most likely was in
response to rising prices and a
drop-off of imports, which, at
107,194 tonnes in May, was its
lowest level since March 2013 and
its second lowest level since 2007,”
Cole says, adding that the fact that
overall zinc concentrate imports
were only up 1.9% year-on-year
during the first five months of this
year could be an indication that the
global zinc concentrate market is
already beginning to tighten.
At the same time, visible
inventories on the LME and
Shanghai exchanges are at
multi-year lows, Weinberg notes.
IHS’s Chang observes that
visible zinc inventories on the
exchanges, which had ballooned in
Distribution of zinc mine supply
8.3% Canada
3.3% India 3.2% Canada
6.0% India
10.6%
Europe
14.3% Peru 7.5%
Europe
10.2% Peru
21.3%
China
35.8%
China
2003
27.1% Other
2013
16.0% 25.7%
Australia Other
11.5%
Australia
Source: ILZSG
2009 after the global economic
downturn, were still at about 1
million tonnes at the start of this
year. By mid-April they had fallen
to about 950,000 tonnes. “It is our
expectation that inventory levels
should tighten further in the next
twelve to eighteen months,” he
says.
This, however, is not as cut and
dried as it seems. “Exchange zinc
inventories have been falling for a
while,” Widmer observes. “But the
question is if they are just going
from reported inventories to
unreported inventories or if they
are actually being worked down.”
Demand robust
Meanwhile global zinc demand
has been fairly robust with about
5% year-on-year improvement
expected this year, Bhar predicts.
Given that zinc’s largest end-use
market is galvanized steel, White
says its growth has a close
correlation to the automotive and
construction sectors. Belinsky
agrees, estimating that galvanized
steel accounts for about 60% of
total zinc consumption, which
ILZSG estimates was up 7.5% to
4.44 million tonnes in
January-April.
“Not only demand in the
emerging economies was strong
recently but also US demand
growth has stabilised,” Weinberg
observes. Nevertheless he says
that China remains the main
driving factor for global zinc
demand.
However, Chang says that with
the recent recovery in
non-Chinese demand as the US
economy strengthens and the
slightly lower growth rate in China
as it looks to right-size its steel
sector, Chang believes that there
could be some shift in China’s
influence upon overall zinc
demand.
But while Chinese zinc demand
has been “a little disappointing”,
held back to some extent by a
general slowdown in economic
growth there, especially in its
property sector, Widmer says that
it has not been that bad. White
agrees, noting that while the
growth rate for Chinese zinc
demand, which was a still very
impressive 12.4% year-on-year in
January-April, is slower than it had
been in the recent past, that is off of
a much bigger base. Therefore the
country continues to have sizable
increases on a tonnage basis.
Bhar observes that China is still
investing in improvements in its
infrastructure with all of the
urbanisation going on there,
creating a need for improvements
in its railway, road, bridge and
water management infrastructure.
Also there have been upgrades in
its telecommunications sector
with the government rolling out a
4G network.
In addition, Chinese automotive
sales have been pretty strong this
year, especially for sport utility and
multi-purpose vehicles, with about
a 9% year-on-year increase during
the first quarter of 2014 following
strong growth in 2013.
Meanwhile, while European
zinc demand had been “pretty
grim” recently, Bhar says there
have recently been some signs of
plan K
mastering quality
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Lead and zinc
Infrastructure boost
Even the lagging non-residential
construction sector has begun to
improve and is likely to accelerate
further later this year and next
with infrastructure construction
also expected to turn the corner,
Zinc in art,architecture and engineering
rob mulholland/galvanizers association
stabilisation in not only its
manufacturing sector, but in
construction demand as well, as
the region emerges from its
recession. Automotive output was
up about 7% year-on-year during
the first quarter with certain other
manufacturing sectors, including
white goods, seeing improvements
as well. Both residential and
non-residential construction were
also better contributors to the
region’s overall increase in zinc
consumption, which has been
gradually increasing month-onmonth although year-to-date
volume was down 0.9%, according
to ILZSG. One reason, Chang says,
is that Europe continues to be
challenged by lower-priced
galvanized imports from China’s
large capacity.
Widmer says that US zinc
demand was relatively weak at the
start of the year, but given that
some of that was due to weatherrelated issues, it has improved as
the year went on and is expected to
continue to do so.
Metal Bulletin Research
observes that US manufacturing
activity continues its gradual
improvement led by the
automotive and energy sectors,
with the US Federal Reserve
reporting that domestic industrial
production is running 4.3% above
year-earlier levels in May including
a 5.3% gain in durable goods
output. Likewise, the Institute for
Supply Management’s
manufacturing purchasing
managers’ index has been generally
edging upwards throughout the
year as has the Conference Board’s
consumer confidence index.
The US automotive sector is
leading the charge, further
bolstered by better than expected
sales in June, which indicates
North American automakers are
on track to produce nearly 16.5
million vehicles this year, nearly
double the 8.6 million production
level at the depth of the recession.
Rob Mulholland’s ‘Skytower’ in Airdrie,
Scotland, has won the Galvanizing in
Architecture Award 2014 from Galvanizers
Association in the UK. Placed on a windswept
hillside for Forestry Commission Scotland’s
new Rawyards woodland park, the sculpture
is made from 1,400 metres of steel rod, cut
into lengths and joined together with over
6,000 welds into an overall shape resembling
sticks of woven willow. The 6 metre high
sculpture was galvanized as one complete
section.
especially if the US Congress
reauthorises the Highway Bill
which is currently due to expire on
September 30. Bhar says a robust,
long-term bill that would address
the nation’s infrastructure needs
would further bolster US zinc
demand, which, even with the
weather-related issues in the first
quarter, was up 2.8%.
“The zinc market fundamentals
are definitely moving in the right
direction,” Bhar says, predicting
that this should bolster prices in
both 2014 and 2015. While the
general consensus is that in the near
term there will be a fairly stable
pricing environment with LME
prices hovering around their
current level of just over $2,200 per
tonne, Weinberg believed there is
more upside than downside.
Galvanizers Association also recently
collaborated on a large-format and lavishly
illustrated hardback book The Alchemy of
Galvanizing – Art, Architecture and
Engineering with specialist architectural book
publisher Artifice (artificebooksonline.com).
It showcases many exemplary projects
making effective use of galvanized steel,
together with a collection of articles giving
expert personal perspectives encompassing
the history, engineering, materials and art of
galvanizing.
Widmer agrees, stating that the
market deficit that will develop
this year should increase over the
next few years, providing support
for zinc prices to increase to about
$2,500/tonne by 2016.
But despite the current
environment of falling stocks, a
weak dollar, solid macroeconomic
data and bullish technical signals,
Cole says it is too early to get too
bullish. “With zinc being a far
more liquid market than nickel, we
don’t think that it is prone to
nickel-type spikes,” he says,
although he concedes that longer
term peaks of as high as $2,500 to
$2,600 per tonne could be
possible.
The author is a specialist writer
based in New York.
Lead and zinc
The power of lead
In recent months, the conclusions of
a series of reports have given a clear
message that the future demand for
lead looks good and that it will be
needed more than ever to support
the growing market for energy
storage solutions.
Lead metal itself has seen
year-on-year increases in production
to reach record levels – an increase of
5.5% per year in 2001-2011, to more
than 10 million tonnes annually,
according to the International Lead
and Zinc Study Group (ILZSG). That
demand has been principally driven
by lead batteries, which now
represent more than 80% of lead use.
Lead-based batteries are an
essential component in the world’s
one billion vehicles, in particular SLI
batteries (Starting, Lighting, Ignition)
for commercial and passenger
vehicles, either as original equipment
in new vehicles or as replacement
batteries – this represents about
three-quarters ($22.8 billion in value)
of the total lead battery market.
Indeed the “aftermarket” for
replacement batteries is by far the
most significant part of the business
– for SLIs it is estimated to be at least
four times larger than the original
equipment market.
Contrary to common belief, the
need for greater energy efficiency
and reductions in carbon emissions
for vehicles is not having an adverse
effect on the lead-based battery
market – and 600 million lead
batteries were produced worldwide
in 2012 – as lead battery
technologies are often at the forefront
of innovation.
The importance of lead batteries
for the automotive industry, plus
lead’s guaranteed availability as a
sustainable resource with low
environmental life-cycle impacts, has
now been confirmed in a series of
ILA
A recent series of reports have shown that demand
for lead in its main applications is assured for the
foreseeable future, writes Dr Andy Bush of the
International Lead Association
The LC Super Hybrid
is an example of an
advanced car with a
bigger 48 volt
lead battery
reports produced by a group
consisting of Europe’s automotive
and industrial battery producers,
plus the vehicle manufacturer
associations of Europe, Japan and
South Korea, with the International
Lead Association (ILA) also
representing the lead industry.
No alternative
In its recent study A Review of Battery
Technologies for Automotive
Applications (published by Eurobat
this year), the group examined the
likely future for battery technologies
in the automotive sector. At present
lead-based batteries are the
technology of choice for almost all
SLI battery applications and the
study concluded that these batteries
will by necessity remain the most
widespread energy storage system in
automotive applications for the
foreseeable future, with no
alternative technology currently
available to challenge this position.
With the global car fleet predicted
to grow to 1.6 billion vehicles by
2030, according to a UN Economic
Commission for Europe report, a
step change in technology is needed
to ensure that sustainable mobility
can reduce carbon dioxide emissions
in the long-term. In response to this
challenge, vehicle manufacturers in
Europe have striven to meet targets
for reduced CO2 emissions with a
subsequent rise in alternatives to the
conventional car engine. These
alternatives include fully electric
vehicles and a variety of hybrid
vehicles where the energy stored
from braking is used to boost a car’s
acceleration, or in some cases for
some electric driving. This has seen
greater use made of lithium-ion and
nickel-metal-hydride batteries, but
one constant has remained – all these
vehicles in addition still need a 12V
SLI lead-based battery.
Among the advantages of
lead-based batteries are their low cost
and unparalleled ability to start an
engine at cold temperatures in
conventional and micro-hybrid
vehicles. In hybrid vehicles, which
have a limited amount of electric
driving, and full electric vehicles,
several battery chemistries are
available for vehicle propulsion.
However lead-based 12V batteries
are also essential in providing the
power for features such as
air-conditioning, entertainment
systems and safety features working
alongside other battery technologies.
Innovations in battery technology
in the automotive sector will help
reduce carbon dioxide emissions
further. A good example of this is the
LC Super Hybrid vehicle, developed
and demonstrated with support from
the Advanced Lead-Acid Battery
Consortium. Advanced
lead-batteries also now provide
start-stop functionality and other
micro-hybrid features in a significant
proportion of the new vehicles
marketed in Europe. These types of
battery require more lead as they are
bigger than those found in
conventional cars due to the need to
restart the vehicle more frequently
and operate in a partial state of charge.
The findings of the group show
that lead-based batteries remain a
reliable, cost-effective, safe and fully
recyclable energy storage solution –
important attributes as the battery
industry aims to maintain the
exemption for lead-based batteries
within the EU End-of-Life Vehicle
Directive’s wider ban on lead in
light-duty vehicles, which is due for
review in 2015.
Commenting on the report,
Johann-Friedrich Dempwolff,
chairman of Eurobat, which
represents Europe’s automotive
A plentiful and safe supply
With predictions that future demand
for lead from the automotive
industry will increase, the group also
examined the future availability of
the metal and other substances
critical for alternative battery
chemistries. The report Resource
Availability of Metals used in Batteries
for Automotive Applications revealed
that there are currently no concerns
about the availability of lead or the
security of its supply for the
foreseeable future. Moreover,
resource availability of materials such
as copper, calcium, selenium and tin,
which can be used as alloying
elements in lead-based batteries, is
also unlikely to be an issue.
The plentiful supply of lead is
supported by the efficient collection
and recycling infrastructure for
lead-based batteries, with more than
half of the 10 million tonnes of refined
lead metal produced worldwide in
2012 coming from recycled sources.
Lead is one of only three metals to
have a global production rate of more
than 50% from secondary
production, with close to 100% of US
lead production and 75% in Europe
from recycled material.
In its analysis of the resource
availability of substances used in
other battery technologies, the study
identified a number of challenges.
For example, increasing use of
lithium-ion batteries in portable
electronics, coupled with their use in
new applications, is expected to
result in a substantial increase in
demand for lithium.
Increased demand for lithium
would need to be met predominantly
from lithium reserves via primary
production as at present lithium-ion
battery recycling is in its infancy with
less than 1% of lithium recycled, and
only a few companies able to recycle
lithium-ion batteries at the end of
their life. Part of the reason for the
lack of commercial recycling
operations is that lithium-ion battery
recycling is complex and not
currently economically viable, with
recycled lithium potentially costing
up to five times more to produce than
primary metal. With lithium having a
low economic value, any recycling
would probably be driven by other
metals contained in the battery such
as nickel and cobalt.
The report concludes that the use
of lead-based batteries should
continue to be encouraged for a
number of reasons, including the fact
that this technology is the most
competitive option from technical
and economic perspectives and the
fact that the existing market for
automotive and industrial lead-based
batteries can predominantly be met
with recycled material.
Environmental impacts
Attention is increasingly being paid
to the environmental impact of
products through their entire life
cycle, including factors such as
extraction, fabrication, recycling and
the use of energy and transportation.
Europe’s vehicle and industrial
battery manufacturers have also
carried out a life-cycle assessment
(LCA) for lead-based batteries (soon
to be published) and came to several
significant conclusions.
From an end-of-life perspective,
the LCA study has found that the
high recycling rates of lead-based
batteries dramatically reduces their
environmental impact. In the US
alone, lead battery recycling keeps
2.4 million tons of batteries out of
landfills and it is estimated that 97%
of a lead battery can be recycled,
including the casing and acid.
In this “closed loop system” there
is limited opportunity for lead to be
released into the environment or to
ILA
battery industry, said: “This report
demonstrates the necessity of
maintaining the exemption for
lead-based batteries within the EU
End-of-Life Vehicle Directive. We
believe that the EU’s legislative and
regulatory framework should
therefore guarantee a fair and
technology-neutral competition
between battery technologies.”
Batteries play a number of other
key roles in everyday life, which are
also expected to add to future
demand for lead. These applications
include stationary batteries acting as
a back-up power source
(uninterruptible power supply) in
telecommunications, public
transportation and medical facilities.
They can also help reduce
greenhouse gas emissions by
efficiently storing electricity
generated from both conventional
and renewable energy sources, such
as solar and wind power.
Fully electric and
hybrid vehicles
still need lead SLI
batteries
present a risk to human health. These
factors contributed to the study
finding that lead-based battery
production has a minimal
environmental impact in relation to
the overall lifecycle impact of vehicle
production.
Moreover, the advanced
lead-based batteries used in
start-stop and micro-hybrid engine
systems offset any environmental
impact caused through their
production by the considerable
savings that they enable in global
warming potential. Over the lifetime
of a vehicle that uses these systems
there are likely to be significant
emission savings of carbon dioxide
equivalent due to a reduction in fuel
consumption of 5-10% compared
with a conventional vehicle.
In a separate LCA study published
in 2010 by the Argonne National
Laboratory, USA, it was concluded
that lead-based batteries had the
lowest cradle-to-gate environmental
impact of all battery technologies
considered. The study compared
life-cycle data from manufacturing
lead, nickel, sodium and lithiumbased batteries, and it reported that
lead-based batteries had the lowest
production energy, and lowest
emissions of carbon dioxide,
particulate matter, nitrogen oxides,
sulphur oxides and volatile organic
carbons.
ILA technical manager Dr Alistair
Davidson, who worked on these
studies, observed: “Lead-based
batteries effectively operate in a
closed loop in which commercial
considerations drive the collection
and efficient recycling of used
batteries and the majority of their
components at the end of their life. As
such, lead use in batteries is a fantastic
example of the circular economy in
action – something that policy
makers around the world
increasingly recognise as being
necessary to address negative
environmental and social impacts
associated with raw material
extraction and production.”
Rather than predicting an
uncertain future for lead, these new
studies have supported the
conclusions that the demand for lead
will continue to be driven by society’s
need for cost effective, reliable, safe
and environmentally responsible
energy storage solutions.
Innovations
The Reflux™ Classifier is a
patented technology from
Denmark-based FLSmidth that
improves the gravity separation of
fines compared with alternative
systems. It employs lamella plates
on top of an autogenous zone and a
teeter bed, improving both
capacity and efficiency.
Acceptance of this technology
having been obtained in the coal
industry, the next target markets
are iron ore and mineral sands,
says the company.
After extensive trialling work,
FLSmidth has now received the
first orders for full-scale Reflux
Classifier installations from iron
ore customers in Australia, Canada
and southern Africa. In addition,
FLSmidth
New separator targets iron ore fines
Improved recovery
and grades have
resulted from the
Reflux Classifier
the first order has also been
received for a mineral sands
application in Australia.
Pilot-scale testing of iron ore
showed an increase in yield and
grade compared with other
technologies such as spirals,
reverse flotation and wet
high-intensity magnetic
separation (Whims). In one
example, the Reflux Classifier
achieved a 64% recovery
compared with 49% for reverse
flotation. Moreover, the ore grades
obtained were 60% and 47%,
respectively. In a test against
Whims, the recoveries were 63%
versus 36% for the Whims, and the
ore grades obtained 65% and 64%,
respectively.
“The experience of the Reflux
Classifier in the chrome industry
over the past three years suggests
that rapid penetration into iron ore
is possible,” says the company.
High-strength reinforcing steel cuts costs
MMFX Steel Corporation, Irvine,
CA, USA, has launched its latest
product in its high-strength
reinforcing steels, ChromX™
4100. This alloy has the same
mechanical properties as
high-strength ASTM A1035
reinforcing steel, with a 100 ksi
yield strength. It is designed to
cater for high-strength steel
applications where high corrosion
resistance is not required. It is
lower cost than the company’s
MMFX2 rebar, which has been
shown to be five times more
corrosion-resistant than
conventional carbon steel.
ChromX 4100 has a low-carbon
martensitic microstructure with
high ductility. Unlike normal
carbon steel rebar, which loses
ductility as strength is increased,
this product maintains excellent
ductility and can be fabricated like
conventional rebar, says the
company. It is available in various
sizes of rebar, smooth rounds and
flats.
MMFX Steel notes that by
specifying high-strength steels,
designers can solve costly rebar
congestion problems and
developers can complete structures
more quickly, resulting in
substantial savings: grade 100
ChromX 4100 high-strength rebar
allows structures to be designed
and built with up to 40% less steel.
Additional cost reductions of up to
60% can be achieved through lower
steel fabrication and placement
labour costs, the company adds.
Reducing bad vibes in argon-oxygen-decarburization
The systems consists of two
hydraulic dampers developed in
collaboration with Hainzl of
Austria, plus measuring devices,
software and an automation
Siemens
The argon-oxygen-decarburization
(AOD) process used in special
steelmaking involves considerable
vibration of the plant and contents
when large quantities of gases are
injected laterally into the molten
metal. This vibration causes
additional dynamic loads that
reduce the service life of
mechanical components such as
bearings and gears, and increase the
maintenance required. Siemens
Metals Technologies has developed
the patented Simetal Drive
Damper which reduces such
induced vibrations by more than
half.
The Simetal Drive
Damper reduces
AOD vibrations by
over 50%
system. The dampers are installed
in parallel to the torque support of
the converter tilt drive, and are
driven independently of it. The
damping effect is achieved by
means of an electrohydraulic
proportional throttle valve, and is
continuously adjustable. The
thermal energy generated by the
damping is dissipated by an
integrated water cooling system.
The first commercial operation
of this system started in March at
Chinese stainless producer Taiyuan
Iron & Steel. It can be installed as an
upgrade to existing plants as well as
in new plants.
End user
The battle of materials in the
automotive market has been hotting
up, and seems likely to become even
fiercer in the future. A big jolt to the
market recently was the launch by
Ford of its latest F-150 pickup truck
model, which has an aluminium alloy
body coupled to a high-strength steel
frame. This results in a vehicle nearly
700 lb lighter than previous models.
This has intensified the tussle
between steel and aluminium in
particular for the main bodywork in
vehicles, although various other
materials are also now coming into
play in the sector, such as magnesium
and reinforced composites. A recent
survey of automakers by Ducker
Worldwide concluded that by 2025,
over 75% of all new pick-up trucks
produced in North America will be
aluminium-bodied. It also forecasts
that the number of vehicles with
complete aluminium body structures
will reach 18% of North American
production from under 1% today.
Among other findings from the
2015 North American Light Vehicle
Aluminum Content Study are:
– Average aluminium content per
vehicle in 2015 will be up by 44 lb, or
13%, over 2012.
– Total North American light vehicle
aluminium consumption will
increase 28% in 2015 over 2012.
– Total North American aluminium
content in 2025 will be 10 billion lb
(4.53 million tonnes).
Ford Motor Co
Many hands make light cars
– Globally, light vehicle aluminium
content will approach 35 billion lb by
2025, making it the most important
market for aluminium.
Light weight is not the only
advantage here, says Ford Motor Co.
It notes that the aluminium door
panels and box panels on its F-150
pickup truck are more resistant to
dents than the previous steel panels.
This is achieved by using 6000-series
alloys which are heat-treated using a
The Lightweight
Concept Vehicle
explores how new
mixes of advanced
materials can be
potentially used in
mass production
proprietary technology that nearly
doubles the strength. The box frame
also has the proportion of
high-strength (70,000 psi) steel
increased from 23% to 77% of the
unit compared with the previous
version. This reduces the weight of
the frame by up to 60 lb.
While the F-150 has generated
much publicity around its
aluminium bodywork, Ford
emphasises that it is committed to a
holistic approach to weight
reduction, using whichever
materials are appropriate. To this
end, the company recently unveiled
a Lightweight Concept Vehicle that
uses a comprehensive blend of
advanced materials, including
aluminium, ultra-high-strength
steels, magnesium and carbon fibre.
These were applied over the entire
design, including powertrain,
chassis, body, battery and interior
features.
The vehicle was developed with
the US Department of Energy’s
Vehicle Technologies Programme
together with Cosma International.
“There’s not a one-size-fits-all
approach to light-weighting. The
Lightweight Concept gives us the
platform to continue to explore the
right mix of materials and
applications for future vehicles,” said
Matt Zaluzec, Ford technical leader,
global materials and manufacturing
research.
Boeing celebrated the 2,000th order
for its 737 MAX airliner in late May,
reaching this milestone faster than
any other aircraft in the company’s
history. The value of the orders is
now over $200 billion, from 39
world-wide customers to date. This
demand has been driven by a
combination of air traffic growth
and the need for more fuel-efficient
aircraft, says Boeing.
“In addition to the latest
technology LEAP-1B engines from
CFM International, the MAX
combines advanced aerodynamics,
Boeing
737 MAX is Boeing’s fastest-selling aeroplane
The 737 MAX offers
a range of technical
enhancements
including the Advanced Technology
winglets, 787-style large-screen
flight deck displays and the
passenger-preferred Boeing Sky
interior to give customers an
aeroplane that will enhance their
fleets for decades to come,” said
Keith Leverkuhn, vp and general
manager, 737 MAX programme.
The single-aisle 737 MAX will be
14% more fuel-efficient than
today’s most efficient
Next-Generation 737s, and 20%
more efficient than the original
Next-Generation 737s when they
first entered service. Boeing claims
that airlines operating the MAX will
see an 8% operating cost per seat
advantage over the new Airbus
A320neo.
Final assembly of the airliner will
begin in mid-2015, the first test
flight in 2016 and delivery to launch
customer Southwest Airlines in the
third quarter of 2017.
Earlier this year, Boeing
increased the production rate of its
Next-Generation 737 to 42 aircraft
per month. Production is due to rise
further to 47 per month in 2017.
Classifiedmarketplace
Recruitment
STEEL SALES
SELBY JENNINGS
Our client, a growing European trading house are expanding their sales team.
They are currently looking for someone specializing in steel sales across the DACH region.
Responsibilities for the Steel Sales role:
• Trade with counterparties in the DACH region (Germany, Austria
and Switzerland)
• Building a wider knowledge of the metals trading industry, with a
focus on steel
• Build and maintain strong relationships across the European
Metals market.
• Be able to handle the reporting and accounting of your work.
Skills / Attributes required for the Steel Sales role:
• 5-7 years of steel sales/trading experience
• Have a good understanding with contacts in the steel space.
• A knowledge of the steel market, so be aware of competitors and
other products available.
• Be fluent/native in German
NON FERROUS
METALS TRADER
SELBY JENNINGS
I am working with an established trading house in Europe who is
looking to develop their metals business particularly within physical
Aluminium and Nickel. They are searching for a German Speaking
individual who has extensive experience in the physical non ferrous
metals markets.
Responsibilities for this Position:
•
•
•
•
Responsible for building and developing new clients and business
activities across the appropriate region in addition to maintaining
relationships with existing clients.
Have strong negotiation skills with internal and external customers.
5 or more years of physical Non-Ferrous metal trading experience.
•
Have strong knowledge in Non-Ferrous products.
•
•
•
•
Selby Jennings is a trading style of Phaidon Capital (Schweiz) GmbH. Phaidon
Capital (Schweiz) GmbH of 31A Dreikonigstrasse, 8002, Zurich, Switzerland is
a branch of Phaidon Capital (Suisse) Sarl of 7 Avenue Pictet de Rochemont,
1207, Geneva, Switzerland
PRECIOUS METALS
OPTIONS TRADER
Managerial experience.
Responsibilities for this Position:
•
Fluent German Language Skills
To apply for this position please send a copy of your CV to:
[email protected]
www.selbyjennings.com
+44 207 019 4193
•
-
5 or more years of precious
metal option trading experience.
Managerial experience.
Have strong knowledge in
Precious Metals – Gold, Silver,
Platinum and Palladium.
Have strong knowledge of the
market and be able to inform
manager, neighbours and
customers of the market
movements.
-
Well established networks
globally.
Have strong negotiation skills
with internal and external
customers.
•
•
Skills and Attributes required
for this role:
-
Proof of trading a profitable book
of Precious Metals Products.
Proven Track Records.
Good Communication Skills.
Responsible for building and
developing new clients and
business activities across the
appropriate region in addition to
maintaining relationships with
existing clients.
•
Well established networks across Europe
Highly Motivated and Driven.
SELBY JENNINGS
I am working with a leading organisation in London who is
developing their platform in the precious metals options space
as part of an expansion. The candidate will have extensive
knowledge of this market and an extensive client base.
Have strong knowledge of the market and be able to inform manager,
neighbours and customers of the market movements.
•
•
To apply for the Steel sales role please send
a word copy of your CV to:
[email protected]
Joe.mcgrath(at)sj.phaidonschweiz.ch
+41 44 208 3770
Proof of trading a profitable book of Non-Ferrous metal products.
Skills and Attributes required for this role:
•
This opportunity will be a good fit for an experienced steel
sales person to join a growing business and take on the sales
of a large area across Europe. The successful candidate
would be immersed in a highly successful company with the
vision of expanding their commodity influence across
Europe.
-
Proven Track Records.
-
Highly Motivated and Driven.
-
Good Communication Skills.
To apply for this position please send a copy of your CV to:
[email protected]
www.selbyjennings.com
+44 207 019 4193
Supplychaindevelopments
Alcoa expands its superalloy capabilities
“Aerospace growth is soaring
and Alcoa is ramping up our
downstream capabilities to capture
that demand,” said chairman and
ceo Klaus Kleinfeld. The plant
expansion is expected to be
complete by the fourth quarter of
2015. It will include the latest
technologies, such as digital X-ray
quality assurance, 3D prototype
printing, blue light technology for
dimensional inspection and
automated casting furnaces to meet
precise specifications.
Alcoa’s aerospace business had
revenues of $4 billion in 2013,
derived from its activities in
aerospace forgings, extrusions,
engine aerofoils and fastening
systems, as well as in structural
castings in titanium, aluminium
and superalloys.
This is the second major
aerospace investment by Alcoa in
Indiana in two years. In 2012, it
announced construction of a $90
million greenfield aluminumlithium facility at its Lafayette
operations. This is on schedule to
open later this year and will be
capable of producing more than
20,000 tpy of Alcoa’s patented
aluminum-lithium alloys used to
build lighter and lower-cost
aircraft.
Examples of engine
parts that will be
made in the new
Alcoa plant
alcoa
Alcoa may be famous for
aluminium, but it also has a
substantial downstream business in
other aerospace materials such as
titanium and nickel-based
superalloys. In June the company
started constructing a $100 million
plant expansion in La Porte,
Indiana, USA, for the production of
superalloy jet engine parts. The
new 320,000 sq ft (30,000 sq
metre) facility will expand the
company’s reach for structural
engine components from business
and regional jets to large
commercial aircraft.
Alcoa says it is already the global
leader in jet engine aerofoils, and
the plant will increase its capacity to
supply engine components for
narrow-body aircraft. It will also
allow it to produce parts nearly 60%
bigger than it does now, expanding
its market to wide-body planes.
Rusal invests in advanced aluminium alloys
Rusal will be launching 6xxx-series
aluminium alloys as rolling slabs for
automotive body-in-white (BiW)
applications later this year, following
the modernisation of its Sayanogorsk
smelter. The company already
supplies 5xxx alloy rolling slabs for
automotive structural parts, and will
now complement this with the new
advanced alloys for the growing BiW
market. Rusal is investing $23 million
at Sayanogorsk to rebuild one of the
casthouses for dedicated 5xxx and
6xxx automotive alloy production.
This is in response to investments by
all major rolling companies to install
heat-treatment capacities to meet the
growing demand for BiW sheet, says
Rusal. The Sayanogorsk
modernisation will be complete by
the end of this year, and the upgraded
casting pit will have a capacity of
100,000 tpy of rolling slabs.
Rusal is also investing over $5.5
million in aluminium-zirconium wire
rod production, of which its first
samples have already been certified
by Russia’s leading cable producers.
The rod will be made at the Irkutsk
smelter. Aluminium-zirconium is a
heat-resistant alloy used to make
electrical cables which have twice the
transmission capacity of standard
aluminium-based power lines. Once
the electrothermal treatment plant is
installed in September, Al-Zr wire
rod capacity will be up to 3,000 tpy.
Grid and electrical distribution
companies are key consumers of
aluminium-zirconium wire rod,
while it also has potential in
automotive cable harnesses, says
Rusal. The company expects to
capture up to an 80% share of the
Russian market for this product.
NSSMC launches Abrex, including world’s hardest plate
have been merged and an expanded
Abrex steel plate range launched.
This includes what is described as
the world’s hardest steel grade –
5-6 times harder than standard steel
plate – and other extra tough
products for high performance in
cold climates. Production of Abrex
plate now exceeds 60,000 tpy, and
is planned to increase.
Excavators are one
application of Abrex
hard plate
NSSMC/Volvo
AB Volvo: Nippon Steel & Sumitomo Metal
Corporation has launched its new
Abrex® Series of abrasion-resistant
steel plate, formed by integrating
the Wel-Ten AR and Wel-Hard
series of the former Nippon Steel
with the Sumihard series from the
former Sumitomo Metals. Since the
integration of the two companies in
October 2012, their technologies
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Dusit Thani, Abu Dhabi, UAE
This event merges Metal Bulletin’s
biggest tube and pipe events into
one location to discuss the key topics
affecting the industry.
2nd DRI and Mini-mills Conference
Hilton Riverside, New Orleans, USA
Running in conjunction with AMM’s
8th Steel Scrap Conference, this event
will bring together professionals
from throughout the DRI and HBI
supply chain.
8th Steel Scrap Conference
Hilton Riverside, New Orleans, USA
In conjunction with the 2nd DRI and
Mini-mills conference, this event
will bring together the entire length of
the steel scrap supply chain and steel
making process.
shutter stock
A major event for ferro-alloy
business and trade, this conference
will interest both national and
international ferro-alloy markets
participants.
Barcelona
Following the International Steel
Tube & Pipe Forum at the same
venue, this only international
conference dedicated to galvanizing
and coil coating is an essential event
for all industry participants.
The latest industry developments
and market assessments will be
discussed at MB’s 4th steel scrap
conference.
2nd Asian Nickel Conference
Ritz-Carlton Jakarta, Jakarta,
Indonesia
12th China International Coking
Technology and Coke Market
Congress
10 – 12 September 2014
Hilton Zhengzhou, China
Indonesia is the appropriate
setting for the 2nd Asian nickel
conference, where the effects of
the country’s nickel ore export ban,
and other related issues, will be
discussed.
A metallurgical coke conference with
simultaneous translation into
Chinese or English.
www.coke-china.com/en
African Copper Conference
7 - 8 October 2014
Taj Pamodzi Hotel, Lusaka, Zambia
28th AMM Stainless and its
Alloys Conference
Swissotel, Chicago, USA
American Metal Market and SMR
present the 28th annual stainless and
its alloys conference, covering supply/
demand, key trends and innovations.
This is the only event focusing
specifically on the exploration,
extraction and production of copper
in Africa. It is a must for gaining a
better understanding of industry
dynamics in this region of great
potential.
Aluminium 2014
7 - 9 October 2014
Messe Düsseldorf, Germany
Mining Philippines 2014
Sofitel Philippine Plaza Manila,
Manila, Philippines
The 10th World Trade Fair and
Conference on aluminium.
www.aluminium-messe.com
A comprehensive trade show for the
mining industry.
http://10times.com/miningphilippines
LME Week
20 - 24 October 2014
Various venues, London, UK
EERA Anniversary Congress
18 September 2014
Brussels, Belgium
The European Electronics Recyclers
Association’s Anniversary event.
http://www.eera-recyclers.com
29th International Aluminium
Conference
Ritz Carlton, Abu Dhabi, UAE
The aluminium industry’s premier
event returns to the Middle East, at
the heart of a region that will see
smelter capacity rise to 5 million tpy
by the end of this year.
4th Steel Scrap Conference
Hilton Rotterdam, Rotterdam,
Netherlands
The LME annual metals seminar,
annual dinner, and other meetings.
https://www.lme.com
4th Asian Bauxite & Alumina
Conference
29 - 30 October 2014
Singapore
Trading, production, supply and
demand issues will be on the agenda
at MB’s 4th Asian bauxite and
alumina conference.
30th International Ferro-Alloys
Conference
9 - 11 November 2014
Hotel Rey Juan Carlos, Barcelona,
Spain
The world’s biggest and most
important ferro-alloys conference.
Monthlyprices
June averages
LowHigh
European free market
min 99.9% in warehouse, $/troy oz 1,088.125
Primary aluminium ingot to meet LME Spec: P1020A
Rotterdam premium
333.571
356.190
LME duty paid premium indicator
H/G Cash $/tonne
404.375
432.500
Selenium
Alumina
MB free market €/tonne
MB free market Regulus 99.65%, max Se 50ppm,
$/tonne in warehouse
9,500.000
MMTA Standard grade II $/tonne
9,400.000
9,800.000
9,700.000
10.30010.700
Cadmium
MB free market
min 99.95%, cents/lb in warehouse 75.000
min 99.99%, cents/lb in warehouse 85.000
14.606
14.281
Germanium Dioxide
MB free market min 99.99%, $/kg 1,275.625
Rotterdam $/kg
1,900.000
1,350.625
1,980.000
Gold
Morning$1,277.85714
Afternoon$1,279.09524
Morning£755.82743
Afternoon£756.69310
Handy/Harman$1,279.10
Indium
685.625
738.125
Magnesium
2,637.500
2,462.500
2,687.500
2,535.000
2,250.000
2,850.000
Mercury
MB free market
min 99.99%, $/flask in warehouse
Molybdenum
Free market in warehouse
Europe drummed molybdic
oxide $/lb Mo
US canned molybdic oxide $/lb Mo
London
spot pence/troy oz
spot cents/troy oz
Handy/Harman cents/troy oz
2,250.000
1,169.88190
1,978.09524
1,989.24
Spot Premium 99.9% $/tonne
500.000
Spot premium 99.85% $/tonne
350.000
Kuala Lumpur (ex-smelter) $/tonne 22,831.91
Ferro-Titanium
70% (max 4.5% Al), $/kg d/d Europe 6.000
European free market APT $/mtu
13.525
13.263
US High-grade cathode premium indicator,
$/tonne
154.000165.000
MB free market
min 99.8%, $/tonne
China free market min 99.8%
2,170.000
750.000
450.000
6.181
Tungsten
Copper
MB free market
Ingots min 99.97%, $/kg in
warehouse
26.313
Titanium
85.000
95.000
Cobalt
London per troy oz
23.313
Silicon
Tin
Bismuth
MB free market
High Grade, $/lb in warehouse
Low Grade, $/lb in warehouse
MB free market
min 99.5% in warehouse $/lb
1,138.125
Silver
311.130
Antimony
MB free market
min. 99.99%, $/lb, tonne lots in
warehouse
LowHigh
Rhodium
Aluminium
Index fob Australia
For the latest prices see
www.metalbulletin.com/my-price-book
14.388
14.638
14.656
14.813
370.000
382.000
Foundry Ingots
Aluminium
LM24
LM6/LM25
Aluminium Europe €/tonne
Phosphor Bronze
PB1 ex-works £/tonne
Zinc Alloy
10 tonne lots ZL3 £/tonne
1,420.0001,480.000
1,600.0001,630.000
1,697.500
1,752.500
5,885.000
1,811.000
London Metal Exchange
High, low and average June (21 days)
LME averages are mean of buyers and sellers except for
settlement and 3 months sellers.
January - June 2014
June
Low HighAverage
$$
$
Copper Grade A ($)
Cash
6,434.25 7,439.256,805.80
3 months
6,429.75
7,421.50
6,777.36
Settlement
6,434.50 7,439.506,806.10
3 months seller
6,430.00 7,422.00
6,777.98
Copper Grade A (£)
Settlement
3,875.204,515.364,026.31
3 months seller
3,871.68
4,507.74
4,012.62
Tin ($)
Cash
21,497.50 23,902.5022,767.62
3 months
21,407.50 23,765.00 22,764.64
Settlement
21,500.00 23,905.0022,773.81
3 months seller
21,410.00 23,770.00 22,773.57
January - June 2014
June
Low HighAverage
$$
$
Lead ($)
Cash
2,007.502,211.75 2,102.92
3 months
2,032.50
2,241.50
2,129.10
Settlement
2,008.002,212.00 2,103.31
3 months seller
2,033.00
2,242.00
2,129.52
Lead (£)
Settlement
1,203.261,345.971,244.23
3 months seller
1,219.04
1,361.97
1,260.68
Zinc ($)
Cash
1,941.75 2,204.252,126.46
3 months
1,947.75
2,197.00
2,130.96
Settlement
1,942.002,204.502,126.79
3 months seller
1,948.00
2,198.00
2,131.52
Aluminium ($)
Cash
1,641.251,870.251,834.15
3 months
1,686.25
1,901.75
1,868.55
Settlement
1,641.50 1,870.501,834.40
3 months seller
1,686.50
1,902.00 1,868.83
Aluminium Alloy ($)
Cash
1,750.00 2,010.001,969.94
3 months
1,785.00
2,015.00 1,982.04
Settlement
1,755.00 2,015.001,973.05
3 months seller
1,790.00
2,020.00 1,985.98
Nickel ($)
Cash
13,362.50 21,175.0018,568.21
3 months
13,422.50 21,095.00 18,650.00
Settlement
13,365.00 21,200.0018,573.57
3 months seller
13,425.00 21,100.00 18,658.57
Nassa ($)
Cash
1,750.50 2,462.502,320.14
3 months
1,785.00
2,472.50
2,349.55
Settlement
1,751.00 2,465.002,322.71
3 months seller
1,790.00
2,475.00
2,353.24
Cobalt ($)
Cash
26,900.00 31,700.0030,443.45
3 months
27,000.00 31,700.00 30,500.00
Settlement
27,300.00 32,200.0030,546.43
3 months seller
27,300.00 32,200.00 30,661.90
Molybdenum ($)
Cash
20,500.00 32,500.0032,040.48
3 months
20,500.00 32,500.00 32,040.48
Settlement
21,000.00 33,000.0032,547.62
3 months seller
21,000.00 33,000.00 32,547.62
Steel Billet ($)
Cash
290.00395.00 388.81
3 months
290.00
405.00
405.00
Settlement
295.00400.00 393.81
3 months seller
295.00
410.00
410.00
LME Settlement Conversion Rates
$/£1.6904
$/yen102.045
$/€1.3592
Nickel
Free market in warehouse premium
Europe $/tonne
uncut cathodes
35.000
125.000
4x4 cathodes
200.000
300.000
briquettes
150.000300.000
US
Melting $/lb
0.271
0.350
Plating $/lb
0.600
0.700
Palladium
Morning $/troy oz
Afternoon $/troy oz
$832.28571
$832.23810
Platinum: per troy oz
Morning $/troy oz
Afternoon $/troy oz
$1,452.42857
$1,452.76190
Disclaimer
This Disclaimer is in addition to our Terms and Conditions as available on our website and shall not supersede or otherwise affect these Terms and Conditions. Prices and other
information contained in this publication have been obtained by us from various sources believed to be reliable. This information has not been independently verified by us.
Those prices and price indices that are evaluated or calculated by us represent an approximate evaluation of current levels based upon dealings (if any) that may have been
disclosed prior to publication to us. Such prices are collated through regular contact with producers, traders, dealers, brokers and purchasers although not all market segments
may be contacted prior to the evaluation, calculation, or publication of any specific price or index. Actual transaction prices will reflect quantities, grades and qualities, credit
terms, and many other parameters. The prices are in no sense comparable to the quoted prices of commodities in which a formal futures market exists.
Evaluations or calculations of prices and price indices by us are based upon certain market assumptions and evaluation methodologies, and may not conform to prices or
information available from third parties. There may be errors or defects in such assumptions or methodologies that cause resultant evaluations to be inappropriate for use. Your
use or reliance on any prices or other information published by us is at your sole risk. Neither we nor any of our providers of information make any representations or warranties, express or implied as to the accuracy, completeness or reliability of any advice, opinion, statement or other information forming any part of the published information or
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We are not an investment adviser, a financial adviser or a securities broker. The information published has been prepared solely for informational and educational purposes
and is not intended for trading purposes or to address your particular requirements. The information provided is not an offer to buy or sell or a solicitation of an offer to buy or
sell any security, commodity, financial product, instrument or other investment or to participate in any particular trading strategy. Such information is intended to be available
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actions should be solely based upon your own decisions and research and appropriate independent advice should be obtained from a suitably qualified independent adviser
before any such decision is made.
Chartist
Jim Lennon, managing director of Red Door Research Limited, ponders the impact of sport events
Will Brazil’s big sport events boost growth?
Most of the world has focused its
attention on Brazil over the past
month, not for economic or
commodity related reasons of
course, but for the far more
important reason of football!
The football World Cup and the
summer Olympics are the world’s
largest, and most expensive,
sporting events. The gross cost of the
Brazilian World Cup is estimated to
be somewhere between $15-20
billion, equal to around 0.7% of 2013
GDP (but spread of course over
several years of GDP, so the net
impact on 2013 GDP was probably
no more than 0.2-0.3% of GDP).
Brazil is also hosting the 2016
Olympic Games in Rio de Janeiro in
2016, at an estimated cost of $14-15
billion.
As in every World Cup and
Olympics, those spending the
money, mainly governments, try to
argue that the net economic impact
and return on the investment is
positive. There is little support for
this contention in the economic
literature, even if the country
actually goes on to win the World
Cup. In fact, empirical economic
research suggests that the more
successful a country is in advancing
through the tournament, regardless
of whether they host it, the greater
the negative impact on GDP growth
due to the loss in labour productivity
during the event! The average GDP
loss to World Cup contenders in the
year of the win is close to 1%!
The host countries of World Cups
and Olympics always point to a
positive infrastructure spend
impact, a greater number of
spending visitors in the tournament
year and subsequent years, a positive
country ‘branding’ exercise and a
feel-good factor that may stimulate
consumer spending. All of these
impacts are real. However, they are
relatively small in terms of overall
GDP and are certainly not
measurable in any perceived boost to
steel or metals’ consumption.
Brazilian steel apparent
consumption grew by 5% in 2013 to
29.3 million tonnes on a crude steel
Brazilian growth lags its fellow BRICs
350
China
Brazil
India
Russia
300
250
200
150
100
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
GDP growth since 2000 (index, 2000 = 100)
‘Even if the
money had been
better allocated,
the money spent
would still have
had no more
than a negligible
impact on
the Brazilian
economy’
2011
2012
2013
Source: IMF
basis, but fell by 7% in 2011 and grew
by only 2% in 2012. Steel use in
2013 was actually lower than it was
in 2010! Similarly, copper demand
was 439,000 tonnes last year, 6%
lower than it was in 2010.
In Brazil, there has been a political
and popular backlash against hosting
the World Cup due to a perception
of corruption in allocating some
construction contracts. Allocation of
spending outside the country rather
than within (such as the $270 million
Manaus stadium, which was built
principally to host four football
games and was largely prefabricated
in Portugal!) was another source of
concern.
While such decisions cause public
aggravation, they do not change the
conclusion that even if the money
had been better allocated, the money
spent would still have had no more
than a negligible impact on the
Brazilian economy. The reality is
that the World Cup was largely
irrelevant to Brazil’s economic
prospects, as it was to that of South
Africa, or the UK in the case of the
2012 Olympics. A similar
conclusion, alas, must be reached
regarding the impact of the 2016
Olympics.
What is more fundamental for
Brazil is whether the incoming
government after this October’s
elections can deal with the structural
problems that have led to a
slowdown in GDP growth to less
than 2% a year in recent years from
4.5% a year from 2003-2010.
As the chart shows, cumulative
GDP growth from 2000-13 was
slower in Brazil than in the other
so-called BRIC countries: 3.1% a
year in Brazil compared with 4.4% a
year in Russia, 7% a year in India and
10% a year in China.
Brazil has been a major participant
in the commodities markets as a
supplier of raw materials to China, in
particular iron ore. Over the period
from 2003 to 2010, Brazilian
economic growth benefited from
booming Chinese demand growth
and rising commodity prices.
However, the impact on GDP
growth was much smaller than in
economies such as Australia and
Chile, where resources form a much
larger part of the overall economy.
In recent years, resources have
been an even smaller contributor to
growth due to weaker commodity
prices and also because of stagnating
output of key commodities. Owing
to poor project execution, declining
grades and a severe environmental
permitting regime, Brazilian output
of iron ore, steel, copper and nickel
has fallen well short of projections
made at the end of the last decade.
That should change over the next
few years as massive investments in
iron ore, including S11D, Carajas
expansion, Minas Rio, and copper
(Salabo) hit the market, and issues at
two nickel projects, Onça Puma and
Barro Alto, are resolved.
On Brazil’s domestic
consumption, steel demand growth
averaged only 3.7% a year between
2000 and 2013, and copper demand
averaged 2.2% a year, not much
different from the GDP growth
average of 3.1% a year over that
period. In a rapidly developing
economy, commodities demand
typically grows much faster than
GDP. In Brazil gross investment and
savings are less than 20% of GDP,
compared with 30-35% in India and
45-50% in China.
Economists believe that Brazil’s
weak growth can only be changed if
the incoming president in October
takes strong measures to improve
productivity. No-one is holding
their breath however, and the
country will certainly need to put its
defeat by Germany in the World
Cup behind it!
NO
W NE
W WA
IT P
H P
PR :
IC
ES
Global metal markets
in the palm of your hand
Get the latest news and prices on the move with
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Aluminium can be recycled again and again – infinitely.
Hydro has been developing natural resources since
1905, and like our metal we are here to stay.
www.hydro.com

Alexei Mordashov prepares Severstal for future

Transcription

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