Fabricators who have enjoyed lower costs for their metal needs should expect to see prices rise over the next couple years, if recent prognostications come to fruition.
According to analysts from IHS, an industry analysis firm that considers the metals market, beginning in late 2014 and early 2015 prices began to fall steadily, primarily because of a glut in supply and a reduction in demand. But, with an improving economy, a belief that production of metals will be cut, especially by metal producers in China, and that inventory levels will drop, the analysts believe that these factors will stem this price drop off and drive prices steadily up through 2017.
“Over the past 2 years,” said John Mothersole, director of IHS, speaking at an April briefing, “we’ve seen this very sharp and prolonged correction in commodity prices that really began back in the summer of 2014 when oil prices started to fall (see Figure 1). Prices have fallen steadily for the past year and a half now, but we think a change occurred as of mid-January and over 7 weeks prices jumped up some 20%.”
Global steel production, he said, is contracting, albeit slowly and not by as much as will be needed if prices are to stabilize at a more sustainable price. Mothersole pointed to China as the country that still needs to take action and cut production rates. “But even in China,” he said “we’re seeing a change in the market and that is a hopeful sign. Steel as a sector remains grossly over supplied, but at least conditions are moving in the right direction to begin to balance the market.”
While gradual increases are expected over the next 18 months or so, even with these increases, “the [pricing] levels are still going to be below what we were seeing in late 2014,” said Frank Hoffman, senior economist with IHS.
China and other factors
This upward movement is the result of several factors, said Mothersole, including production cuts, a bloated inventory starting to slim down, a peaking of the U.S. dollar. China, the world’s largest steel producer and exporter, accounting for about half the global production, remains the X factor. Its economy is stabilizing, which should use some capacity, but will the country reduce production?
Pressure is being placed on China too, and not just at the market level. In April, representatives from the US, Canada, the European Union, Japan, Mexico, South Korea, Switzerland, and Turkey issued a joint statement calling for nations to act ‘quickly’ to reduce global steel output. Nations, in this case, being a synonym for China.
In an interview with National Public Radio, U.S. Commerce Secretary Penny Pritzker said, “The steel market is in a state of crisis, primarily due to massive global excess capacity. In this current crisis, the United States’ industry has suffered price declines, decreased profitability — and over 13,000 jobs have been lost in the last year or so.”
Whether China acts to cut production is unknown. China is able to export a record amount of steel because of demand. In March, Chinese companies hit a record monthly high of nearly 78 million tons of steel, according to data from the China Iron & Steel Association. This is at a time when less steel that is being produced is being used due to a faltering economies such as in China. If US steel mills raise prices, service centers and other suppliers can take advantage of lower international steel prices.
MarketRealist.com also points to the falling prices of raw materials including iron ore, coal, and steel scrap, which would make it difficult for US steel mills to justify price increases. According to MarketRealist, suppliers such as AK Steel Holding Corp., United States Steel Corp., and Steel Dynamics have already cut spot steel shipments in the last few months as spot steel prices sharply deteriorated.
Hoffman, the IHS economist, said that prices on materials from aluminum to Zinc would be increasing throughout 2016 (as seen in Figure 3) stating that there has been a rebound in prices in base metals, he said.
Here is a brief rundown of individual metal predictions:
–Aluminum prices, he said, are unsustainably low. Primary capacity in the Western Hemisphere has been gutted. This means elevated premiums in North America going forward. But, inventory remains “huge.” Hoffman expects production cuts that will start to foster price increases. Where these production cuts come from will dictate partially how much prices will come up. (However, NPR reported that the Chinese might be flooding the U.S. market with low-cost aluminum, as well.)
“They really need to [cut production] in China for some meaningful price gains as a lot of the capacity in the Western Hemisphere’s been cut,” he said. “One big looming issue has been inventory, which is currently bloated, and this high level of inventory is really going to cut into the rebound in prices.”
For copper, IHS’ forecasts a bullish market. The reason behind that for copper is that HIS is seeing a fundamental deficit (supply to demand) in 2016, and that’s going to push prices up higher. Now, we’re seeing some production cuts and state reserve bureau purchases, but we see consumption growing, and part of that is because we don’t see manufacturing activity getting weaker. Also, last year we had this inventory destocking cycle, so that kind of artificially made apparent consumption a little bit lower and why there’s a consumption decrease in 2015.
Nickel is one of the metals that have the potential to see the biggest price increases, Hoffman said. Roughly, seventy percent of the market is underwater where production costs are greater than the current price. Hoffman is anticipating production cuts are going to occur. “They’re inevitable,” he said, “so we see those happening this year and really eating into supply and creating some upward pressure on prices.”
There’s currently a modest deficit in the nickel market, but this has been just “absolutely dwarfed by inventory levels, so as things stand without these production cuts, there really isn’t much pressure to push up prices, which is why these production cuts are necessary to really propel prices upward,” he said.
–Zinc: Hoffman said that there’s “a lot of mined production coming off line due to production cuts, and then also just general buying closures that have occurred last year and were exogenous to this down turn in overall commodity prices.” The year 2015 ended the year in surplus, but most of the surplus occurred in the first half of last year. As HIS looks later in the year, Hoffman says he can see that there is an overall deficit. “We can really see that reaction to low prices has caused these production cuts.” Now, the bulk of the big production cuts occurred late last year. It typically takes two or three months for these cuts to really hit the refined market after that last bit of material was mined. “That really started to impact the market in mid-January or so,” he said, “and that’s led to this upswing in prices for zinc …”
While Hoffman and Mothersole are predicting price increases through 2017 pretty much across the board, as economies improve, inventories reduce, and production, presumably, falls, they reiterated that these prices will continue to be below the market prices of 2014.Still fabricators may need to adjust their budgets with an eye to future price hikes or considering contracting for the materials at these lower prices.
Service costs expected to rise
Fabricators should expect to see additional increases in costs when it comes to services such as transportation, warehousing, temporary staffing, legal services, equipment, real estate leases, and engineering services.
According to Emily Crowley, senior economist, IHS, these costs often fly under the radar, but that doesn’t diminish their importance. “Indirect cost recently rarely captured headlines,” said Crowley, “and one of the reasons that that is is because they have been quite stable, unlike material prices which experienced a recent decline. Services have been growing around 2.5 percent. One of the things about services is that they really are an important contributor to operational cost.”
In 2012, when the Bureau of Labor completed an economic census, contracted services accounted for a total of 3-5 percent of total spending in manufacturing and construction industries. A conservative estimate, Crowley said, because of the broad spectrum of services. “It can be transportation if you don’t want to invest in a fleet of trucks and the labor required to operate those trucks on your own. It can be warehousing, even temporary staffing services. Legal services, if you don’t have an in house council. Equipment and leasing services, engineering services. They really do run the gamut.”
She said that there is a perfect storm that’s starting to coalesce that will be driving these costs higher. The key driver there will really be labor market and labor market conditions, and the material cost increases.