WHAT IS DRIVING FASTENER PRICES?
A special report from Phil Matten editor of the Fastener+Fixing Magazine (www.fastenerfair.com)
A complex combination of factors is driving up global fastener prices at an extraordinary rate, likely to prove more violent in its effect than the events of 2003-4. Fastener distributors and importers are already incurring substantial cost increases, with prices from manufacturers across the word hardening dramatically in recent weeks. The prevalent question is , 'What is causing it this time?" closely followed by "how will I get my customer to understand? Here Phil Matten draws on extensive research to try to provide some coherent,
if uncomfortable, answers.
In recent weeks fastener companies have been deluged with notifications of price increases,
In many cases applied immediately to existing, outstanding orders. Fastener wholesalers are
Forecasting that prices across the range of standard steel fasteners could easily be 30 to 50% higher than 2 07 prices within a matter of months.
The main contributors to these increases are:
· Steeply increasing steel prices as a result of shortages, dramatic increases in raw material
costs, and persistent rises in other input cost.
· Resultant steep cost increases and shortages in wire rod for fastener making.
· The continued appreciation of the Chinese RMB Yuan currency against the US Dollar.
· Chinese government actions to reduce exports of steel and steel products.
· Continued increases in Chinese labour costs, energy transport and sea freight.
Another significant factor; already biting, is the potential for the application of antidumping tariffs on fasteners from China. The deadline for preliminary tariffs is August 8th 2008. Although no decision has yet been made by the EU, fastener production and shipping lead times mean that
orders placed now will be received after the deadline. This has created massive uncertainty for importers and necessitated spreading order loads to other, higher cost, sources. Conversely
European producers are not in a position to commit to additional production resources until they are sure of the outcome of t he antidumping investigation.
What follows is a detailed consideration of these factors and their implication for fastener pricing.
Producing steel
Pig iron is produced in a blast furnace using two primary “ingredients” – iron ore and coke.
Two main methods are used to produce steel. The Basic Oxygen System, accounting for around 60% of word production, requires an initial “charge” of around 25% of ferrous scrap to which is added molten iron from a blast furnace. The process consumes massive volumes of hydrocarbons – normally natural gas of fuel oil.
The other method uses an Electric Arc Furnace and is popular in the U S, where it accounts for around 40% of steel production, as well as Italy and Turkey closer to home. In this process the charge is almost entirely ferrous scrap, with only small amounts of pig or direct reduced iron. The
EAF process uses between 350 to 700kWh of electricity to produce a tonne of steel.
Wire rod is produced by driving heated billets of steel along a track, which progressively convents the rectangular billet to circular profile and draws it to wire rod required diameter. Substantial energy consumption is reheat billets before wire production.
Input costs
As can be seen there are four key elements to the process of producing wire rod for fastener production:
lron Ore
Coke
Ferrous scrap
Energy
To these should be added freight – rail and bulk sea freight of raw materials from mines to steel makers, as well as freight of finished products.
Iron ore
Three companies control more than 70% of the world supply of iron ore. Vale (previously CVRD) supplies from Brazil. Rio Tinto and BHP Billiton (BHPB) supply mainly from Australia.
India is also a significant producer as is China, although its resources are insufficient and of inadequate quality to meet its demand for high grade steel.
Late in 2007 BHPB initiated a hostile takeover bid for Rio Tinto. The battle continues, with BHPB
Recently upping its share offer and Rio continuing to argue that it undervalues the company. There
remains a strong probability that three could become two, further tightening the stranglehold on iron
ore supplies – a source of deep concern to steelmakers.
Despite major growth ,ore extraction still cannot keep up with demand ,with some bizarre consequences .In Australia, drivers of massive mining dump trucks are reportedly being taught to drive more gently to extend the life of tyres, replacements for which are on a two year lead time.
Additional locomotives to haul the ore to dock are similarly delayed. Not surprising, then, that all
Three major suppliers have been extremely robust in annual contract negotiation with steel makers. In late February, despite strong resistance from Chinese steelmakers, Vale clinched deals with Korean Japanese and some Chinese steel makers to apply a 65% to 71% price increase for iron ore effective April 2008.
Rio Tinto and BHPB continue to negotiate, seeking a price premium (which could bring their increases in contract prices as high as 85%) to reflect the lower cost of shipping form Australia as opposed to Brazil. Both companies have now set an end of June deadline for Chinese steelmakers to agree contract increases or face ore being supplied at spot prices.
Spot prices had already soared above contract levels, more than doubling since January 2007, and hitting US$236 per tonne in February. Supply bottlenecks were exacerbated earlier this year by extreme weather in Australia, resulting in miners claiming force majeure in order to sell at spot rather than 2007 contract prices. Rio Tinto has made it dear it wants to move away from fixed annual prices and to sell more on the lucrative spot market.
Iron ore costs for all steelmakers, across the world, were already increasing and have increased dramatically from April 2008. 2008 ore prices will be around 360% higher than those in 2003.
Steelmakers sourcing ore on the spot market have already been hit hard. The Chinese iron and Steel Association (CISA) says that the cost of imported iron ore in January and February (predating the new contract prices) averaged US$128.50 per tonne, 84 % higher than the same months in 2007.
Coke
Although there is a wider range of suppliers in the market, and China has been a major player Rio Tinto and BHP Billiton are, again, significant suppliers of coking coal from Australia.
Prices had trended downwards form a peak in 2005/6 but remained double pre – 2004 levels.
Recent problems in Australia – extreme weather and supply chain bottlenecks – are expected to result in a shortfall of 14 million tonnes for 2008.
International contract prices for coking coal are now hitting figures approaching US$300 per tonne, well in excess of the highes forecasts, and over 200% higher than the 2007 contract level of US$98 per tonne. At the latest price coking coal is over three and a half times more expensive than in 2003.
Spot prices in the first quarter of 2008 had run at over 3 times contralct levels –reaching US$330 per tonne. Forerasts for 2009 are for coking coal contract price to remain robust.
Prices for internationally traded coke have increased steeply over the last year, in February hitting US$475 per tonne, 224% higher than in 2003. This is siqnificant for E U steelmaking, which is not self sufficient for coke.
Domestic coking coal prices in China, although significantly lower than world levels, are increasing rapidly and hitting Chinese steel making costs. According to CISA coking coal accounts for 15-20% of steel production costs indicating that current increases in domestic prices of around RMB150-200 per tonne would feed through to 4 to 5 % increases in the price of crude steel.
It sould also be noted that the vast majority of China’s electricity is generated from coal and that the factors affecting coking coal are also affecting power coal. Wile electricity princes in China are government regulated, generators will lose money it they are not able to pass on increased cost to electricity customers.
Ferrous scrap
Required for bath steel-making processes but absolutely crucial for Electric Arc Furnaces, ferrous scrap is a product of consumption, whitch makes the US and Europe major suppliers. Historically, large volumes of scrap have also been sourced from Russia and some of the CIS countries, like Ukraine, but these supplies are slowing down mow.
The scrap market is volatile. However the trend over the last two years has been upwards, heading back towards peak levels experienced in 2004. At the beginning of 2008 prices in Europe jumped by 20% -higher still in the UK – and US prices also harvened. Since then the market has continued to rise and there are persistent reports of scrap shortages affecting mills in Turkey and Italy.
US scrap prices in the second quarter are hitting record levels, with per ton increases of upwards of US$ 150 representing a 30% increase on just a month prior.