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Posts Tagged ‘demand’

Alcoa: Aluminium demand will outstrip supply

November 18, 2010 1 comment

“Aluminium supplies will struggle to meet surging global demand over the next decade, leading to price rises, according to the head of Alcoa, the world’s largest producer of the metal.

Over the past 20 years, aluminium demand grew an average 3.4 per cent a year, made up of 15 per cent annual growth in China and 1 per cent in the rest of the world. Alcoa believes that over the next decade, even with slower demand in China, global demand can grow 6.5 per cent per year, doubling total use by 2020.

Later in the decade, he adds, it is likely to be increasingly difficult to find new high-quality mines to produce bauxite – aluminium ore – and sites for new refineries and smelters.

‘The constraint will not be capital – the money will be there – but the availability of these high-quality assets’ he says.”

Source: Financial Times, November 17 2010

Observations:

  • Aluminium is growing in importance as building material and in parts for transportation because of the low weight characteristics. However, polymers and composites might become available as low cost substitutes, increasing the risk of aluminium investments in the long term.
  • Mr. Kleinfeld, Alcoa’s CEO, is one of the persons in the industry that is most active in commenting on capacity issues in the industry. Last year and early this year he warned for potential overcapacity in the short term, warning for undercapacity in the long term in his latest conversation with the Financial Times.

Implications:

  • Timing of development is going to be the key to success in the bauxite mining industry. The competitive move of building production capacity early will discourage competitors to increase capacity in fear of overcapacity and low prices. However, increasing capacity too early might cause losses in early years of operation. Securing access to potential capacity will be the focus of business development in the next years.
  • The comments of mr. Kleinfeld can be seen in the light of the underperformance of Alcoa’s shareprice. Convincing investors of the long term prospects of the industry is crucial for the executives.

©2010 | Wilfred Visser | thebusinessofmining.com

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World Steel Association expects record 2010

October 5, 2010 Comments off

“Stronger-than-expected increases in steel demand in Europe, Japan and the former Soviet Union are propelling the global steel industry to a robust recovery this year, according to forecasts released by the World Steel Association. The association – the main trade body for the sector – said on Monday that global consumption of the metal would increase by 13.1 per cent in 2010 to a record level, above a forecast of 10.7 per cent made in April.

Next year demand for all grades of steel – the most widely used industrial material, which goes into a range of sectors from cars to toy manufacturing – is likely to rise by a more modest 5.3 per cent to hit a fresh record of 1.34bn tonnes.”

Source: Financial Times, October 4 2010

Observations:

  • Last week both the CEO of ThyssenKrupp and the head or the iron ore division of Vale announced similar expectations about the demand for iron ore. Vale expects the price of ore to remain high, although analysts expect the price to drop by approx. $15/t.
  • In June of this year various steel producers warned for potential overcapacity in the industry, caused by low growth expectations for China. However, most steel makers have gained confidence that the risk of a double dip recession is limited.

Implications:

  • This year’s change of the iron ore pricing mechanism to a system linked to the spot price of the ore is an incentive to business leaders to try to influence the spot price. Published expectations on the demand and supply of ore and steel by various companies can be seen as part of the game of influencing the price and the strategy of suppliers and customers.
  • The effect of announcing high demand expectations by steel makers works in two directions: it is a signal to the mining industry to step up production, which causes price of ore to drop in the long run; at the same time it might increase the price of ore in the short term as demand drives the price up.

©2010 | Wilfred Visser | thebusinessofmining.com

Steel glut to hit iron ore price

August 30, 2010 1 comment

“The price of steelmaking commodities iron ore and coking coal will drop next quarter for the first time in a year as lower steel production forces global miners Vale of Brazil and UK-listed Rio Tinto and BHP Billiton, to offer discounts on their supply contracts.

The cost of iron ore and coking coal is key to the global economy as it affects steel prices and the cost of everyday goods. It is also crucial for the profitability of the mining and steelmaking sectors, two of the world’s largest heavy industries.

Mining executives and analysts estimate that iron ore prices for the fourth quarter will drop by 10-15 per cent and coking coal prices by 5-10 per cent. The falls will either push down steel prices or widen steelmakers’ profit margins.”

Source: Financial Times, August 29, 2010

Observations:

  • After introduction of the spot price linked pricing system the iron ore price has increased almost 100%. The projected price cut will be the first time the new system leads to a price decrease.
  • New price is expected to be around $135/ton, which still allows for a 35%+ profit margin for the large miners.

Implications:

  • The pricing system causes a faster response of mining production than in the old system. Although the miner’s profits will be lower in the 2nd half of the year, the balance in the value chain will help the demand to stabilize and growth to return.
  • Vale was the first of the large iron ore miners to announce price cuts, assuming the lead role in the global market. Traditionally BHP Billiton and Rio Tinto would lead the benchmarking pricing decisions.

©2010 | Wilfred Visser | thebusinessofmining.com

Not all Chinese Cash Boosts Commodities

June 3, 2010 Comments off

“It is rarely a good idea to become overly reliant on one customer. Especially when that customer is trying to build a rival supply business of its own. China accounts for 36% or more of global demand for metals like copper, aluminum and zinc, according to Barclays Capital…

One big risk with a key customer is that its appetite wanes. Another, less obvious one, when it comes to China is its effect on the supply side.

China’s approach to dealing with its shortages of raw materials is ‘to throw money at it,’ says Jennifer Richmond at Stratfor, a global intelligence firm. Chinese firms have spent $79.6 billion acquiring foreign natural-resources producers since the start of 2008, according to Dealogic. Meanwhile, Beijing has struck deals from Russia to Africa offering loans and infrastructure development in exchange for minerals.”

Source: The Wall Street Journal, June 2 2010

Observations:

  • Using various investment funds, banks and state-controlled companies, China has invested in building production capacity across the world. Not only in Africa, but also in Australia and Asia the Chinese are building a supply foothold.
  • WSJ’s Denning argues that the increase of production capacity caused by the Chinese investments will eventually lead to overcapacity and thus to decreasing commodity prices.

Implications:

  • The potential oversupply created by Chinese investments is certainly a long term issue. Most investments in the mining industry do not lead to output in a period shorter than 5 years. Many things can happen to the demand in that period.
  • Apart from the need to build capacity to satisfy the demand increase, the surge in investments in exotic places is driven by the decreasing ore quality of the average new mine. Companies need to mine lower grade ores in more extreme places. As the investment required per ton of output increases, the investments will not necessarily increase supply at the same levels as demand. As long as China grows at 10% per year, it is going to be very hard to keep up in terms of production.

©2010 – thebusinessofmining.com