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1Q13 IPD Commodity reports The IPD COMMODITY REPORTS are prepared quarterly in February, April, July & October by the members of the IPD Executive Council
ROUTE TO
This report is published as a member service of the American Supply Association’s Industrial Piping Division (IPD). Its contents are solely for informational purposes, and any use thereof or reliance thereon is at the sole and independent discretion and responsibility of the reader. While the information contained in this report is believed to be accurate as of the date of publication, ASA, its IPD and the authors disclaim any and all warranties, express or implied, as to its accuracy and completeness. © 2013 American Supply Association. All Rights Reserved.
© 2013 American Supply Association. All Rights Reserved.
1q13 IPD Commodity Reports
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CARBON STEEL PIPE
MANUFACTURING AT A GLANCE • DECEMBER, 2012 Source: Institute for Supply Management
Import Carbon Steel Pipe The fourth quarter of 2012 showed just how dreary demand was and how it affected the market pricing of import steel pipe. While the domestic welded manufacturers enjoyed a shaky price increase, import pricing remained soft and slightly down. January, 2013, is different. Import coil seems to be on the upswing with pricing from China rising to over $600 for spring 2013 shipments. The future seems a bit unclear as demand is still lackluster, which is to say the least. The increase in coil costs has given rise to higher ERW pricing from import mills from $10 to $30 per NT. Pricing appears to be on the rise, but at the same time, the increases seem a bit shaky. The import seamless market pricing, on the other hand, is still soft and shows weakness across the board. There are more mills coming on line to fill the void left when Chinese mills were locked out as a result of trade cases. The west coast is seeing an increase of seamless product from India, Korea and now Thailand. 2013 may be the year when a saturation point is reached, and there will be more steel products produced than the world can handle. As a result of too much supply, pricing for all products could be weak for the foreseeable future in all products..
Index
Series Index Dec
Series Index Nov
Percentage Point Change
Direction
Rate of Change
Trend (# of Months In Current Direction)
PMI™
50.7
49.5
+1.2
Growing
From Contracting
1
New Orders
50.3
50.3
0.0
Growing
Same
4
Production
52.6
53.7
-1.1
Growing
Slower
3
Employment
52.7
48.4
+4.3
Growing
From Contracting
1
Supplier Deliveries
54.7
50.3
+4.4
Slowing
Faster
2
Inventories
43.0
45.0
-2.0
Contracting
Faster
2
Customers’ Inventories
47.0
42.5
+4.5
Too Low
Slower
13
Prices
55.5
52.5
+3.0
Increasing
Faster
5
Backlog of Orders
48.5
41.0
+7.5
Contracting
Slower
9
Exports
51.5
47.0
+4.5
Growing
From Contracting
1
Imports
51.5
48.0
+3.5
Growing
From Contracting
1
OVERALL ECONOMY
Growing
Faster
43
Manufacturing Sector
Growing
From Contracting
1
Domestic Carbon Steel Pipe Overall pipe demand remained soft in in the fourth quarter of 2012. The average HR coil cost ($620) fluctuated and settled at the same level as October’s close. Non-residential construction is still flat with no growth projected in 2013. The domestic (onshore) oil and gas industry reported weak demand. Demand for pipe products in the hydrocarbon market has taken a hit this year. Pipe mill deliveries are out into 2Q13 for LP and OCTG products with their current booking levels. Wheatland Tube has become the marketing arm for Michigan Seamless 1/2”-2” A106 and also resumed production at its Sharon Tube facility. The Institute for Supply Management (ISM) reports that economic activity in the manufacturing sector expanded in December following one month of contraction, and the overall economy grew for the 43rd consecutive month. The Purchasing Managers’ Index™ (PMI) registered 50.7 percent, an increase of 1.2 percentage points from November’s reading of 49.5 percent, indicating expansion in manufacturing for only the third time in the last seven months. This month’s PMI™ reading moved manufacturing off its low point for 2012 in November. The New Orders Index remained at 50.3 percent, the same rate as in November, indicating growth in new orders for 2
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1Q13 IPD Commodity Reports
the fourth consecutive month. The Production Index registered 52.6 percent, a decrease of 1.1 percentage points, indicating growth in production for the third consecutive month. The Employment Index registered 52.7 percent, an increase of 4.3 percentage points, indicating a resumption of growth in employment following only one month of contraction since September, 2009. Both the Exports and Imports indices registered 51.5 percent returning both indices to growth territory following consecutive periods of contraction of six and four months, respectively. Comments from the panel this month are mixed with some indicating strengthening demand and others indicating continued softness. Additionally, many respondents express uncertainty about government regulations, taxes and global economics, in general, as we approach 2013. Of the 18 manufacturing industries, seven are reporting growth in December, in the following order: Furniture & Related Products; Paper Products; Petroleum & Coal Products; Wood Products; Primary Metals; Computer & Electronic Products; and Food, Beverage & Tobacco Products. Nine industries are reporting contraction in December, in the following © 2013 American Supply Association. All Rights Reserved.
order:
Nonmetallic Mineral Products; Chemical Products;
Miscellaneous Manufacturing; Plastics & Rubber Products; Fabricated
Metal
Products;
Transportation
Equipment;
Machinery; Electrical Equipment, Appliances & Components; and Apparel, Leather & Allied Products.
The American Metal Market (AMM) HR sheet index closed out in mid-January, 2013, at $620/ton. A year ago (01/27/2012), HRC was at $750/ton. With the wild swings in HRC cost over the years, customers are not making any speculative purchases, continue to only fill holes and maintain low inventory levels.
Inventories for both raw material and finished goods have risen to levels higher than current demand with many distributors cutting back purchasing to quell the inventory growth. Most distributors are buying to fill holes for immediate need. With the continued threat of unstable HRC pricing, demand for all ERW products are affected. Import pricing is sliding as the quarter comes to a close. Pricing for domestic seamless pipe products remained soft in the fourth quarter. ERW pipe pricing (6” and under) has been volatile with smaller producers continuing to fight over market share. Pricing in the 8” and above ERW market continues to be stable. However, with the lack of demand in the construction/ fabricator markets, large OD pipe shipments still have yet to recover. Although the manufacturing sector is up, the market for non-residential construction, a key market for standard pipe product, still remains at abysmal levels and continues to shrink with no turn-around projected in 2013.
CARBON STEEL FITTINGS & FLANGES Carbon Forged Steel Fittings & Unions Demand for forged steel fittings, unions and related items ended 2012 in a weak position with November and December being the first declining months in more than three years. The driving force behind the three years of growth was primarily oil shale and related activity. As of January 18, 2013, the oil and gas rig count in North America is down a net 312 compared to a year ago. There has been a slight up-tick of new orders in January, but this may have more to do with low year-end inventory replenishment than any industry movement. Both domestic and import manufacturers are expecting no change in pricing for the remainder of the first quarter and possibly well into the second. Special Bar Quality (SBQ) hot rolled carbon steel, as reported by the American Metal Market (AMM), has been on a slide for most of 2012 and relatively flat since August, 2012. This, combined with the volume of quality
AMM HR Sheet index $1,150 $1,050 $950
$ / Ton
$850 $750 $650 $550 $450 $350 08 008 008 008 009 009 009 009 010 010 010 010 011 011 011 011 012 012 012 012 013 0 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 25 /25 /25 /25 /25 /25 /25 /25 /25 /25 /25 /25 /25 /25 /25 /25 /25 /25 /25 /25 /25 / 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1
© 2013 American Supply Association. All Rights Reserved.
1q13 IPD Commodity Reports
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manufacturers and the fact that all are quoting excellent fill-rates, means availability will be no problem and should support the stable prices for the remainder of the first quarter and possibly into the second.
Carbon Steel Butt Welding Fittings & Carbon Forged Steel Flanges Pricing for carbon steel butt welding fittings and carbon forged steel flanges should remain unchanged from the end of the fourth quarter 2012 through the end of the first quarter in March, 2013. The primary forces effecting price are the cost and availability of raw materials, which have remained relatively stable thus far. Demand for carbon steel welding fittings and flanges, high yield welding fittings and flanges and heavy wall carbon steel welding fittings, along with high pressure flanges continue to be driven by the energy sectors of our economy. Shale gas plays, pipeline activity for oil and gas (transmission and distribution), power generation (new construction nuclear, gas and retro-fit from coal to gas) and yes, even solar power generation (steam driven generation), will play a major role in energy-oriented demand this year.
Worth Keeping on the Radar An external influence on costs that merits constant monitoring is the cost of transportation. Fuel costs are under pressure due to a dramatic reduction in the corn crop as it has been subjected to continued drought across the South and Midwest sections of the U.S. Refinery shut downs resulting in reduced gasoline production capacities as well as pending federal regulations, particularly from the EPA, that will affect production of gasoline, shale gas and other derivatives only add to the pressure. Continued turmoil in the Far East along with Syria, Iran, Egypt, Israel and the OPEC dominated Middle East could escalate into a major conflict that would cause severe disruption in the supply of raw materials and fuel, particularly oil. Union negotiations with Longshoremen at most major ports in the U.S. are still pending. A breakdown could cause major shortfalls in the delivery of raw materials resulting in major manufacturing disruptions and a substantial increase in the cost of finished goods. It is suggested, therefore, that close monitoring of supplier websites and/or suppliers directly for price revision due to effect of unforeseen events would be indicated. Public works has been the weak link in the construction recovery, and building construction continues to be a drag on the public sector. According to McGraw-Hill Construction Economics released in December, 2012, public housing construction is down 26 percent from a year ago. In addition, Institutional building work is down 13 percent following an 11 percent decline the previous year, and school construction, the public sector’s second largest market, is down 2.3 percent. 4
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1Q13 IPD Commodity Reports
Uncertainty remains the single most negative factor in moving forward with new construction. The political environment exacerbated by last November’s election, unresolved fiscal issues, taxes, ballooning healthcare costs/regulations and pending EPA regulations give cause for a wait and see attitude. The upcoming national convention meeting of the Mechanical Contractors Association of America (MCAA) this March, which reflects the sentiment of the construction industry at-large, will be viewed as a major indicator for expectations in 2013.
STAINLESS STEEL PIPE, FITTINGS & FLANGES Can Nickel Shed its Negative Image? Nickel has been the worst performing base metal over the last two years, and its 2012 annual average dropped 23 percent compared to 2011. After falling during the latter part of 2011, LME prices climbed in the first quarter of 2012 as a surge of buying activity, particularly in China, buoyed prices. Thenselling figures decreased slowly but steadily from March through September dropping to levels not seen since the financial crisis. The extended period of low prices fed on itself, which resulted in aggressive, widespread destocking and further exacerbated the bearish views towards nickel. Steel consultancy firm MEPS International is projecting higher nickel prices in the first quarter amid increased purchasing brought on by global restocking coinciding with the high consumption season. LME prices have been unusually stable trading within a fairly tight band since the beginning of December ($7.72 to $8.06/lb.). Will prices remain relatively flat and help facilitate a more realistic and even pattern of demand? Or, might we see the major cost driver of 300-series stainless steels repeat its selfdestructive course of the last couple of years in 2013?
A Craving for Monotony Stainless steel surcharges are vital to demand sentiment of austenitic coil, billet and bars as well as their byproducts. For example, January surcharges represent 60-65 percent of the total cost of domestic stainless steel welded pipe, depending on alloy and diameter. Surcharges for 304/L and 316/L increased in October and November but reversed course in December, which has seemingly quelled whatever speculative demand momentum that may have been building. But January and February surcharges have recovered to November levels, and moving forward, a good stretch of stability would enable genuine market forces to drive nickel’s supply and demand instead of prices being subject to speculative swings that distort actual requirements. Steady nickel prices - and by extension surcharges - would also go a long way towards fostering © 2013 American Supply Association. All Rights Reserved.
healthier, more balanced market conditions throughout the stainless steel pipe, flange and fittings market channel. In October, 2011, the timeframe to determine surcharges was compressed throughout the U.S. and Europe (Asian mills do not employ surcharges), and the nickel component is currently calculated as follows: the LME average price calculated on the daily official cash settlement price from the 21st day of month #1 through the 20th day of month #2 determines the nickel portion of the surcharge for shipments in month #3. While market leaders had hoped that this modification would promote added stability throughout the industry, speculative behavior has persisted. European coil producer Aperam has been speaking with its distributor customers about utilizing a more immediate and consistent approach to finished product pricing. In essence, each order would be fixed at the time of order by using the spot price on the LME plus a fabrication cost adder. This system could be used for spot or contract purchases. If this alternate method is widely implemented by coil producers, it would likely be passed on by welded pipe producers and set the tone for more even and predictable demand, which would seemingly improve overall market conditions for nickel miners, stainless steel manufacturers and distributors. In the meantime, with respect to nickel price moves, boring would be good. SURCHARGES FOR AUSTENITIC STAINLESS STEELS
5.000
304/L SURCHARGE
316/L SURCHARGE
4.500
4.000
3.000
2.500
2.000
1.500
1.000
0.500
LME INVENTORY (MT)
LME CASH PRICE AVG (LB)
170,000
36
160,000
34
150,000
32
140,000
30
130,000
28
120,000
26
110,000
24
100,000
22
90,000
20
80,000
18
70,000
16
60,000
14
50,000
12
40,000
10
30,000
8
20,000
6
10,000
4
0
2
© 2013 American Supply Association. All Rights Reserved.
1q13 IPD Commodity Reports
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CASH PRICE OF PRIMARY NICKEL (LBS)
Analysts’ prolonged negative bias towards nickel has been rooted in the understanding that a flood of new supplies are set to hit the market at literally any moment, but this has not yet happened. Still, the International Nickel Study Group estimates that nickel production grew by seven percent in the first 11 months of 2012 and registered a 68,000 metric ton surplus as compared to the reported 8,000 metric ton deficit during the same period for 2011. LME inventories are at their highest levels since May, 2010, which on the surface supports the widely held premise that nickel’s fundamentals remain very poor. But due
LME INVENTORY (MT)
Nickel Supply - The New Abnormal
Jun 07 Jul 07 Aug 07 Sep 07 Oct 07 Nov 07 Dec 07 Jan 08 Feb 08 Mar 08 Apr 08 May 08 Jun 08 Jul 08 Aug 08 Sep 08 Oct 08 Nov 08 Dec 08 Jan 09 Feb 09 Mar 09 Apr 09 May 09 Jun 09 Jul 09 Aug 09 Sep 09 Oct 09 Nov 09 Dec 09 Jan 10 Feb 10 Mar 10 Apr 10 May 10 Jun 10 Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 Jan 11 Feb 11 Mar 11 Apr 11 May 11 Jun 11 Jul 11 Aug 11 Sep 11 Oct 11 Nov 11 Dec 11 Jan 12 Feb 12 Mar 12 Apr 12 May 12 Jun 12 Jul 12 Aug 12 Sep 12 Oct 12 Nov 12 Dec 12 Jan 13
Dec 12 Feb
Jun
Aug 12 Oct 12
Feb
Dec
Apr 12
Jun 11 Aug 11 Oct 11
Feb
Dec
Apr 11
Jun
Aug 10 Oct 10
Feb
Apr 10
Dec
Jun
Aug 09 Oct 09
Dec
Feb 09 Apr 09
Jun
Aug 08 Oct 08
Dec 07 Feb 08 Apr 08
Jun
0.000 Aug 07 Oct 07
SURCHARGE (PER POUND)
3.500
to the aforementioned destocking, inventories of stainless steel – particularly in China and Europe – are extremely low, and a return to some semblance of normalcy may bring supply and demand back into balance sooner than anticipated. Moreover, much of the anticipated upsurge of new supply is supposed to come from high pressure acid leaching (HPAL) projects, which extract nickel by processing laterite ore in a sulphuric acid leach at temperatures up to 270º Celsius and pressures up to 600 psi. Technical problems have doomed a number of ventures, and virtually all of the projects designed to yield major volume, such as Vale’s Goro and Sherritt’s Ambatovy, have so far failed to meet expectations. Environmental concerns among affected local citizenry bring another layer of difficulty to some of the largerscale projects and additional questions regarding long-term dependency on HPAL. Nickel Pig Iron (NPI) production, which continues to increase in China, also emanates from laterite ores but features simpler, more expensive nickel extraction techniques with costs driven by energy, transportation and ore costs. The British bank Barclays reports that aggressive investment in enhanced technologies over the past four years has modernized the NPI sector from profoundly energy dependent blast furnaces to more efficient electric arc furnaces and, finally, to rotary kiln electric furnaces (RKEF). However, most investments towards RKEF were made before the Indonesian government began taking action to tax and potentially ban ore exports, and this production method requires the use of high grade ore found mainly in Indonesia. Some analysts project NPI production costs will increase by as much as 25 percent by 2015, which would, ironically, push average costs back up to the pre-sector modernization level of around $9.00/lb. However, in terms of ongoing nickel supply issues, the real “elephant in the room” concerns the fact that sulphide ore deposits, which feature the highest nickel grades and are cheaper and easier to mine and concentrate than laterites, are depleting.
Looking Ahead
Copper Still Vital to China’s Future
As always, the price outlook for nickel, and by extension stainless steel pipe, flanges and fittings, is confusing but should become a bit clearer following the Lunar New Year holidays in China. Global requirements from stainless-intensive energy and process industries should remain solid, but first half forecasts for construction and consumer related industries appear rather bland. However, stainless steel scrap (18-8) prices have increased around 20 percent since early November, which is an indication of improved, underlying demand. Key alloying ingredients chromium and molybdenum have also been lifted from their doldrums recently. While nickel’s and austenitic stainless steels’ fortunes are inextricably linked to each other, so are refined nickel and NPI – at least until the supply and tax implications from Indonesia become more transparent. In the short-term, if LME nickel prices rise, expect NPI production levels in China to ramp up quickly and essentially place a ceiling on prices. If LME prices drift lower towards or below the marginal cost of refined nickel production, look for swift closures of higher-cost NPI facilities to provide a floor. Regardless of its own fundamentals, the reality is that nickel prices will continue to be influenced by myriad macroeconomic dynamics including general trends in globally traded commodities, U.S. fiscal policies, stimulus programs initiated by China, the U.S. and Japan, and growth rates in emerging economies.
It’s true that China is facing a multitude of tough problems throughout its economy and society, regularly contributing to copper’s constant fluctuations. Bad banking debts, tensions with its neighbors, an unhappy middle class and a disruptive leadership changeover have stood in the way of the full force of the expansion momentum. But the view held by large-scale investors takes these factors into account and still arrives at the conclusion that prices will climb. Back in October, Goldman Sachs repeated its copper forecast with a six month target of $4 per pound, which is about 10 percent higher than its current price. The bank refers to copper as its “most preferred base metals exposure,” basing its position on demand from China remaining strong. Morgan Stanley concurs, projecting substantial increases for Chinese demand into 2014.
INPUTS THAT IMPACT STAINLESS STEEL PRICES 90,000
9,000 Chromium
8,000
70,000
7,000
60,000
6,000
50,000
5,000
40,000
4,000
30,000
3,000
20,000
2,000
10,000
1,000
0
SCRAP & CHROMIUM PRICES (M/T)
18-8 SCRAP
80,000
Oct 2012
Dec 2012
Apr 2012
Jun 2012
Aug 2012
Feb 2012
Oct 2011
Dec 2011
Apr 2011
Jun 2011
Aug 2011
Oct 2010
Feb 2011
Dec 2010
Apr 2010
Jun 2010
Aug 2010
Feb 2010
Oct 2009
Dec 2009
Apr 2009
Jun 2009
Aug 2009
Oct 2008
Feb 2009
Dec 2008
Apr 2008
Jun 2008
Aug 2008
Feb 2008
Oct 2007
Dec 2007
Jun 2007
0 Aug 2007
MOLYBDENUM PRICES (M/T)
Molybdenum
COPPER TUBE & FITTINGS Key economic trends point to inconstant but rising copper prices in 2013. It may be argued that the metal fell victim to a dangerously steep mid-year fall in 2012 from a high around $4 per pound to a low closer to $3 per pound. And with the Chinese economy showing signs of slowing down and, in general, a worldwide pullback on growth projects, won’t that drag down prices and hurt the share price of copper mining companies? 6
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1Q13 IPD Commodity Reports
Goldman’s latest analysis notes that construction in China, though tapering off in some areas, is still going to propel high consumption this year because of the large amount of “late stage” construction demand. Projects already started are just reaching the stage where copper wiring and pipes are ready to be brought in after the basic structure is built. Over and above that, China is building out a massive electrical grid to service 500 million people, larger than the entire U.S. grid, and requiring many thousands of tonnes of copper. So while the pace of growth is slowing, China is still expected to expand from 39 percent of the world’s demand to 45 percent in the next five years. For comparison, the U.S. and Europe combined represent just 28 percent of copper usage, despite being 50 percent of the total global economy. Joining China’s still-substantial demand with some minor recovery in the U.S. housing market, Goldman, Morgan Stanley and many other analysts on Wall Street are seeing the stage being set for copper to have a good year. Even taking into account the rest of the world’s economy remaining stagnant, there is enough demand in evidence to keep driving prices upward.
The Copper Industry Investment Cycle Jack Lifton is a consultant, author and lecturer on the market fundamentals of the technology metals, a term he uses for metals whose electronic properties make our technological society possible. As Founding Principal of Technology Metals Research, LLC, he makes some fascinating observations of the current copper market conditions. He is clearly of the opinion that we will soon face a significant shortage of copper. “Copper forms the nerves of our civilization. The copper crisis will make the current rare-earth crisis look minor by comparison. Everything depends on moving electrons around on copper wire. And we’re approaching the point where there’s not enough copper to make enough wire.” © 2013 American Supply Association. All Rights Reserved.
Mr. Lifton’s comments illuminate a point about the high levels of capital expenditure characteristic of the copper producing industry. Most of the world’s copper comes from about 30 very large mines. The ore grades in these huge pits tend to be low, which necessitates moving large tonnages of rock to the crushers. A lot of low-grade rock has to be dug to refine enough product into copper metal that can be sold. The process is energy and capital-intensive. Vast amounts of heavy equipment, fuel, electricity and labor are used in a typical mining operation.
30 Years of Underinvestment To go from an undeveloped prospect to a fully operational mine takes money, equipment, management and risk. It also takes 10-15 years. Jack Lifton’s statement about not enough new copper coming to market to meet the world’s need for copper wire refers to an issue growing worse over the last 30 years. For a variety of reasons, there has not been nearly enough investment in new exploration and mine development. The result is that about 20 of the world’s largest mines are dwindling down to their last 10-20 years of productive life. New replacement mining ventures would need to be undertaken right about now, and relatively little of that is happening. The scarcity is estimated to be evident in the market in 36 - 60 months. Presently, copper supply and demand are about equal in strength. Growing inventories in China are balanced against shrinking inventories almost everywhere else that lacks state banks able to pay the carrying cost for inventory. Any rebound in the economy causing increased demand could quickly reveal the beginnings of the supply deficit with sharp increases for copper prices. In contrast, there are some reports that mine output is expected to increase in the coming months, but it should be noted that the overall trend has been towards declining production for the last several years.
Conclusion
PLASTICS, RESINS & HDPE Higher feed stock costs and tighter availability will probably result in higher prices for PVC and polyethylene in the first quarter. Resins rose three to four cents in the fourth quarter of 2012 and are expected to rise at least another two cents in the first quarter of 2013. Projected price increases for PVC-related products are expected to range 5.0-8.0 percent, although it may take a couple of increase announcements to get the full increase. While housing starts and construction activity is gaining steam, overall confidence in the economy is still a little tepid. While the majority of companies polled are not forecasting banner years, they do feel optimistic about 2013 for PVCrelated products. Albeit a minority, there are even a number of companies that feel 2013 will be a great year for PVC, citing stable oil prices, housing starts and the continued growing acceptance of PVC as an alternative as primary reasons for the prediction. Both Kallman and IHS Consultants note that after the dramatic downturn in PVC demand since 2004, there was improvement between 2011 and 2012. Demand growth for 2012 was expected to round out to about 5.0 percent. Polyethylene prices dropped in the fourth quarter due to a decline in both demand and monomer costs. December saw the spot ethylene monomer prices rise slightly with January through the first quarter predicted to continue to rise or swell. The energy market is typically the largest consumer of HDPE products, and not surprisingly, prices track with the relative strength of the energy market. Occasionally there are also other influences that affect the HDPE pricing and availability, such as the unplanned cracker outages that occurred in December. But as a general rule, tracking the energy market is usually a good barometer for the HDPE market. After reasonable performance in 2012, the energy market for 2013 looks to build even further on what has been a nice ride for the past several years. HDPE pulled back modestly in 2012, but optimism for decent growth in 2013 is the general consensus.
China’s need for copper will continue to be tremendous, notwithstanding the temporary impediments that are slowing down certain segments of demand. Top analysts reviewing the fundamentals for the coming months are in agreement that investments in copper will pay off due to vast infrastructure expansion there. Even as mines are moving to increase production, supplying enough copper to meet the needs of China and any other country that might experience a slight economic recovery seems unlikely in the long-term. With mining exploration and development being a risky and costly business, new sources of copper are uncommon and could take many years to bring to fruition. © 2013 American Supply Association. All Rights Reserved.
1q13 IPD Commodity Reports
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VALVES According to the Valve Manufacturers Association (VMA), the U.S. valve industry, although certainly not robust, had better results in the fourth quarter than it had in the previous quarter. A recent survey showed 66 percent of respondents registered an improvement in shipments over the third quarter and 86 percent expected December’s shipments to be greater or equal to the same month last year. Distributors registered similar results for 4Q12 and forecast a 1.8 percent improvement on their first quarter results in 2013 when compared to the 1Q12. While these recent results and near-term forecasts are both positive at this time, it should be noted that the valve manufacturers are slightly more pessimistic versus optimistic in their view of the economy going forward.
Raw Materials Pricing Raw materials pricing remains relatively flat quarter to quarter with no significant uptick on the horizon. Of particular concern are the manufacturers’ operating costs, which continue to rise with labor and healthcare being the prime focus areas. The initial impact of our new healthcare law will begin to be felt over the next year by both our industry and our customers, and the fear is that these costs could rise at a much faster pace than we have already seen to date or ever anticipated going forward. Our industry also has many concerns regarding “overregulation” by the U.S. EPA, which could place a considerable burden on many of our businesses, cause prices to increase and slow the rate of growth in our economy even further.
Cost of Raw Materials The Chinese RMB has appreciated in value against the U.S. dollar by roughly 2.5 percent since last August. Should this current rate of increase continue, it would translate into a cost increase of 5.0 percent annually on any material sourced from China.
Low Lead The low lead requirements for all bronze and brass valves in potable water that took effect in a handful of states in January, 2010, are now scheduled to take effect for the rest of the country on January 1, 2014. This is a significant event in our industry and will require considerable planning and change for the engineering and contractor sectors, our distribution channels and our valve manufacturers to ensure that the new alloy, which is a requirement of this law, is available, properly specified and installed. The new low lead alloy is significantly more expensive than the current alloys being utilized, and the law also requires that the current alloys remain in place for 8
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1Q13 IPD Commodity Reports
non-potable water applications, which will require all of us to duplicate our inventory for this valve product class. These concerns should be duly noted as they could factor into pricing in the future, but in the near-term, we see no significant movement on valve pricing for our industry.
Oil & Gas Markets These markets have retained a very healthy outlook overall. Despite a flattening in the U.S. rig count and oil/gas “fracking” activity, this remains our most vibrant market.
Power Markets Similar to last quarter, this market is viewed as weaker (35 percent) rather than stronger (25 percent) by the respondents to the Baird Industrial Review of Process Controls. Activity in the U.S., particularly in the area of new construction, appears to be slowing as companies continue to push out investments due to the unfavorable atmosphere which currently exists in Washington, D.C.
Chemical Markets The chemical market will remain healthy, at least through the first half of 2013, driven by low natural gas prices and very solid plant capacity utilization levels.
Municipal Water/Wastewater Markets This market continues to see very challenging trends in the areas of new construction and major infrastructure replacement due to a lack of public monies to finance that type of project. However, MRO and operating expenditure type work has remained solid.
Residential Construction & HVAC Markets These markets appear to have finally turned the corner and are beginning to grow again, admittedly slowly. But any growth is good, especially in light of the performance over the last four years.
Commercial Construction & HVAC Markets The commercial construction market remains lackluster at best with the majority of the activity centered in the areas of healthcare and higher education. Corporate and private company spending for expansion remains very weak and will not recover until there is a much higher level of confidence in both our government and our economy. © 2013 American Supply Association. All Rights Reserved.
General Industry
MALLEABLE & IRON FITTINGS
These markets improved modestly in 2012 but reflected
Domestic
uncertainty toward year-end. We believe their performance is indicative of the “wait and see” attitude that most of this country has taken as we watch to see how our government deals with the challenges of the next ninety days.
Final Thoughts One, likely recommendation for 1Q13 is, “Steady as she goes.” Until we see how our new Congress handles the current debt ceiling problem, our 2013 budget, universal healthcare and challenges from EPA overregulation, there is really no other prudent course.
GROOVED PRODUCT Grooved manufacturers have seen more competitive pricing pressures due to the additional manufacturers that are now participating in this sector. The softness of the commercial market nationally, despite certain areas of improvement, is also helping contain prices on large quoted projects. The primary offset to that is strong activity in the oil & gas sector, which is not only bolstering manufacturing production in that sector but is also having spillover effects into the commercial sector in the specific regions that are experiencing the surge in oil and gas activity. The largest domestic manufacturers do expect continued increases in raw material, labor, regulatory and healthcare costs and anticipate a 5.0-8.0 percent price increase to be implemented this summer.
© 2013 American Supply Association. All Rights Reserved.
In the face of increasing raw material, labor, regulatory and healthcare costs, the domestic manufacturers raised their prices 6.0 percent in December, the first price increase in 18 months. These same manufacturers also started benefitting from more wholesalers switching to domestic products as the “in-sourcing” trend in America continues to gather strength. The domestic manufacturers also anticipate another 5.0-8.0 percent price increase in the fall as they expect more cost increases and continued increases in import prices (see below). The domestic manufacturers expect to reap further improvements in their operations as they further capitalize on “in-sourcing” and the housing market continues to gather steam. Worth noting is that Ward is in the midst of labor contract negotiations as its current contract expires at the end of March. While no disruptions are anticipated, this bears watching. Anvil’s contract expires in 2014.
Import Chinese and Thai producers raised their prices 8.0 percent in December after having raised prices in April. In additional to traditional cost increases as noted in the previous section above, container costs have also been on the rise. In November, the European Union found China and Thailand guilty of dumping and imposed dumping margins of 32.1 - 67.8 percent on China and 15.9 - 50.7 percent on Thailand. It is too early to tell what effect that will have in the U.S., but domestic manufacturers have won dumping cases against the Chinese in the past. These cases are up for renewal at the end of the year, and more duties may be imposed against these Chinese producers.
1q13 IPD Commodity Reports
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