The Herald, Sharon, Pa.

Business

February 9, 2010

China impacts raw materials market

Raw-materials junkies can appreciate the impact that China has on prices for the ingredients used to make steel and other metals. For those who can’t, consider this data, courtesy of the International Iron and Steel Institute.

In 1994, China produced 91.5 million metric tons of steel, slightly more than the 88.9 million metric tons that U.S. steelmakers produced and less than 13 percent of global production. Fifteen years later, China produced 567.8 million metric tons of steel, about 10 times more than U.S. producers and nearly 47 percent of global production.

Consider China’s need for nickel, used to make the stainless steel found in cars, appliances and other everyday items. In 1995, China consumed about 4 percent of the nickel sold each year, according to Roskill Information Services, a London-based metals and minerals watcher. China’s demand has grown an average of 25 percent annually over the last decade, and now accounts for nearly 30 percent of world nickel consumption.

Given China’s healthy and growing appetite, what kind of leverage do you think it has when negotiating prices for iron ore, scrap, coal and other steelmaking ingredients?

“(The Chinese) have a big influence on raw-materials prices all around the world,” said Jeff Mindlin of the Pittsburgh-based Mindlin Fund.

China’s ascendency to the third-largest economy in the world has profound implications for pricing, said James Burnham, Ph.D., who teaches business at Duquesne University.

“China’s rate of growth, whether it’s consumer-driven or export-driven, will continue to be a major factor in world commodity markets,” Burnham said.

Say you’re a U.S. electric utility looking for thermal coal for your power plant or a U.S. steelmaker seeking the metallurgical coal used to make coke, which fuels blast furnaces. Chances are your supplier has noticed that markets around the globe are growing faster than the mature U.S. economy and has at least investigated doing business there.

Consol Energy has.

The company announced an Asian initiative in December, saying it will sell coal through a partner that has offices in Beijing, Seoul, Tokyo and Singapore. Since then, Consol has sold nearly a half-million tons to Asian customers.

The initiative “has meaningful implications for Consol’s earnings in 2010 and beyond,” president and CEO J. Brett Harvey said.

North America has significant sources of high-quality metallurgical coal that are lacking in other parts of the world, said James Moss of First River Consulting, a Pittsburgh metals industry consulting firm.

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