ihs material price outlook: a 2014 buyer’s guide

IHS Material Price Outlook: A 2014 Buyer’s Guide

November 7, 2013

Welcome to Today’s Webcast

Copyright © 2013 IHS Inc. All Rights Reserved www.ihs.com/PricingPurchasing

Today’s Speakers

Howard Rappaport

Senior Director of Chemicals, IHS

Howard Rappaport has over 30 years of experience in the chemicals and

plastics industry. He is a sought after industry speaker, and has been quoted in

various publications and media including: The Wall Street Journal, The New

York Times, The Financial Times, Fortune Magazine, Forbes Magazine,

Bloomberg, National Public Radio, The BBC as well as numerous other

chemical & plastics industry publications.

Prior to joining IHS, Howard held various chemical industry management level

positions in commercial development, business management, product

management, sales/marketing, and customer service. Company affiliations

include American Hoechst > Huntsman Chemical, Cain Chemical > Occidental

Chemical, Himont > Montell Polyolefins, and Westlake Chemical.

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http://www.ihs.com/PricingPurchasing


Today’s Speakers

John Mothersole

Director of Research & Lead Nonferrous Metals Analyst, IHS

Mr. Mothersole is a Principal in the Industry Practices Group, where he is the

nonferrous metals analyst. He also helps supervise the Pricing and Purchasing

Service's price and wage forecasts and the construction cost and operation

and maintenance costs forecasts prepared by the group's Power Planner

Service. He has a graduate degree in economics from the University of

Maryland.

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Today’s Speakers

John Anton

Principal Economist, Pricing & Purchasing, IHS

Anton is Director of the IHS Steel Service and the ferrous metals industry

analyst for the firm's Cost and Industry Service. In addition to producing regular

forecasts of steel production, demand, and price, he is also responsible for

managing the relationship between IHS and major steel clients, including some

of the largest mills in the United States, Japan, and Europe.

He has an economics degree from Florida State University and a law degree

from the Marshall-Wythe School of Law at the College of William and Mary.

In addition to his work with IHS clients, Mr. Anton regularly provides steel

industry analysis to magazines and dailies such as Purchasing Magazine,

Steel Business Briefing, American Metal Market, Investor’s Business Daily,

Pittsburgh Post-Gazette, Bloomberg, and Engineering News Record.

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Fundamentals vs. Fear

Energy & Chemicals

8

Howard Rappaport

Senior Director of Chemicals, IHS

Operational Excellence & Risk Management

[email protected]

November, 2013

mailto:[email protected]

Copyright © 2013 IHS Inc. www.ihs.com/PricingPurchasing Copyright © 2013 IHS Inc.

Chemicals & Plastics: What to Expect

• Currently a “sellers market” with high and volatile prices

• Demand slowly recovering, but growth is below normal historical rates for

many products

• New capacity is on the way, but not enough to change the short term

market dynamics

• Elevated energy prices (predominantly crude oil) continue to pressure the

cost side (strong producer profits in US, however)

• Recent events tipping the scales on supply / demand

• Price direction will be elevated for most products, but more stable with

downside potential later in 2014

• Keep an eye on the Middle East and the US Gulf Coast (politics, violence

& weather)

9


Copyright © 2013 IHS Inc. www.ihs.com/PricingPurchasing

Better Fundamentals Drive Oil Prices Lower

• No change to our fourth quarter Brent outlook ($108/barrel)

• Diplomatic initiatives with Syrian chemical weapons, issue and Iranian nuclear program easing “fear premium” on oil prices.

• Slightly increased Brent price outlook for 2014 and 2015

• Brent crude oil will average $104 for 2014 and $99 for 2015

• The oil market is now more vulnerable to another major outage

• Global spare capacity will be lower than anticipated in 2014/15

• Libyan and Iraqi production will continue to disappoint

20

40

60

80

100

120

140

2009:1 2010:1 2011:1 2012:1 2013:1 2014:1 2015:1

Brent Crude Oil Price Outlook (US dollars per barrel)

Source: IHS CERA

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• Capacity expansions being driven by low cost feedstocks &

integration strategies in North America, Asia and the Middle East

• Cost of production is closely tied to the cost of hydrocarbon

feedstock's (ethane from natural gas and naphtha from crude oil). The

Middle East and North America have a natural gas cost advantage

• Higher global crude oil prices put added upward pressure on market

prices in all regions

• North America has had some recent supply issues, but those will

resolve themselves along with new projects coming on line

• Demand growth has been hampered by the slow economic recovery

and the expectation of lower prices in 2014

General Trends

Chemical Industry Building Blocks – Market Dynamics

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• High prices today with record margins for US producers

• Cost of production is closely tied to cost of hydrocarbon feedstock's (ethane and naphtha)

• North America will enjoy a long term cost advantage based on natural gas reserves

• North America prepares for a surge in capacity investment

• Asia and Middle East continue to build as planned

• Europe may consolidate higher cost production

Ethylene


12



Ethylene Prices - Outlook

• Near-term ethylene forecast

slightly higher due to recent

spot activity.

• Costs still remain low relative to

history.

• Low cash costs and fairly stable

spot prices will continue with a

mostly flat forecast through the

end of the year.

• The turnaround schedule in the

first half of 2014 for crackers

could affect spot pricing starting

in January as market players

start pre-building inventories…

13



Propylene Prices – Outlook

• The propylene forecast for next few months remains slightly

higher but volatile based on supply issues.

• PP supplies are tight and converters are having difficulty

building inventory.

• Chevron Phillips is still on sales allocation due to production

issues.

• Outages of supply expected in the 1H of 2014 boost prices

in the US.

• The average 2014 PG price will be 64 cents. Down 5 cents

from the 2013 average.

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More “On Purpose” Production Will Drive Global Propylene Capacity Growth

0

5

10

15

20

25

30

35

2000 2002 2004 2006 2008 2010 2012 2014 2016 2022

Ex Dehydro - PDH Metathesis Olefin Cracking

Via Methanol: CTP HS FCC Others On-Purpose

On Purpose Propylene Production, Million Metric Tons

25%

45%

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Benzene

• Supply trends complicated by

ethylene, gasoline, paraxylene

and shifting environmental

regulations

• Refinery operations and

renewable fuel trends are critical

to benzene supply

• Growth in demand and capacity

migrating to Asia (where

majority of polystyrene & ABS

growth is)

• Elevated prices are expected for

the next 12-18 months


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$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

Jan-2000

Jan-2002

Jan-2004

Jan-2006

Jan-2008

Jan-2010

Jan-2012

Jan-2014

US Asia

Price (Cents Per Gallon)




Butadiene

• On-Purpose production will continue to rise

• Technology related to region and feedstock availability

• Steam cracker and refinery (FCC) supply trends also vary

by region. North America is “supply challenged” near term

• Demand growth trending towards GDP due to emphasis

on more durable goods applications (auto, construction,

appliances, electronics)

• Prices heavily influenced by crude oil trends

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Implications For Chemical “Building Block” Buyers

• Ethylene

• Slightly lower prices near term, but higher in early 2014

• Keep an eye on hurricane activity in USGC (season ends 11/30)

• Big investments coming in US capacity longer term = better pricing

• Propylene

• Tight supply in the US near term

• Higher prices in early 2014.

• More “on purpose” production will provide relief

• Benzene

• Closely following oil price trends

• Prices will remain above $4.00 per gallon through 2014

• Butadiene

• Recent high prices coming down early in 2014 as supply improves

• Continuing volatility will plague rubber prices until “on purpose” capacity arrives

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No return of the “Supercycle”

Nonferrous Metals

19

John Mothersole

Director of Research, IHS


[email protected]

November, 2013


© 2013 IHS

www.ihs.com/PricingPurchasing

• Collectively, prices look range bound

• Production costs in most cases limit the downside

• Upside is also capped – aluminum, copper, nickel or zinc all look fundamentally

weak or balanced in 2014

• A slow global recovery means consumption growth improves --

modestly

• The acceleration in growth over 2014 will be stronger in the old ‘dull’ industrial

economies

• But there is room for this recovery to grow into

• Capacity is adequate or inventory is high

• Markets generally look well supplied with flat or rising coverage ratios

• Bottom-line: near-term prices look flat at levels well below their

recent 2011 peak

Nonferrous Metals: What to Expect

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© 2013 IHS


No return of the “Supercycle” – prices look flat 25%

below their recent peaks

21

1.0

1.4

1.8

2.2

2.6

3.0

2004 2006 2008 2010 2012 2014

IHS Index of Primary Nonferrous Metal Prices, 94-95=1.0


© 2013 IHS


Consumption growth improves, but remains modest

-4.0%

0.0%

4.0%

8.0%

12.0%

2000 2002 2004 2006 2008 2010 2012 2014

Global Metal Consumption Growth (Combined Al, Cu, Ni, Pb, Zn, percent change)

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© 2013 IHS


China’s impact on base metal prices

4

6

8

10

12

14

16

18

20

-60

-40

-20

0

20

40

60

80

100

2000 2002 2004 2006 2008 2010 2012 2014

IHS Index of Primary Nonferrous Metals Prices, LHS Chinese Industrial Production, RHS

Year over year change

23


© 2013 IHS


Aluminum

• Market is in surplus with huge inventory overhang

• But prices can’t go lower -- they are already below cost

• The physical market is tighter that it appears by traditional fundamental

measures because most inventory is tied up in ‘financing deals’

• This is what is lifting premiums

• So what happens?

• The key is interest rates, higher rates will raise carrying costs and make financing deals

unprofitable

• As financing deals unwind, metal will become available to the physical market, lowering premiums

• Change in LME warehousing rules this April may also have the same effect

• The result will be cuts in production

• LME prices will drift higher as the surplus narrows toward balance

• Actual transaction prices may remain flat as higher LME prices are offset by falling premiums

• LME prices hit $2,171/mt in Q4 2014 – a 17% increase though prices

will not be much different than they were in early 2013

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© 2013 IHS


Copper

• Prices head lower in 2014

• Production costs near $5,000/mt underscore

how much downside there potentially is

• Market is in surplus • Visible inventory did fall last month, but the

long anticipated rise in mine production has

arrived. Data to July shows the strongest

gains in more than 10 years

• Demand growth looks healthy, but no

boom

• Chinese demand is picking up, but not

enough to offset the rise in domestic

production; import growth likely to fall in

2014

• ETF launches are delayed

• The Bottom Line: market looks well

supplied with prices falling well below

$6,500/mt next year

25

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Copper/Aluminum price ratio: copper still looks rich even

after next year’s correction


© 2013 IHS


Nickel: Oversupplied

• Nickel is besieged by a glut of material

that continues to grow

• Inventories are at record highs with a rising

coverage ratio

• New production continues to come online

• New NPI technology lowers the cost floor for

stainless production

• Rescission of Indonesia ore ban means

material flows uninterrupted in 2014

• Demand is improving but not yet

enough to dig into inventories

• Stainless steel production will grow about 4% in

2014, enough to allow prices to move out of the

cost curve early next year

• Prices continue to sit in the cost curve –

the only direction to go therefore is up

• Expect a mild recovery in prices with

any uptick in stainless steel production

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75

100

125

150

175

200

225

250

275

2000 2002 2004 2006 2008 2010 2012 2014

Nickel Inventory, thousands of metric tons


© 2013 IHS


Implications for Buyers

• Aluminum

• Prices are unsustainably low

• But another surplus in 2014 and a huge inventory overhang limit the upside

• Watch interest rates – they will signal the beginning of the end for financing deals

and lower premiums

• Changes in LME warehousing rules slated for April may also have the same

effect

• Copper

• Prices are headed lower

• Surplus widens in 2014, with inventory heading higher

• Downside is only limited by production costs, which are well below $6,000/mt

• Nickel

• Like aluminum, prices are unsustainably low

• But also like aluminum, another surplus in 2014 and high inventory limit the

upside

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Short-term benefit, mid-term danger

Steel for 2014 and 2015

28

John Anton

Director of Steel Service, IHS


[email protected]

November, 2013


© 2013 IHS


Steel –Sedate for 2014, Increasing risk afterwards

• A buyer’s paradox

• The basic outlook is flat, so no hurry

• But risk creates one-sided bets, so we still think locking

could be wise

• Prices cannot go down much, they easily could go higher

• Prices are essentially flat for most of 2014

• No shortages without a disaster

• Eventually (2015?) the low prices cause mill failures and

higher prices

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© 2013 IHS


• China Best

• China is overproducing as mills favor tonnage over profits

• Prices are often $150/metric ton lower than in the U.S., $70 below Europe

• Other Asia

• Low Chinese prices pressure Korea and Japan, who have excellent quality

• Europe

• Prices hover between those in Asia and North America

• Quality is often very high

• North America

• Well above those already mentioned, but delivery is fast and quality is high

• South America

• Protectionism makes South America one of the worst places to buy Worst

Where are the Bargains?

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© 2013 IHS


Hot rolled carbon sheet (Dollars per metric tonne)

• Demand is strong in NAFTA

and China, soft in Europe

• US price consistently higher

than others

• Price hike for 13Q4, probably

drops back in early 2014

• Advice: Locking minimizes

risk, but otherwise no reason

to rush

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400

500

600

700

800

900

1000

2009 2010 2011 2012 2013 2014 2015

United States Europe China


© 2013 IHS


Plate (Dollars per metric tonne)

• Demand rises significantly in

2014

• Premium over sheet is much

narrower than normal

• Some rebound in 2014 as

premium partially returns

• China is far lower, giving

upside room

• Chinese weakness suppresses

Japan and Korea

• Advice: try to lock current

levels for 2014, especially

Asian prices

32

400

600

800

1000

1200

2009 2010 2011 2012 2013 2014 2015



© 2013 IHS


Merchant Bar (Dollars per metric tonne)

• Demand rises in 2014 in line

with overall manufacturing

• Idle capacity is rampant

• USA prices dropped in 2013

to narrow the premium

• Still comparatively wide

• Little downside for Europe,

effectively none for China

• Advice: try to fight North

American price hikes. In other

regions, lock now if cautious,

buy spot if daring.

33

500

600

700

800

900

1000

1100

2009 2010 2011 2012 2013 2014 2015



© 2013 IHS


Concrete Reinforcing Bar (Rebar) (Dollars per metric tonne)

• Demand rises in 2014

• United States

• Middle East/North Africa

• China-led Asia

• High amounts of idle capacity

• A premium exists, but not as

wide as for other products

• WARNING: Trade action

coming to the United States

• Higher prices?

• Lower in other markets?

• Advice: Buy soon. The price is

low, and the logical direction is

upwards.

34

400

500

600

700

800

900

2009 2010 2011 2012 2013 2014 2015



© 2013 IHS


Special bars (SBQ) (Dollars per metric ton)

• The buying outlook is finally

improving

• New capacity is coming online in

North America

• Huge lead times are shrinking

• Demand is high but effectively near

a plateau

• Autos, energy are already strong

• Prices fall as allocation fades, but

remain elevated

• Some European SBQ mills are in

distress, & may be dragged under

by weakness in other products

35

700

900

1,100

1,300

1,500

2009 2010 2011 2012 2013 2014 2015

Special Quality Bar Merchant Bar


© 2013 IHS


Stainless (Dollars per metric ton)

• Input costs (surcharges) will rise

in 2014

• Nickel selling at/below cost

• Stainless mill capacity is high,

utilization is fairly low

• Prices will rise in coming years

• Ni, Cr, other alloy metals increase for

2014 and beyond

• Beware of labor and electricity

problems in South Africa

• Advice: buy ASAP

36

2000

3000

4000

5000

6000

2007 2008 2009 2010 2011 2012 2013 2014 2015



© 2013 IHS

• Sheet

• Sit on your wallet until February or March, unless you are offered a

full year at a reasonable prices

• Plate

• Lock in current bargains. 2014 will not explode, but right now there

is opportunity.

• Bar steel – Commodity grades

• Buy soon or sit until 2014Q2. Not extreme, but up.

• Watch out for US protectionism on rebar and wire rod

• Bar steel – Special bar

• Live hand to mouth. Prices should fall sharply in coming months.

• Stainless

• Buy now! This is our most clear cut advice.

2014 Buying Advice

37 www.ihs.com/PricingPurchasing



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© 2013 IHS


IHS Pricing & Purchasing Service Coverage Across Industries and Geographies

North America Europe Asia-Pacific Rest of World Total

Electronic Components (1,000+ Prices) are available to add on to any of the P&P packages

Agricultural Modules: Grains, Sugar, Dairy, Oils, Livestock, Biofuels are available to add on to any of the P&P packages

Labor (200+ Wages) Labor (200+ Wages) Labor (100+ Wages) Labor (100+ Wages) TOTAL WAGES: 750+

Energy (100+ Prices) Energy (150+ Prices) Energy (10+ Prices) Energy (≈100 Prices) TOTAL ENERGY PRICES: 400+

Steel (50 Prices) Steel ( ≈50 Prices) Steel (20+ Prices) Steel (≈10 Prices) TOTAL STEEL PRICES: 100+

Non-Ferrous ( ≈50 Prices)

Non-Ferrous (20 Prices) Non-Ferrous (10+ Prices)

Non-Ferrous (2 Prices)

TOTAL NON-FERROUS PRICES: ≈100

Chemicals & Plastics ( ≈100 Prices)

Chemicals & Plastics (50+ Prices)

Chemicals & Plastics (≈50 Prices)

Chemicals & Plastics (2 Prices)

TOTAL CHEMICALS & PLASTICS PRICES: ≈200

Building Materials Capital Eq Paper/Packaging Logistics Indirect Spend




TOTAL OTHER PRICES: 400+

TOTAL NORTH AMERICAN PRICES AND WAGES: 700+

TOTAL EUROPEAN PRICES AND WAGES: 400+

TOTAL ASIAN PRICES AND WAGES: 100+

TOTAL RoW PRICES AND WAGES: ≈200

GLOBAL PRICING COVERAGE: 1300+ Prices and Wages

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