Despite a
slumping Chinese steel market, with short-term World Steel Association
projections showing China’s usage falling to only 1% growth YoY (set to decline
further next year to 0.8%) and iron ore prices already off by around 40% so far
this year (under $79/ton over the weekend), increasing demand from the EU28 (4%
growth YoY) and in particular NAFTA (6.4% YoY) markets, as well as the capital
costs associated with ore production, continue to be positive indicators of the
steel market’s future. Increased demand from the U.S., EU and even Japanese
markets may not be able to pick up the slack from China, the CIS (including
Russian Federation) and South America, but an improving USD making U.S. exports
expensive, as well as strong demand from the U.S. (led by the shale boom and
improving vehicle manufacturing), represents a clear target for steel and scrap
steel exporters in China.
A leading
indicator of the underlying market dynamics can be seen in the recent rebuff by
Rio Tinto (NYSE:RIO), whose biggest shareholder is Chinese state-owned Aluminum
Corp., of the Glencore (LON:GLEN) merger proposal. A deal that would’ve given
Glencore, which has a strong hand in copper, coal, nickel and zinc, a solid
footing in steel and would have created a mining concern big enough to rival
BHP Billiton (NYSE:BBL). Glencore is clearly bargain hunting still, even after
their $46 billion merger with Xstrata last year, as the bigger players shy away
from such deals and are even looking to divest assets amid the commodities slow
down, with over-production of iron ore by many of these big players even
exacerbating the low market price.
There is
still a vibrant market in steel and scrap, despite the iron ore price ugliness,
as indicated by increasing demand from the U.S. and others. The stainless steel
market, bolstered by nickel supply shortfalls in China (Indonesian nickel ore
export ban playing a big role), is a good secondary indicator here. With
Chinese supplies of low-cost nickel ores and nickel pig iron nearing depletion,
despite slumping in the nickel price that is comparable to iron ore and record
high stockpiles at the LME (where nickel for delivery dropped 1.3% to settle at
$16,095 a metric ton last week), the relative strength of the global stainless
steel and scrap stainless markets is encouraging.
Such
choppy waters and big-name M&A buzz throws a bright spotlight on smaller,
more diversified sector players like Armco Metals Holdings, Inc. (NYSE
MKT:AMCO), which managed to post a nice revenue rebound in their Q2 scrap steel
recycling operations. Net revenue was up at AMCO in Q2 this year to around
$32.9M, a 19% jump compared to the same quarter in 2013.
U.S.-based
Armco Metals covers the waterfront when it comes to recycled steel, as well as
metal and non-ferrous metal ores, doing imports from sources all over the
planet to China (including the U.S., Brazil, Indonesia, India and Ukraine to
name a few), as well as production of recycled steel scrap and direct sales of
their product mix to an increasingly sophisticated and logistically efficient
domestic network of Chinese manufacturers. Moreover, AMCO has the inside track
when it comes to prevailing legislation by the PRC’s Ministry of Industry and
Information Technology, being one of only a handful of companies approved for
operation under the new June guidelines this year, something which the company
started prepping for back in March of 2013.
Armco
Metals’ success is also attributable to their increasingly international and
integrated architecture, going well beyond their metal sourcing and
distribution/sales model, as well as scrap steel recycling capacities focused
on the Chinese market. A potentially $63M deal to import wood chips (Eucalyptus
Nitens) from a Chilean supplier signed last month and initiated with a trail
shipment of 50k metric tons, exploits AMCO’s established decade-plus of
experience in international trading/sourcing, giving the company an in-road to
China’s supply-strapped paper/paperboard market. Despite growing domestic
production capacity, China continues to outstrip domestic supply and is the
biggest importer of hardwood chips today.
Even a
more than two-fold increase in eucalyptus plantations over the last eight years
still sees a supply shortfall for the country; and while AMCO remains dedicated
to their core business in metal ores, non-ferrous metals and steel scrap
recycling, this deal with the Chilean supplier is a clear indication of
management’s desire to diversify their portfolio into new areas with high
growth potential. Clearly, AMCO is not taking the global slump in mining
commodity prices, or the Chinese steel and iron ore markets, laying down. The company
has quickly moved to offset the impact from such slowing growth by leveraging
their existing sourcing and distribution capacity, as well as their experienced
business development team, in order to capture higher profit margins for their
shareholders.
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