China buys set world prices

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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, 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," Dr. 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 Cecil-based company announced an Asian initiative in December, saying it will sell coal through a partner who 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.

He says U.S.-based scrap producers also are linking up with overseas customers. About 80 countries currently buy U.S. scrap, nearly triple the number of a few years ago, according to Mr. Moss. China is a prime target of those ventures.

"In most resources, they're 30 to 50 percent of demand," Mr. Moss said. "What they are willing to pay ends up determining what everybody else ends up paying."

China is emerging as the lead negotiator in annual price negotiations between iron ore producers and global steelmakers, a responsibility formerly handled by Japanese steel producers.

"Once they set the price for iron ore, that sets the price here," Mr. Mindlin said.

His fund typically holds a healthy dose of commodities and commodities producers. Mr. Mindlin describes the Chinese as opportunistic buyers, acquiring raw materials they don't need when prices are low. Backed by a state-controlled economy, they are formidable competitors, he said.

"I think the average guy in Crafton is seriously underestimating these people," Mr. Mindlin said. "They're not playing for the next two to three years. They're not playing for the next five years. They're playing for the next 150 years."

China's economic growth is a safety valve for U.S. companies that can export into that market, particularly with a weaker dollar, said Stephen F. Auth, a chief investment officer for Downtown-based Federated Investors. At about 9 percent of the world's economy, "Whatever China needs is going to go up in price to a certain extent," he said.

China recently took measures to rein in growth and head off inflation. Mr. Auth doesn't believe inflated commodities prices will translate into inflation here, saying that in mature economies, wages are a bigger cause of inflation than materials. Wages will be kept in check by productivity growth and high unemployment, he said.

But inevitably, China's economy will affect U.S. markets.

A few short weeks ago, Wall Street was being urged on by better than expected corporate earnings and dimming prospects for cap-and-trade and health care initiatives. Then China decided to tighten the spigots, and a stock market looking for an excuse for a correction found one, said Hank Smith, chief investment officer of Haverford Investments in Radnor, in southeastern Pennsylvania.

He said China's inflation fighting shouldn't deter investors from capitalizing on faster growing overseas markets. "One of the themes we're emphasizing for this year is focusing on companies that have international exposure and global reach, particularly in emerging markets."

Len Boselovic: or 412-263-1941.


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