Hilco Valuation Services News

The Hilco Global Four-Minute Metal

Oct 22, 2014

Everything you need to know about metal market pricing in four minutes or less

Thought for the Third Quarter of 2014

Any appraisal may include damaged, obsolete, customer returns, internal rejects, or aged inventory that typically is deemed ineligible. That same thought pattern sometimes is applied to metals inventories when distressed inventory is excluded on the borrowing base. Unlike other distressed inventories that may have no value, metals typically have a scrap value that, in some cases, may represent more than 50% of cost in certain products. In some cases, including distressed inventory as eligible at scrap value could provide additional liquidity and a more accurate estimate of true recovery values.

What drives changes in Net Orderly Liquidation Values  (NOLVs) for metals products?

In the metals industry, changes in market prices lead to changes in NOLV, and understanding changes in market prices and what drives them provides insight into changes in inventory recovery values. Hilco Global’s Four-Minute Metal provides a quick recap of major metals markets, including where values are rising and falling and why, and might serve an indicator of which markets or customer accounts might need review or special attention.

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How the Metals Markets Work

Large metals users (e.g., pipe makers, automotive stampers, and other high-volume users) purchase directly from producing mills; smaller-volume users purchase through distribution centers that provide warehousing and processing services, such as coil slitting, cut-to-length processing for sheets and long products, plate cutting, etc.

Most steel, stainless steel, aluminum, and copper products, including coils, sheets, plates, structural shapes, and other products, typically are sold on a replacement cost basis. Market price changes from the producing mills are rapidly reflected in transaction prices as distributors sell inventory purchased in prior periods at the then-current market prices.

Gross Orderly Liquidation Values (GOLVs) tend to rise during periods of increasing market prices, since portions of the inventory were purchased in earlier periods at lower cost and may not require significant discounting from cost. The opposite is true during periods of decreasing market pricing, when portions of the inventory were purchased in earlier periods at prices higher than the current market, necessitating increased discounting from cost.

Metals Products Summary and Expected Changes to GOLVs
(One-Minute Metal for the really busy)

Product Type

Market price outlook

Market drivers

Expected Effort on GOLV

Steel Coils and Sheets

Steady to slight decreases

Low inventories, increasing mill lead times and producer consolidation supporting higher prices. Strong demand from auto and other sectors.

Increased Values

Pipe and Tube

Increasing

Increasing coil prices lead to increasing pipe prices, recent trade cases have limited low-cost imports

Increased Values

Steel Long Products; Beams Bars and Structural

Flat to slight increases in certain products

Some bright spots in the economy adding to demand and supporting higher prices.

Increased values

Aluminum Plate, Sheet, Bars, and Extrusions

Increasing

London Metals Exchange (LME) values for aluminum and the Midwest premium hav both trended upward since December, adding approximately $400 per ton to most commodity aluminum products. After an extended period of increases, LME warehouse inventories trended downward

Increases of up to 15% on certain products

Copper Products (All)

Decreasing

Comex spot copper pricing decreased from $3.34 per pound in December 2013 to $3.12 per pound in September 2014.

Slight decrease

Steel Products

Supply and demand factors, market segment strength, import volume, and other factors affect the mar-ket price of steel products, but scrap is one of the major drivers. Short-term variations in scrap are ab-sorbed into the cost of finished goods, but long-term changes in scrap pricing typically result in corre-sponding changes in the prices of finished products. Scrap prices trended upward in the first quarter of 2014, were flat in the second quarter, and trended downward in the third quarter as supply and demand were in relative balance, contributing to price stability. Shredded auto scrap, one of the highest-volume scrap categories, was $372 per ton in December 2013 and $345 per ton in September 2014. Recent scrap and scrap substitute pricing is shown in the chart below.

Steel Products Graph

Downward trending scrap prices and modest demand led to stable or downward trending prices for most steel finished products in the first nine months of 2014. Certain product types, including steel plate, in-creased in price due to strong demand from energy and other sectors. Coil prices remain in an unusual-ly stable price range. Recent prices for various steel products are show in the chart below.

Steel Products Graph

Service center inventories are a barometer of the market as a whole, rising in periods of weak demand, and falling in periods of increased demand. The chart below shows recent changes in service center inventories for all steel products. In the first 9 months of 2014, service center inventories averaged ap-proximately 2.3 months of supply, exemplifying a continued unwillingness to hold inventory throughout the supply chain.

Carbon Steel Products Graph

Stainless Steel

Unlike steel products, which have one price, stainless steel product cost typically is composed of a base price that changes slowly over time and alloy surcharges that are published monthly by the major stain-less producers. Alloy surcharges are dominated by the cost of the three key alloys used in stainless: nickel, chrome, and molybdenum. Major producers of stainless steel, like OutoKumpu and North Ameri-can Stainless, publish surcharge tables monthly.

Like carbon steel, the recovery values for stainless products are based, in part, on replacement cost. Replacement cost is based in large part in changes in the alloy surcharges. Decreasing nickel values typically would signal a decrease in the cost of new stainless products and a loss in value of existing stainless inventories; the reverse would be true in a period of rising nickel values. The table below shows recent changes in surcharge prices and recent market prices for common stainless products. The upward trend in surcharges was driven primarily by increases in nickel prices.

Stainless Steel Products Graph

Aluminum Market

Aluminum product prices in North America typically are based on the cost of pure aluminum as reported on the LME; the Midwest Premium, which accounts for transportation, warehousing, and financing; and fabrication costs to convert aluminum ingots into semi-finished products (e.g., coils, sheets, and bars). LME and Midwest Premium prices change daily, and the sum of the two numbers is referred to as the Midwest Transaction Price

Fabrication costs for common products (i.e., sheets, coils and extrusions) vary from $0.40 to $0.70 per pound. Certain highly processed goods, such as machined plate, are significantly more expensive than sheets and coils due to higher fabrication cost. Fabrication costs change slowly over time, increasing in periods of high demand and decreasing in periods of low demand.

Increased demand and production curtailments in high-cost facilities contributed to improved supply and demand balance in the North American market. After trending downward for much of 2013, LME alumi-num prices increased in the first nine months of 2014, from $0.79 per pound in December 2013 to $0.92 per pound in September 2014. In the same period, the quantity of aluminum in LME warehouses decreased from 5.4 million tons in December 2013 to 4.7 million tons in September 2014. The chart below shows recent changes in aluminum pricing and a long-term increase in the quantity of aluminum in LME warehouses.

Decreasing LME inventories may indicate a tightening physical market, but LME aluminum values and LME inventories levels are both heavily influenced by financial hedging and speculation. Physical limita-tions on outbound shipments from crowded warehouses continue to limit physical delivery of aluminum from LME warehouses; however, in spite of those limitations, inventory in LME warehouses trended downward in the first nine months of 2014.

Aluminum Products Graph

In January 2014, the Midwest Premium jumped to all-time highs and has remained at or near those highs in the first half of 2014, before increasing further in the third quarter. Historically in the $0.04 per pound to $0.08 per pound range, the Midwest Premium averaged $0.10 per pound in 2012 and $0.11 per pound in 2013, before increasing to $0.18 per pound in January 2014 and averaging $0.19 per pound in the first six months of 2014. The Premium then increased to $0.21 in the third quar-ter of 2014. The increase in the LME aluminum value, coupled with the increased Midwest Premium, resulted in a total increase in aluminum transaction prices of approximately $0.20 per pound, or $480 per metric ton, compared to December 2013. Recent changes in Midwest Transaction Prices are shown on the following page.

Aluminum Products Graph

Copper

Similar to aluminum products, the market price of copper products in North America typically is based on the cost of pure copper as reported on the LME or Comex, and fabrication costs to convert copper cathodes into semi-finished products (e.g., coils, sheets, and bars). Copper prices are driven, in part, by global demand, primarily demand in China. Reduced Chinese demand contributed to decreasing copper prices in the first nine months of 2014, as shown in the chart below.

Copper Products Graph

For More information contact:
Michael Sullivan
Senior Appraiser
Hilco Valuation Services
msullivan@hilcoglobal.com