The Hilco Global Four–Minute Metal

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

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

Typically 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.   The Four-Minute Metal provides a quick recap of major metals markets; where values are rising and falling and why, and might be an indicator of which markets or customer accounts might need review or special attention.    Got four minutes?   You might learn something.

How the Metals Markets work.

Large metals users such as pipe makers, automotive stampers and other high-volume users purchase directly from producing mills while smaller volume users purchase through distribution centers that provide warehousing and processing services; 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 are typically sold on a replacement cost basis.  Price increases from the producing mills are passed on immediately and distributors and fabricators sell from low-cost inventory purchased in prior periods at the then-current higher prices.   

In the event of a liquidation that occurs during a period of increasing market prices, NOLV tends to rise, since portions of the inventory were purchased in earlier periods at lower cost and may not require significant discounting.    The opposite is true during periods of decreasing market values, when portions of the inventory were purchased in earlier periods at prices higher than the current market, necessitating increased discounting.    

Metals Products Summary and Expected Changes to Gross Orderly Liquidation Values (the One-Minute Metal for the really busy)

Metals Products Summary and Expected Changes to Gross Orderly Liquidation Values (the One-Minute Metal for the really busy)

 

Product Type

Market Price Outlook

Market Drivers

Expected effect on GOLV

Steel Coils and Sheets

Increasing

Low inventories, increasing mill lead times, rising scrap prices

Increased values

Pipe and Tube

Increasing

Increasing coil prices lead to increasing pipe prices

Increased values

Steel long products; beams bars and structural

Flat to slight increases in certain products

Year-end destocking, weakness in certain markets particually non-residential consturction

Flat

Aluminum plate, sheet, bars and extrusions

Decreasing

London Metals Exchange (LME) values for aluminum continue a slow decline, down 14% for the year, and LME warehouse inventories continue to increase

Slight Decrease

Copper Products (all)

Decreasing

Comex Copper down 9% in 2013

Slight Decrease


 

Steel Products

Supply and demand factors, market segment strength, import volume, and other factors effect the market pricet of steel products, but scrap is one of the major drivers.  Short term variations in scrap are absorbed into  the cost of goods but longer term changes in scrap pricing typically result in corresponding changes in the prices of finished products, such as sheets, coils, plate and long products (beams, bars and structural).   In 2013, scrap prices varied month to month in a narrow range.   Shredded auto scrap, one of the highest volume scrap categories was $350 per ton in January 2013, and $340 in November 2013.  For 2013 as a whole, shred ranged from a low of approximately $320 per ton to a high of $370 per ton, reaching a local minimum in the third quarter, and then increasing in the fourth quarter as shown in the chart below. 

Relatively stable scrap pricing and modest demand led to stable pricing for most steel products in 2013 as shown in the chart below.   Coil prices rebounded in the second half of the year, supported by increased demand in certain segments and continued strength in the automotive market. 

 

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 2013, service center inventories averaged about 2.3 months of supply, exemplifying a continued unwillingness to hold inventory throughout the supply chain.



 

Stainless Steel

Unlike steel products which have one price, stainless cost is typically comprised of a base price which changes slowly over time, and alloy surcharges that are published monthly by the major stainless producers and change monthly.     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 American Stainless publish surcharge tables monthly.

Like carbon steel, the recovery values for stainless products are based, in-part on replacement cost; “what would I pay for similar goods from the producing mills”.   Replacement cost is based in large part in changes in the alloy surcharges.   Decreasing nickel values would typically signal a decrease in the cost of new stainless products and a loss in value of existing stainless inventories, and the reverse would be true in a period of rising nickel values.    The tables below show recent changes in surcharge prices and recent market prices for common stainless products.





 

Aluminum Market

Aluminum product prices in North America are typically are based on the cost of pure aluminum as reported on the London Metals Exchange (LME), the Midwest Premium, which accounts for transportation, warehousing, and fabrication costs to convert aluminum ingots into semi-finished products (e.g., coils, sheets, and bars).  Fabrication costs for most products vary from $0.40 to $0.70 per pound, and the Midwest Premium typically varies from $0.10 to $0.12 cent per pound.  Certain highly processed goods, such as machined plate, are significantly more expensive than sheets and coils due to higher fabrication cost.

Limited demand and financial hedging resulted in decreasing aluminum pricing in 2013, decreasing from $0.92 per pound in January to $0.79 per pound in December.  In the same period the quantity of aluminum in LME warehouses increased from 5.2 million tons in January to 5.4 million tons in December.  The chart on the following page shows recent changes in aluminum pricing and a long term increase in the quantity of aluminum in LME warehouses. 

The large inventories stored in LME warehouses typically would indicate over-supply in the market, however, most of that metal is locked in financial deals and unavailable for use in the short term, and changes in LME inventories may not accurately represent changes in supply and demand.  Physical limitations on outbound shipments from crowded warehouses further limit supply.  This is particularly true in Detroit, Michigan, where approximately 25% of total LME aluminum is stored.




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Copper

Similar to Aluminum products, the market price of copper products in North America are typically based on the cost of pure copper as reported on Comex Exchange and fabrication costs to convert copper cathodes into semi-finished products (e.g., coils, sheets, and bars). 

 

 

 For more information contact:

Michael Sullivan
Industrial Inventory Appraiser
Hilco Valuation Services
(847)
313-4714 

msullivan@hilcoglobal.com