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.
More information on Armco Metals is available at www.ArmcoMetals.com
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