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An empirical analysis of structural forces in refractory metal markets von Dirk Johannes Langhammer Diplom-Wirtschaftsingenieur Promotionsschrift Eingereicht am 19. Juli 2010 Prof. Dr. Armin Reller, Lehrstuhl für Festkörperchemie (Erstgutachter) Prof. Dr. Axel Tuma, Lehrstuhl Production & Supply Chain Management (Zweitgutachter) Datum der mündlichen Prüfung: 24.09.2010 ii Acknowledgements The following work would not have been possible without the unfailing support, encouragement, and constructive critics of a number of special people. I am particularly indebted to my doctoral advisor Prof. Dr. Armin Reller (Augsburg University), whose initial ideas formed the nucleus for this work and whose encouragement and valuable comments were always a driving force throughout the entire process. In addition, Prof. Reller created a thought-breeding environment to explore new frontiers and ways to the theoretical underpinnings of the dynamics in metal markets. Furthermore, I would like to express my earnest appreciation to Dr. Benedikt Zeumer (McKinsey&Company) who brought an inspiring commercial view to the topic and was a key sparring partner always available to discuss new issues and concepts. Dr. Leonhard Birnbaum (RWE AG) and Dr. Thomas Vahlenkamp (McKinsey&Company) were an invaluable force in helping to lay out the initial concept and support for this work and I would like to express my gratitude to both of them. Prof. Dr. Axel Tuma (Augsburg University) provided a crucial second opinion to the topic from a different angle through pointed questions and valuable challenges. My parents deserve special mention. I would like to thank my father for supporting me with material guidance on economic concepts and with timely proof reading of the final work. My mother always never ceased to encourage me wholeheartedly throughout the course of the work. Finally, but foremost, I would like to sincerely thank my wife Vanessa for her unwavering support throughout this time during which she gave birth to our first son, Kilian. She was an invaluable source of encouragement and vigor and proved to be an astute discussion partner with whom I was able to structure this work. This work is dedicated to her. iii iv Executive summary The record price development in commodity markets during the boom period lasting from early 2000 to mid 2008 highlighted a perceived scarcity particularly in metal markets that contrasted the preceding period beginning in the late 1970s of largely abundant availability and falling real metal prices. While the fly ups in metal prices were most visible for exchange traded non-ferrous base metals, refractory metals used predominantly as alloys in the production of steel grades experienced an even stronger price rise. Whereas annual prices and production volume for non-ferrous metals rose by 12.2 percent and 4.9 percent respectively from 2001 to 2008, the aggregate price index for refractory metals rose by 17.6 percent annually, despite an average annual increase in the production volume of 9.6 percent. Scholars are in disagreement how to evaluate the recent commodity boom with respect to its long-term impact on metal prices. Also, the primary focus of the discussion on metal markets and metal price development is based on insights derived from non-ferrous base metal markets. An in depth analysis of refractory metal markets matching the level of quantification found in works on non-ferrous base metals is missing. The upward trend in demand for refractory metals ascribes to both an unprecedented surge in demand and to structural changes in the supply of alloyed materials. Contained only in traces in the end product, these invisible metals effectuate indispensable functions in steel grades, predominantly corrosion resistance, strength and high temperature strength. Driving the demand for these functions are long-term industry trends, which may be clustered as weight saving, advancement of operating parameters, quality improvement and operations in increasingly corrosive environments. While these trends are not new, the surge in demand for sophisticated steel grades in developing countries to establish an adequate industrial infrastructure, a rising class of influential consumers in emerging economies, an increasing awareness for climate change and for a sustainable, efficient use of resources as well as constructions in increasingly corrosive environments such as the gulf region and polluted areas in emerging economies have all accelerated the demand for lighter and more enduring steel grades during the last decade. This development is reflected in the increasing intensity of refractory metals in steel not only in emerging but also in advanced economies during the commodity boom. v The solidity of these trends lends credence to the hypothesis that they will continue undeterred by the current economic crisis. Furthermore, the concentration of molybdenum and niobium in domestically produced steel in advanced economies is still higher by a factor of three compared to emerging ones. This implies that emerging economies, notably China as the dominant global steel producer have still a long way to come to catch up to advanced economies’ levels. Both developments suggest solid demand growth for refractory metals going forward. The growing economic relevance of refractory metals underlines the importance of a reliable and secure supply. Here, selected refractory metals have undergone a structural change in the composition of supply and are particularly exposed to induced scarcity situations and consequently price fly-ups and have become a weighty factor with respect to cost, risk, revenue and profit of hitherto unknown relevance. Suppliers begin to reevaluate the significance of these metals in their portfolio and the revenue and profit opportunities that stem from it. Strong demand secures the profitability of developing hitherto uneconomic assets and introduces a new floor price as the cost position of the marginal producer rises and the tail of the cost curve becomes steeper. Metal consuming industries, notably steel producers in countries relying on imports, are faced with a highly concentrated production profile in most refractory metal markets and are dependent on the willingness of exporters to trade. In this context, China’s role deserves special mention. During the last decade, it has become a leading consumer of raw materials to sustain its economic growth. Yet its role on the supply side changed equally fundamental. It has become the largest exporter by far for many refractory metals, not only for those in which it holds domestic mining assets such as molybdenum but also for metals in which is has assumed a dominant position in the smelting and refining stage such as chromium. China’s determination to pursue its domestic interests over unobstructed trade has led to the introduction of export tariffs on raw and refined refractory metal to limit the unconstrained export of these metals in their intermediate forms and to nourish a downstream steel industry. The effect on China’s role in the alloyed steel market is considerable. During the past decade, the country has switched from being a net importer to becoming a net exporter of alloyed steel, a trend, which correlates strongly with the increase in the intensity of advanced alloyed metals molybdenum and niobium in its domestic steel production. In parallel, exports of ferro-molybdenum, an intermediate product in which China held a dominant export position until 2003, have been replaced by alloyed steel exports containing molybdenum. vi This indirect subsidy of downstream capacities in Chinese alloyed steel production has severe consequences for alloyed steel producers outside China reliant on imports of refractory metals in their intermediate forms. Their position is doubly inferior to their Chinese counterparts. Access to raw materials is restricted and average global raw material costs carry a surcharge of Chinese export tariffs. Furthermore, the competitiveness of their products outside their domestic markets, which are often protected by import tariffs, is challenged. Changes in the global alloyed steel market during the last decade bear witness to the consequences of these distortions. Traditional exporters of alloyed steel, notably in Europe and Japan have lost significant market shares from the mid 1990s to 2008. The share of net alloyed steel exports of major Western European producers relative to total global alloyed steel exports fell from around 9 percent in 1994 to below 4 percent in 2008 measured by weight and to just above 5 percent measured by value. During the same period, Japan’s share of global alloyed steel exports dropped from around 11 to 8 percent measured by weight and to 6 percent measured by value. Yet Sweden, Austria and Finland have managed to keep stable their share in global alloyed steel export markets. The business model of steel producers in these countries highlights a path to successfully stand the ground against global competition. Home to highly specialized steel producers, which is visible in the highest average concentration of refractory metals per ton of domestically produced steel in these countries, they are pursuing a strategy of innovation and specialization to maintain a competitive edge going forward. The work intends to contribute to the discussion on the long-term impact of the commodity boom on metal prices. It enlarges the scope of metal markets in the focus of research to date by focusing particularly on refractory metal

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