Editor’s Note: In this week’s edition of Ask the Industry, MEMA Senior Market Research Analyst Richard Anderson provides his predictions for some of the industry’s most important raw materials. This is the final article in a two-part series. To read part one, click here.
In our interview with Anderson , he indicated that petroleum, steel, aluminum, copper and nickel will be the top five raw materials for the aftermarket to keep an eye on in 2007. Below, are his thoughts on two of the most talked about raw materials for this industry — petroleum and steel. (It’s also important to note that this interview was conducted prior to the announcement late last week that the International Trade Commission revoked all tariffs and duties it had previously placed on imported steel .)
PETROLEUM: “Everybody knows there is petroleum in gasoline, in diesel and in engine oils. But, you have to remember that petroleum makes up a huge portion of plastics as well, and we see more and more plastics today in vehicles and replacement products, and just in everyday life. You can’t just think fuel. There are also tangible products that are very much dictated by the price of petroleum.
“OPEC has announced that it’s cutting production because it saw reserves going up and prices falling. They had also cut production sometime in the fall, but it really didn’t seem to do much, so there’s a danger it is going to try and do that again. However, we know world demand of oil is still going to increase. When the prices went down very quickly in late summer/early fall of this year, a lot of that was use of stockpiles. Stockpiles generally insulate the consumer from price changes, so any volatility in crude oil prices will be more quickly transferred to gasoline and diesel prices.
“We’ve kind of got a balance in petroleum in my opinion. We know demand is going up, and we already know that OPEC is trying to cut prices so that’s not all of a sudden going to drive prices up, hopefully. We’ve got increasing sources in this country. However, in this country, we’ve also got less of a stockpile, so what could have previously been a smaller change might have a more direct impact on the consumer. I don’t believe 2007 will be as volatile as 2006, where we saw a 50 cent increase in the price of gas in a single quarter. We could still see a 50 cent increase; it will just take place over the course of six to nine months. In my opinion we won’t see the sudden changes like we did this year.”
STEEL: “ Demand in China has actually been down over the past few months. It’s not so much that the demand has gone down as it is that the growth rate of demand has tapered. The numbers aren’t as important as the fact that the incredible growth rate of China ’s consumption of steel has started to slow down. They are the ones that have been driving the growth and the demand.
“Unfortunately for other consumers of steel, the Chinese government has announced they are cutting steel production from the smaller steel producers, the mini mills, so to speak, in order to help better regulate their production of steel and increase efficiency. In this case, we’re looking at a decrease in options for steel sourcing, which could drive up the cost.
“Over the past few years, China has moved from being the number-four source of imported steel into the U.S. to number two. There is a danger that with the Chinese closing down the smaller mills, they will be able to continue feeding their own demand but perhaps impacting their exports. The other variable in this equation is India , which in 2005 committed to triple their steel production capabilities by 2020. They also have a lower labor cost structure right now than China does. As China’s small production starts to be cut out by the government that can probably be taken up by India. The issue will be the potential time lag between the two.
“ China can shut down small mills a whole lot faster than anyone in India can build them, so in terms of steel one of the key indicators to look for will be steel production in India . While India is really the biggest player, there are other developing countries that are looking to do the same sort of thing. In my opinion, you can use India as a sort of barometer to see if things like China shutting down smaller mills can be filled by these developing countries. My opinion is that while the demand in China is down, they are still growing and any reduction in capacity is dangerous. For 2007, in order not to see volatility we need to see alternate sources. We need to see someone fill the gap of those small mills. The other problem is that U.S. production of raw steel is at a three-time low, so we don’t really have an internal source to quickly go to. My opinion is that there is actually a real danger of steel seeing some significant volatility based on how drastic the Chinese government’s cuts are.”
Anderson also provided predictions for a couple lesser talked about raw materials that have an impact on this industry, molybdenum and zinc. Happily, as Anderson points out, not all predictions are bleak for 2007.
MOLYBDENUM: “It’s used in lubricants, which is important because as we move toward thinner oils and less oil being burned, and also emissions reductions, molybdenum is being used to a greater degree. And zinc, which was being used before, is being phased out. Tiny little things like that can create a sudden surge in demand. Molybdenum is also a very important alloying element in steels to make them stronger. Again, this is fed by the influence of petroleum and the need for lighter weight vehicles and reduced fuel consumption. Manufacturing products thinner and lighter is the key today, but in order to maintain strength you need alloying elements to increase the strength without increasing weight, and molybdenum is used for that.”
ZINC: “ Zinc is used for plating and the decrease in zinc being used for lubricants could actually bring zinc prices down. Production capacity of zinc has actually increased recently. While most of the attention is given to the prices that go up, there are things that have a chance of going down. A quarter of all the zinc used is used by the automotive industry. As an industry, we don’t drive the bus entirely, but we’re a significant portion of that business.”
