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An empirical analysis of structural forces in refractory metal markets [Elektronische Ressource] / von Dirk Johannes Langhammer

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319 pages
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 iiAcknowledgements 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.
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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
iiAcknowledgements
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 ivExecutive 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.
vThe 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.
viThis 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 markets and illustrates through which forces
structural changes in metal markets occur and how this may impact level and volatility of
metal prices.
This approach complements existing metal price research by integrating industry insights and
research findings in a framework to establish a holistic approach to price analysis. The
approach chosen in this work owes to the author's practical industry background and focuses
on the integration of solid industry knowledge. The insights gained are meant to contribute to
prospective studies by scholars from various backgrounds and to the lively debate about the
future development of metal prices.
vii viiiTable of content
Executive summary.................................................................................................................iii
Table of content .....................................................................................................................viii
List of tables............................................................................................................................xii
List of exhibits......................................................................................................................... xv
Table of abbreviations ..........................................................................................................xix
1. Introduction ...................................................................................................................... 1
1.1 Problem definition and objective ............................................................................... 1
1.2 Structure..................................................................................................................... 6
2. Situation background....................................................................................................... 8
2.1 Categorization of metals.............................................................................................8
2.2 Distinctiveness of the commodity price boom since 2000......................................... 9
2.3 Rising economic importance of refractory metals ................................................... 16
2.4 Summary22
3. Research background .................................................................................................... 24
3.1 Review of literature on long-term metal price development.................................... 24
3.1.1 Metal price cyclicality......................................................................................26
3.1.2 Long-term trends in metal prices ..................................................................... 32
3.1.3 Price volatility..................................................................................................36
3.1.4 Summary and evaluation.................................................................................. 41
3.2 Review of literature on metal demand 43
3.2.1 Intensity of use concept.................................................................................... 43
3.2.1.1 Studies applying intensity of use technique 46
3.2.1.2 Dematerialization 54
3.2.1.3 Transmaterialization and rematerialization 60
3.2.2 Demand function estimation ............................................................................ 64
3.2.3 Production function estimation ........................................................................ 69
3.2.4 Summary and evaluation.................................................................................. 71
3.3 Review of literature on metal supply ....................................................................... 74
3.3.1 Research on long-term supply dynamics ......................................................... 75
3.3.2 Research on short to mid-term primary supply dynamics................................ 80
3.3.2.1 Holistic metal industry perspective 80
ix3.3.2.2 Industry supply structure 84
3.3.3 Research on the interdependency of secondary supply and metal prices ........ 91
3.3.4 Summary and evaluation.................................................................................. 94
3.4 Summary and deduction of research questions........................................................ 97
4. Methodological and practical approach to metal market analysis.......................... 101
4.1 Conception of research methodology..................................................................... 101
4.1.1 Approach to analyze metal demand ............................................................... 101
4.1.2 Analysis of metal supply................................................................................ 103
4.2 Data sources and data preparation.......................................................................... 105
4.3 Coverage of metal markets..................................................................................... 110
4.3.1 Growth in market value.................................................................................. 111
4.3.2 Uniform demand structure ............................................................................. 113
4.3.3 Data availability.............................................................................................115
4.3.4 Plausibility of estimates.................................................................................120
4.3.5 Summary........................................................................................................121
5. Structural differences between non-ferrous base and refractory metal markets .. 122
5.1 Structural supply side differences .......................................................................... 122
5.1.1 Regional mine production concentration ....................................................... 122
5.1.2 Trade concentration, export restrictiveness, and market organization........... 124
5.1.3 Split of production.......................................................................................... 130
5.2 Demand side structural differences........................................................................ 134
5.3 Summary................................................................................................................141
6. Demand structure of refractory metals...................................................................... 143
6.1 Functions of refractory metals and corresponding long-term trends ..................... 144
6.2 Methodology of demand growth decomposition ................................................... 149
6.3 Chromium...............................................................................................................153
6.3.1 MCP and PCI analysis of chromium demand growth.................................... 154
6.3.2 Summary........................................................................................................160
6.4 Manganese..............................................................................................................162
6.4.1 MCP and PCI analysis of manganese demand growth .................................. 163
6.4.2 Summary167
6.5 Molybdenum..........................................................................................................168
6.5.1 MCP and PCI analysis of molybdenum demand growth ............................... 169
6.5.2 Summary175
6.6 Niobium..................................................................................................................176
x