Reflecting on the challenging Ferrotitanium markets in 2016 and looking ahead to 2017
----An Interview with Mohammad Rahbary; CEO of Metalliage Inc.
Asian Metal: Hello Mr Rahbary and thank you for taking this opportunity to be interviewed by Asian Metal, as the largest producer of ferrotitanium in Canada and one of the major players in the market for North America as a whole, could you give more details of the company, its position and your own personal role?
Good Evening Asian Metal, and thank you for taking the time out of your busy schedule to speak with me today. It is a real pleasure.
I don’t know how well you know about myself or our business - I have personally been fortunate enough to have been involved in a number of areas at Metalliage prior to my most recent appointment as CEO. Having started my career in banking, (from company valuations and portfolio analysis in private equity, trading equities with a background in stock and strategy analysis, to technical and fundamental analysis and sell-side portfolio analysis at a hedge fund dedicated to risk mitigation) I joined Metalliage in 2013 to build the company’s finance arm with the anticipation of company expansion, in addition to fully restructuring its accounting framework. We adopted systems and protocols that provided it structure and scalability. After 18 months, I was pleased to provide my assistance in the commercial department to develop a network that helped to better hedge raw material prices on larger production volumes, while building a larger sales base to capitalise on annual contract requirements across different continents – we had anticipated a severe drop in spot offerings and aimed to get ahead of the curve.
This experience helped to provide me with a well-rounded understanding of the Ti scrap and FeTI markets, allowing me to better delegate high levels tasks and decisions across a number of relevant departments at Metalliage. Today my focus is on overarching long term strategy decision.
Despite a challenging climate, strategic decisions were made at Metalliage in 2015 to combat the downturn. Since 1998 Metalliage has focused on Ferro-Titanium production, supplying to steel mills across the globe. Much of our production focused on standard material. However, by 2015 we noted a full paradigm shift, expecting prices to remain tight beyond 2020, with only a limited upturn over the next 36 months.
As such we concluded the need to take action on two fronts. Firstly, despite a crowded market, Metalliage needed to significantly expand production levels in order to reduce marginal costs; and equally importantly placed a far greater focus on value-added product offerings, including superior grades of FeTi from low carbon, aluminium and vanadium for far more specialised steel grades, more bespoke sizing based on client requirements, and finally a dedicated powder division, noting a general uptrend in cored wire demand across both continents.
Implementing these changes has required major infrastructure investments, technical improvements, key quality control and quality assurance improvements, and a complete change in philosophy. Today the cornerstone of Metalliage’s operations is an ethos of client satisfaction, touching on every area of the supply chain, from raw material purchasing, processing, melting, crushing and packing, to shipping; with the client receiving a greater level of communication, to aftersales feedback that provide our business continuous improvement.
Thanks to this underpinning, we have increased our sales by over 30% in 2016, with an expected growth rate of over 50% in 2017 thanks to further expansion projects that are currently either completed, underway, or are planned for completion by Q3 2017, with a capacity increase of 2.5x.
Asian Metal: It goes without saying that market conditions have not been ideal over the past year; price stagnation, oversupply and less steel demand have all played a factor in this. What do you personally feel has been the biggest challenge you’ve had to confront in the North American market over 2016?
What can be said of 2016? It has been a noteworthy 24 months in ferro-alloys, steel and commodities overall, with persistent contractions throughout the last 12 months. Oil has also remained under pressure throughout 2016, with a shifting geopolitical climate placing further pressure on a number of key markets that play roles in the demand for steel.
Needless to say, it has been a challenging year for all Ferro-Titanium producers in North America, and particularly in Europe. Market fundamentals have more or less vanished. Both titanium scrap and in FeTi markets are oversupplied, where an unusual phenomenon has emerged: FeTi is being produced at noble alloy levels – with producers’ average annual production rates set at between 4,000 to 10,000 tonnes, while being priced closer to bulk alloy levels. Current prices range between $2,500/mt and $3,500/mt; a stark collapse considering levels ranged between $6,600/mt and $9,000/mt only in the last 36 months, with a peak of over $12,000/mt in 2012. Dealers have exited the market, seeing little speculative opportunity, with under-utilised mills either overstocked with FeTi or under long term contract with select producers. The spot market is almost inexistent for standard lumpy material in North America.
Asian Metal: Prices in North America have stood at USD1.70-1.80/lb Ti EXW and usually the same sort of level DAP North America for much of this year on sales of 1 container of material or more, with only slight fluctuations. Do you foresee prices staying stable into next year?
This is an excellent question, albeit somewhat open-ended simply owing to the many variables that exist in determining the next 12 months in FeTi. This includes the price of oil (The geopolitical climate in the Middle East and North Africa region, and the hegemonic power-struggle between players in the region); unknown and unpredictable policies of the future US incumbent and its effects, whether isolationist and/or deregulatory; maintained or expanded international duties on dumped Chinese steel; Russian currency devaluation levels determining arbitrage spreads, allowing for cheap FeTi pouring into Europe and to a lesser extent into North America; and the state of Ti scrap availability from China and North America. Based on our internal MACD and RSI technical indicators, including our fundamental indicators, we expect a slight rise in North American FeTi to above $1.90/Lb Ti in Q1 2017, with a consolidation at that level for the next 2 quarters, with resistance at $2.10/Lb Ti; and a support at $1.70/Lb Ti. We expect for European prices to have a better price shift to reduce the spread between its North American counterpart, with prices returning above $3.50/kg Ti by the end of H1 2017. We do not expect the market to rise above $2.10/lb Ti or $4/Kg Ti in 2017, respectively.
Asian Metal: Moving onto the European market, prices there have gradually moved down - hitting their lowest at present with some confirmed transactions at USD2.90-2.95/lb Ti DDP Europe on transactions of 1 container of material or more seen as the year draws to a close, down from a more common average of USD3.30-3.40/kg Ti DDP Europe earlier in the year. Why - in your opinion - has Europe seen this price decrease while North America has largely avoided this?
Europe is a different animal to North America. It is a far more crowded market, with a host of producers across the UK and Europe, in addition to Ukrainian and Russian imports. A race to the bottom has emerged, with mills more than happy to take advantage of the current situation. In reality, we expected this to be an ephemeral event in 2015, with a strong correction by 2016. However, a depreciated Rouble has allowed for cheap FeTi with adequate quality to flood into Europe without abatement, distressing and skewing the paradigm fundamentals which have historically shaped this market.
On the whole, what has saved North America from directly competing with these price levels has partially been the cashflow difficulties faced by a number of large North American mills; they have little interest in stocking FeTi and binding their capital in inventory. With a lead time of over 60 days, mills prefer to pay a premium for immediate domestic deliveries - a saving grace for North American FeTi.
Asian Metal: A number of European sellers have been successfully securing spot deals on a delivered basis to Asia and Latin America as demand in these areas outperforms Europe. Have you also been able to secure sales to other areas of the globe or have higher prices in America hampered this somewhat?
Not at all. We have reached the same conclusion, particularly in a climate of dwindling North American spot sales; accessing the Asian market far earlier than many of our counterparts in Europe. A large portion of our annual contracts are in fact with major Asian mills. We find them to be technically exacting, with very strict quality requirements – a fact we appreciate tremendously as it reflects well the quality ethos of our business.
Asian Metal: Long-term contract season has been underway now for a few weeks. Some noble alloys such as ferrovanadium and ferromolybdenum have seen less generous discounting on long-term contracts owing to supply and production problems seen over the past year. Ferrotitanium lacks these market fundamentals in the same way. Has it been a struggle trying to secure more favourable contract terms as a result?
What is notable is what has been learnt by mills from hasty decisions made in 2015. 12 months ago, mills were enthusiastic at the prospect of acquiring material extremely cheaply, and simply accepted the ‘best’ bid. What has transpired at the end of 2016 is a far more informed steel market, avoiding the risk of ‘too good to be true’ prices. A number of mills secured contracts with unprecedented discount rates, only to find half way into their contracts the inability for suppliers to facilitate material, or risked providing substandard grades, causing blow-outs or major quality issues. This year many mills, while hoping to secure large discount rates, are far more sensitive to the source of material, and prefer to work with large and well-known suppliers. This is a benefit for traditional players, while raising the barrier to entry for many of the newer suppliers. As a result, we have found a more reasonable and open atmosphere in contract negotiations in 2016, while remaining aggressive on pricing.
Asian Metal: Many raw materials are exported from China - manganese, magnesium and vanadium to name just a few - but titanium appears to have eluded this trend with Russia, Europe and North America dominating the global marketplace. Could you foresee China being able to export more ferrotitanium over the next 1-2 years?
As a producer and entrepreneur, I have to ask myself why I operate in a particular market; what are the opportunity costs of investing into a particular market? Does the expected rate of return justify diversifying it? How big is the field? What price and demand impact will my additional supply bring to the market? What are my competitive advantages?
China successfully provides material to its own extensive domestic market with its offering of FeTi30/40. While I understand that a number of companies have begun to enter the FeTi70 field, I do not see the financial benefit of doing so, when compared to the markets you just mentioned.
Understandably mountains of cheap Ti scrap and a cheap workforce may incline them to begin exporting, competing directly against their Russian counterparts. This would risk a dangerous race to the bottom; while the nature of the market would lead to an equilibrium rate, below which would be infeasible. In this scenario, you could expect a number of traditional players to be forced to exit the market – something we have already noted with the influence of Russian imports alone. This would help to alleviate prices and provide a higher steady state price. However, what it would mean is that FeTi would remain depressed indefinitely; as fundamentals will have completely shifted away from traditional pricing methodologies, geared instead towards uncompetitively cheap labour, utilities and scrap, with a focus on leveraging currency exposures.
This is not unlikely, as we have seen elements of it with Russian material; but I cannot see an added value for either the market or the supplier. And indeed with FeTi being a relatively small market, I cannot see the attraction in doing so. I do however believe that Chinese mills may wish to move away from FeTi30/40 towards FeTi70, allowing FeTi producers to fulfil domestic demand; a significant shift that has been noticed in India.
Asian Metal: Finally, regarding your own company, what are possible projects and goals going into next year and also 3-5 years down the line? Do you expect market conditions to hamper these plans or - conversely - enable them?
We operate day to day with a 5-year plan in place, with monthly goals set in an attempt to meet it. The last 24 months have indubitably altered the course of the business; a blessing in disguise. With a shift towards value added material, we have adopted a culture of technical excellence geared toward client satisfaction. With optimised testing facilities and QC technologies; and the appointment a field of metallurgists, project managers and industrial engineers, we have developed and are currently expanding our FeTi powder division to meet the needs of tomorrow today. It has driven us to expand our business with ambitious goals in place. We have also modernised and expanded our washing line and processing facilities to ensure carbon levels below 0.03%, and have increased our production capacity with access to an additional furnace. Moreover, Improved melt technologies with steadfast R&D into the reduction of oxygen levels in Feti have also allowed us to provide a product that offers higher performance without additional cost, providing the client a better return on their purchase. We expect to leverage these improvements into FeTi powder in applications beyond cored wire, with research into titanium powder and its extensive applications; with a strong R&D philosophy driving our business into the future.
Many thanks for sharing your time with Asian Metal, it has been a privilege to hear your thoughts on the markets.
Asian Metal: It has been my pleasure, I appreciate your time. I wish you the very best for Christmas and New Year, and look forward to seeing how the market evolves in 2017. As always you can get in touch with our sales team for more information at sales@metalliage.ca.
