Tinplate and tin-free steel price indexing in 9 variables
In the era of volatility and unprecedented market disruptions, can the metal packaging industry plan and execute winning business strategies? Davide Padovani, CEO of Steelforce Packaging, notes that steel packaging might not always be as effective as aluminium in replacing plastic and other materials that harm the environment, due to a consistent lack of transparency in how its pricing is determined. Hence, Steelforce proposes a nine-variable approach to guide end-users into a fair steel price indexing.
Looking at the packaging world, one would claim this is the perfect time to promote metal as the trigger for an environmental revolution in consumer goods.
Indeed, aluminium bottles and cans have been performing outstandingly, as brands seek to demonstrate their commitment to sustainability and establish a reputation for environmental stewardship. When such growth endures through global pandemics, political tensions, conflicts, logistics disruptions and massive price increases, it’s clear consumers’ awareness is in the right place to accommodate this change.
Nonetheless, when it comes to steel packaging, the environmental replacement mechanism is not always smooth. On the one hand, the recycling and technical properties are clear, but on the other hand, global brands struggle to make packaging decisions without a clear understanding of the cost dynamics behind steel pricing. In other words, the lack of indexing and transparency within the steel packaging sourcing market is undermining its growth opportunities, in what appears to be the best time for metal sustainability to win packaging shares and consumers’ hearts.
They say there’s no antidote to make steel procurement as transparent as that of aluminium, too poor of globally recognised indexes and too different the steel production dynamics at different latitudes to hold a common global ground for pricing Electrolytic Tinplate (ETP) and Tin Free Steel (TFS). While we understand transparency is a moving leverage when it comes to drawing stakeholders’ attention, we propose a transparent, proactive approach to steel procurement, where certain key variables need to be under control:
- HRC: The flat carbon product commodity is a good barometer of how profitable ETP and TFS are, as it outlines the conversion rate trend. There are several key origins to control, with a set of local costs to account for, for a complete global assessment.
- HRC demand & offer balance: While current HRC price can indicate how the short-term steel for packaging trend may look like, pricing cans and therefore making steel sourcing decisions over longer period of three, six, or 12 months, will definitely require more than a few weeks’ visibility. With the ambition to look at a quarter or semester trend, one must understand which markets are pulling the strings in the steel commodities arena. The future performance of these markets will be the key factor pushing mills in one direction or another with regards to overall steel production and ETP/TFS conversion rate expectations. The HRC’s future trend will vary at different origins and might be severely affected by local costs and/or by the local balance between supply and demand.
- Conversion rate: Paying the expected premium on top of HRC price charged by mills to produce steel for packaging products is not data one can find online. Steel producers do not wish to disclose estimated profitability for each product. To gain control of this variable one must truly be in the market of both commodity and steel packaging, at each market relevant origin. Only then, comparing with the historical data, crossing the results with current costs circumstances and/or supply and demand trend balance for HRC and ETP/TFS becomes possible.
- Long products: There’s hardly any direct cost relationship or similarity between long and flat products. However, these two categories have common end-markets, and usually the long one expresses those markets’ performance before the flat carbon, thus helping with a forecast evaluation.
- USD/RMB: With China representing roughly 55% of the global steel production, this rate can mark a difference for global balance in the world steel export business.
- USD/EUR: Between January and September 2022, there was a €200 (over 12%) difference in price effectiveness (and counting) due to USD appreciation. This also gives a hint to the changes in attractiveness and competitiveness of European ETP/TFS exports, and therefore future EU mills export strategies.
- Containers vs bulk vessels market trend:In the last 40 years, steel for packaging went from being a local product to a global one. Logistics have not always been the determining factor in the industry costs, but the last few years taught the world the opposite with extra logistics costs and time usually causing disruption in the supply chain.
- SKEO (seasonality control at the key export origins): When one has finally mastered a steel cost and raw materials demand/offer situation, it’s time to dive into the steel packaging demand/offer dynamics. There’s no place on Earth where the metal packaging business is 100% free from consumption seasonality. Seasonality applies to the supply chain, productivity and financial constraints at origin and destination. In a very global market like steel packaging, such constraints have been consistently compensated in the decades by exports. So, by being familiar with the consumption seasonality at the key origins, one can clearly determine a perfect timing in the year when each origin might or not need foreign demand. Always remember: no producer’s capacity could ever be designed to only function in high season!
- Scrap & key minerals: Prices of steel making raw materials these days are more of a consequence of the demand for steel, rather than the cause for it to change. However, there’ve been times when minerals’ availability had heavily affected steel production costs. Such circumstances might just happen again in the future, so, it’s also good to always keep an eye on main steel making raw materials.
Finally, while we acknowledge to control the nine levers might not be what’s normally intended for transparency, at Steelforce Packaging we know there’s a process to access and elaborate the key info in real time. The process is about understanding the weight of each variable and their relationship in a price equation.