Lisa Reisman | Posted on January 24, 2011 |

MetalMiner is pleased to have guest columnist Jack Taylor contribute a GOES market analysis. Jack is an independent metals analyst and consultant focusing on ferrous and base metals used in the energy industry. Prior to working as a independent metals consultant he worked at PowerAdvocate as an Energy Business Analyst and at Independence Investments covering the automotive and transportation sectors. He can be reached at JTaylorMA(at)gmail.com

Many investors and analysts have been watching rare earth metals markets over the past few years, yet another metal, not as rare but just as valuable, has gone unnoticed – Grain Oriented Electrical Steel (GOES). GOES is a high value product that is almost six times the price of hot rolled coil; it is mainly consumed by transformer manufacturers. Indirectly, GOES impacts the utility market since it represents as much as 40% of transformer material costs and, therefore, influences the construction and maintenance cost of utilities operations. GOES represents only 0.2% of finished steel products volume with very limited supply due to a small number of producers: two in the U.S. (AK Steel and ATI Ludlum) and 200 world-wide as reported by Novolipetsk Steel. GOES base price in years past has been set on a yearly basis with a surcharge added to circumvent any fluctuation in raw material costs.

Source: US Census Bureau; compiled by Jack Taylor

GOES pricing is heavily influenced by the demand of power construction and supply of raw materials. Power construction spending has declined 7.9% while overall non-residential construction spending collapsed 13.2% since January of last year according to current U.S. Census Bureau (USCB) data. Hot rolled coil, the largest raw material cost component of GOES, usually dictates where the final surcharge could travel. Surcharges can fluctuate significantly and be substantial: earlier, in 3Q2008, domestic producers increased charges to over $1000 per short ton while, as of this writing, they are near $350 per ton as stated on domestic producers’ websites.

Last year’s implementation of the new Department of Energy (DOE) efficiency rules also impacted demand for GOES by transformer manufacturers. Most new transformers must use thinner laminations of GOES, which will result in the increase of the number of strips required, while also increasing the weight of the transformer along with material costs. Conversely, many other countries have not set the same efficiency standards and, therefore, many producers simply do not make sufficient amount of GOES with specs meeting new DOE regulation for import to the U.S. With only two domestic producers, GOES sales have remained more profitable compared to other types of steel. There is little expectation to increase the number of GOES manufacturers as the entry barrier is high due to the considerable cost of research and development. Those that have the technology have increased production but not enough to meet the 200K ton per year shortage worldwide according to Sumitomo Metals Industries.

Over the course of 2010, GOES pricing decreased nearly 15% due to power generation projects being delayed or canceled according to my estimates. Less demand for transformers caused unfilled orders of power generation equipment to rise 14% over the past year (USCB). Furthermore, rising raw material costs also dampened transformer and GOES demand somewhat as many buyers pushed back delivery dates. Hot rolled coil and steel plate costs rose more than 20% last year due to iron ore and coking coal suppliers switching to quarterly contracts instead of yearly contracts in order to capture higher open market pricing. Consequently, transformer costs grew 4-10% in response to escalating steel prices last year according to my findings. On a positive note, given most high voltage transformers take 12-18 months to manufacturer new orders increased 27% (year-over-year) during 2010 in anticipation of a pickup of power generation spending over the next few years. Next month we will dive into the GOES forecast for 2011 and what impact it will have on the power industry.

Filed under: Commodities, Ferrous Metals, Manufacturing

so are AK Steel and ATI Ludlum ‘the’ plays in this field?

In my experience the cost of grain oriented steel is generally less than reported here. My experience is with larger power transformers but it should scale. These companies are not only producers of this product but many other steels. As such even if the profitability of Grain Oriented Steel increased it would not have that much of an effect.

In additon amorphis electrical is a more advanced version of normal Grain Oriented Steel which is used where the best performance is required.

This article is short of actionable information which makes it of little value in investment decisions.

Mr. Taylor explains everything, except the most important fact: Just exactly what IS “Grain Oriented Electrical Steel”. He explains how it is used. He explains its potential investment value. But he does not explain just exactly what it is. Who would invest in such a prospect, if one doesn’t even know what one is investing in? Not me.

Can some of the 200 worldwide producers underprice our 2 US producers?

Actually the Chinese have filed anti-dumping cases against us for this material. For sure, some of the other producers’ material makes their way into the US. Does anyone out there have anything they can add on this point?

Good point. It’s used for cold strips which make laminated cores used in transformers and motors http://en.wikipedia.org/wiki/Electrical_steel http://www.alleghenytechnologies.com/ludlum/pages/products/xq/asp/t.2/qx/productcategory.html

The GOES index provided is from established pricing since January 2000 for the most widely used grain oriented electrical steels. The type of GOES used in a transformer is dependent on the efficiency rating the buyer requires.

Amorphous steel is the least consumed laminate to build the transformer core due to its higher cost but this could change with the increase of further stringent government efficiency regulations.

GOES is one of AKS and ATI most profitable segments which both firms want to expand. As power construction and non-residential construction spending are expected to rise over the next few years so will the need for new transformers, hence greater demand for GOES. This is on top of the significant capital needed to update the aging U.S. power grid are good reasons to take a look at AKS and ATI as value investments.

Not many of the international GOES producers have the ability or capacity to manufacture quality GOES at similar cost compared to the domestics. Many international GOES producers are totally dependent on raw material imports or do not have the technology to manufacturer the better grades to keep up with demand. However, some international firms have been exporting material to U.S. due to lower prices in their region.

Standard Transformers is a private limited company engaged in manufacture, testing of Transformers & Rectifiers Stabilizers in the voltage class of 11 KV to 132 KV and rating from 10KVA to 40 MVA.

Power Core Industries is a renowned name in manufacture of transformer cores and allied induction steel components, including, Core Manufacturers, Transformer Lamination.

for more details please contact http://www.powercores.com/home.php

Hi, I am doing a small project and would like to know the price per tonne for the iron MR 36 or M4 electrical steel, Regards, Asmaiel Ramadan

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