On Wednesday, the People’s Bank of China weakened the yuan/renminbi to its lowest level in five years. The actual cut was small: only about 0.34%. The Chinese yuan closed 0.2% weaker on Tuesday at 6.559 per dollar compared with that morning’s midpoint of 6.5468. Since the end of April, the currency’s value has dropped three weeks in a row.
It did not send world markets spiraling downward as panicked investors did last August when China devalued its currency by nearly 2%, or in early January, when it cut by about 0.5%.
How Fast is the Chinese Economy Growing?
China’s ruling Communist Party still claims the country is growing 6.5% to 7% a year. Capital Economics, among other independent forecasters, believes the real number is closer to 4.2%.
Click for full size. Source: Bloomberg News
Market watchers believe there is a struggle going on between China’s top leaders on what to do next.
The Wall Street Journal reported that, behind closed doors in March, some of China’s most prominent economists and bankers bluntly asked the PBOC to stop fighting the financial markets and let the value of the nation’s currency fall. They supposedly got nowhere with bank officials.
U.S. Customs and Border Patrol has stepped up efforts to enforce U.S. trade law. Earlier this week, the Department of Commerce confirmed the cold-rolled steel anti-dumping margins from China (265.79%) and Japan (71.35%) as well as a countervailing subsidy for China of (256.44%). This makes for a total of 522% duties on Chinese cold-rolled steel.
The U.S. steel industry says we are at economic war with China. With cold-rolled steel being used in automobile panels, appliances and construction, could the anti-dumping and countervailing duties lawsuits against Chinese producers actually be hurting the United States?
The steel industry directly employs 142,000 people which is part of the 12 million U.S. manufacturing jobs according to the National Association of Manufacturers (NAM). The newly elected chairman of American Iron and Steel Institute — John Ferriola, chairman, president and CEO of Nucor Corp. — said at a recent AISI CEO press briefing that steel jobs declined by 13,000 in 2015. Although steel jobs declined last year, manufacturing jobs in other subsectors have picked up the slack. According to the Bureau of Labor Statistics, a total of 13,000 manufacturing jobs were created in 2015.
Trade is a two-way street, what if China begins to tariff the goods U.S. manufacturers sell there? Source: iStock.
Steel prices have been rising in the U.S. as domestic mills are now shielded from imports China and other countries named in the trade cases. According to numerous sources, the domestic lead times have extended which is leaving some companies scrambling for metal. Read more
It would seem Iran is not the only major Middle East economy on the cusp of radical change. If the espoused wishes of deputy crown prince Mohammed bin Salman al-Saud (or MbS as the media have got into the habit of calling him) are realized, the desert kingdom is in for a period of change over the next decade that would be unprecedented in it’s recent history.
Certainly, oil has transformed the kingdom since it was first commercially extracted in 1938 but the culture of Saudi society has been carefully nurtured, protected, even shielded — one might say — from the corrupting influence of the outside world.
A group of fuel tanks in the Ras Tanura oil terminal in Saudi Arabia. If Prince Mohammad has his way, this will someday be a thing of the past in the kingdom. Source: AdobeStock/eugenesergeev.
Yet the days of a close compact between the House of Saud dynastic monarchy and the religious Wahhabi clerical establishment that, in exchange for control over education and the judiciary, has provided the rulers with legitimacy, may be seeing the beginning of its end.
The Prince’s Plan
The new King Salman’s son, Prince Mohammad, believes Saudi Arabia has been addicted to oil, an addiction that has cost it dearly in terms of economic development and progress. Trying to look into the future, he clearly feels Saudi Arabia needs to face up to the march of time before it is too late. Read more
The Steel Authority of India Ltd. and JSW Steel & Essar Steel India filed a complaint with India’s Directorate General of Anti-Dumping and Allied Duties, seeking an anti-dumping investigation as well as the imposition of tariffs on steel imports from six countries. Soon thereafter, the DGAD said it had prima facie evidence of dumping of steel originating from China, Japan, Russia, Korea, Brazil and Indonesia.
Chinese Production vs. Indian Production
China is the world’s biggest steel producer, accounting for around 822 million tons a year. Driven largely by a fast track economy in the past quarter century, China’s steel output has grown by more than 12 times it’s size in the ’80s. By comparison, the EU’s output fell by 12% while U.S. output has remained flat. Of late, China has found itself in the midst of dumping controversies involving many countries it sends exports to, including the U.S., the European Union and Australia.
Chinese steel production is the target of India’s anti-dumping probe. Source: Adobe Stock/zjk.
The Indian probe’s purpose is to establish the “existence, degree and effect of dumping” by the six nations. If found to be true, it will then recommend a minimum amount of anti-dumping duties. The probe covers hot-rolled flat products of alloy or non-alloy steel in coils, as well as hot-rolled flat products of alloy or non-alloy steel not in coils. Most of these products are used in the the automotive, oil and gas line pipes/exploration, cold-rolling, pipe and tube manufacturing industries.
Trade between China and India has been growing but individually, the two are polar opposites so far as global exports are concerned. India’s exports account for just 1.7% of world trade, compared with nearly 12% for China’s. China exported 112 million metric tons of steel in 2015, which was 25% more than India’s total production of steel. India produced 92 mmt of steel in its 2014-15 fiscal year, while it imported over 9.32 mmt of steel, of which, an estimated 30% came from China.
Meanwhile, on the other side of the globe in Belgium, international steel producing countries, too, called for urgent action to curb overproduction.
A joint statement from the U.S., Canada, the E.U., Japan, Mexico, South Korea, Switzerland and Turkey, called calls for “ongoing international dialogue” to remove “market-distorting policies.”
But China rejected suggestions that it subsidized its loss-making steel companies.
India has often used anti-dumping duties and also imposed safeguard duties due to such import surges.
A few days ago, the Indian government extended the safeguard duty on steel imports until March 2018, after having first imposed them in September 2015. There will be no safeguard duties on steel imported at or above the minimum import price (MIP) stipulated by the government.
Anti-Dumping or Countervailing Duties?
Both, anti-dumping and countervailing duties try to rectify the same issue: low-priced imports. But the difference between the two is the real cause of the low price.
Anti-dumping duties are used to tackle “dumping,” a legal definition for imports whose price is lower than their production cost. An exporter sets steel prices lower than production costs and floods other markets with such steel products. If a Chinese producer spends $120 per mt to make cold-rolled steel, and then sells it in the Indian market for $90 mt, while his Indian counterparts are selling their produce for $110, then these imports are based on a predatory pricing model that is either indirectly subsidized in the originating country, or takes advantage of a lower-valued currency and production costs back home.
On the other hand, countervailing duties seek to counter low prices that are an outcome of direct subsidies. The Chinese government, like some others, offers subsidies on exports in the form of tax breaks. As a result, exporters can offer lower prices than domestic producers. Countervailing duties level the playing field by negating the advantage of direct government sponsorship by increasing import tariffs to level the playing field.
Such duties are allowed by the World Trade Organization under the General Agreement on Trade and Tariffs (GATT) but only if dumping is established. Anti-dumping duties have to be removed if the margin between the domestic price and imported price goes below 2%, or when the imports of product from a country account for less than 3% of total imports of the product.
Also, the WTO says safeguard and anti-dumping duties cannot be country specific. So, if India or the U.S. imposes duties on imports from China, the latter can also impose duties on imports from those two nations.
This is what China is now pointing out to India. A few days ago, the world’s top steel maker asked India not to resort to “trade protection measures” and to “strictly follow” WTO rules while investigating cases of dumping by Chinese iron and steel exporters. Steel overcapacity is a worldwide problem which requires a joint effort from all countries, an unnamed Chinese official was quoted as saying by the official Xinhua news agency.
The Steel Index (TSI) put this down to stronger demand from Turkish mills and a squeeze on supplies. Low steel prices have resulted in low scrap prices, particularly in major exporter the U.S. The resulting lack of supply has created a tighter market. At least for awhile.
Source: The Steel Index.
In Asia, prices have picked up in, particularly in Taiwan where imports of HMS #1&2 80:20 increased $23 a metric ton to $247 per mt at Taiwanese ports last week.
India Not Buying Increases
In India, TSI’s containerized shredded index for Indian imports rose $25/mt to finish the week at $263/mt at the CFR Nhava Sheva port. Indian buyers, though, have not committed to the market in a big way, drawing on domestic stocks in part because they do not see the price increases as sustainable.
U.S. prices, though, have been more lackluster showing just a small $2/mt uptick according to the TSI, more a reflection of increased west coast exports and lack of steel scrap arisings than any strength in the market.
Iron Ore Competition
Low iron ore prices, though, have largely replaced scrap demand in China, decimating imports of ferrous scrap.
Source: The Wall Street Journal.
Scrap inventory has built up at scrap yards in the U.S. and Europe as processors have faced weak markets. There appears little shortage of unprocessed metal, given that this could come through the system if demand and or prices picked up any significant strength in the market could ease in Q2.
The steady decline in volumes is forcing consolidation in the U.S. market and some have voiced concerns about the future of domestic recycling. With electric arc furnaces steelmaking such a dominant production route in the U.S., the supply market will, in part, be supported by vertical integration from steelmakers but recycling is a fragmented business and further mergers, rationalization and consolidation is probably inevitable as export prospects remain subdued, not just for months, but probably the next few years. Scrap prices have moved sharply in the US and remain highly correlated to HRC prices which are also now on the rise. Whether this will spur further scrap metal to come on to the market remains to be seen, in theory there is pent up supply waiting for better pricing to attract its collection and processing, some smaller scrap dealers have gone out of business but the industry has plenty of capacity to produce more, it just needs the trend of firming prices to continue, for many it can’t come soon enough.
The U.S. International Trade Commission made a unanimous preliminary determination on March 25 that unfairly-traded imports of stainless steel sheet and strip are causing injury to U.S. stainless producers. The petitioners were AK Steel, ATI’s Flat Rolled Products Division, North American Stainless and Outokumpu Coil Americas.
The ruling was no surprise as the cold-rolled stainless steel anti-dumping and countervailing duties petition is one of many petitions being filed against Chinese products in recent months. What is surprising is that cut sheet has been included in the petition. The last cold-rolled stainless anti-dumping action filed in 1998 included only products in coil form.
The petitioners need to supply at least 25% of the U.S. market to claim injury. Only NAS and Outokumpu have cut-to-length lines, so it is impossible for the mills to have significant market share in cut sheets. Service centers process the lion’s share of cut sheets for the U.S. market. Unless the service centers are willing to be a party to the petition, I think cut sheets should be removed from it.
Non-coil stainless is included in a new anti-dumping petition. Source Adobe Stock/Jovanning.
Since the cold-rolled stainless petition was filed earlier this year, Chinese mills have been canceling open orders with U.S. customers. No new offers are being made to the U.S. market. Domestic lead times for cold-rolled stainless steel are now well beyond eight weeks, with some products at over 12 weeks. Steel mills are in “controlled order entry” mode for Q2 in order to ensure volume for their key customers. Read more
Using Chicago as an example, the change in freight equalization rates means that service centers and large end users will be paying for the freight for 72-inch wide on Outokumpu Coil Americas‘ Calvert, Ala., mill’s almost 900 miles compared to around 300 miles from Ghent, Ky., where North American Stainless is located. For the metal buyer, the only other options for 72-inch-wide continuous mill plate and cold-rolled stainless are TISCO, Aperam and Outokumpu’s European facilities.
TISCO will not be a factor in cold-rolled 72-inch-wide due to the anti-dumping and countervailing duty actions that the U.S. mills filed earlier this year. Unless you buy for facilities on the East Coast near a port, this new freight policy should remain intact. On another note, Outokumpu should consider its premium on 72-inch-wide. I wrote in a previous posting that the U.S. domestic market for 72-inch-wide wide could grow if the premium over 60-inch-wide was dropped. Perhaps Outokumpu should consider optimizing its 72-inch cold-rolling mill by increasing the production of 72-inch-wide.
Bright-annealed, 48-inch-wide products now are equalized based on an 1,800 mile trip from San Luis Potosi as opposed to the 400 miles of Allegheny Technologies’ Louisville, Ohio, facility where ATI produces its bright-annealed. Read more
The U.S. trade deficit widened more than expected in January while architecture billings were slightly up in February.
Trade Deficit Widens
The U.S. trade deficit widened more than expected in January as a strong dollar and weak global demand helped to push exports to a more than five-and-a-half-year low, suggesting trade will continue to weigh on economic growth in the first quarter.
The Commerce Department said on Friday the trade gap increased 2.2% to $45.7 billion. December’s trade deficit was revised up to $44.7 billion from the previously reported $43.4 billion. Exports have declined for four straight months.
Economists polled by Reuters had forecast the trade deficit widening to $44.0 billion in January. When adjusted for inflation, the deficit increased to $61.97 billion from $60.09 billion in December.
ABI Up in February
The Architecture Billings Index saw a dip into negative terrain for the first time in five months in January, but inched back up in February with a small increase in demand for design services.
As an economic indicator of construction activity, the ABI reflects an approximate nine-to-12 month lead time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the February ABI score was 50.3, up slightly from the mark of 49.6 in the previous month. This score reflects a minor increase in design services (any score above 50 indicates an increase in billings). The new projects inquiry index was 59.5, up from a reading of 55.3 the previous month.
The U.S. Senate today, by a vote of 75-20, passed the conference report for the Trade Facilitation and Trade Enforcement Act of 2015, known commonly as the customs bill. The measure includes the ENFORCE Act, which is critical to several metals producing industries — as well as others — to ensure that anti-dumping and countervailing duty orders against unfairly traded imports are being fully and vigorously enforced at the border.
“By approving the customs bill today a majority of U.S. Senators voted to ensure strong enforcement of our trade remedy laws,” said Thomas J. Gibson, president and CEO of the American Iron and Steel Institute (AISI). “This is an important piece of legislation that gives U.S. manufacturing industries and their workers new tools to fight back against unfair trade. Steel imports are decimating the American steel industry and it is imperative that we have the strongest tools and resources to fight back.”
The bill is expected to be signed by President Obama who has previously said he supports it.
The measure includes an overhaul of the U.S. Customs and Border Protection agency, as well as new protections for intellectual property and more tools for the government to crack down on currency manipulation.
Jay Timmons, the president of the National Association of Manufacturers, said, separately, ahead of Thursday’s vote that “if senators want to grow manufacturing in the U.S., then they should pass this bill immediately.”
Rosneft‘s CEO has floated a plan for a global, coordinated oil production cut and a vote is scheduled today in the U.S. Senate on a customs bill to better enforce U.S. trade laws.
Rosneft Supports Oil Output Cut
The head of Russian state-run oil company Rosneft on Wednesday floated the idea of a coordinated output cut by major oil-producing countries to prop up sagging prices but fell short of saying whether Moscow would contribute to such a plan.
Rosneft Chief Executive Igor Sechin, a close ally of President Vladimir Putin, told the IP Week conference in London that the global oil glut was predominantly the fault of the Organization of the Petroleum Exporting Countries (OPEC).
Senate To Vote on Customs Bill Today
The long-delayed customs bill is headed to the full U.S. Senate for approval today. If the Senate approves the conference report of the Trade Facilitation and Trade Enforcement Act (ENFORCE Act, H.R. 644), it will move on to the White House for the President’s signature.