Exports

We recently received a note from a reader with questions regarding the recent Chinese remninbi currency devaluation and how sourcing professionals ought to engage with their Chinese metals suppliers. The questions included:

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  1. Should I be approaching all of my Chinese suppliers for a 3.5% price reduction?
  2. Should I expect to get it?

There are several ways to answer that question. So let’s start with the narrow answer and then expand into other aspects of China’s currency announcements.

US dollar vs. RMB

What will the devalued yuan mean for your metal buying strategy?

The Basics

First, if you pay your Chinese metal suppliers in RMB (yuan) then you ought to expect an automatic price reduction of 3.5% because the currency has depreciated. In other words, when you convert your dollars to RMB, you should see a 3.5% advantage (or whatever the newest/latest currency exchange rate is).

But let’s assume that you buy your Chinese goods in US dollars, as most US buying organizations do. The next question you may need to ask is as follows: Did your Chinese suppliers extract a price increase from you in the last 12 months due to an appreciating currency (as opposed to any other reason)? If yes, then certainly it seems appropriate to request a price adjustment now.

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This post has been excerpted from our sister site, Spendmatters. For more on what the devaluation means to your buying organization visit SpendMatters.

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As China goes, so too does the rest of the world, and that has been none more painfully clear than with the plummet of aluminum prices. China export volumes continue to be a main driver for this industrial metal’s decline. You can learn all about it, in addition to how other industrial metals are faring, […]

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Domestic steel producers have filed new anti-dumping petitions against eight countries, charging them with unfairly subsidizing steel exports into the US. Also, the Senate Energy Committee has advanced a bill that would lift the 40-year US oil export ban but it faces a tough road with the full Senate.

Domestic Producers File New Steel Anti-Dumping Cases

AK Steel Corp., ArcelorMittal USA LLC, Nucor Corp., Steel Dynamics, Inc., and U.S. Steel Corp. – filed petitions recently with the Department of Commerce and the US International Trade Commission charging that unfairly-traded imports of cold-rolled steel flat products from Brazil, China, India, Japan, South Korea, Netherlands, Russia and the United Kingdom are causing material injury to the domestic industry.

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The petitions allege that producers in each of the eight countries are dumping cold-rolled steel in the US market at substantial margins, all above 42% government subsidy.

Bill to Lift US Oil Export Ban Advances

The US Senate Energy Committee on Thursday narrowly passed a bill to lift a 40-year-old ban on the export of crude oil, but the measure faces an uphill battle in getting passed by the full Senate, Reuters reported. The bill would allow the US to export oil and boost state revenue-sharing for offshore oil and gas drilling. It passed along party lines by a vote of 12-10.

Three Best Practices for Buying Commodities

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This is part two of an analysis of how China’s recent stock market crash affects neighboring India.

The Indian arm of global credit rating agency Fitch said with soft demand in China, base metal prices had gone down in the range of 2-21% in the first six months of 2015.

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On a year-to-date basis, Chinese domestic hot-rolled coil steel prices declined by 21%. London Metal Exchange nickel prices are down by about 12%, LME copper prices by 9% and China alumina prices by about 10%. In the last one month, iron ore prices dropped by 20%, Shanghai steel prices by 16.4%, and zinc prices by 7%.

What’s This Mean for Steel?

In reference to India’s steel sector, rating agency Ind-Ra pointed out that Indian manufacturers were already struggling with low capacity utilization, and lukewarm domestic demand was unlikely to benefit the margins of manufacturing units in the short term.

So was there any silver lining at all for India where the Chinese downturn is concerned? Depends who you listen to or talk to. Here’s what a report in the Business Standard claimed — the economic downturn would be good for smart cities. The rationale — copper is trading at a 6-year-low and China is the world’s top copper consumer, accounting for 40% of global consumption.

How About Aluminum?

Similarly, aluminum is trading at new lows and was already trading at prices below cost of production of many Chinese companies. For India, as a consumer, this is good news as the cost of constructing new infrastructure, especially smart cities, would reduce.

And that extends to a lower price for a technology innovation dear to almost everyone in the world, according to the report. Mobile phones will be cheaper, it predicted. If the Chinese really devalued their currency, world markets will be flooded with Chinese goods at low prices affecting exports of other countries, including India.

As for the rest, such as automobile manufacturers, it could possibly get only worse in the coming days.

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The author, Sohrab Darabshaw, contributes an Indian perspective on industrial metals markets to MetalMiner.

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The US House voted last Wednesday to approve a short-term, $8 Billion extension of federal transportation funding, which will last until December.

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House Ways and Means Committee Chairman Paul Ryan (R-Wis.) has called on the Senate to pass the House’s $8 billion transportation funding patch “without any unrelated measures.”

Exports, Imports are Not Infrastructure

Ryan said after the temporary patch was approved on a 312-119 vote in the House, that the Senate should follow suit and send the lower chamber back a clean highway funding extension with no “unrelated measures.” Ryan was referring to a Senate plan to include an extension of the US Export-Import Bank’s charter in the upper chamber’s version of a new highway bill.

Ex_Im_bank_550

The US Export-Import Bank is closed for business and House republicans don’t want a new charter for it attached to a Highway bill.

The Ex-Im Bank’s charter was recently allowed to expire and House republicans have soured on the credit institution for US exporters. Many conservative groups view the bank as an outdated federal bureaucracy ready to be thrown on the scrap heap of government innovation and streamlining, believing that private banks can provide loans for exporters as they can for any other financial transactions. The Ex-Im Bank’s supporters claim it’s a vital institution needed to support US export competitiveness.

Clean Bill Requested

Either way, Ryan is sending a clear message that the House views infrastructure as an issue that should not be dependent on passage of a new Ex-Im Bank charter or other issues. Unlike the six-year, $275-billion Senate plan, Ryan’s December extension of the Highway Trust Fund is entirely paid for. The House Bill relies on $3 billion in savings from Transportation Security Administration fees (the ones you pay when you buy an airline ticket) and $5 billion in tax compliance measures to fund road projects through Dec. 18.

The Senate has yet to detail how it would pay for the $275 billion, six-year plan. Congress has been fighting over how to fund highway projects since 2005. The 18.4 cents-per-gallon federal gas tax is the main source of funding for the Highway Trust Fund, which will run out of money by the end of the month without another extension, but the tax has not been increased since 1993 and more fuel-efficient cars have eroded its power as a tax. The federal government typically spends about $50 billion per year on transportation projects, but the gas tax only brings in approximately $34 billion annually.

How to Fund Highway Projects?

Most House republicans oppose a gas tax increase and argue that the current economy is still hurting American consumers and any increase would further discourage travel and purchases, even with relatively low prices at the pump. Many republican senators agree, but influential democrats such as House Minority Leader Nancy Pelosi (D.-Calif.) have gone on the record saying that we should hike the federal gas tax.

With Ryan’s stand, though, it would seem that the House leadership will not even begin discussing a tax increase, or another funding mechanism for a long-term highway bill, unless it is in a standalone bill and will not allow other issues, such as the Ex-Im Bank, to be a part of those negotiations. The highway funding ball is now in the Senate’s court.

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Old Chinese proverb: when a giant in a race with another falters, the other, without a doubt, wins.

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Actually, I made that up. Ignore it. Still, when China’s economy started showing signs of a meltdown, some in India “predicted,” in a knee jerk reaction, that it was a “welcome development” for neighbor India.

No need to reiterate here how the two nations, with the largest populations and the largest economic growth rates, were in competition with each other in almost every sector.

A few days later, after the fog cleared, warning bells were rung by analysts and ratings agencies that if China was to lose the race, it would be tough for India, too. Even a tiny spill, such as the one China’s stock market felt last week, was bad enough. There would really be no winners in the race.

China’s economic troubles could have a significant impact on India, particularly in sectors like IT and steel, according to India’s trade and industry body, The Associated Chambers of Commerce and Industry of India (Assocham).

The adverse economic developments may have a directionally negative impact on the Indian metals industry as well as on sectors with an export focus, claimed another agency, India Ratings and Research (Ind-Ra) in a statement.

News reports, quoting metal analysts, claimed that while it was true that a drop in commodity prices linked to China’s slow demand was a positive for India, it was not really “good news” for a host of metal and iron ore producers such as Steel Authority of India, Tata Steel, and upstream oil producers.

The fall in ore, steel and copper prices hit Indian manufacturers as hard as any other company in the world, so what’s there to cheer about?

A paper prepared by Assocham said that in today’s global economy, where India’s economy — like any other — is plugged into the rest of the world’s, the China downturn was bound to impact India. China, incidentally, was the number one merchandise trader in the world with over $4.16 trillion worth of trade, followed by the US with $3.9 trillion, as claimed by Assocham.

But the more pertinent point made by Assocham was that the kind of cost competitiveness which the Chinese companies provided to manufacturing semi-process industries — such as electronics, electrical and telecom equipment — would disappear from the global supply chain. This is without even mentioning the inability of India to fill any of those spaces vacated by the Chinese companies.

Another news report quoted Hitesh M. Avachat, Deputy Manager at CARE Ratings, as saying that China accounted for more than 30% of the overall consumption of metals globally. For Indian metal producers, the price collapse meant their landed price in India would go down further, thereby pressuring companies to reduce prices. Because of the likely Chinese dump of its surplus goods, India’s export demand may also fall, he added.

Jayant Acharya, Director, Commercial and Marketing, JSW Steel Ltd., quoted in the same report, said if prices kept falling, margins would get impacted.

The Indian arm of global credit rating agency Fitch said with soft demand in China, base metals prices had gone down in the range of 2-21% in the first six months of 2015. On a year-to-date basis, Chinese domestic hot-rolled coiled steel prices had declined by 21%, London Metal Exchange nickel prices by about 12%, LME copper metal prices by 9% and China alumina prices by about 10%. In the last month, alone, iron ore prices dropped by 20%, Shanghai steel prices by 16.4%, and zinc prices by 7%.

Free Download: Latest Metal Price Trends in the July MMI Report

The author, Sohrab Darabshaw, contributes an Indian perspective on industrial metals markets to MetalMiner.

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Gold miners saw their stock values plummet with the price of the yellow metal on Monday. BHP Billiton is investing $240 million in its Western Australia iron ore tug boat and port business.

Gold Sell-Off Hits Miners Hard

The steep sell-off in shares of gold miners, tracking a plunge in the metal’s price, wiped out more than $8 billion from their combined market value on Monday and pushed a global index of gold stocks to a six-and-a-half-year-year low.

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The Thomson Reuters Global Gold index slumped 8.5% to its lowest since late 2008, the biggest one-day percentage drop in two years, after gold prices sank.

BHP Investing in Infrastructure

BHP Billiton said today it will spend $240 million upgrading its marine iron ore facilities in Western Australia. The funds will be used to purchase six tug boats and build a new tug harbor in Port Hedland’s inner harbor, with construction due to be completed in September 2016.

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This week saw the bears continue to run roughshod over our monthly MetalMiner Indx as the July MMI was almost universally down.

bearwave

“Hey guys, remember me? I’ll just be over here in your metals markets.”

How bearish was it? I saw Yogi and Boo-Boo stealing picnic baskets from our raw steels index, that’s how bearish!

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Yet, even as steel, nickel and copper hit multi-year lows, we did see some proof that at least some of our metals may have hit rock bottom this week.

Banks Buying Aluminum Again

In the wacky world of aluminum warehousing, Japanese stocks of the light metal finally started falling again in June. That’s the first time in a year. The cause is big banks in the stock and finance trade purchasing and warehousing the metal as it’s now inexpensive enough for bankers to bet on it as an investment again.

No one in that business invests in aluminum without expecting the price to go up and prices are low enough, now, to make it worth the banks’ while. Umm, yay?

Pile of aluminium bricks waiting for transport to the factory

“See ya later, Japan!”

Chinese Steel in the Crosshairs

A week after the US steel industry won unprecedented protections from foreign, particularly Chinese, steel, things got worse for the Chinese steel industry.

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The sell-off in the Chinese stock market is hurting base prices and demand in the world’s largest construction market is not recovering. Exports seem to be the only place Chinese overproduction can go.

Can prices go lower? Always, but these are certainly good signs for the battered aluminum and steel markets.

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First it was cheap steel imports from China that bothered India’s steel companies, now just-as-cheap imports from Japan and South Korea, two nations with whom India has a Free Trade Agreement (FTA), are causing the same type of consternation.

This September: SMU Steel Summit 2015

Earlier this month, as reported by MetalMiner, the Indian government imposed five-year anti-dumping duties ranging between $180 and $316 per metric ton for some industrial-grades of stainless steel imported from China, Malaysia and South Korea. The duty was obviously an attempt to try to halt surging steel imports.

Structural_Steel_Frame_550

Structural steel from India could soon get more expensive in the US thanks to anti-dumping duties.

The Heavy Industries Minister in the Indian government has said there could be moves afoot to further raise tariffs on imported steel. The Minister said he would be taking the matter up with the Finance Ministry soon.

Meanwhile, Back in the USA…

While India grapples with its own skewed steel supply and demand issues, back in the US, some Indian steel companies find themselves on the receiving end of upcoming tariffs. A few weeks ago, the Commerce Dept. initiated investigations to determine whether to impose anti-dumping (AD) and countervailing duties (CVD) on import of corrosion-resistant steel products from India, China, Italy, Korea and Taiwan.

Not many players in India’s steel segment want to comment on the US development, blaming the economic slowdown almost everywhere around the world for the low prices.

Free Trade Agreements Making it Easier to Dump Steel?

But when to comes to protecting their own market, local steel firms are almost united in the belief that even if the Indian government was to increase import tariffs, it would not stop countries such as Japan and South Korea who have FTAs with India.

One of these players willing to go on record was Sajjan Jindal, Chairman of JSW Steel Ltd., who felt that both Japan and South Korea paid almost no duty when they sold steel in India.

He told news agency Reuters that almost 50% of steel coming into India was from the FTA countries and that almost all steel players felt the government would not really step up to the plate to impose additional import duties after it did so in June.

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The US Steel industry has long said that a wave of cheap and illegally subsidized imports is crushing its ability to compete.

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While not turning a blind eye to the situation, Washington has not been as responsive to the situation as many in the domestic steel industry would like. The lobbying efforts of domestic steel have largely fallen on deaf ears when it comes to enforcing existing trade laws and placing tariffs that would be punitive enough to stop foreign nations such as China from overproducing.

Yet, today, a key bill supporting tougher anti-dumping enforcement has passed the House, has a path to passing the Senate and even more customs protections could be passed as early as next week. All from a Congress known more for not passing legislation than passing it. How did this happen? First, let’s see how we got here.

WTO Claims Chinese Imports Aren’t Subsidized

Some relatively modest tariffs were revoked a year ago when the World Trade Organization said the US broke the rules for imposing duties on Chinese steel products, solar panels and other goods.

The WTO’s judges said that under the 1964 Marrakesh accords (which also set up the WTO) countervailing duties can only be levied when there is clear evidence that state-owned or partially state-owned enterprises passing on the subsidies are “public bodies.”

The panel found that Washington had produced insufficient evidence to prove subsidization, and was also at fault in its calculations of the value of the subsidies to Chinese firms. This was a very novel reading for the WTO as there is…

Actual Proof That Chinese Steel is Subsidized

Last year, and now, evidence exists that Chinese steel is subsidized on the state and national level and exports are sold below cost.

This history of ignoring evidence is why we didn’t expect big things for steel this week. Maybe more ambiguous language about actually enforcing existing law as a sweetener in the Trade Promotion Authority bill that both the president the republican congress support, but nothing more.

How, then, did steel become the big winner?

TPA Goes Down in Flames

When democrats in the House refused to approve TPA it looked like the bill, that would ensure an up or down vote for future trade agreements such as the Trans-Pacific Partnership, wouldn’t move forward.

When TPA was separated from a worker aid package for those displaced by future trade deals known as Trade Adjustment Assistance, we still didn’t think it would result in help for domestic steel, yet competing interests that put free-trade Republicans and the Obama administration on one side and more liberal democrats on the other worked in the industry’s favor.

Long Live TPA

TPA, once separated from TAA, passed the House and then the Senate. It still looked like more trade deals and no help for steel or US manufacturing. But with TAA still stuck in the House, guess what the perfect sweetener to get democrats on board become? Support for the US steel industry. The Congressional Steel Caucus is a bipartisan group that spans several key states. Senators and congressmen and women from the midwest, south and southwest coalesced around their support for local steel.

TAA Passes With Stronger Steel Support

Not only did the House leadership promise new safeguards for the steel industry as part of the revamped TAA bill that passed yesterday, but a customs enforcement bill that would force US Customs and Border Protection to enforce anti-dumping laws as written also passed both houses earlier in the week. It awaits a conference committee negotiation, one that the American Iron and Steel Institute favors the Senate version of the bill in. Everything’s suddenly coming up steel.

TPA passed both houses by midweek and TAA passed the Senate and, after being sweetened with support for the steel industry, the House yesterday. Even more customs enforcement protections are still waiting in the conference committee.

“We commend the House for passing legislation today that will improve the effectiveness of our anti-dumping and countervailing duty laws to combat unfairly traded imports,” said Thomas Gibson, president and CEO of the AISI. “These modifications to the trade laws come at a critical time for the steel industry, as we are currently faced with a surge in steel imports that are causing injury to the domestic industry, including significant reductions in domestic steel production and job losses. We look forward to President Obama quickly signing this bill into law.”

It’s about time.

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