Ferrous Metals

Aluminum Drivers:

July 2015 Monthly Metal Buying Outlook copy

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1. Dollar to Euro exchange rate

2. Primary aluminum production

3. China export volumes

4. MidWest (MW) Premiums

5. Capacity utilization

6. Oil prices

7. European & Japanese premiums

8. China GDP & PMI data

Market Commentary

Aluminum continued to fall throughout June closing at $1,686/mt, a 3+% decline from our previous monthly report and just above key support levels. The back-story remains exactly the same as one month ago in terms of global oversupply, falling MW premiums and the potential return of the stock and finance trade. What has changed are some of the details within each of these drivers. None have fundamentally changed the monthly outlook.

It’s All in the Output

World production of primary aluminum has grown 12% from one year ago. This is the fastest growth rate since 2011. The notion that China will curb production remains a pipedream. In fact, global producer UC Rusal pointed to rising Chinese aluminum exports as evidence of no checks on Chinese aluminum production. Combine that with a new “Make in India” campaign and we see a similar situation developing there – more capacity. The bottom line: aluminum prices may need to fall further and it will be the non-Chinese producers that take out capacity.

Watch the MW Premiums

Last month this report indicated the conditions appear “ripe” for the stock and finance trade – a strong forward curve combined with low interest rates may be all that is needed to soak up excess inventory and re-start the warehouse trade. MetalMiner analysis of LME data, however, suggests that total tonnages stored in Detroit warehouses are indeed declining meaning we don’t yet see any evidence of the return of the stock and finance trade. Nevertheless, aluminum buying organizations will want to pay close attention to this development.

In the meantime, semi-finished aluminum prices are under pressure. Physical delivery premiums have come down nearly to their historic levels of $100-125/ton and mills are short of work so the conversion premium is under considerable pressure. In Europe, a weak Euro is helping mills export but there is limited demand placing downward pressure on prices.

The Outlook

Metal prices are falling across the board, and some of them have already fallen below key support levels. Based on current market conditions, it’s likely that aluminum prices will keep trending lower. Therefore, making long-term commitments is not a good idea until we see real signs of strength. We do, however, leave open the possibility of rising premiums as an indicator of the resumption of the stock and finance trade.

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This aluminum price forecast was excerpted from our brand new Monthly Metal Buying Outlook report. For a short- and long-term buying strategy with specific price thresholds, consult the July 2015 report!

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Through half of 2015, US auto sales are on track to hit record levels not seen in 15 years. After climbing more than 4% through July annual sales could approach the previous annual record of 17.4 million if they stay on this pace.

Yet, none of that demand seems to be helping automotive metal prices.

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As robust as the US automotive market is, it can't entirely make up for sluggish sales elsewhere that are depressing demand for metals such as steel, aluminum and copper and pushing our index further down. Even the exhaust system metals, platinum and palladium, saw a deep dive this month.

Chinese New Car Sales Barely Growing

New car sales grew just 1.2% in China this May. Further complicating matters, is the fact that the nation of 1.37 billion is starting to develop a used car market and it's looking very much like Chinese consumers like paying less for a used car, rather than paying more for a new one. What a shock?

This is, of course, bad news for raw materials suppliers as the massive Chinese auto market only recently transitioned to automobiles being the main form of transportation. Less-metals intensive bicycles and motorbikes had filled that role until recently.

Chinese steel and aluminum manufacturers had been counting on more robust growth from the domestic new car market and a strong used market could stunt the advances many were planning to reap from new car sales.

Bearish Market Hits Home

The monthly Automotive MMI® registered a value of 82 in July, a decrease of 3.5% from 85 in June.

Automotive_Chart_July-2015_FNL

As we have documented liberally, the strong US dollar has created a bearish environment for all metals and automotive inputs are no exception. The steep fall observed this month in palladium, a metal that had previously held our automotive index up, was an example of just how much the bearish market is affecting even metals with strong demand. Palladium hit a two-year low this month and the bottom, subsequently, fell out of an already listing price index.

Copper, zinc and lead also fell significantly.

What This Means for Automotive Metal Buyers

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The drama surrounding Greece's debt is compounding the bear market and, while it hasn't yet caused strong currencies such as the dollar to see significant gains, its potential to do so threatens all commodities.
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The statistics on steel imports to India speak for themselves.

Steel imports went up 72% in the last fiscal year to 9.3 million metric tons, of which South Korea and Japan together sent 3.5 mmt. They’re still going up. In the first two months of this fiscal year, the situation got worse, with shipments from Japan at 111% and from South Korea 51%.

This September: SMU Steel Summit 2015

Fitch Ratings, for example, in a recent report, said it, too, did not expect the Indian government’s recent tariffs on the two free trade agreement partners to increase customs duties on steel imports would alleviate the pressure on Indian steel producers. The higher customs duties will likely result in only a marginal increase in the landed costs of imported steel products.

Coiledsteel_585

What Indian steel companies are hoping is that, just like in the US, the Indian government starts thinking of imposing anti-dumping and safeguard measures. Contrary to their expectations, the government is said to be actively toying with the idea of signing a free trade agreement with the Philippines. It also extended a previous deal to supply high-grade ore to Japan and Korea.

Steel in Free Trade Agreements

Steel is one of the many commodities that make up an FTA. At the time of signing its FTAs with Japan and Korea, the global steel scenario was very different compared to the one seen today. It was flourishing and market demand for quality steel was high, both in India and abroad. Now, in 2015 though, the situation is downright bleak.

India represents a growing market, which will require copious amounts of steel for infrastructure and other sectors. So nations such as China, Japan and Korea are dumping inferior steel into the Indian market. The foreign steel is being bought and specified because of its attractive price range.

Many here feel that the FTAs that India signed with Japan and Korea are flawed. Under these agreements, duties paid on imported finished steel products from these countries were given a waiver of 5%. Import duties on goods imported from these two countries was 2.5% compared to the usual duty of 7.5%.

Then Vs. Now

While such FTAs may have worked before, experts are of the opinion that India’s deals with South Korea and Japan weighed heavily in the latter’s favor. The Indian steel ministry already highlighted these concerns to the government, which eventually came around to the view that steel should now be removed from the FTA list. Unfortunately that’s not going to happen any time soon.

Some steel leaders here have pointed to the recent passage of the Leveling the Playing Field Act. This legislation, they said, was designed to give American companies new ways to fight unfair trade practices. That’s the way the Indian government needs to go if it is to protect its own steel industry.

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

 

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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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Our construction metals index fell slightly this month despite strong US housing demand and generally good employment numbers.

The monthly Construction MMI® registered a value of 74 in July, a decrease of 1.3% from 75 in June.

Construction_Chart_July_2015_FNL

The drop was mainly driven by hefty price hits to Chinese rebar and H-beam steel – yet the dip was spared from going lower by a more than 10% spike in the US shredded scrap price.

The construction sector neither lost nor gained jobs in June, according to the Bureau of Labor Statistics, and the Commerce Department said permits to build new homes surged 12% in April to an annual rate of 1.275 million, the highest since August 2007. Permits for apartment construction were the breakout leader, while permits for single-family homes, a much broader segment, still rose modestly.

Homebuilders Bullish

Confidence among US homebuilders, as measured by the National Association of Home Builders’ index, rose to its highest level in 9 months in June, so all signs point to a strong building season domestically.

Meanwhile, the developing world isn't exactly holding its part of the construction spending deal up. A recent World Bank report detailed how China's state-run banking sector is creating debt while not delivering on the construction stimulus promises Beijing has made. With Brazil still mired in recession and Russian construction limited to heavy pipeline work, the BRICS countries are not developing at the rates they earlier envisioned.

Oil & Gas Demand Up

Demand for oil and gas products such as steel tubes has rebounded domestically as the US passed Russia this month as the world's top natural gas producer. Baker Hughes reported that the rig count for US oil producers increased for the first time this year, despite massive output by Saudi Arabia and other OPEC countries trying to undercut US producers' prices. It was the first weekly increase in 30 weeks.

Actual Construction Material Prices

Construction purchasing remains on the cusp of what could be a breakout, but both lending and a shortage of skilled labor remain major concerns.

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The price of Chinese rebar fell 7.4% to $341.39 per metric ton. At $368.77 per metric ton, Chinese H-beam steel was down 6.9% for the month. Weekly US Midwest bar fuel surcharge prices fell 4.6% to $0.30 per mile after rising the previous month. After rising the previous month, weekly US Gulf Coast bar fuel surcharge prices dropped 4.3% to $0.30 per mile. A 3.8% drop over the past month left Chinese aluminum bar at $2,134 per metric ton. Weekly US Rocky Mountain bar fuel surcharge prices fell 3.6% to $0.31 per mile after rising the previous month. After rising the previous month, European 1050 aluminum prices dropped 0.4% to $2,907 per metric ton.

The price of US shredded scrap rose 10.2% over the past month to $280.00 per short ton.

Last month was consistent for the Chinese low price of 62% Australian iron ore fines, which did not move from $77.30 per dry metric ton.

This September: SMU Steel Summit 2015

The Construction MMI® collects and weights 9 metal price points used within the construction industry to provide a unique view into construction industry price trends over a 30-day period. For more information on the Construction MMI®, how it's calculated or how your company can use the index, please drop us a note at: info (at) agmetalminer (dot) com.

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Metals, especially copper, experienced plummeting prices Monday as the world reacted to Greece’s no vote on whether or not to accept more austerity measures from the European Union. The Organization for Economic Cooperation and Development (OECD) also came no closer to phasing out coal subsidies for member nations.

Greek Debt Crisis Hurts Metals, Other Commodities

Most commodity prices suffered on Monday after Greece rejected terms for a bailout and top consumer China unleashed emergency measures over the weekend to prevent a full-blown stock market crash.

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“The thing to watch is the Euro/Dollar exchange rate. If the dollar starts going up as a result of what happened, that would exacerbate an already bearish commodities and metals markets,” said MetalMiner Executive Editor and Co-Founder Lisa Reisman.

Brent crude fell below $60 per barrel on Monday, to levels last seen in April. Chinese steel prices are now at their lowest since the peak of the global financial crisis in 2009, with futures down 70% to around 2,000 CNY per metric ton.

“A lot of bad news out of China will be very bearish as well and we don’t yet know how much of that crisis has been factored into the current market,” Reisman added.

Three-month copper on the London Metal Exchange hit its weakest since mid-March at $5,640 a mt, down by 2%.

“The longer term question of Greece is also one that goes unanswered – what is the long term health of the European Union? That could have a long term impact but not a short term one,” Resisman said.

OECD No Closer to Ending Coal Subsidies

A decision on phasing out a form of coal subsidy is unlikely to come soon but discussions among members of the Organization for Economic Cooperation and Development continue ahead of UN climate talks, the OECD’s secretary-general said on Friday.The OECD has been trying for a year to get an agreement from its 34 member nations on ending export credits for technology used to produce coal, the most polluting of the fossil fuels.

This September: SMU Steel Summit 2015

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Screen Shot 2015-07-01 at 11.56.49 AMIt’s been a wild ride, but after three months of adding, subtracting, nip/tucking and perfecting, we are finally at the July metal buying outlook – the third and final complimentary MetalMiner™ Monthly Metal Buying Outlook – the only July metal price forecast and market commentary you will ever need.

Lisa Reisman, CEO, Azul Partners and executive editor, MetalMiner, is back with her tool kit and expert insight into the industrial metals aluminum, copper, nickel, lead, zinc, tin and steel (HRC, CRC, HDG, Plate) so you can formulate your short- and long-term buying strategy.

While this is the last complimentary Monthly Metal Buying Outlook, we are excited to announce the launch of the commercial product on Aug. 1.

Beginning in August, we will offer the Monthly Metal Buying Outlook for $899/year. That’s less than $75/month for 12 reports, or an annual subscription.

Check out the complimentary July report!

More About Lisa

A third-generation metals enthusiast, Lisa Reisman founded MetalMiner in 2007 – 13 years after she began trading semi-finished aluminum metals and 3 years after she was tasked by the CEO of a Tier 1 automotive company to save his company some money on their direct material spend. Lisa is an ex-big 5 consultant who built MetalMiner into the largest online publication for metal-buying organizations, and has the experience and depth of insight to produce this one-of-a-kind invaluable monthly report to impact your industrial metals purchasing strategy.

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A recent study by SNL Metals & Mining reported that delays in the US mine permitting process diminish the value of minerals and mining projects – underscoring a need for a streamlined permitting process.

This September: SMU Steel Summit 2015

The study, “Permitting, Economic Value and Mining in the United States,” commissioned by the National Mining Association, found that duplicative permitting processes can delay mining projects a decade or longer and those processes, both federal and state, are hindering US mining industry’s ability to meet a rising demand for minerals.

SNLstudyimage

It can take three to five times as long to receive a mining permit in the US than in Canada or Australia. Source: NMA/Minerals Make Life.

Some mining projects lost as much as half of their value while awaiting state or federal approval. Three domestic mines in Arizona, Alaska and Minnesota served as case studies for the research. In one example, SNL found that after eight years of delay the value of Arizona’s Rosemont mine dropped by $3 billion. Alaska’s Kensington mine suffered 20 years of mining delays, while the capital cost of building the mine increased by 49%.

Where Have Exploration Dollars Gone?

“Why aren’t we attracting the exploration dollars we should be? Back in the mid-’90s we attracted about 20% of the worldwide exploration budget for mining. Now, it’s only about 7% and I do think it’s this delay on the return on investment that makes a big difference,” said Katie Sweeney, senior vice president, legal affairs, and general counsel at the NMA. “Are you going to put your money in Australia where you can get a permit in a couple of years or here where it’s 7 to 10? The process is definitely broken.”

The study details a veritable alphabet soup of permitting processes in all three states as well as the federal process. It quantifies incremental, production and additional risk. There is a comparison with the processes in Australia and nearby Canada in the report as well, one that’s not favorable to the US as both clock in with an average permit time of two years compared to seven or more for US projects.

The timeline for the government to respond is more clearly outlined in those countries, the permitting agency leading the process is identified from the outset and responsibility for preparing a well-structured environmental review is given to the mining company, not the government. In the US not only is a primary permitting agency not defined, but several groups with competing interests could be lining up for review.

New Legislation

There are bills pending in both the US House and Senate to streamline federal processes.

“On the House side we should see the bill move through. It’s passed the lower chamber the last two congresses so I would anticipate it will get through this congress as well,” Caswell said. “On the Senate side we think there is more opportunity than in previous congresses. Senator Lisa Murkowski (R. Alaska) is a champion of this bill and with her in position as Chairman of the Energy and Resources Committee, she has more opportunity to promote moving this bill forward. When she held the last hearing on this bill there seemed to be wide support among the committee members present. We are hopeful of making progress in the Senate this time.”

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A growing number of industries, including fabricated metals companies, are bringing manufacturing back to the US. According to the Reshoring Initiative, leaders include Master Lock, Quick Fitting (pipe fittings) and Windstream Technologies, a manufacturer of wind turbines.

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Source: Reshoring Initiative Library, Dec. 2014.

Source: Reshoring Initiative Library, Dec. 2014.

Wage growth in China is the main cause of many of these jobs moving back to the US.

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This September: SMU Steel Summit 2015

 

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While US steel producers have reason to celebrate the signing of a trade package that includes Trade Promotion Authority (TPA) and Trade Adjustment Assistance (TAA), other manufacturing organizations will also benefit from the opening up of new markets. However, procurement professionals may perceive the legislation less favorably.

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MetalMiner asked Jennifer Diggins, Director of Public Affairs at Nucor, to explain why these trade initiatives are so important for all manufacturers and specifically how the legislation will positively impact metal buyers.

jennifer diggins nucor stillMetalMiner: A lot of your customers purchase imports. How is this legislation helpful to them in any way?

Jennifer Diggins: The legislation is not targeting fairly traded imports. The American steel industry does not have a problem with imports; imports will always be part of our market. But we do have a problem with unfairly traded imports, where governments break trade rules they agreed to and provide illegal subsidies that allow foreign steel producers to sell products below costs.

If a company cheats on price, it raises serious questions about other ways they may be cutting corners to gain an advantage, which could ultimately come back to hurt their customers. We know China has tried to evade duties on some of their steel products by routing them through third-party countries to hide the point of origin and avoid the trade duty. Steel producers in China have also added chemicals to products to avoid trade duties. Several years ago, China added boron to cut-to-length plate to avoid a duty. Nucor brought that case to the attention of the Department of Commerce who ruled that the boron added did not change the product and was subject to the trade duty.

Behavior like this should raise concerns for any customer. If China is willing to bend the rules like this, can you trust claims of product quality? Do you really know what you are buying? A free, transparent marketplace is best for both producers and consumers.

MM: Arguably the Chinese have done a lousy job curbing excess production and shutting down excess capacity. Do you think this legislation will provide the stimulus necessary for Beijing to finally shutter excess and obsolete production? Why/why not?

JD: The main goal of the legislation is to provide more effective tools to enforce our trade laws to ensure that countries sending products to our market are playing by the rules. The provisions in this legislation should create a disincentive to dump products in our market, but the legislation is not intended to address overcapacity issues in China.

The capacity problem is a much larger issue and won’t be meaningfully addressed until China gets serious about moving away from being a state-run economy to a market-based economy. Unfortunately, there are few signs they are serious about doing this. Earlier this year, China issued a draft of its Steel Industry Adjustment Policy, saying – as it has for years now – that this new policy will resolve its excess capacity problems. The major steel industry associations from North America, Latin America and Europe issued a joint response, expressing their disappointment that the Policy still shows that China insists on a top-down, state-controlled approach to the steel market. We are all in agreement that the Policy actually is less interested in eliminating excess capacity in China, but instead would seek to transfer capacity overseas through government-supported foreign investments and acquisitions.

It’s clear that China has no interest in letting market forces dictate the size of its steel industry. And so long as China maintains this state-supported approach to market competition, it’s hard to see how they can have a place in any free market economy. This legislation is an important step, and should help any company from any nation that fairly competes in the American marketplace. But so long as China can be successful dumping steel in other foreign markets, it is unlikely the Chinese government will get out of the steel business. We need more concerted action from our trading partners to force China to comply with WTO rules.

MM: Why, in general, is excess capacity (steel production capacity) a bad thing for steel buying organizations? Most might say it’s a good thing because buyers can get lower prices. How do chronically low prices harm the industry and eventually your customers?

JD: I think it’s important to note here that we are talking about artificially low prices – not competitively low prices. In a free market economy, overcapacity would be eliminated through the balancing of supply with demand. So in a situation of excess production, customers would buy steel from the companies that best meet their needs, and the other steel companies would go out of business. This kind of competition drives quality up and prices down. In a truly free market, efficient producers survive while inefficient ones go out of business.

However, the global steel market is not a true free market. Chinese steel companies are being artificially sustained by their government, creating the risk that efficient foreign steel companies will go out of business while inefficient Chinese companies survive. With state support, they can produce an overabundance of steel at absurdly low prices, and drive their competition out of the marketplace. The market will not be well served if inefficient steel producers survive at the expense of efficient ones. At some point, customers will have no choice but to buy product from those steel companies. There will be no diversity in the market place – no competition. Just one source of state-owned suppliers. And they won’t be accountable to their customers for their success. The only entity they will have to keep happy is their government’s bureaucracy. In that scenario, you can bet the absurdly low prices will disappear with no guarantee that customers will be getting a quality product.

China’s real goal is not only to dominate global steel production, but also to transfer the global downstream supply chain to China (in order to maximize job creation in China). To ensure the reliability and survival of the supply chain in the United States, including both suppliers and downstream consumers, we need to ensure that global supply chains are free from market distortions.

Disclaimer: Nucor is a sponsor of MetalMiner.

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