Global Trade

Construction spending falling again was the big news in today’s MetalCrawler report. The race for world’s largest steelmaker by market value heated up, too.

Construction Spending Falls

Outlays for US construction projects fell 0.6% in March to a seasonally adjusted annual rate of $967 billion, the Commerce Department reported Friday.

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Economists polled by MarketWatch expected a drop of 0.5%, compared with an originally reported decrease of 0.1% in February. On Friday, the government revised February’s result to show almost no change. Looking at private outlays in March, spending fell 1.6% for residential projects, and rose 1% for nonresidential projects. For overall public construction projects, spending fell 1.5%.

Baosteel Keeps Growing

Baoshan Iron & Steel Co., spurred by China’s stock-market rally and growing car market, is poised to overtake Japan’s Nippon Steel & Sumitomo Metal Corp. as the world’s largest steelmaker by market value.

Baosteel, supplier of half of China’s automotive steel, had a market capitalization of $23.8 billion to Nippon Steel’s $25 billion on Thursday. The spread on Tuesday was only $52 million. Also tracked in the attached chart is South Korea’s Posco, which wrestled with the Japanese steelmaker for the crown from 2013 until last year.

Shares of Shanghai-based Baosteel more than doubled in local-currency terms since Oct. 30 as the benchmark Shanghai Composite Index rallied 86% Nippon Steel’s stock rose 14% and Posco fell 18% in the same period.

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We have a problem, by we I don’t mean we in the metals markets specifically, nor we in the US or UK, nor even we in the western world.

Why Manufacturers Need to Ditch Purchase Price Variance

I mean we all have a problem: too much debt.

The International Debt Pile

“Whoa!” you say. Hold on, wasn’t the last financial crisis all about too much debt? Haven’t we learned our lessons – corporations are awash with cash, dividends and share buy-backs are at record highs, austerity measures are curbing government spending around the world, household debt — after years of recession — are under control again, what are you talking about?

Quantitative Easing (QE), started in the US by the Federal Reserve, was taken up by the Bank of England, followed by the Bank of Japan, the latest is the European Central Bank at €60 billion-a-month and even the Bank of China is talking about some form of unconventional monetary support, which we can read as QE to support flagging growth.

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While India leads the world in Direct-Reduced Iron production, the domestic industry has been facing an uphill production battle for the last four years.

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India’s DRI sector is hoping for help from the government and clarity in the overall steel policy to see it through, what many have dubbed, its most critical phase ever.

Demand DRIs Up

What is worrisome is that the falling demand for steel, especially construction steel globally, could further, negatively impact the sector. Some are quick to note that India’s DRI units need not worry much on this front as the market in India has remained insulated from global trends owing to steadily increasing domestic steel consumption.

Two other risks facing the sector are imported scrap being used by steel companies in India, DRI is an excellent substitute for scrap in electric arc furnaces, and the reliance by medium-sized DRI producers on inferior technology. That means technological limitations stop the producers from exploiting inferior grades of iron ore and coal.

Further, the limited availability of coking coal only motivates steel production in the country through a combination of DRI and blast furnace. What has added to the misery is the recent round of coal auctions held by the federal government.

Unable to Bid in Coal Auction

DRI companies were unable to participate in the auction, and a hitherto discounted source of fuel was lost, pushing the cost of DRI production by an estimated 40%, some have said. The DRI segment has brought this to the government’s attention.

While many steel companies prefer to use DRI instead of scrap, the slowdown in the global steel industry has seen some amount of the steel melting scrap being imported into India because of lower import duties. What makes steel plants happy in such cases, besides the cheap duty, is the fact that the imported scrap percentage works out to be higher, which eventually negates the cost of imported scrap.

To many analysts, the DRI sector in India is poised on the cusp of a turnaround, but only if there is adequate government backing as well as support from domestic steel companies. Even then, it could easily take four years for the industry to come back to an even keel and ramp up production.

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When domestic markets weaken, most producers turn to export markets to sell excess capacity, but you don’t just break into export markets overnight. It’s not that easy. Sort of like one does not simply walk into Mordor.

Why Manufacturers Need to Ditch Purchase Price Variance

The tried and trusted short-term approach is to sell cheap, making it hard for buyers to refuse the low-priced product being offered.

Sell Low, Buy Even Lower

If those mills are supported by plunging raw material costs and extensive local state support gifting them a break-even price around the lowest in the world, then the intent to simply “dump” metal into export markets has few barriers.

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Why Manufacturers Need to Ditch Purchase Price Variance

High costs and lower demand are just two of the problems plaguing India’s DRI sector. DRI is used by the steel industry in flat as well as long steel product segments, and is also used in infrastructure projects.

Low Steel Demand Hits DRI Producers, Too

According to figures put out by the World Steel Association, in the first quarter of 2015, India, with over 4,500 tons of DRI, headed the list of 14 nations that accounted for 87 % of the world’s total DRI production. The Sponge Iron Manufacturers Association has estimated India to have an installed capacity of 37 million metric tons, although it’s difficult to arrive at an accurate figure due to a general lack of proper research.

EAF and Induction Resources

India’s DRI industry has nurtured secondary steel producers who largely use electric arc or induction furnaces to make their steel, for which DRI comes as handy substitute for scrap.

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Deepwater Wind began construction off the coast of Rhode Island on a five-turbine wind farm that will, eventually, have the ability to power 17,000 homes.

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The 30-megawatt, $290 million wind power project began construction this week 18 miles off the coast of Rhode Island, but, itself, is a much smaller project than the stalled Cape Wind farm project originally planned for the area around Cape Cod in Massachusetts.

US Wind Power Lags

Offshore wind projects are common in Europe and a real driver of renewable energy success there. The fact that the US is only starting to get into the offshore game is a testament to how the regulatory framework and maturity of the renewable energy industry are both lagging here in the states.

The death knell for the proposed 130-turbine Cape Wind project may have come early this year when the two largest electric utilities in Massachusetts backed out of a plan to buy most of the power that was slated to be generated by the proposed turbine project, the latest casualty of what can only be described as an environmentalist civil war over whether to place turbines off Nantucket Sound.

Green vs. Green

The Humane Society, the International Fund for Animal Welfare, the International Wildlife Coalition and and others are against the project. On the other side are groups that might normally be considered allies, including the Natural Resources Defense Council, the Union of Concerned Scientists and Greenpeace.

Opponents, such as environmental lawyer Robert F. Kennedy, Jr., say the natural environment of the Sound should be preserved and that the industrial nature of the turbines would spoil views from the shore. They also say that native birds would be decimated by the 40-foot-tall turbines.

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Yesterday’s post explained how the Short Range Outlook (SRO) report released by the World Steel Association for 2015-2016 predicted steel demand would grow by just about 0.5% to 1.544 million metric tons in 2015.

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The world’s steel sector looks on with hope to India to see it through this downturn. The country’s per capita consumption was still low, at about 60 kg as against the world average of 220 kg. With the government’s Make In India (manufacturing) plan slowly grinding into motion, it is hoped that this will lead to an increase in steel consumption.

The End of Annual Growth for Chinese Steel

So, the China steel story is over, at least for the short-term. The economic deceleration there, following low investment growth since 2008, is expected to adversely impact any steel growth there, and it has so far this year.

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In a surprise move, the Chinese Ministry of Finance announced this week that, effective May 1, they are scrapping export tariffs on alloyed and unalloyed aluminum bars and rods, according to Reuters.

Pool 4 Tool’s Automotive SRM Summit

Along with similar changes to a host of other metals including molybdenum, tungsten and rare earth metals, Beijing has moved to support domestic aluminum producers by opening the flood gates to export markets. This will have the effect of reducing the domestic glut of metal, supporting domestic prices and depressing prices in overseas markets.

China Increases Exports

Even with tariffs in place, China has been rapidly ramping up exports, Reuters said. China’s exports of semi-finished aluminum products rose 49% year-on-year to 1.07 million metric tons in the first quarter, of which 182,257 mt were bars, rods and profiles.

With a domestic primary production capacity of 36 million metric tons and actual production last year of about 27.5 mmt Chinese producers have the ability to easily increase production without creating any shortages in their domestic market. Recent power tariff reductions by the national grid will aid smelters in controlling costs even if prices in export markets fall further.

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This week, the UK’s Metalysis and GKN Aerospace announced a bold, new process that’s a significant step forward in the adoption of 3D printing/additive manufacturing for aerospace. The advance will allow users to essentially sinter titanium from rutile powder, a process that previously could be accomplished with only lighter metals.

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The cost of the powder in 3D parts makes up roughly 50% of the final cost so a significant reduction in powder costs could be a major spur to the adoption of such technology in more applications and in industries beyond aerospace and medical devices, such as automotive.

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Today in MetalCrawler, the sleepy iron ore market was jolted to life. Is it a shift from the bearish trends we’ve seen lately? Only time will tell.

BHP Dials Back Mining Expansion

Iron ore advanced after BHP Billiton Ltd. curbed expansion plans and supplies from higher-cost mines dropped, easing concern that global output will outpace demand and feed a global glut. Miners’ shares jumped.

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Ore with 62% content at Qingdao, China, rose 5.5% to $57.81 a metric ton early today, its highest since March 16. Benchmark iron ore is still 60% below the peak of $144.18 reached in August 2013. Visit our MetalMiner Indx for the latest prices.

Exports Fall for the Quarter

The Sydney Morning Herald’s Peter Ker writes that the week’s iron ore moves could have a major impact on markets if other producers follow BHP’s lead and constrain supply. Across Rio Tinto Group, Vale SA, Fortescue Metals Group, Arrium Limited, Mt. Gibson Iron and Grange Resources, exports were more than 19 million mt lower this quarter than in the December quarter, raising questions about why the iron ore price has fallen 28% during a period of supply weakness.

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