Thomas Gibson, president and CEO of the American Iron and Steel Institute testified today before the Senate Banking Committee’s hearing on “Evaluating the Financial Risks of China.”
Gibson highlighted global steel overcapacity, market distortions created by China’s state-controlled steel industry and China’s market economy status, among other issues. The committee is chaired by Sen. Richard Shelby (R-Ala.), and the ranking member is Sen. Sherrod Brown (D-Ohio), both of whom represent states with a strong steel presence.
“The surge in imports is a result of foreign government interventionist policies that have fueled global overcapacity in steel, more than half of which is located in China,” Gibson said. “This has led to increased imports of dumped and subsidized Chinese steel in the U.S., which have injured the American steel industry. While China is not the only source of the problem, the overcapacity in China is the greatest challenge facing the global steel industry today.”
Gibson said with China’s domestic steel demand declining, the Chinese steel industry has increasingly relied on exports to consume surplus production. Chinese steel exports rose to 112 million metric tons last year, and through May of this year Chinese producers exported 46.3 million metric tons of steel to the world.
China’s Commerce Ministry said on Wednesday the U.S. deliberately misinterpretedWorld Trade Organization rules after the Commerce Department found that Chinese stainless steel sheet and strip was illegally subsidized. Some companies were hit with 193% import duties.
Commerce found in favor of countervailing duties for imports of stainless steel sheet and strip from China and said it had set a preliminary subsidy rate of 57.3% for a Chinese steel manufacturer, Shanxi Taigang Stainless Steel Co. Ltd. Many, many more were hit with 193% duties, in part because they did not respond to Commerce’s requests for information during the investigation.
Chinese Steel overproduction remains a global issue, even as China complains that other nations unfairly place tariffs on its steel.
China’s Commerce Ministry said in a statement it was not satisfied with the decision and that it would use the WTO dispute settlement process to defend its interests. That’s awfully rich, as China continues to overproduce steel — both carbon and stainless — at a rate that dwarfs every other country in the world.
China produced more steel than the rest of the world combined in May. According to the World Steel Association, China produced 70.5 million metric tons of crude steel products in May, up 1.8% from the levels of a year earlier and just shy of the record level hit in March.
The China Iron & Steel Association said March steel production hit 70.65 mmt, a record high, amounting to 834 mmt on an annualized basis. To China’s credit, Beijing is using both its clout and power to finally start an attempt to consolidate China’s massive steel sector, according to the Financial Times. However, that process is going along about as glacially as other changes in the People’s Republic.
Overproduction Leads to Frustration
It should come as no surprise to China that U.S. and other nations’ regulators are fed up with its overproduction. Read more
China, this year, is becoming more than just the world’s largest metals consumer, it’s also taking a larger role in setting metals prices. While oil prices have crept up this summer, another selloff could be caused when refined products in storage finally come to market.
China is Taking a Bigger Role in Setting Metals Prices
The prices of metals from aluminum to zinc have long swayed to the beat of the world’s largest manufacturing nation, Reuters’ Andy Home writes.
But this is the year that China has emerged from the limelight to take center-stage in the trading of those metals. On one day alone, March 10, trading volumes on the Dalian Exchange iron ore contract exceeded one billion metric, more than the combined annual output of the world’s biggest three producers, Rio Tinto Group, BHP Billiton and Vale SA.
Another Oil Glut is Likely Due to Products in Storage
In its July Oil Market Report, the International Energy Agency warned about shockingly high levels of refined oil products sitting in storage. Gasoline, diesel and heating oil are built up to such high levels in so many parts of the world, that a sharp rise in crude oil prices is unlikely in the short run, oilprice.com reported.
The IEA said that “the fact that crude oil has in the past two months moved within a range in the high $40s/bbl should be a relief for some producers.” But it went on to caution that “the existence of very high oil stocks is a threat to the recent stability of oil prices.”
Commerce calculated a preliminary subsidy rate of 57.30% for mandatory respondent Shanxi Taigang Stainless Steel Co. Ltd. Mandatory respondents Ningbo Baoxin Stainless Steel Co., Ltd. (and its cross-owned companies Baosteel Stainless Steel Co., Ltd., Baoshan Iron & Steel Co., Ltd., Baosteel Desheng Stainless Steel Co., Ltd., Baosteel Co., Ltd., Bayi Iron & Steel Co., Ltd., Ningbo Iron & Steel Co., Ltd., Shaoguan Iron & Steel Co., Ltd., Guangdong Shaoguan Iron & Steel Co., Ltd., and Zhanjiang Iron & Steel Co., Ltd.) and Daming International Import Export Co. Ltd. (and its cross-owned company Tianjin Taigang Daming Metal Product Co., Ltd.) either notified Commerce that they would not participate in this investigation or did not, in fact, participate in the investigation. Read more
Moves this month, therefore, have to be perceived as efforts to hold pricing, even though they are pitched as price increases. For now, the moves appear to have worked; hot-rolled coil is steady at $620 a short ton out of minimills and $640/st from integrated mills with cold-rolled coil at $820-840/st.
Amid lower scrap prices, the minimills certainly have room to negotiate. Meanwhile, buying tends to slow over the summer. Import deals are also firming up given the spread. As such, it is our view that the bias is to the downside, but discounting — at least initially — will be limited. Hot-rolled coil lead times remain at around six weeks, although some minimills are closer to four to five weeks. Cold-rolled coil and hot-dipped galvanized remain in the eight to 10 week range — down from their peak, but not long enough to allow distributors much leeway in negotiation. Moreover, with some mills having downtime in August, there is no incentive to cut prices to fill schedules.
US Hot-Rolled Coil Prices ($/metric ton ex-works Midwest) Margins Widen
Falling scrap prices and high steel prices are leading to rising spreads for minimills, a further reason to maximize output. Slab re-rollers are still seeing their spreads widening as well. At around $350/mt free-on-board Black Sea, the spread to U.S. domestic steel is around $300/mt over landed slab, an enormously profitable spread. It is, perhaps, no wonder that provisional semi imports in May were over 700,000 mt. We would expect them to move higher as buyers take advantage of the arbitrage. However, we caution that this could be another contributory reason for U.S. prices to drop later in the year as rising supply of coil hits the market. Read more
As if there hasn’t been enough fall out from the U.K.’s decision last month to leave the European Union, a Financial Times article reveals that European Commission president Jean-Claude Juncker is set to ditch fast-tracking the European Union’s trade deal with Canada, officially known as The Canada and European Union Comprehensive Economic and Trade Agreement (CETA), a deal that has already taken five years to negotiate.
In a move criticized as undemocratic, Juncker had sought to push approval through on the nod of trade ministers and ministers of the European Parliament, giving no recourse to the 38 parliaments (some of them are regional, only 28 are national members of the E.U.) if they don’t agree to it.
France, Germany Block Fast-Track
Apparently, Berlin and Paris put a stop to the Commission’s move, seen by some as yet another example of the Commission’s undemocratic behavior put into the spotlight by Britain’s objections to rising control from Brussels. Read more
Yes, by some accounts nickel swung into deficit this year after five years of surpluses as global demand rose by some 4% and supply has been constrained by a lack of new investment, Indonesia’s export ban on nickel ore exports and, more recently, a fall in exports from challenger Chinese supplier, the Philippines where low prices have reduced output.
Investors Are Cashing In
The euphoria among investors is not simply due to a change in outlook. Nickel prices have surged this year by some 13% according to the Financial Times with the latest boost coming from the Philippines’ new environmentalist mining minister Gina Lopez, who has announced plans to audit domestic mines for compliance with environmental standards, the expectation is up to 70% could fail resulting in them potentially having their licenses revoked. Two have already lost their licenses. Read more
In its future energy scenarios report, the U.K.’s network operator, the National Grid, said even its most optimistic scenario suggests it will miss the European Union’s15% energy consumption from renewable sources 2020 climate target for member-states by at least two years.
“While we believe the electricity sector can achieve its contribution to the 2020 renewable target, we believe the progress required in the heat and transport sector is beyond what can be achieved on time. As a result, none of our scenarios achieve the 15% level by the 2020 date. Our (most optimistic) Gone Green scenario is the earliest to reach this, meeting the target by 2022,” the report stated.
Our Renewables MMI fell 2% to 53 this month as it still traded in the narrow range it has fluctuated in for much of the year, but the U.K.’s situation mirrors that of many industrialized nations and shows just how difficult it has been to reliably grow renewable energy markets without burning coal or natural gas as backups. Despite the best of intentions, the U.K. simply cannot make its 15% energy reduction targets and the Leave campaign took full advantage of that fact last month when it promised citizens that it would get an independent U.K. out of such deals. But can it? Really?
Can the UK Escape EU Climate Deals By Leaving?
Withdrawing from the E.U. will certainly give the U.K. an easier route on heat and transportation policies in the short-term. The island nation will no longer be obligated to hit the 15% reduction target for 2020 whether it actually leaves two years from now or later.
But when it comes to renewable electricity, long lead-times to build new wind and solar farms (particularly wind in the U.K.) mean most of the projects needed to hit the E.U.’s 30% reduction goal for 2030 have already been granted planning permits and government money has been spent on their contracts. In other words, the genie is out of the bottle for almost all of the U.K.’s 2020 goals and even for some of its 2030 goals. It’s going to be really hard to put that genie, economically, back in the bottle.
The U.K.’s Own Goals Are More Ambitious in the Long Term
There’s also the fact the U.K.’s own unilateral Climate Change Act actually imposes even tougher requirements for cutting carbon emissions. Under the Act, the U.K. must cut its carbon emissions by 80% on 1990 levels by 2050. Again, whoever is Prime Minister and in charge of the National Grid can push the 15% 2020 goal and even the 30% 2030 goal set by the E.U. further off, but that 80% 2050 goal will only hang more ominously over the U.K. like a figurative sword of Damocles if politicians decide to do that.
The 2008 Climate Change Act also requires the government to set legally binding “carbon budgets,” which have already been set up. A carbon budget is a cap on the amount of greenhouse gases emitted in the U.K. over a five-year period. The committee provides advice on the appropriate level of each carbon budget. The budgets are designed to reflect a cost-effective path to achieving the long-term objective of an 80% reduction by 2050. The first four carbon budgets have already been put into legislation and run through 2027.
The early implementation of regulations makes it even more difficult for any future government to get out from under the U.K.’s own 2050 targets as utilities, local governments and the federal bureaucracy has already appropriated money to achieve its short-term goals. So, the possibility of a repeal of the 2008 Climate Change Act is highly unlikely, as well, although some are vocally advocating it just as they did Brexit when that idea was called “bonkers” and we all know how that turned out.
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Steel mills across Europe have been criticized for not addressing overcapacity since the financial crisis but if you think closing steel mills in the U.S. is a problem, with states lobbying mills to maintain operations, it is nothing compared to the 28 nation states of the European Union, for whom the continued existence of a national steel industry — each country generally has only one or two champions — is a matter of political survival for many governments.
Port Talbot in South Wales, U.K., could close if Tata Steel can’t strike a deal and Brexit could make it harder to get one done. Source: Adobe Stock/Petert2
So, for transnational steel producers to moot the possible rationalization of a mill in one country is to invite howls of protest and a political storm. Plus, governments sometimes offer financial support, although, technically, that is against E.U. rules, but ways are often found.
Steel Deals Now in Peril
Tata Steel’s proposed closure or sale of it’s U.K. operations has stuttered along this year with long products being successfully sold to various parties and the major blast furnaces and flat-rolled operations at Port Talbot, South Wales, being circled by a couple of bidders. Read more
Aluminum prices have yet to make a significant upside move, although prices have held well this year, we haven’t seen gains like in the cases of steel, zinc or tin. But the industrial metal complex is in bull mode since early this year and that is giving aluminum a tailwind.
Overcapacity Still an Issue
The reason why aluminum is lacking that upside momentum is that overcapacity hasn’t really been addressed like in the steel industry. China has committed to stop the expansion of its steel capacity and has at least tried to actively and appropriately wind down “zombie enterprises” through a range of efforts, including restructuring and bankruptcy. That’s not the case when it comes China’s equally giant aluminum sector.
In June, China and the U.S. failed to reach an agreement on how to address excess global aluminum capacity. Although aluminum and steel markets have some similarities, there are also some key differences that explain China’s willingness to engage with its steel critics but not its aluminum critics.
First, China’s steel industry represents an old economic model that keeps losing money due to poor profitability. In contrast, China also has some of the most modern and low-cost operating aluminum smelters in the world, although China’s aluminum industry has its own loss makers, too. It’s understandable that China is more focused on getting rid of old, high-cost capacity in its steel industry, rather than removing its new generation of aluminum smelters.
Second, China wants to achieve market economy status in the World Trade Organization. But this goal is jeopardized by steel organizations and policymakers unhappy with the prospect of even heavier Chinese exports and less freedom in dealing with them.
The U.S.-based trade body Aluminum Association has also been fighting against China being granted market economy status, but it’s mainly doing it alone. The aluminum sector is simply not as important for European and U.S. politicians as the steel sector.
On the other hand, the International Trade Commission (ITC) launched an investigation into the global aluminum trade to impose tariffs of up to 50% on primary unwrought aluminum. This proceeding could have a significant impact on global aluminum producers, particularly from China, and U.S. importers and users of aluminum products. The ITC will likely release its findings any day now.
This trade case is something to watch in the second half. It could be the tipping point from which China starts tackling the aluminum overcapacity issue for real. The demand side of the equation is just as important. Furthermore, China’s stimulus measures later this year would continue to support demand for aluminum, while investors could be disappointed if China fails to spur growth.
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