Public Policy

China has changed its tack on steel exports.

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In previous years it has sought a more conciliatory position to complaints by trade partners, a WSJ article says in the past CISA, China’s steel trade association, has sought to persuade local steel mills to curb exports and show restraint but this year, in the face of an unprecedented surge in volumes, Ministry of Commerce spokesman Shen Danyang is quoted as taking a much more defensive line saying the rise in steel exports is due to higher global demand and is a result of Chinese steel products having strong “export competitiveness.”

Chinese Now Say Exports ‘Justifiable’

Set against a backdrop of the EU’s recent investigation into dumping of cold-rolled coil from China and Russia, Shen is reported to have come out fighting, saying “Under such circumstances (demand and competitive pricing), I feel that it’s quite normal for Chinese steel exports to these countries to be rising, and it’s quite justifiable.”

Meanwhile, the WSJ adds the US, Australia and South Korea have also signaled that they are lining up support for trade action against Chinese steel exports, which rose by 50.5% last year to a record 93.8 million metric tons and have continued at a high level this year.

Chinese steel mills are on a roll according to data reported by the WSJ. Between September last year and January this year, the volume of China’s outbound steel shipments each month shattered the preceding month’s record. While in the first four months of 2015, steel exports were 32.7% higher than a year earlier.

The reason isn’t hard to find, domestic steel prices in China have been on a slide as demand has collapsed. According to a Bloomberg article Infrastructure and construction together account for about two thirds of China’s steel demand, citing HSBC research, and construction is slow as housing prices fall there.

Construction Slump Continues

New home prices slid in 69 of the 70 cities tracked by the government in April from a year earlier, according to National Bureau of Statistics data. As a result construction-related steel prices such as rebar have hit their lowest level since 2003.

What’s worse is the peak buying period for the construction sector is now in the past and demand would fall for seasonal reasons even if construction was strong. According to Reuters, prices have dropped 13% so far this year with the most-traded rebar futures contract for October settlement on the Shanghai Futures Exchange down to 2,355 yuan ($379.71) per ton, while MetalMiner’s own China tracking service has recorded a 16% fall in domestic steel prices this year from 2,810 yuan/mt at the beginning of the year to 2,340 yuan now.

What is Chinese ‘Cost?’

Such a slump in prices has aided steel mills in their drive to dump excess capacity overseas. Is it below cost? What is the cost price in China? what are a mill’s true costs for state enterprises that receive all kinds of support both at the regional and state level?

Steel mills are under pressure to close excess capacity but so far the result has been limited, excess capacity is being offered for export rather than any real attempt made to exercise market discipline and shutter plants. The trend is likely to get worse before it gets better, particularly if Beijing’s hard line continues, we can expect more trade disputes and possibly lower prices in the year ahead.

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Minutes were recently released of the Federal Reserve Board’s most recent meeting and another rosy forecast for the US construction market was released.

Construction Starts About to Surge?

Construction starts for residential and nonresidential construction in the second quarter should improve after weak numbers in the first quarter, according to a forecast by consultancy CMD.

Why Manufacturers Need to Ditch Purchase Price Variance

However, construction starts overall in the US could rise 9.2% this year, even though both residential and nonresidential starts have been downgraded, CMD said. The CMD forecast is derived by combining proprietary data with macroeconomic factors.

No June Rate Hike

Federal Reserve officials believed it would be premature to hike interest rates in June even though most felt the US economy was set to rebound from a dismal start to the year, according to minutes from their April policy meeting released on Wednesday.

The central bank debated whether a slew of disappointing data, including weak consumer spending, signaled a temporary slump or evidence of a longer-lasting slowdown, with most participants agreeing economic growth would climb to a healthier pace and the labor market would strengthen.

The US economy grew an anemic 0.1% in the first quarter, according to the most recent government data.

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There is a lot of talk in the business press about trade agreements.

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Most of us skip such articles on our way to the sports pages as it’s that impacts on such a macro scale that it is of little relevance to us day to day, but that is to overlook the massive impact trade liberalization has had on our lives over the last twenty years.

Although the low-hanging fruit has already been plucked, further agreements could yet impact, for good and bad, in the years to come. Lawmakers are split on many lines over the issue. Some are intrinsically against liberalization on the basis that it can expose domestic industries to unfair competition from abroad, that by reducing trade barriers, it encourages off shoring and the export of jobs overseas.

What is Trade Liberalization?

Others say trade liberalization raises GDP for all and the rising tide lifts the boats of everyone’s income levels, in developed and developing markets. The experience of the last 20 years can be used to support both arguments and, in reality, both are true to a greater or lesser extent.

Currently considerable argument rages about the President’s two plurilateral (by which we mean between a limited number of partners) trade agreements known as the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP).

Why Only Certain ‘Partners?’

The fact these agreements will be between a limited number of countries is itself a bone of contention. Many argue only multilateral agreements such as the failed Doha negotiations are the way to go because they encourage a universal set of rules and standards, but with the more readily agreed issues resolved further progress is proving increasingly difficult and acrimonious.

The FT did a quick idiot’s guide to the TPP and TTIP summarizing them as follows. The TPP is a negotiation with 11 countries, most importantly Japan. Its partners account for 36% of world output, 11% of population and about one-third of merchandise trade. The TTIP is between the US and the EU, which accounts for 46% of global output and 28% of merchandise trade.

The main partner not included in these negotiations is, of course, China. Import tariffs are only a part, arguably a small part of what these agreements are about. In the FT’s analysis, the agreements are more about making rules more compatible with one another and more transparent for business, particularly around intellectual property rights.

Not a Trade Booster, An IP Defender

They are an effort to shape the rules of international commerce, the FT argues and quotes Pascal Lamy, former director-general of the World Trade Organization, saying that “TPP is mostly, though not only, about classical protection-related market access issues . . . TTIP is mostly, though not only, about . . . .  regulatory convergence.”

The benefits of each to national incomes is small. Even supporters do not claim the level seen in earlier trade agreements. The FT quotes independent analysis suggesting between 0.4% and less than 1% rise in national incomes as a result, with the US-EU TTIP towards the upper end of the range and the US-Asia TPP towards the lower end. The most reliable guess is they will be positive but modest. That will make the President’s job correspondingly harder to get past a skeptical Congress.

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The transportation funding can got kicked down the road in Washington and a major steel company agreed to pay for a predecessor’s Michigan environmental infractions.

House Passes Short-Term Highway Bill

The House voted Tuesday to extend federal transportation funding for two months, in an attempt to prevent an interruption in the nation’s infrastructure funding at month’s end, the Hill reported.

Why Manufacturers Need to Ditch Purchase Price Variance

The decision to punt a long-term funding extension to the summer was approved by a 387-35 vote, over the objection of Democrats, who argued Congress should have found a way to pay for a longer-term extension.

Twelve Republicans and 23 Democrats voted against the bill. Rep. Mark Amodei (R-Nev.) voted “present.”

Ahead of Tuesday’s vote, White House officials said President Obama is willing to sign the temporary transportation funding extension if it is passes the Senate later this week, even though he would prefer a longer-term solution.

AK Steel Dearborn Pays Severstal’s Fines

AK Steel will pay $1.35 million to settle alleged air pollution violations at a Dearborn plant previously owned by the American subsidiary of Russia-based Severstal.

The Justice Department announced the agreement among the steelmaker, the federal government and the State of Michigan Wednesday, saying it settles 42 violations alleged by the state Department of Environmental Quality and two notices issued by the Environmental Protection Agency against Severstal North America.

AK Steel, based in Ohio, announced last summer its intention to purchase Severstal’s Dearborn coke-making facility and other assets for $700 million. Following the sale, completed in September of last year, AK Steel took responsibility for past violations.

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OK, got over laughing yet?

Why Manufacturers Need to Ditch Purchase Price Variance

Yes, the European Union will impose anti-dumping duties of up to 35.9% on imports of a grade of electrical steel from China, Japan, Russia, South Korea and, yes, the United States, which those countries are allegedly selling at below cost.

European Commission Acts

According to Reuters it is the EU’s second set of measures this year to protect European steel producers such as ArcelorMittal, Stalproduckt STP, ThyssenKrupp and Tata Steel UK. Apparently the European Commission has just set tariffs on imports of grain-oriented, flat-rolled electrical steel (GOES, for those of you that regularly read our MMI coverage) following a complaint lodged in June 2014 by the European steel producers association, Eurofer.

The duties are provisional, pending the outcome of an investigation due to end in November, but as we all know the moment a duty looks like a real possibility importers stop importing in case they get caught retroactively. Normally, such duties would then continue for five years, the paper reports.

More specifically duties of 28.7% will cover imports from Chinese companies, including Baosteel and Wuhan Iron and Steel Corp. and of 22.8% from South Korean producers such as POSCO. The rate for US producers including AK Steel is 22% and for Russian firms such as NLMK 21.6%.

Meanwhile, Japan’s JFE Steel Corp. will face duties of 34.2% and Nippon Steel and Sumitomo Metal Corp., among others, 35.9%. Eurofer is quoted as saying the dumped imports have damaged the EU industry by driving prices to below the costs of production, causing substantial losses. It said the market share of dumped imports into the EU rose to 47% in 2012, with most from Japan and Russia.

2nd Anti-Dumping Action This Year

This action follows anti-dumping duties being applied in March to flat-rolled stainless steel from China and Taiwan, a new investigation into specific grades of steel rebar and attempts to prolong the existing duties on Chinese wire rod.

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Like most governmental, or worse intergovernmental, bodies the Organisation for Economic Co‑operation and Development is more dedicated to talking shop than legislating, and a report following the recent meeting of the OECD Steel Committee is no exception. Long on talk and short on hard recommendations.

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As a snapshot of the current, global steel market it deserves a pause and review even if its recommendations are likely to be largely ignored by those governments that can most have any beneficial impact on the market.

Their first finding, and this will come as no surprise to anyone in the industry, is global apparent steel use has nearly ground to a halt in 2015. According to the OECD’s March 2015 “Interim Economic Assessment,” the effects of lower oil prices and monetary policy easing have led to a slight improvement in economic growth prospects in the major economies, but the near-term outlook is still one of reduced world GDP growth.

Miniscule Growth

Global crude steel production grew by only 1% in 2014, driven by China’s slowdown and modest growth in developed economies. In the first quarter of 2015, global crude steel production decreased by 1.8%, while Chinese crude steel production in the first quarter of 2015 fell by 1.7%, reaching 811.5 million metric tons in annualized terms.

In the rest of the world, crude steel production was 810.8 million mt in the first quarter of 2015, in annualized terms, down 1.9% compared to the previous year. Looking forward, global apparent steel use (of finished steel products) is expected to grow by only 0.5% in 2015 and by 1.4% in 2016, after 2014 when it grew by an equally anaemic 0.6%.

Anyone active in the North American market will not be surprised to hear that OECD expects demand here to decline by 0.9% in 2015 and remain weak in Central and South America. Only the Middle East and Asia, outside of China, are expecting to show decent growth with India probably leading the way.

In light of the poor growth prospects, and discussion went so far as to suggest we may be in a permanently low steel growth environment from here on as population growth slows and populations age, overcapacity and the consequences thereof featured highly in the committee’s attentions.

Too Much Investment

Too much new steel investment continues to be made, often aided and abetted by governments even though overcapacity is chronic globally and severe in markets where normal market forces do not provide counterbalancing controls. As a result, steel-related trade actions are on the rise, with complaints accounting for as much as 25% of the total number of complaints brought to the WTO in recent years.

This isn’t going to get any better in 2015-16 and will create distortions in markets as producers switch their sales focus in response to legislation.

Mandatory Climate Change Comment

No intergovernmental meeting would be complete without reference to climate change or environmental factors and, not to disappoint, the OECD wraps up with the observation that progress on low-carbon industrial innovation over the next decade is crucial. The iron and steel sector accounts for about 22% of total industrial energy use and 31% of industrial, direct CO2 emissions. So, like it or not, changes in environmental legislation are going to have a major impact on the industry in coming years, particularly in those countries where these standards are actually enforced.

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Another domestic steel plant closing has been blamed on cheap imports and a major steelmaker in India took a big write-down for similar reasons.

ArcelorMittal Shut Down

ArcelorMittal is permanently closing its money-losing Georgetown, S.C., mill, delivering a blow to the local economy, the Charleston Post and Courier reported.

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The company said the shutdown will be completed by Sept. 30 and 226 workers there will lose their jobs.
Luxembourg-based ArcelorMittal blamed “challenging market conditions facing the USA business,” which uses electric arc furnaces to make wire rod used in the automotive and construction industries.
In the press release announcing the closure, ArcelorMittal also said the mill “has been severely impacted by waves of unfairly traded steel imports from China and other countries.”
ArcelorMittal previously shut down the Georgetown operation in 2009. It reopened in early 2011 after negotiating pay cuts and other cost-saving measures with employees.
“Despite our joint efforts and a highly productive workforce, the facility has incurred significant losses since the restart due to high input costs and imports,” P.S. Venkat, CEO of ArcelorMittal Long Carbon North America, told the Post and Courier.

Tata Steel Has Long Product Woes, Too

Tata Steel Ltd. slumped in Mumbai after India’s largest producer of the alloy wrote off its long-products business in the UK.

The shares fell as much as 3.1% to 355.10 rupees and traded at 359 rupees as of 9:37 a.m. local time, Bloomberg reported. The stock has declined 10 percent this year, compared with a 0.7% drop in the benchmark S&P BSE Sensitive Index.

The Mumbai-based company expects to take a non-cash impairment of 50 billion rupees ($787 million) for the quarter ended March 31, according to a statement Thursday. That would completely write off the value of the UK long-products business, which Tata Steel is trying to sell to Geneva-based Klesch Group.

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According to a recent report from the Freedonia Group, worldwide demand for copper is expected to advance 4.7% every year to 37.2 million metric tons in 2019. It also says the Asia-Pacific region is expected to see the fastest annual gains, led by increased output in China and India.

Free Webinar: What The EPA Clean Power Plan Could Cost Your Business

Electrolytic refining of primary copper will be the primary method of production in these countries, but recycled scrap will account for a larger share of total refined copper output.

Construction Spending in India, US

Outside the AP region, the Freedonia report says advances in construction spending would also fuel copper demand in North America, particularly in the US, where early signs of building construction activity significantly increasing exist. This is followed by Western Europe which could see a “moderate increase” in copper demand since construction and manufacturing output there is expected to climb at a below average speed.

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Rules and regulatory compliance already got ya down? Well, another one’s comin’…

The final rule of EPA’s Clean Power Plan, set to go into effect mid-summer 2015, will likely have significant financial implications for US manufacturers. The potential cost, supported by several independent third-party studies, could be far below the original estimates put forth by the EPA. This has led to great cause for concern among domestic manufacturers as they already struggle to compete with international companies who, in many cases, receive heavily subsidized energy.

So what are US manufacturers to do? Join us this Friday for the webinar, What EPA’s Clean Power Plan Could Cost US Businesses (and What Procurement Can Do About It).

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Long seen by successive administrations as a fair and independent arbiter of global exchange rates the International Monetary Fund is about to upset some in Congress if, as expected, it announces that China’s yuan (or renminbi) fairly valued for the first time in more than a decade, a Wall Street Journal article reports.

What the EPA’s Clean Power Plan Means For You

Few outside of China argued back in the last decade that China gave its companies an unfair competitive advantage by keeping the currency below a level that normal market forces would have achieved. Now, after a decade in which the yuan has been allowed to appreciate by more than 30% against a basket of currencies, senior IMF officials say the exchange-rate value is roughly appropriate the WSJ reports.

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