CommentaryMarket Analysis

In the week when the world pensively awaits the U.S.’s Section 232 judgement — a move promised by President Donald Trump during his election campaign and aimed largely at China — a recent Reuters report on Chinese steel exports makes interesting reading.

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Source: Reuters

China’s steel exports have been sliding for months.

According to Reuters, China’s January-May export total was 34.2 million tons, down 26% from last year’s equivalent period and the lowest level since 2014. The year drop in export tonnage amounted to 12.1 million tons — roughly equivalent to Canada’s production over a full 12-month period, Reuters reported.

Yet bizarrely enough, China produced 72.78 million tons of steel in April, an all-time record Reuters says. The following month, China tallied the second-highest monthly total at 72.26 million tons.

Meanwhile, profits on products like steel rebar have surged to $162 dollars per ton this month, as inventory levels have fallen and demand has remained robust (particularly from the construction sector). Investment in real estate is running at an annual growth rate over 6%, Reuters reports. Although there are fears of overheating in some regions, real estate has been stronger for longer than analysts outside the market expected.

As we noted in a piece yesterday reviewing the 232 probe, China’s share of the U.S. import market for steel products has been falling for the last couple of years, mainly due to successful anti-dumping cases. China no longer appears even in the top 10.

So, what exactly is going on in China with respect to steel production and demand? Can we take it that Beijing’s actions to tackle excess steel production have finally resolved China’s deflationary impact on global steel markets?

First, Reuters notes that China has been quite successful in permanently closing previously shuttered steel plants, as well as in in tackling older and more environmentally damaging mills. Those actions combined has resulted in the removal of some 100 million tons of capacity.

In addition, Beijing’s focus on environmental issues has hastened the closure of induction furnaces, which use scrap rather than iron ore as their input and are often labelled as producers of sub-standard products (and, hence, unapproved). Unapproved equates to illegal by Beijing — as such, their production and their closures does not figure in the normal statistics. A significant proportion of China’s rebar production came from these mills, which explains the record profits being earned by surviving state-owned manufacturers of the same products as they capitalize on the removal of these scrappy competitors.

Unfortunately, nobody expects China’s construction market to continue at the current pace and a slowdown is in the forecast for the second half of the year.  Replenishment of low inventory levels will maintain steel mill production runs for a while, but as Reuters notes, China’s mills have a notoriously poor record in adjusting output to demand. So, we should expect that as demand eases, inventorying levels will rise, prices will fall, and access production may well begin to leak through exports onto the international market.

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While America’s anti-dumping legislation will largely protect that market from Chinese material, the rest of the world may find itself under pressure next year from greater availability of Chinese steel at falling prices, further fueling an already rising tide of protectionist sentiment in both developed and emerging markets.

So far, June is busting out all over, but not in the way metals producers would like.

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Market observers may actually observe a possible change in trend (note: the current bull market, which began in May 2016, appears to have run out of steam).

First, the Fed hiked interest rates by 0.25% last Thursday. Though expected, it will most likely not impact markets in an abrupt way.

Let’s take a look at some of the key indicators:

Dollar Up

Source: TradingEconomics.com

The most recent Fed rate hike breathed a little life into the dollar, which has fallen for most of this year.

We believe this could have a direct impact on the metals industry — namely, causing prices to fall.

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It is not unusual for the wrong thing to be done for the right reasons.

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Whether it is the rule of unexpected consequences or blind adherence to doctrine, there are countless historical examples of individuals, companies and governments that made decisions, claiming the moral high ground, which have resulted in damage or impoverishment to those the decision was intended to assist.

The mining sector and even some unions have reacted angrily to South Africa Minister of Mining Mosebenzi Zwane’s announcement last week at a presentation in Pretoria of a new mining charter intended to further extend South Africa’s Black Economic Empowerment (BEE) rules.

The charter sets out a number of significant changes to the rules governing ownership of South Africa’s vast mining industry.

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A new front seems to have opened up in India’s steel wars.

Only this time, the country seems to be fighting for its steel companies to be allowed to sell its steel in a foreign market.

India has complained to the World Trade Organization (WTO) that the U.S. had failed to drop anti-subsidy duties on certain Indian steel products. The move comes on the heels of India itself having imposed anti-dumping duty on 47 steel products from six nations in May.

According to the Indian government, the U.S. had not kept its promise of an April 2016 deadline to comply with a WTO ruling that faulted it for imposing countervailing duties on hot-rolled carbon steel flat products from India.

In December 2014, the WTO ruled against the U.S.’s move to impose high duty on imports of certain Indian steel products. The world body said the high duty by the U.S. was inconsistent with various provisions of the Agreement on Subsidies and Countervailing Measures.

The U.S. sought time until the April 2016 deadline to comply with the ruling. Realizing that the deadline had passed away without any action on part of the U.S. authorities, India has now requested the WTO dispute consultations with the U.S. regarding U.S. compliance.

Some experts say the U.S. will have to amend its domestic norms to comply with the WTO’s verdict on countervailing duties.

In May, India imposed anti-dumping duty on products from six nations — China, Japan, South Korea, Brazil, Russia and Indonesia — to protect its own industry from cheap imports.

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It won’t have escaped your notice that the shine has gone off the metals market.

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Prices have been softening across not just metals but other commodities, like oil, too.

Consumers, of course, will not be complaining, but are nevertheless keen to understand what is going on and whether we are seeing a temporary dip or a move into a prolonged bear period.

Commodities in general are facing multiple headwinds.

While demand for iron ore and oil is steady, both markets are in oversupply. Oil prices have received short-term support from favorable comments around output cuts. Prices have subsequently continued to soften as long positions have been unwound and investors have concluded prospects of a supply balance are receding.

In China, the authorities have been squeezing investors by increasing shadow banking borrowing costs, resulting in positions being unwound and prices softening.

In the U.S., markets surged after President Donald Trump’s election victory with the expectation his campaign promises of trillion dollar infrastructure investment would create a building and consumption boom.

Since those heady days, the realization has set in that the desperately needed investment may not be quite as significant as first thought.

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Steel and stainless steel buying organizations have expressed concern to MetalMiner about the potential outcome of the current Section 232 steel investigation led U.S. Secretary of Commerce Wilbur Ross.

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According to a recent Reuters article, Ross, when discussing the Section 232 steel investigation told a Senate Appropriations Subcommittee last week that, “there is a genuine national security issue,” suggesting his agency would make recommendations that would potentially curb steel imports.

He went on to suggest several potential policy recommendations, including: “Imposing tariffs above the current, country-specific anti-dumping and anti-dumping duties on steel products; imposing quotas limiting the volume of steel imports; and a hybrid ‘tariff-rate quota’ option that would include quotas on specific products with new tariffs for imports above those levels,” and intimated that this last option would help mitigate price risk for steel consumers. Ross made several additional comments to allay consumers’ concerns regarding price increases.

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British elections and referenda have recently proved to be anything but boring.

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Last week’s general election — called just a few short weeks ago at a time when Theresa May’s Conservative Party had a small but solid majority and the left wing Labour Party appeared in complete disarray — has delivered a crushing defeat for the prime minister’s hard Brexit policy.

The election result has once again thrown wide open the debate on what kind of deal the U.K. will — or even can — seek to strike with the European Union (EU) over the year ahead.

Theresa May called the election to give herself a stronger mandate to argue with the Europeans that no deal — meaning a break with Europe, falling back on basic World Trade Organization (WTO) rules — would be preferable to any kind of compromise the EU tries to impose.

Although not stated, it was tacitly understood the election was also intended to deliver her a larger majority in the House of Commons. That larger majority would have enabled her to ignore disruptive minor elements of her own party who may disagree with elements of a deal as the negotiation process unfolds.

What transpired was a dramatic swing to the left, with the loss of Conservative seats to the Labour Party. The result? No party enjoyed an overall majority.

The Conservatives have therefore been forced into a loose coalition with Northern Ireland’s Democratic Unionist Party (DUP), whose agenda differs from the Conservatives in one significant way.

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Editor’s Note: This is the second of two posts — the first of which ran yesterday — from our Sohrab Darabshaw on renewable energy in India. 

India saw nearly $10 billion invested, both in 2015 and in 2016, in renewable energy projects. Last year, $1.9 billion of green bonds were issued. India’s solar targets alone need $100 billion of debt.

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Posting in the Bloomberg View opinion section, columnist Mihir Sharma, however, struck a slightly skeptical note.

“India is not like China, or the U.S., or Australia or Germany when it comes to meeting its Paris pledges,” he wrote. “In India, hundreds of millions of people still live without electricity — a big part of what keeps them desperately poor. India also has a shrunken manufacturing sector, partly because electricity is so expensive (relatively) and its supply so variable. No democratically accountable Indian government can ever favor an international agreement over fixing these two problems.”

Sharma added coal “looks bad” in India at the moment because “its economy is struggling and because it is so services-intensive. Over the past few years, coal plants have used less and less of their capacity as growth has slowed.”

But, if India’s economy does take off, Prime Minister Narendra Modi might indeed be faced with such a choice.

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Editor’s Note: This is the first of two posts from our Sohrab Darabshaw on the renewables industry in India. Check back tomorrow for Part 2. 

Energy experts, the domestic media, research organizations and even representatives of other governments seem pretty sure that India is the next green-energy giant in the making (U.S. President Donald Trump’s recent assertions notwithstanding).

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Trump, while announcing his country’s intention to withdraw from the Paris climate accord, justified it on the grounds that the agreement was unfair to the U.S., and that it was skewed unfairly in favour of developing countries, such as India.

In the wake of that move, many in the Indian media have pointed out that a fact that the Trump administration seemed to have missed was that while India was the third-largest contributor to carbon emissions today, the U.S. was the second. The U.S.’s per capita carbon emission was still significantly higher than other large countries, according to data from the World Bank, and far higher than that of both India and China, according to a report in the online publication Scroll.

Not many within or outside the country are doubting India’s stated aim of ensuring that 40% of energy used would come from non-fossil fuels and rapidly developing renewable energy sources by 2030.

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Qatar is a major supplier of liquefied natural gas. donvictori0/Adobe Stock

Editor’s Note: This is the second part of Stuart Burns’ analysis of last week’s decision by several Arab nations to break ties with Qatar. On Friday, Burns covered the political backdrop. 

Qatar may well be asking: why now?

The country has been engaged in such activity (as detailed Friday) for a decade or more, but the young Saudi Deputy Crown Prince Mohammed bin Salman and Abu Dhabi’s Crown prince, Sheikh Mohammed bin Zayed, seem to have found common ground to take Middle East politics into their own hands and mold the region the way they would like to see it.

It would seem they are not above fabricating their own fake news to achieve it, either. For example, Qatar’s Emir Tamim is reported to have said that Hamas is “the legitimate representative of the Palestinian people,” and called Iran “a big power in the stabilization of the region.”

But attendees at the speech reported he said no such thing. Shortly afterward, it was discovered the Qatar News Agency (QNA) website had been hacked into and the stories inserted.

The timing of the diplomatic freeze is also relevant.

Just two weeks after President Donald Trump’s visit, you have to think this was discussed and approval was sought for U.S. backing, at least politically, for such a dramatic move. It should not be forgotten that the U.S. has a major intelligence-gathering military base in Qatar, the Al Udeid Air Base on Qatari soil is a pivotal staging ground for U.S. counterterror operations, the Washington Post states.

In a more recent development, Secretary of State Rex Tillerson on Friday made a call for de-escalation, asking the Saudi-led coalition to ease its blockade of Qatar on the grounds that it is creating food shortages and making the fight against ISIS more difficult, according to Bloomberg.

The alliance is trying to pull Qatar into line with the position taken by the other members of the Gulf Cooperation Council — aligning against Iran and backing away from supporting terrorist sympathizers. In that they are to be applauded, but the risk is the situation gets out of control. One must assume closed-door discussion has not worked and the GCC coalition is taking this more extreme step to shock Qatar into compliance. The danger is it could also drive Qatar further into the arms of the Iranians, further polarizing the region’s political blocs.

Not surprisingly, the move caused a jump in the oil price and jitters in the liquefied natural gas (LNG) market, in which Qatar plays an outsize role as a major supplier to Europe and Asia. Oil prices immediately jumped but then fell back, as it became clear Qatar’s 30,000 barrels a day were unlikely to have any impact of global supply.

Of more concern, however, was LNG.

Qatar supplies a third of the U.K.’s consumption and is the world’s largest exporter of LNG.

Qatari production of aluminum — at 610,000 tons per annum, in a 50:50 joint venture with Norsk Hydro — represents less than 1% of the global market Prices have been unaffected by the news of the GCC blockade.

In the short term, exports may be disrupted because cargoes were transhipped in neighbouring UAE onto larger vessels. However, Qatalum (the joint venture between Qatar Petroleum and Norsk Hydro) says it can ship directly from its own ports, if necessary.