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This morning in metals news, U.S. raw steel production went up last week, aluminum is heating up as China prepares for winter cuts to excess capacity and Kobe Steel’s data falsification scandal could stretch back a decade.

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Raw Steel Production Up 5.4%

U.S. raw steel production for the week ending Oct. 14 was up 5.4% from the same week in 2016, according to weekly data from the American Iron and Steel Institute (AISI).

Production for the week amounted to 1,744,000 tons, up from 1,655,000 for the same time frame in 2016.

Aluminum Heating Up

It’s been a big year for aluminum — and with Chinese winter cuts to excess capacity on the way, the aluminum price could continue to rise.

According to a Reuters report, China is preparing to reduce its aluminum smelting capacity by one-tenth by the end of the year.

Kobe Steel Scandal Could Go Back More Than 10 Years

The data falsification scandal plaguing Japan’s third-largest steelmaker could go back more than a decade, according to a Bloomberg report.

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According to the report, Kobe Steel will cooperate with the U.S. Department of Justice. A company executive quoted in the report told Bloomberg that data falsification at the firm has likely been happening for over a decade — stretching further than Kobe’s admission of falsification dating back to 2007.

The U.S. Department of Commerce. qingwa/Adobe Stock

This morning in metals news, the U.S. Department of Commerce has delayed ruling on whether or not to consider China a market economy, the Commerce Department also deferred a preliminary ruling on Chinese aluminum foil, and also issued a preliminary determination in an antidumping duty investigation of silicon from Australia, Brazil and Norway.

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Commerce Waits to Rule on China’s Market Economy Status

China officially became a member of the World Trade Organization in 2001, but its status as a market economy is still something of debate around the world.

In that vein, the U.S. Department of Commerce has elected to delay a ruling on whether to treat China as a market economy until after President Donald Trump’s upcoming trip to China, Bloomberg reported Thursday.

“In all cases, the Department conducts a full and fair assessment of the facts,” Secretary of Commerce Wilbur Ross said Thursday, as quoted by Bloomberg. “This extension will ensure that the highest standards are followed in this case as we seek to guarantee fair treatment for U.S. workers and businesses.”

Trump will travel to Asia from Nov. 3-14, making stops in Japan, South Korea, China, Vietnam and the Philippines.

For more information on China’s market economy status, make sure to visit our microsite on the issue.

Commerce Defers Aluminum Foil Ruling

In addition to the aforementioned, the Commerce Department announced it would defer a preliminary ruling in its antidumping investigation of aluminum foil imports from China.

“The deferral will allow the Commerce Department to fully analyze information pertaining to China’s status as a non-market economy (NME) country, which is being contemplated within the context of this AD investigation,” according to a Commerce Department release Thursday.

The Commerce Department announced it intends to issue a ruling on both China’s market economy status and Chinese aluminum foil imports no later than Nov. 30.

Commerce Issues Affirmative Determination in Silicon Investigation

The Commerce Department did, however, act in its investigation of silicon imports from a trio of countries.

On Thursday, Commerce issued an affirmative preliminary determination in its antidumping investigation of silicon imports from Australia, Brazil and Norway.

According to the Commerce Department announcement, exporters from Australia, Brazil, and Norway have sold the metal at rates ranging from 20.79%, 56.78% to 134.92%, and 3.74%, respectively, at less than fair value.

According to the Commerce Department, imports of silicon metal last year from Australia, Brazil, and Norway were valued at an estimated $33.9 million, $60.0 million, and $21.6 million, respectively.

The petitioner in the case is Globe Specialty Metals, Inc., which has production facilities in Alabama, New York, Ohio and West Virginia.

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A final determination in the case is scheduled to be announced Feb. 16.

The Automotive MMI dropped for the first time since June, falling one point for an October reading of 93. 

Much of the automotive basket of metals was stuck in neutral this month, but a few did show some notable movement. U.S. HDG steel dropped 1.7% and LME copper, one of the darlings of August, dropped 4.2%.

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Chinese primary lead rose 8.7%. Our Irene Martinez Canorea wrote about environmentally-based smelter shutdowns in China, which supported the lead price.

“The Chinese environmental campaign has heavily impacted lead,” Martinez Canorea wrote. “According to research group Antaike, 80% of illegal secondary smelters have been shut down during the second half of 2017. China has also lost an important source of raw materials from North Korea due to its commitment to international sanctions.”

Palladium Pulls Past Platinum

One tidbit worth noting is the relationship between palladium and platinum. As of Oct. 1, palladium closed higher than platinum.

The last time that happened? Sixteen years ago.

According to a report by Kitco News, however, many analysts don’t expect palladium’s dominance over platinum to last.

The report attributes the price dynamic to a rise in demand in gasoline-powered vehicles and platinum’s fall alongside gold.

“Palladium is benefitting from its inclusion in catalytic converters in gasoline-powered vehicles, which is expecting robust growth from the shift from diesel engines following the 2015 Volkswagen emissions-rigging scandal, and hybrid electric vehicle demand,” according to a research note from commodities broker SP Angel quoted by Kitco.

Dr. Copper Loses Ground

After surging throughout the summer and hitting three-year highs, copper has been backsliding of late.

As of Oct. 1, LME copper dropped from the previous month’s closing price by 4.2%. The metal, often cited as a global indicator of economic health, lost steam in September like a number of other base metals, as Martinez Canorea wrote on Tuesday.

After a booming August, copper slowed down in September.

“Copper has retraced and the general downtrend has slowed down this month. However, the CRB commodities index has increased, something we had suggested might happen and something that signals a potential bull run,” Canorea wrote.

U.S. Auto Sales

In U.S. auto sales, light trucks continued to be a popular option for buyers. In the year to date, over 8 million units have been sold in the U.S., which is up 4.4% from the same time frame last year, according to sales data released Tuesday by Autodata Corp.

By month, September 2017 light truck sales hit 967,547 units, up 12.4% from September 2016. Meanwhile, sales of passenger cars dropped 3.3% last month compared with September 2016 and dropped 10.5% in the year to date (compared with the same time frame last year).

In short? Trucks continue to be in.

As for sales by manufacturer, General Motors led the way with 279,176 units sold, which was up 11.8% from its September 2016 sales total. On the year, however, GM’s sales are down 0.8%.

Similarly, Ford had a strong September, with sales jumping 8.9% from September 2016. However, like GM, Ford’s sales are down in the year to date (2.7%).

Reuters reported Tuesday that GM’s shares rose 3.1% and hit a record intraday high, while Ford’s stock rose 2.1%.

It wasn’t a great month for Fiat Chrysler. September sales dropped 9.7% year-over-year. In the year to date, the automaker’s sales are down 7.9%.

A number of other automakers boasted strong September 2017 sales figurers that raced past September 2016 sales.

Toyota (14.9%), Honda (6.8%), Nissan (9.5%), Volkswagen (22.8%) and Mitsubishi (17.2%) all had solid September year-over-year increases. In the year to date, all five of the aforementioned automakers have exceeded sales compared with the same time frame of last year — Volkswagen posted the largest year-to-date jump of that group at 7.8%.

Sales in China

According to the most recently available sales data from the Chinese Association of Automobile Manufacturers (CAAM), August automotive sales in China were up 5.3% year-over-year.

For the first eight months of the year, 17,511,000 units were sold, up 4.3% from the same time frame last year.

Volvo was among the big winners in China in September. Volvo’s September global sales rose 11.2% year-over-year. In China — Volvo’s biggest market — sales rose a whopping 29.8%, according to a company release. From January-September, Volvo’s Chinese sales are up 29.9% compared with the first three quarters of 2016.

Feeling the Electricity

Meanwhile, our Stuart Burns wrote about an announcement that could represent the rise of the electric vehicle (EV) in China, a shift that has massive implications for the automotive world.

China, the largest automotive market in the world, moving toward the EV constitutes a significant development, to say the least.

Burns covered the recent announcement from Beijing outlining the government’s plans to move toward EVs, as the country — and the world — prepares for the phaseout of vehicles powered by fossil fuels. The U.K. and France have made similar announcements this year, setting long-term goals to ban the sales of gas and diesel cars by 2040.

India, too, announced a push toward electrification earlier this year, with an ambitious goal of selling only electric vehicles by 2030.

For now, of course, these are merely government statements — actual implementation of the processes necessary, in both the public and private sectors, to reach these goals is another story entirely.

As for automakers, GM announced Monday its plans to move toward an all-electric fleet.

“General Motors believes in an all-electric future,” said Mark Reuss, General Motors executive vice president of product development, purchasing and supply chain. “Although that future won’t happen overnight, GM is committed to driving increased usage and acceptance of electric vehicles through no-compromise solutions that meet our customers’ needs.”

The automaker plans to introduce two new all-electric vehicles in the next 18 months, according to the GM announcement, and a total of at least 20 new all-electric vehicles by 2023.

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A Reuters report last week suggests relief is in sight for Western manufacturers of aluminum semi-finished products under pressure from growing Chinese exports.

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Headlining how China’s semi-finished aluminum exports fell for a third straight month in August, the article cites punitive duties imposed by the United States and India on Chinese aluminum foil as a reason for the decline. Semi-finished exports stood at 360,000 metric tons last month, Reuters reported, quoting revised customs data. That figure is down 3.2% on the same month a year ago and down 7.7% from 390,000 tons in July.

Although the monthly export figure is the lowest since February 2017, the first eight months of this year still showed a 5.2% increase versus the same period in 2016. Further data seemed to conflict with the argument that the foil duties were the cause of the decline in recent months. January to August foil exports were up 10.1% at just under 800,000 tons. Although they have dropped in recent months – down 4.9% year-over-year and down 6% from July, those drops only account for 5-6,000 tons per month of lost semis exports. The vast majority, 30,000 tons per month of reduced exports, are coming from extrusions.

Quoting Paul Adkins of AZ China, the report identified a substantial 29% slump in exports of extruded aluminum bars, rods and profiles as the main cause for the overall falls in semis exports despite an increase in flat rolled numbers. The main culprit appears to be U.S. tariff action against extrusions and helps explain why Chinese extrusion mills have been so aggressive in Europe in recent weeks, dropping conversion premiums for extrusions (possibly in an attempt to make up for lost sales to the U.S.).

With Chinese extrusion mills on less than 30-day delivery schedules they are clearly not overly busy. This suggests that although domestic demand has been steady, it has not been as strong an influence on primary metal prices as investor appetite for bidding up the futures markets would suggest. That has more to do with environmentally motivated capacity curtailments creating a narrative of shortages — resulting in speculators building strong net long positions and substantial primary metal prices rises — than it does any genuine tightness in supply.

An Aluminium Insider article discussing the findings of a report called the China Beige Book by a private, China-based analyst raises questions about the sustainability of recent rapid price rises and if they are based purely on the premise of reduced supply.

The study states that, despite numbers released by Beijing, overall capacity in the aluminum market has experienced a net rise over the last six consecutive quarters. At the same time, the economy is experiencing a slow-down. “Sector-wide growth took a dive across the board—revenue, profits, output, export orders, volumes, hiring, capex, borrowing, wages, and sales prices,” explained the report, suggesting perceptions of tight supply are misplaced and speculator-driven.

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If that is the case, European extruders may not be alone in facing increased competition this winter from China’s semi-finished product mills, as they seek to secure markets for a wide range of semi-finished products propelled by a cooling domestic market.

Steel prices in China have been rising, but iron ore prices have been falling — what’s going on there?

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China is shutting domestic iron ore mines at an accelerating rate, forcing steel companies to import iron ore from overseas, which would normally be supportive for the iron ore price.

The answer it would seem, as is so often the case, has more to do with speculators’ view of future fundamentals than actual current fundamentals.

Strong Chinese Demand for Steel

Steel prices in China are strong because steel demand remains robust, despite exports being crimped by protectionist measures in North America, Europe, India and elsewhere. Domestic demand is holding up well.

Meanwhile, supply-side action by Beijing is cutting swathes of steelmaking capacity. Initially, much of the cuts came to “illegal” production, such as EDF scrap based long products mills — which has happened largely under the radar — but also older, less efficient and more polluting steel plants. All of this follows Beijing’s pledge to cut 50 million tons this year as part of an environmental drive to reduce air pollution by November (the start of the winter heating season).

Source Financial Times

After strong price rises this year, investors have done well and are now taking their profits ahead of a perceived fall in demand, as steel curtailments really begin to bite later in the year. It would be a brave speculator who bet against the wave of negative sentiment toward the iron ore price, including even the Australian government, which has been warning of price falls.

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It would be an exaggeration to say steel producers have never had it so good, but on the whole, conditions have been supportive of the sector this year — both globally and in top producer China.

What’s Up, Beijing?

Beijing’s supply side reforms, cutting out older, less efficient steel plants largely on environmental grounds has directly supported the larger state steel sector. Much of the “illegal” and less well-regulated (therefore more polluting) producers are concentrated in the smaller end of the private sector. These have been the first to suffer enforced closure as Beijing pushes through its aim of closing some 50 million tons of capacity this year.

A widespread clampdown on the scrap-based EAF producers (virtually all of whom are in the private sector, and deemed illegal because they often do not have licenses and more polluting because they are based on scrap)  has constrained supply and given rebar prices a drug-induced high.

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The move underpins Beijing’s rationale to achieve as many wins as possible, reduce capacity to avoid anti-dumping moves by trading partners, improve environmental conditions (specifically particulate emissions, which cause smog), and consolidate a highly fragmented domestic steel industry all while simultaneously minimizing job losses and supporting the state sector at the expense of the private sector.

Bingo — they have it all!

Tale of the Tape

So far, you should say, Beijing is doing very well. Capacity has closed, particularly older and therefore likely less efficient capacity; steel production is actually up 4% year-on-year, and prices have risen robustly.

The state sector is doing very well, enjoying high prices, strong demand with the removal of their smaller competitors and, following an 18% fall in iron ore prices over the last month, look set to make even better profits in the last quarter. Iron ore import volumes have also fallen of late, as the graph below from the FT shows, but that may partly be due to large inventories that had built up as the price rose.

Source: Financial Times

Steel prices in China as tracked by MetalMiner’s IndX have weakened this month, but with the fall in raw material costs Chinese producers’ margins have held up well.

Free Download: MetalMiner’s September 2017 MMI Report

In the rest of the world, China’s reduced exports, down 26% year-to-date due to anti-dumping barriers and improved domestic demand, have created some respite for foreign steel mills, particularly Russian, Turkish, Ukrainian and Canadian suppliers that have stepped in to take China’s place as low-cost supplier to the U.S. and European markets.

Producers in Europe are still complaining bitterly about competition, but as with the U.S., realistically it is less about China and more about low-price suppliers in Russia, Ukraine and elsewhere.

Outlook

On the back of rising global steel demand and soft input costs, steel producers’ margins should be supported even in Western markets and prices remain firm next year — even if China’s demand grows only slowly.

It seems to be the perennial question among those dependent on and those active in the metals market – what are the prospects for China?

And, well,  we should be concerned.

As both the world’s largest producer and largest consumer – in many cases constituting nearly half of global consumption and production of many metals – China and what its economy does is the primary driver on price direction and pace of change.

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What’s Happened in China This Year…So Far

This year, metal prices have risen strongly on the back of robust demand fueled in part by a mini stimulus boom initiated last year. Anxiety is growing as to how long China can keep that demand solid and what the medium-term impact of the country’s rising debt-to-GDP ratio will be. The rising “credit gap” is split 70% in the stodgy public sector, which is contributing relatively less to growth and not in the more dynamic private sector where most growth is being generated.

As such, Beijing feels it has enough ammunition to handle any fallout without it seriously impacting the economy — and with the economy growing in a broad-based manner, across manufacturing, trade and services as well as construction. HSBC, in their most recent Metals Quarterly, remains cautiously optimistic that growth will remain solid around 6.7% next year.

What This Means for Metal Buyers

For metals consumers, however, it has been about more than macroeconomic issues.

Supply-side reform has been a major driver of price this year, with enforced consolidation in the steel sector driving shortages of certain product areas like rebar, and hence fueling price rises. Meanwhile, smelter closures in aluminum have pushed prices to multi-year highs. Arguably those price rises are investor-fueled and could, at current levels, be somewhat overdone — but much depends on how vigorously Beijing continues to implement environmental policies during the upcoming winter heating period.

Clearly the market thinks it will follow through with the policy as investors are positioning themselves for shortages within China. Although the rest of the world is technically in deficit, comparing production to consumption in that country results in still more than 85 days of inventory with unknown additional tonnage available in stock and finance trades. This will act as a damper on price rises in the medium term, but the market is quite capable of spiking further in the short term.

We will have a follow-on article on steel, nickel and stainless, where despite prices being off recent peaks, there is much to suggest we will not see a sell-off next year and prices could be well supported at current levels.

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This morning in metals news, the International Trade Commission rules that imports of solar cells are hurting U.S. manufacturers, iron ore enters a bear market and the UN proposes that businesses take responsibility for environmental pollution.

A Bear Market for Iron Ore

The price of iron ore has undergone the biggest weekly fall in 16 months, Bloomberg reports. Having slipped into a bear market, the metal was trading at $63.56/ton on Friday, more than 20% lower than its August 21 high of $79.93/ton.

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We may see this price slump to continue for the near future. Some expect the price of iron ore to drop to the $50s in the fourth quarter. If China’s steel production cuts do go into effect as planned this winter, the country’s steel output may decrease as much as 30 million tons, thus cutting iron consumption by 50 million tons.

End of the U.S. Solar Boom?

The U.S. International Trade Commission voted in a 4-0 decision on Friday that the U.S. solar energy industry is being hurt by foreign overcapacity and cheap solar cell imports, the Washington Post reports. However, the proposed 40-cent-per-watt tariff on solar cells would double the price of solar panels, putting pressure on the rest of the U.S. solar industry.
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Given the recent price rallies in base metals, the market can continue to expect upward movements. The bull party winners — copper, aluminum and zinc — experienced rapid price increases while lead and tin have languished (tin more so than lead).

Source: MetalMiner analysis of FastMarkets data

However, lead prices appear to have joined the bull party, as prices have increased for five consecutive days. Trading volumes appear high, which means that a new uptrend may have started for lead.

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Lead and zinc are often discussed in tandem. Between those two metals, zinc has shown greater price strength, with prices recently rallying to their highest levels in more than 10 years. Lead, meanwhile, has been the “shy sibling” during the last couple of months, prices have started to sharply increase.

Fundamentals also look favorable and support the price rally.

The Chinese environmental campaign has heavily impacted lead. According to research group Antaike, 80% of illegal secondary smelters have been shut down during the second half of 2017. China has also lost an important source of raw materials from North Korea due to its commitment to international sanctions.

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What This Means for Industrial Buyers

Even if there is still room for additional lead price increases, buying organizations will want to watch the behavior of both lead prices and trading volumes. Heavier trading volumes will signal an official lead price rally.

To better understand how to adapt industrial metal buying strategies for the metals that you purchase, take a look at our Monthly Metal Buying Outlooks.

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Before you head into the weekend, check out some of the stories that went up this week on MetalMiner:

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  • The London Metal Exchange (LME) is an institution steeped in tradition — but even the most tradition-rich entities have to change, eventually. Our Stuart Burns wrote about the LME and how it is changing (or, in some cases, staying the same).
  • The electric car industry continues to grow, but the move toward electric in China likely represents the biggest such move by a single nation to date.
  • Our Irene Martinez Canorea checked in on tin and other base metals. In short, many that boomed in August have come back down a bit this month.
  • Burns wrote about China Zhongwang and its ongoing efforts to build up its presence on the global stage.
  • The U.S. Department of Commerce opened countervailing duty and antidumping investigations into titanium sponge imports from Japan and Kazakhstan.
  • Meanwhile, the U.S. International Trade Commission, voted to uphold antidumping orders in a five-year sunset review related to CASSLP pipe from Japan and Romania.
  • The third round of North American Free Trade Agreement renegotiations kicks off tomorrow in Ottawa. United States Trade Representative Robert Lighthizer, during a question-and-answer session earlier this week, touched on the negotiations and what the U.S. is hoping to accomplish.
  • United Steelworkers issued a statement calling for the Trump administration to act vis-a-vis its ongoing Section 232 probe related to steel imports.
  • It’s been talked about for more than a year, but Tata Steel and Thyssenkrupp finally agreed to merge their European operations this week.

Free Download: The September 2017 MMI Report