China

By anyone’s reckoning, iron ore and coking coal had a stellar year in 2016. Driven by infrastructure investment and a robust construction market, Chinese imports of our iron ore could top 1 billion metric tons for the first time in 2016. Prices more than doubled in the space of 12 months and the supply-demand situation seemed to be largely in balance for much of the year.

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After topping $80 per mt in early December, prices eased back a little toward the end of the year prompting many to ask “have we seen the peak in iron ore prices?” Mills typically cut output during the quieter winter months when construction demand slows. Many steel mills have already curbed output due to chronic smog alerts across northern China.

Chinese Demand

Seasonally, it would not be unusual if iron ore prices remained subdued up to the Chinese New Year and then picked up in preparation for the peak production months of late spring and summer. But, while Chinese demand defied many expectations of a slowdown in 2016, the recent softening of both iron ore and coking coal raw material prices, and the price of some finished steel products over the last week or 10 days, has lent support to some analysts’ predictions that we could be seeing markedly lower Iron ore prices throughout this year and next. Read more

If there is one area in which 2017 is going to be a momentous year, it is in trade.

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The incoming Trump administration campaigned on and has, since winning the election, robustly promoted an anti-free trade platform saying the North American Free Trade Agreement is “the worst trade deal maybe ever signed anywhere,” bullying GM, Ford Motor Company and various other multinationals into rethinking strategic investments planned for Mexico and forcing them to be shelved or amended. Read more

Welcome to the first MetalMIner Week-in-Review of 2017!

This week, trade issues came to the forefront as President-elect Donald Trump, now just two weeks from his inauguration, named veteran trade lawyer and former Reagan administration official Robert Lighthizer as his U.S. Trade Representative.

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While nobody could accuse China of getting a free ride from the current administration, I think it’s safe to say the U.S. Trade Rep’s office website won’t have an endorsement of the Trans-Pacific Partnership on it come January 20th.

Michigan or Michoacan?

Who gets hurt the most by a bunch of fair trade hardliners coming into office with Trump? It might look like Mexico right now — Ford Motor Company just pulled up stakes on a new facility there and instead invested in Michigan — but it’s actually China, as the U.S. trade deficit with them is our largest and the director of Trump’s National Trade Council, Peter Navarro, is a longtime critic of the way the People’s Republic trades with the U.S. and the entire world. Expect Navarro, Lighthizer and Commerce Secretary nominee Wilbur Ross to set their sights squarely on China’s trade with the U.S.

Also, China says it’s really serious about cleaning up its dirty steel mills and smelters this time.

From Russia with Hard-to-Find Oil

President-elect Trump has had mostly good things to say about Russia and he’s even boasted that he’d “get along well” with Russian Federation President Vladimir Putin, despite intelligence community accusations that Russia “hacked” the recent election by providing information from the Democratic National Committee and Democratic Nominee Hillary Clinton’s campaign manager, John Podesta, to organizations such as Wikileaks for wide distribution and dissemination. Trump may get tested early on that Russian reset, anyway, because Russia is already reclassifying its biggest shale oil find to avoid sanctions placed on the federation when it annexed Crimea.

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If Russia can avoid sanctions on its oil exports what will that say about any other country thumbing its nose at international law? Interesting trade times coming up.

US Steel plant in Granite City wide

The U.S. Steel Granite City Works captured by Google Street View in September, 2014 — a year and two months before the latest idling of the mill.

See the latest multimedia version of this story here.

This is our final top-rated post of 2016. Chinese market economy status was a huge issue for the entire year and this interactive package, originally published in May, put all facets of the problem into one package. How China will change its economy to compete with the rest of the world without overproduction for export is still an open question and a major threat to market stability. — Jeff Yoders, editor

Dan Simmons has seen a lot during the 38 years he’s worked at U.S. Steel’s Granite City Works in Illinois, just outside St. Louis.

From starting out as a general laborer, to swinging hammers on the track gang, to “feeling like Mr. Haney from Green Acres” while trucking around the mill, Simmons took it all in. There were days “you were whistling when you came in, and whistling when you left,” he said.

But nothing compares to what he’s seeing now.

“I have grown men coming into my office, crying,” said Simmons. “You see the pain, the ‘what ifs,’ the blank stares…”

Simmons, who just turned 56, is now the president of the United Steelworkers Local 1899, and some of the grown men coming to him are pipefitters just like he had become during his long tenure, which began in 1978.

However, those men and women aren’t coming to him because they’ve been hurt on the job. They are coming to plead for help, because they have lost their jobs, and in many cases still don’t know when they’ll land their next one.

Cyclicality in steel production is nothing new, but it wasn’t until 2008 — when the global markets began crashing — that USS Granite City Works endured its first indefinite idling in its history.

“We had the unemployment office cycling 400 people through at a time,” Simmons told MetalMiner. “The biggest fear is not knowing. If I could have given them a definitive timeframe, they would’ve said, ‘OK, I can handle that.’ But after two to three months, people come to me and don’t know what to do with themselves.”

And now, after the mill went idle a second time in December 2015, some of those workers have been without a job for nearly half a year. Last December, 1,500 people were laid off — 75% of the mill’s total workforce. Across the country, a total of 13,500 steel workers have been laid off over the past year.

Simmons knows what it’s like to feel that fear firsthand. “I got a brother that works here, a brother-in-law that works here, so it’s personal. You worry about where your whole family will be.”

So what’s different today, compared to 2008?

For Simmons and scores of others in the country’s steel sector and other manufacturing industries, much of the pain can be traced back to one main source: China.

A History of Unfair Trade?

The world may have never encountered a more crucial Year of the Monkey than 2016.

That is, at least as far as global trade between China and the Western world is concerned. At the end of this year, China believes it ought to receive Market Economy Status (MES). This would allow China to enjoy the same market status as the U.S. and European Union when it comes to anti-dumping investigations before the World Trade Organization.

In its quest to grow its economy over the past two decades, China has become the leading producer — by far — of steel, aluminum, cement and other industrial materials. Read more

Over the holidays, we are republishing and revisiting some of our most well-read posts of 2016. While this one technically doesn’t fall into the 2016 (it was initially published December 14, 2015) but we are still looking back at it anyway since it deals with predictions about metal prices for the year we’re about to leave behind. It also gathered the second-most traffic of any post we published in 2016 despite predating the year by a few weeks.

At the time, my colleague Raul de Frutos wrote “Currently, some key Chinese indicators we are tracking are giving us no reason to expect higher metal prices in 2016.”

Yet, we have seen higher metal prices in 2016 and we are now in a full metals bull market. The reason we are is because of everything Raul cited in his post. He was 100% right that “the longer it takes China to clean up its mess, the later metal prices will hit bottom.”

China cleaned up its mess, hit bottom early in 2016 and turned global commodities demand around remarkably fast, all things considered. This reminds us that markets can make a turn around quickly. The future is unpredictable and we need to take the market day by day. Just four months after this post, we went from bearish to completely bullish on industrial metals.  Enjoy the second of our Best of MetalMiner in 2016 series. -Jeff Yoders

As you well know, the main cause of the commodities meltdown has been China’s slowdown. Since China makes up half of the world’s demand for commodities, the economic slowdown means lower demand which has led to a situation where a glut of materials can’t find a home.

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The role that China plays in commodity prices is so big that the future of metal prices is totally dependent on China. The longer it takes China to clean up its mess, the later metal prices will hit bottom. Currently, some key Chinese indicators we are tracking are giving us no reason to expect higher metal prices in 2016.

Trade Surplus

Imports to China dropped 8.7% to $143.14 billion in November from a year earlier, extending a slump in imports to a record 13 months, suggesting that government stimulus measures are failing to boost growth.

China Imports (millions $) Source: trading economics.com

China Imports (millions $) Source: TradingEconomics.com from Customs Administration Data.

Meanwhile, Chinese exports declined 6.8% to $197.24 billion in November from a year earlier, marking the fifth straight falling month. The fact that China is struggling to increase its exports demonstrates that global demand is weak and that China will have to find a more painful solution to balance its surplus. The trade surplus and the inability to find a home for the excess of materials flow will continue to keep a lid on China’s growth, depressing commodity prices.

China Exports (millions $). Source: tradingeconomics.com

China Exports (millions of dollars). Source: TradingEconomics.com

 Yuan Falls To Four-Year Low Against The Dollar

Chinese authorities want to see a smooth depreciation of the yuan/renminbi as China faces external pressure not to devalue its currency too quickly. A sharp depreciation would probably hurt the country’s credibility at the same time China wants to attract more foreign capital. In addition, it would raise criticisms that China is keeping its currency artificially low to encourage more exports.

Yuan versus dollar. Source: yahoo finance

Yuan versus dollar. Source: Yahoo Finance.

Recently, China’s central bank cut its reference rate to the lowest level since 2011. The yuan fell against the dollar to the lowest level since 2011. Although China has said that it has not allowed the yuan to slide to boost the economy or increase exports, it seems that the market is taking these developments as desperate actions from China’s government to help the economy, raising concerns among investors that the country’s slowdown might worsen.

China’s Equity Markets’ Slump Continues

We believe that equity markets are the best benchmark for the performance of China’s economy, or at least investors’ sentiment about China. We’ve analyzed before the link between China’s stock market and commodity prices. Currently, this link is even more noticeable.

China FXI ishares

China FXI shares continue to fall. Source: @StockCharts.com.

After the huge slump this summer, equity prices mildly recovered, but since October we see that equities are heading south again. The poor performance of Chinese stocks demonstrates that investors are still worried about the future of the country and not lured by its government actions.

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Contrary to what others are saying, we suspect that the slump in China’s stock market could continue, resulting in more fears and more sell-offs in commodities/metals markets.

In recent weeks the Dalian and Zhengzhou commodity exchanges and the Shanghai Futures Exchange have all toughened trading requirements several times.

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The measures imposed include raising trading margins, hiking transaction fees and imposing trading limits in attempt to tamp down speculative trading. Reuters’ Clyde Russell referred to the situation as China having “thrown the world’s commodity producers and traders a massive party.”

HRC and CRC prices in China continue to rise. Source: MetalMinerIndex

HRC and CRC prices in China rising through November. Source: MetalMinerIndX.

This year saw most analysts surprised by the strength of both China’s coal and iron ore imports, which led to rallies in the prices of both commodities. Chinese imports of iron ore jumped to the third-highest on record in November with 91.98 million metric tons up 13.8% from the previous month, taking the year-to-date gain to 9.2% compared with the same period in 2015, according to Reuters. Read more

Many economists and market observers have been warning for some time that with cheap cash sloshing through the Chinese economy, and attractive investments in the real economy remaining scarce, investors had plowed too much money into China’s bond market.

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The Financial Times reports China’s 10-year government bond yield fell from 4.6% in January 2014 to 2.65% by late October. Banks borrow overnight and buy longer dated bonds in what appears a clear carry trade but, to work, the market requires stable and low market rates. Read more

President-elect Donald Trump isn’t even in the White House yet, but he has managed to shake up America’s foreign policy more severely in the last few weeks then many presidents that have served a full-term.

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His choice of Rex Tillerson, the chief executive of ExxonMobil, for the position of Secretary of State has rattled not just Democrats but many Republicans. Tillerson is accused of being too close to Russia and too friendly with Vladimir Putin following years of interaction between the world’s largest oil company and the Russian regime. Specifically, some accuse him of having a conflict of interest due to ExxonMobil’s investments in the Russian Federation.

Rex and Vlad: Best Buds?

ExxonMobil has a profitable operation at Sakhalin Island in eastern Russia and had begun a drilling program in the Arctic Kara Sea. The firm had agreed to explore shale oil areas of western Siberia and in deep waters of the Black Sea if sanctions are lifted. According to the Washington Post, deciding whether to lift economic sanctions on Russia will be one of the first priorities if Tillerson secures his position as Secretary of State. Read more

China took action yesterday and filed a complaint with the World Trade Organization against the U.S. and Europe for not automatically granting China Market Economy Status.

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In fact, Commerce Secretary Penny Pritzker went on record specifically stating that the U.S. would not be granting China such status.

The granting of market economy status, of course, would make it harder for domestic companies to prove dumping against China. It all comes down to how price comparison data is calculated.

GOES_Chart_December_2016_FNL

According to Tim Brightbill, an attorney at Wiley Rein LLP, “essentially the only thing that would force the Commerce Department to formally confront the China/MES question is a trade lawsuit filed by China, or implicating China, in which the latter would be explicitly able to make that type of request.”

Alhough Europe appeared to be teetering with its decision not to provide MES, Japan also sided with the U.S. and denied China MES.

Why This Matters to GOES Markets

GOES has been the subject of international trade dumping cases for the past several years. The real challenge to MES will be the first trade case filed by any domestic industry against China. GOES will unlikely serve as that test case.

For readers interested in how China sees this issue (and uses the word protectionism to make its case), this post provides a good example.

We remind readers that MetalMiner is a banned publication within China because of all of our subversive anti-China rhetoric.

On that note, GOES industry observers should take note of a steel mega-merger within China. China’s Baoshan Iron & Steel (Baosteel) and Wuhan Iron and Steel Corp. (WISCO) have formed China Baowu Steel Group with a whopping 60 million metric tons of capacity (that is more than half of the entire U.S. steel-making capacity).

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The combined firm has publicly stated it would cut 16.6 million mt of capacity by 2018 to address the country’s over capacity concerns.

Baosteel is also major producer of GOES within China.

Grain-Oriented Electrical Steel M3 prices lost nearly all of last month’s gains dropping by nearly 3%.

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The European Union has launched a new investigation into Chinese steel imports, this time to determine if corrosion-resistant steel grades merit further investigation and possible duties.

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The E.U. currently has 40 anti-dumping and anti-subsidy measures in place, according to Reuters. 18 of these are products from China and a further 20 investigations on steel products are ongoing. The European Commission said it would start another anti-dumping investigation into cast-iron products from both China and India while reviewing whether existing duties on Chinese seamless steel pipes and tubes should continue for another five years. The E.U.’s action is being met by a rising level of concern in China which sees protectionist overtones in the E.U.’s moves.

Ascension Debate

The timing of the E.U.’s latest action is viewed with some suspicion in Beijing, coming just days before the 15th anniversary of China’s accession to the World Trade Organization. China says that from December 11 the E.U. should consider China’s prices as fair market value. Others say China must make minimum standards of market participation. Up until now, the E.U., like all WTO member nations, could compare Chinese prices with those of another country of their choosing, in this case Canadian prices. Not surprisingly, Chinese steel prices are consistently below Canadian prices, supporting legislation and anti-dumping penalties. Read more