China

The China Non-Ferrous Association announced this week that leading Chinese aluminum smelters intend to axe 2.4 million metric tons of capacity in the next couple of months.

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Nearly all the world’s net gain in production capacity has come from China this year and, while estimates vary, a portion of the industry, even in China, is certainly losing money at current prices.

That is the case in the rest of the world, too, with UC Rusal and Alcoa, Inc. both contemplating further closures. Inside China, the growth of new smelter capacity has been in the northwest, often based on captive, low-cost coal deposits for power generation and utilizing the latest smelter technology that, combined with large economies of scale, has made these Chinese smelters some of the lowest cost of production in the world.

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The aluminum surplus, and a weak economy at home, have finally forced Chinese smelters to cut production.

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Just when iron ore miners thought sentiment couldn’t get much worse, Goldman Sachs Group comes out with a report predicting iron ore prices will tumble by 30% over the next 18 months according to a Bloomberg article this week.

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The bank is saying the rebound seen over the last five weeks is merely a blip and that normal business will shortly resume.

Source: FT

Source: Financial Times

Supply growth is set to continue, the report states, but, and this is crucial, China has reached peak steel and from now on steel production will only contract in China.

More Inventory Than Necessary

As shipments pick up from Australia, Brazil and India, the seaborne market will become awash with inventory and prices will be further driven down. Iron ore is seen by Goldman as averaging $49 a ton this quarter, and $48 in the final three months of 2015. Before falling further next year to $46 in the first quarter and $44 the following quarter. With little or no market discipline, the bank suggests 2016 will see average prices around $44 per ton. In the words of the report’s authors “the summer of 2015 is the calm before the storm.”

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Steel consumers can, therefore, expect mills’ raw material prices to continue to weaken as seaborne prices gradually knock on to contract prices elsewhere. With demand lackluster and too much finished steel chasing too few orders, even as markets like North America and Europe show encouraging signs of GDP growth, steel prices will have little to support them this year and next. Good news for consumers, tough times for producers working with low-capacity utilization and stronger domestic currencies sucking in imports.

 

The Department of Commerce formally initiated new anti-dumping duty and countervailing duty investigations of imports of cold-rolled steel flat products from Brazil, China, India, South Korea, and Russia and anti-dumping investigations of imports of the same cold-rolled flat products from Japan, the Netherlands, and the United Kingdom.

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This action by commerce is in response to petitions filed by domestic producers on July 28th.

The petitioners are the usual group of US producers that have long said that foreign steel imports are subsidized by overseas governments in complete violation of US anti-dumping law. The group is composed of AK Steel Corp., ArcelorMittal USA LLC, Nucor Corp., Steel Dynamics, Inc. , and U.S. Steel Corp.

The products covered by these investigations are cold-rolled (cold-reduced), flat-rolled steel products, whether or not annealed, painted, varnished, or coated with plastics or other non-metallic substances. The products covered do not include those that are clad, plated, or coated with metal. The products covered also include coils that have a width or other lateral measurement of 12.7 millimeters or greater, regardless of form of coil (e.g., in successively superimposed layers, spirally oscillating, etc.).

The products covered further include products not in coils ( in straight lengths) of a thickness less than 4.75 mm and a width that is 12.7 mm or greater and that measure at least 10 times the thickness of the product. The group of products alleged to have been dumped also includes products not in coils (e.g., in straight lengths) of a thickness of 4.75 mm or more and a width exceeding 150 mm and measuring at least twice the product’s thickness.

The investigation will also take into account origin country. The petitioners allege that some cold-rolled products are shipped from their origin country and further processed in a third country before import into the US market. This is a key point for the domestic producers, particularly concerning exports of Chinese steel. The domestic producers have previously accused Chinese producers of shipping to third-party countries where the product are processed and changed in order to conceal the initial manufacturing country upon entry in US ports.

The US International Trade Commission (ITC) is scheduled to make its preliminary injury determinations on or before September 11.

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The alleged anti-dumping margins of each country:

Brazil: 30.28 to 35.43%
China: 265.79%
India: 43.12%
Korea: 75.42 to 177.50%
Russia: 69.12 to 227.52%
Japan: 71.35%
Netherlands: 39.43 to 121.53%
United Kingdom: 32.59 to 69.30%

All alleged subsidies by foreign governments, which would qualify the products for countervailing import duties are alleged to be above a 2% subsidy.

 

Contrary to so many other elements of the trade relationship between China and the rest of the world, supply chain experts had come to expect a relatively benign relationship between the yuan renminbi and the US dollar. Over the past decade, China’s central bank has either permitted the renminbi to creep slowly upward against the US dollar – at a pace considered glacial by the standards of foreign exchange markets, the FT reports in a recent article – or held it steady in times of stress, such as the global financial crisis of 2008-09.

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But this week’s flash devaluation, by as much in one week as the currencies have moved in the last year, has sent shock waves through the markets and upset the long-held and, in hindsight, somewhat complacent view that, at least in terms of that currency pairing, the renminbi was destined to rise with the dollar.

Economic Aftershocks

In many ways, the shock is greatest for China’s Asian competitors who had planned on a continued appreciation and are now faced with the possibility of a more competitive China on their doorstep.

You would expect China’s exporters to be delighted with the move but a combination of gradually appreciating currency since the dollar peg was removed in 2005 and rising inflation, particularly wage inflation, has resulted in many Chinese manufacturers finding themselves at a considerable disadvantage to competitors in Bangladesh, Vietnam, and other low-wage countries even after this modest devaluation.

Such manufacturers of low-value products, such as textiles, were looking for a renminbi devaluation in excess of 10% against the US dollar, and who is to say that that may not come about? Beijing is clearly rattled by the slide in the economy’s GDP, by some measures the real growth rate is well below the headline 7% and still falling so we should not rule out the possibility of further falls in the exchange rate.

Borrowing Boondoggle

However, Beijing will have one eye also on debt financing. To the extent that exports may be boosted by a lower exchange rate, debt financing costs are increased. Not just China but many developing countries that have borrowed heavily on the external finance markets have been fearing the impending rise in the Federal Reserve prime rate and the accompanying rise in the US dollar that will, it is widely expected, accompany the Fed’s move.

As the US dollar has risen this year against global currencies, companies and states have found their external finance costs increse. China is far from alone in this respect and is much better prepared, with huge US dollar foreign reserves, to weather such a rise, but other developing market economies are not so fortunate as this graph from the Financial Times based in BIS data illustrates the extraordinary rise in debt levels

Source: FT

Source: Financial Times

The FT uses a couple of examples to illustrate the problem at company level. Read more

As China goes, so too does the rest of the world, and that has been none more painfully clear than with the plummet of aluminum prices. China export volumes continue to be a main driver for this industrial metal’s decline. You can learn all about it, in addition to how other industrial metals are faring, by subscribing to our new Monthly Metal Buying Outlook.

China Export Volumes

We touched on the rise of Chinese aluminum exports back in April, as the Far East nation continued its transition into a consumer economy and, in turn, saw its domestic demand for aluminum fall off. However, that didn’t stop the Chinese from commissioning a new plant later this year that has the ability to produce upwards of 2 million tons of finished aluminum.

With so much aluminum being produced and so little domestic demand, what is a nation that has historically had issues unloading the product to do? The Shanghai Futures Exchange price has helped alleviate China’s difficulty exporting aluminum by dropping relative to the LME, allowing Chinese producers to better compete across Asia.

Just last month, the sharp increase in Chinese aluminum exports (35% year-over-year) raised a few eyebrows, most notably from Alcoa Inc.‘s Klaus Kleinfeld, who claimed the nation’s surging export figures were skewed by semi-finished products. The 2.5 million metric tons of unwrought aluminum and related products in the first half of 2015 equaled a 650,000-mt increase compared to the year prior.

At the Mercy of China’s Aluminum Producers

According to the Wall Street Journal, China accounts for about half of the world’s aluminum production and its producers are showing no signs of relenting their output of the metal despite plummeting prices. This is not what the rest of the market wants to hear.

“Chinese production is growing faster than in the rest of the world,” Ivan Szpakowski, Hong Kong-based analyst with Citi, told the news source. “Most producers in China are still making money, especially the ones with new capacity.”

Although the strength of the dollar has benefited aluminum producers outside the US to offset China’s export volumes, something has to be done as the global aluminum market could reach a surplus of 3 mmt of the metal before year’s end.

“China’s government should realize that huge exports are significantly influencing lower prices at the London Metal Exchange and it hurts primary producers not just outside China, but in China too,” Goran Djukanovic, an independent aluminum analyst, told the WSJ.

What Should My Industrial Buying Strategy Be?

You can find a more in-depth aluminum price outlook and forecast in our brand new Monthly Metal Buying Outlook report. For a short- and long-term buying strategy with specific price thresholds:

Goldman Sachs Group, love ‘em or hate ‘em, has an enviable reputation for correctly predicting economic trends, be they stock markets, exchange rates or commodities.

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Part of the reason is that they hire some of the brightest and best, and another part is that they have enormous resources at their disposal.

Bulls vs. Bears

Bulls and bears are squaring off again, this time over the future of the Chinese metals market.

A combination of the two is channeled into top-class research and analysis, so when the bank creates a new index, the markets take notice. A Financial Times commodities note reviews Goldman’s latest creation, the China Metals Consumption Index and reports what it has to say about China’s economy based on 100 components of China’s industrial production data that pertain to commodity consumption.

China’s Far-Off Hard Landing

The index shows the pace of demand growth for metals and other mined commodities has now been slowing for four years. In the second quarter, Chinese demand actually fell for the first time since the financial crisis, the FT says, and as a result Goldman is now forecasting a “hard landing” for metals demand for the first half of this year which has not fully translated into prices yet.

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One may think that China’s steel industry could hardly be in a worse place.

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Half the industry is losing money in spite of falling iron ore and coking coal costs and a reduction in domestic power costs all aiding steel producers on the supply side. Even among those that did not lose money in the first half, margins are said to be razor-thin and banks are reported to be cutting credit lines and presenting difficulties in rolling over loans, according to China Iron and Steel Association (CISA) comments posted by Reuters.

Too Much Production

It’s a toxic mix of overcapacity and poor demand that is causing the industry the most trouble.

The residential construction sector is undergoing a painful adjustment as a previous boom turns to something close to a bust, Reuters reported. Investment in real estate grew by just 4.6% in the first half of this year; a year ago it was running at just over 14%. The collapse of the stock market and corresponding impact on confidence could even see that turn negative in the second half.

Construction, though, is just one part of a broader slowdown in fixed asset investment (FAI) in China. Despite all the talk of government infrastructure spending, FAI growth has decelerated to 11.4% from 17.3% over the same period a year ago.

Steel producers outside of the country are looking on with concern.

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Concern in China is rising that June’s 3.4% fall in auto sales, compared to the year before, could be the start of a trend. After two years of consistent growth and high capacity utilization the world’s largest car market is showing signs of fragility.

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Data from the China Association of Automobile Manufacturers quoted in the Financial Times suggests China’s automotive market may be maturing after years of breakneck growth.

Chinese Automotive Market Falling

Foreign firms have been hardest hit. Volkswagen and BMW have reported falling sales and increased pressure from distributors for discounts. Chinese brands, by contrast, have fared a little better after four years of consecutive annual decline relative to overseas brands. The Japanese are also back in the mix having rebounded after two years in which anything Japanese suffered as a result of territorial disputes and political tensions.

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This is part two of an analysis of how China’s recent stock market crash affects neighboring India.

The Indian arm of global credit rating agency Fitch said with soft demand in China, base metal prices had gone down in the range of 2-21% in the first six months of 2015.

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On a year-to-date basis, Chinese domestic hot-rolled coil steel prices declined by 21%. London Metal Exchange nickel prices are down by about 12%, LME copper prices by 9% and China alumina prices by about 10%. In the last one month, iron ore prices dropped by 20%, Shanghai steel prices by 16.4%, and zinc prices by 7%.

What’s This Mean for Steel?

In reference to India’s steel sector, rating agency Ind-Ra pointed out that Indian manufacturers were already struggling with low capacity utilization, and lukewarm domestic demand was unlikely to benefit the margins of manufacturing units in the short term.

So was there any silver lining at all for India where the Chinese downturn is concerned? Depends who you listen to or talk to. Here’s what a report in the Business Standard claimed — the economic downturn would be good for smart cities. The rationale — copper is trading at a 6-year-low and China is the world’s top copper consumer, accounting for 40% of global consumption.

How About Aluminum?

Similarly, aluminum is trading at new lows and was already trading at prices below cost of production of many Chinese companies. For India, as a consumer, this is good news as the cost of constructing new infrastructure, especially smart cities, would reduce.

And that extends to a lower price for a technology innovation dear to almost everyone in the world, according to the report. Mobile phones will be cheaper, it predicted. If the Chinese really devalued their currency, world markets will be flooded with Chinese goods at low prices affecting exports of other countries, including India.

As for the rest, such as automobile manufacturers, it could possibly get only worse in the coming days.

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The author, Sohrab Darabshaw, contributes an Indian perspective on industrial metals markets to MetalMiner.

Gold hit a fresh five-year low today and China’s top steel-producing city is getting serious about enforcing pollution standards.

Gold Keeps Falling

Gold stretched its losing skid to six sessions and made a fresh five-year low in early trading Monday. At its low point Monday, an ounce of gold dipped below $1,100 to $1,080 — its lowest level since February 2010 — and was down 4.6% before recouping some of its steep losses.

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About 8:30 a.m. ET, an ounce of gold was down $18.80, or 1.7%, to $1113.10. Last week, gold tumbled more than 2%.

Our Lead Forecasting Analyst, Raul De Frutos predicted the yellow metal had further to fall last week.

Tangshen to Crack Down on Pollution

China’s top steel producing city of Tangshan will punish steel companies if they fail to meet tough new pollution standards over the next three months, according to new industry guidelines. This could force closures and help ease a severe capacity glut. China is using tougher environmental rules to help tackle a severe glut of steel capacity that has depressed prices.

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