China

That China uses overseas investment as a tool for political as well as economic advancement is no surprise to anyone.

Why Manufacturers Need to Ditch Purchase Price Variance

Beijing has come under criticism in the past for investing in places like Zimbabwe and Sudan regardless of the human rights flavor of the regime in power, but such criticism is like water off a ducks back. China is in it for China’s gain and cares little for what others may say.

It will be intriguing looking back 10 years from now to see what some of these emerging markets have given away to China in return for much-needed investment. Beijing is not stupid and exacts a price for it’s infrastructure and development investments in in the form of ownership of mines and agricultural assets useful for their industry and food supplies.

A Tale of Two Centuries

Many would argue this is no different from western nations’ exploitation of African and South American countries in the last century, but you would certainly hope the recipients had learned from such experiences. One advantage China wrings from such deals is often the supply of materials and equipment in addition to expertise and finance.

In many cases even the workforce is supplied, too, in the construction of infrastructure projects. In the face of growing global alarm at rising Chinese steel and aluminum exports, recipients of direct investments can hardly complain about the provider supplying materials, so major road, rail and power projects provide an opportunity for substantial Chinese exports.

China in Brazil

This appears to be one of the major attractions in investment decisions made this month in Brazil following Premier Li Keqiang’s visit to Brazil, Columbia, Peru and Chile. Li announced billions of dollars of investments while there last week, potentially up to some $50 billion to Brazil alone according to Reuters, on top of a similar amount in other South American countries.

In return, Brazil has gained not just desperately needed finance and investment but concessions for exports such as a lifting of the 2012 beef ban following an outbreak of mad cow among Brazil’s herds. According to the Guardian newspaper, trade between China and Latin America as a whole exploded from barely $10 billion in 2000 to $255.5 billion in 2012, while Chinese-Brazilian trade mushroomed from $6.5 billion in 2003 to $83.3 billion in 2012.

Although China is just the 12th-largest investor in Brazil, it is Brazil’s largest export market, mostly of raw materials, a situation Brazil would dearly like to change if it were only competitive when it comes to manufactured goods. One area of expertise is aircraft, part of the recent deal is a $1.3 billion sale of 22 Brazilian Embraer commercial jets to China’s Tianjin Airlines.

Anyone familiar with the trials Vale SA has been going through gaining agreement to use its fleet of new Valemax super ore carriers docking at Chinese ports, will not be surprised to hear the iron ore producer has finally caved in and sold four of the vessels to China Merchants Energy Shipping Co. Ltd. for an undisclosed sum. It was only ever about China having a role in that trade.

Construction has started on a 2,800-kilometer transmission line by China’s State Grid Corp., the world’s largest utility to link the Belo Monte hydroelectric dam under construction in the Amazon to the industrial state of Sao Paulo whilst much talk is being made of a possible railway from the southeastern Brazilian port of Santos more than 3,500 km (2,200 miles) to the Peruvian Pacific port of Ilo.

For Brazil, it offers the chance to avoid the Panama Canal and, for China, lower-cost access to Brazil’s markets via the Pacific in addition to the steel, rolling stock and associated equipment that would no doubt be part of the deal.

China has become adept at, as the Japanese before them, combining finance, expertise and material supply in their overseas investments. State driven and financed, they can afford to play the long game and maximize political and well as commercial aims. In that regard, cash-strapped but economically more developed South America has much more potential than Africa did. Expect more of the same in the years ahead as China seeks to both spread its influence and put those massive reserves to use abroad.

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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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According to a report, crude-steel output in China dropped 1.3% to 270.07 million metric tons in the first four months of 2015 as compared to the same period in 2014. The World Steel Association has forecast that China will end up using far less steel this year and maybe even the next. Which again means more supply and far less demand.

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The report quoted Alan Chirgwin, BHP Billiton iron ore marketing vice president, as saying steel supply was expected to rise by about 110 million metric tons this year, exceeding demand growth by around 40 mmt.

Yet this has not fazed Rio Tinto Group, for example, which recently announced it would continue with its plan to produce iron ore at full capacity despite the fall in prices. While BHP and Brazil’s Vale SA have, for now, stepped on the brakes vis-à-vis their medium-term plans, team Rio, on the other hand, thinks reducing production costs will help it hang on to its lead…and profits.

Betting on a Comeback

Rio Tinto sees China coming back with renewed vigor and driving global iron ore demand through 2030.

Where does that leave India? So far as iron ore or even steel consumption is concerned, China is miles ahead of India, even in the fatigued condition it finds itself today. India, as reported by MetalMiner, drew a blank for about two years due to a court-imposed ban on ore mining, which left its steel companies at the mercy of imports, something that they continue to rely on even today.

That had also affected its iron ore exports, especially from the ore-rich provinces of Goa and Odisha. India’s iron ore imports went up dramatically to a record 6.76 million tons in the first 7 months of the 2014-15 fiscal year. Once, the country was the third-largest supplier of iron ore to the world, but, because of the export duty and a national mining ban, it had turned into an importer.

Analysts predict India was likely to remain a net importer of iron ore in 2015-16 as well, no thanks to the continued drop in falling international rates. The only silver lining, claimed analysts, could be that due to the resumption in the domestic production of iron ore, the quantity of imports may not be as high as the last fiscal year.

Captive Market

India’s steel companies do not have captive mines, so they have to get their average 95 mmt a year of iron ore from elsewhere. With international price of ore hovering today at about $50 per mt for high-grade ore, it is too attractive a deal for Indian steel mills to be passed on. As reference points, last year, iron ore imports happened when rates had touched $90 per mt.

In all this, Australia, a country that sells about 80% of its ore to China, sits in a happy position. While it hopes that the recent cuts in interest rates will revive the Chinese economy, and thus its demand for iron ore and coking coke, it is also looking increasingly to India to pick up its stock. Last year, for example, as reported by MetalMiner Australia had approved Adani Group’s approximate $15.5-billion (AUS $16.5 billion) Carmichael coal project in Queensland that could yield up to 60 million mt of coal per year. That was just the beginning. For the Aussies, if the dragon’s appetite for iron ore and coking coal is satiated, the hungry tiger is always lurking in the background.

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When the Tiger and the Dragon dine together the world sits up and takes note.

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Signing business agreements worth $22 billion is a big deal so Indian Prime Minister Narendra Modi’s recent visit to China made big, bold headlines here. Some of India’s old, and some not so old (Adani, Bhusan Power and Steel), players in the steel and power sectors, were signatories to the 26 deals.

Steel and Energy Deals

The notable contracts included the one between India’s IL&FS Energy Development Co. and China Huaneng Group for a 4,000-megawatt thermal power project, and India’s Bhushan Power and Steel sealing a pact with China National Technical Import and Export Corporation for an integrated steel project in Indian province of Gujarat.

So here were two Asian, nee global, giants, breaking bread and talking business at the same table, sending analysts scurrying to their laptops to chalk out spreadsheets and draw pie charts in an effort to understand the impact of all this in the long term.

While business leaders of both nations, including Alibaba Group Chairman Jack Ma, spoke of long-term interests, such talk brought the arclight swinging back to the present and short-term situation currently prevailing in the Asian region, especially in iron ore and coking coke, two crucial ingredients in making steel.

There’s no doubt in anyone’s mind that steel is the mainstay of Asia’s infrastructure, a fact that has had iron ore and coal miners — and even steel majors in China, India and as so far as Australia — jockeying for a major piece of new market share. With demand from Europe and the US lacking, suppliers in all three countries are walking a thinly veiled tight rope to ensure their survival.

Wither Demand

Once a destination of hope, the Chinese dragon, for now, has lost some of its hunger. Some say next-door neighbor India is where one can find fresh action. The jury’s honestly still out on that one, though. But the slowdown in China’s economy means less need for steel, in turn, lowering the demand for ore and coking coal. Leaving miners re-tweaking their business plans.

Last year, for example, the Rio Tinto Group, BHP Billiton Ltd. in Australia, and Vale SA of Brazil, to stem the tide, had stepped up low-cost output to pump up volumes, leading to a glut. Now, everybody’s mantra seems to be – cut production costs faster than the falling prices.

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The American Iron and Steel Institute (AISI) 2015 General Meeting closed just yesterday here in Chicago, where steel industry folks on the producer and service center sides (to name a couple) came together to discuss key issues surrounding the US steel market landscape, while leaving a crucial issue explicitly unmentioned – but we’ll get to that in […]

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This week, our metals markets fell lower as they were buffeted by seemingly ever-increasing exports of steel, aluminum and other products from China.

Why Manufacturers Need to Ditch Purchase Price Variance

Even though China’s economic growth has been falling, its government still gives producers strong incentives to produce steel and aluminum that eventually ends up exported elsewhere. My colleague Stuart Burns rightfully points out that if Chinese mills are “supported by plunging raw material costs and extensive local state support, gifting them a break-even price around the lowest in the world, then the intent to simply ‘dump’ metal into export markets has few barriers.”

Can Debt Fuel Long-Term Growth?

But what’s the eventual result of state support? In China or anywhere else? Can government debt actually lift these economies back into growth mode? Stuart was there again, with an assist from the Daily Telegraph, postulating that sluggish growth and low inflation is the new normal and “advanced economies — and perhaps emerging ones, too — seem to have run out of productivity-enhancing growth and, therefore, need constant infusions of financially destabilizing debt to keep them going.”

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When domestic markets weaken, most producers turn to export markets to sell excess capacity, but you don’t just break into export markets overnight. It’s not that easy. Sort of like one does not simply walk into Mordor.

Why Manufacturers Need to Ditch Purchase Price Variance

The tried and trusted short-term approach is to sell cheap, making it hard for buyers to refuse the low-priced product being offered.

Sell Low, Buy Even Lower

If those mills are supported by plunging raw material costs and extensive local state support gifting them a break-even price around the lowest in the world, then the intent to simply “dump” metal into export markets has few barriers.

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Another day at MetalCrawler and another steelmaker reports a loss due to imports. Also, US economic growth ground nearly to a halt in the first quarter and the US International Trade Commission reaffirmed duties on Chinese steel tubes.

U.S. Q1 Results Disappoint

U.S. Steel Corp. reported a loss and lowered its pretax 2015 earnings forecast by around $500 million, citing “massive” imports, particularly from China, low oil prices and excess inventories.

Why Manufacturers Need to Ditch Purchase Price Variance

The results were worse than expected and pushed the Pittsburgh-based steelmaker’s stock down.

Domestic steelmakers are reeling as prices have dropped to their lowest levels since the 2009 financial crisis. The benchmark hot-rolled coil index has declined 26% since the start of the year, to $444 per ton.

U.S. Steel Chief Executive Mario Longhi called market conditions “extremely difficult” as the company, in a statement, blamed imports and oil prices.

Overall steel imports into the US rose 14% to 7.9 million tons during the first two months of 2015, according to Global Trade Information Services. The US imported 397,062 tons of steel from China during that time, up 24% from the same period a year before.

US Economy Barely Grows

The US economy skidded to a near halt in the first three months of the year, battered by harsh weather, plunging exports and sharp cutbacks in oil and gas drilling.

The overall economy grew at a barely discernible annual rate of 0.2% in the January-March quarter, the Commerce Department reported Wednesday. That is the poorest showing in a year and down from 2.2% growth in the fourth quarter.

ITC Affirms Steel Oil Tube Tariffs

The US International Trade Commission (ITC) voted unanimously that US producers were injured by subsidized imports of oil country tubular goods (OCTG) from China. The ITC decision affirms countervailing duties (CVD) of 10-16% established earlier this year by the Commerce Dept. Commerce will now issue a countervailing duty order on the Chinese imports as a result of the ITC’s affirmative determination.

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In a surprise move, the Chinese Ministry of Finance announced this week that, effective May 1, they are scrapping export tariffs on alloyed and unalloyed aluminum bars and rods, according to Reuters.

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Along with similar changes to a host of other metals including molybdenum, tungsten and rare earth metals, Beijing has moved to support domestic aluminum producers by opening the flood gates to export markets. This will have the effect of reducing the domestic glut of metal, supporting domestic prices and depressing prices in overseas markets.

China Increases Exports

Even with tariffs in place, China has been rapidly ramping up exports, Reuters said. China’s exports of semi-finished aluminum products rose 49% year-on-year to 1.07 million metric tons in the first quarter, of which 182,257 mt were bars, rods and profiles.

With a domestic primary production capacity of 36 million metric tons and actual production last year of about 27.5 mmt Chinese producers have the ability to easily increase production without creating any shortages in their domestic market. Recent power tariff reductions by the national grid will aid smelters in controlling costs even if prices in export markets fall further.

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According to the latest Short Range Outlook (SRO) report released by the World Steel Association for 2015-2016, steel demand was forecast to grow by just about 0.5% to 1.544 million metric tons in 2015. The next year could be better with a forecast of 1.4% to reach 1,565 mmt. Last year, incidentally, steel use grew by 0.6% in 2014.

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The economic slowdown in China is leading to lesser uptake of steel and that was was one of the major reasons for the sluggish growth. This was expected to be partly only partially offset by a measure of growth in developing economies such as India, Indonesia and Vietnam.

The Dragon Gives Way to the Tiger

Clearly, in the next two years, so far as steel is concerned, one emerging superpower will give way to another neighboring one. India’s steel consumption growth was on its way to register a new high this year as well as the next, at 6.2% and 7.3%, respectively, while other high-consuming nations besides China, including the US and Japan, are expected to see a decline.

India, as per WSA data, was the world’s third-largest steel producer with a production of 14.6 mmt in the first quarter of 2015. In this period, India’s production grew by 9.4% compared with the first three months last year. As reported by MetalMiner, it was in February this year that India had passed the US to become the world’s third-largest steel producer, after China and Japan.

Can India Offset the Losses?

The world’s steel sector hopes India can power it through this downturn. The country’s per capita consumption is still low, at about 60 kg opposed to the world average of 220 kg. With the government’s Make In India (manufacturing) plan slowly grinding into motion, it is now hoped that this would lead to an increase in steel consumption.

So, is the China steel story over? It’s affirmative, at least for the short-term. The economic deceleration there, following low investment growth since 2008, was expected to adversely impact its steel growth, and it has.

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