China

The top steel executives in the U.S. called the fight against cheap steel imports a “war” in the American Iron & Steel Institute‘s annual press conference at its general meeting in Salt Lake City, Utah. The picture they painted was bleak.

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Domestic steel capacity utilization averaged just 70% in 2015. It’s still only at 71.3% capacity utilization for Q1 of this year. They also said 13,000 steel jobs have been lost in the past year. All pointed the finger at global overcapacity.

Crisis Level

“Global overcapacity has been a problem for a long time but, today, it is a crisis,” said John Ferriola, chairman, president and CEO of Nucor Corporation and the newly elected chairman of the AISI for 2016. “This overcapacity, combined with declining demand from countries like China is fueling continued high levels of dumped and subsidized imports into the U.S. market. China has subsidized the growth of its steel industry through grants, low-interest loans, free land, low-priced energy and other raw material inputs. Simply stated, the Chinese government is a company disguised as a country and they are waging economic war on the United States.”

steelexecs

Executives from major North American steel companies addressed the media at the general meeting of the American Iron & Steel Institute in Salt Lake City. Source: Jeff Yoders/MetalMiner.

Thomas J. Gibson, president and CEO of AISI, called upon other steel making nations to take action to eliminate global steel overcapacity. Gibson also said the U.S. government should vigorously enforce trade laws to fight against the dumping of cheaper steel products and the implementation of market-distorting policies and practices by other steel producing nations, particularly China.

China’s Still a Non-Market Economy

The executives also said that China must continue to be treated as a non-market economy for anti-dumping purposes according to the World Trade Organization. Read more

China has a dilemma.

On the one hand, popular protests due to increasing levels of pollution are an expression of growing unrest among China’s rising middle classes, all conscious of environmental issues.

Too Much Pollution

Pollution is a source of international shame that has prompted Beijing to take the drastic steps of closing down coal-fired power generation and coal-consuming heavy industry around cities hosting major events such as the Olympic games and flower festivals, so that the People’s Republic can show a clean face to the world.

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On the other hand, that same coal is mined by some 5 million coal workers who have already come onto the streets to protest loudly and publicly about proposed rationalization in the industry and Beijing is nothing if not sensitive to public protest.

Could 2015 be the beginning of the end for coal-fired power in the US? Source: Adobe Stock/Snap Happy

Coal-fired power continues to dominate Chinese power  generation. Source: Adobe Stock/Snap Happy

So, what to do? close coal mines and coal-fired power stations or keep them open and suffer the atmospheric pollution and health hazards that involves?

Pollution Exports

The answer, as with so much else in China, is export it so it’s someone else’s problem. In this case, the policy appears to have been to export the pollution and hence the problem westwards and centrally to less-affluent and less-populated areas.

According to the Financial Times, pollution has decreased in Beijing and Shanghai while it has increased in the interior. Beijing’s smog has been lifting, the average concentration fine particulate pollution (PM2.5) is down 28% year-on-year in the first three months of this year. Read more

If you had been asleep for the last month, woke up this morning and picked up a paper you could be forgiven for thinking you had been transported back to 2009.

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Chinese construction is up 20% last month year-on-year, Chinese loans were up 41% last month, the government is raising exchange-margin requirements from 5 to 8% to dampen rampant speculative behavior, should we go on?

Is it 2009 Again?

Turn to commodity prices, copper is up 20% this quarter, zinc is up 22%, iron ore has nearly doubled, hitting $70 per metric ton and a 16-month high according to Bloomberg. Steel mills in China, encouraged by rising prices and strong construction demand, churned out over 70 million metric tons last month, nearly equivalent to the entire U.S. annual output. Sound like the start of the supercycle to you?

Iron ore producers are trying to take credit for cutting back on expansion of iron ore mines and are indicating they would limit production to support prices, but, in reality, they are tinkering at the margins. Read more

While one high level meeting was going on in Doha, Qatar — in an effort to control the fate of the oil price — another was going on in Brussels, Belgium, seeking to decide the fate of the steel market.

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Representatives from around 30 countries including China, Japan, Germany, India, the U.K. and the U.S. met with European Union, World Trade Organization, Organization for Economic Cooperation and Development and World Steel Association representatives met in the Belgian capital in a bid to come up with a package of measures that will curb the huge overcapacity at the heart of the steel crisis, the London Telegraph reports.

Chinese Production Cuts Demanded

The E.U. and U.S. would like to see China agree to cut production and fast but China has said, “Blaming other countries is always an easy, sure-fire way for politicians to whip up a storm over domestic economic woes, but finger-pointing and protectionism are counter-productive.”

This steel plant at Port Talbot in South Wales, U.K., could close if Tata Steel can't find a buyer. Even as steel prices increased last week. Source: Adobe Stock/Petert2

This steel plant at Port Talbot in South Wales, U.K., could close if Tata Steel can’t find a buyer. Source: Adobe Stock/Petert2

China even called such allegations a “lame and lazy excuse for protectionism.”

China Cries Protectionism

One could easily have some sympathy for the Chinese position, at least as far as the E.U. is concerned. Environmental legislation-inspired energy costs have been the dead weight dragging down all European steel producers, none more so than the U.K. which is likely to see the last major primary production facility close in coming months, leaving just one electric arc furnace plant.

Officially, the OECD said the meeting will “discuss how governments can facilitate market-driven industry restructuring and … agree on steps to reduce competition-distorting policies.”

According to OECD analysis, overcapacity in steel was above 70 million metric tons at the end of 2015, and new plants are set to add another 47 mmt by 2018. In spite of promises of good intent made in the past, China has continued to increase production. Output in March rose 2.9% over the same month last year hitting 70.76 mmt, an annual run rate of nearly 850 mmt.

On the back of this, iron ore has risen to a high for the year, up 36% since the turn of the year. China, though, is aware of the problem and while they will refuse to be bullied into closing plants they are desperate to implement a plan to cut large chunks of older and less-efficient, more-polluting plants in time.

Importer Nations Can’t Wait for Cuts

The “in time” will not be fast enough for many, though. Beijing is talking of two to three years, fearful of the impact mass layoffs could have on social unrest there. Figures of five to six million job losses are substantial, even in a population as large as China’s, particularly as they would be disproportionately concentrated in a few coal-mining and steel-producing states.

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So, the Brussels summit will have little more positive outcome in the short term than the complete waste of time that was OPEC’s summit in Doha. However, rest assured that won’t stop politicians coming away claiming all kinds of goals met and agreements made. The proof will be whether global steel production is any lower as a result by the end of this year as it is today. Most projections are for it to continue rising.

Big news for companies buying aluminum product or semi-finished goods from China and for aluminum product producers who have been facing tough competition from Chinese exporters.

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MetalBulletin reports China has agreed to end export subsidies it provided to industries including aluminum products, titanium and specialty steel after the U.S. complained to the World Trade Organization (WTO) in February 2015. Except, according to Andy Home of Reuters, it’s not big news.

New WTO Agreement

Before we get excited that Chinese manufacturers may be forced to join the real world, Home urges some caution. United States Trade Representative (USTR) Michael Froman’s headline grabbing statement was, “Today we have signed an agreement with China to eliminate export subsidies that the United States challenged because they are prohibited under WTO rules.”

Are aluminum slabs welded together really "deep-processed extrusions?"

Are aluminum slabs welded together really “deep-processed extrusions?”

That actually covers a host of product areas including textiles, footwear, medical products and chemicals to name but a few. Aluminum comes a lowly third on the list and the sums involved are paltry when you consider the breadth of products effected and the time frame — the last three years. Apparently, most of the support mechanisms had already been dismantled so it will amount to so much hot air as far as the aluminum market is concerned. Read more

The World Steel Association painted a gloomy picture of future global demand this week saying finished steel consumption this year is likely to reach just 1,487 million tons, a fall of 0.5% from last year… which, in turn, was 3% lower than 2014.

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Just last October the association was predicting an uptick in demand saying consumption this year would be 1,523 million tons, so the reversal has sent tremors through and already depressed global steel market.

Source: Platts

Source: Platts

The countries that led the supercycle up 10 years ago are largely the same that are now leading it down. China, Russia and Brazil are all showing down, only India, of the old BRICS acronym, is boasting growth, the world’s third-largest steel consumer is still bucking the trend and on a roll. Indian demand is expected to rise by 5.4% both this year and next reaching 88 million tons in 2017. Read more

Chinese mutual funds are turning to metals and other commodities to create wealth for investors and Brazil is the latest producer-nation to cut back steel production.

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Chinese Mutual Funds Bet on Commodities

China’s mutual fund industry is pushing to develop investment products linked to local commodity futures, betting that plans to fight chronic oversupply in the country’s mammoth resource sector will drive up prices for raw materials.

Brazil Will Cut Steel Production

Brazil will produce 32.9 million metric tons of raw steel in 2016, 1% less than last year, as the sector wrestles with a slump in demand amid the worst recession in a generation, the Brazil Steel Institute said on Monday.

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Steel sales for the year are expected to fall 4.1%, to 17.4 mmt BSI President Marco Polo de Mello Lopes told reporters at the industry association’s headquarters in Rio de Janeiro.

China has a problem. Well, like the rest of us, it has many problems, but a major one is debt.

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It is not a secret that China’s phenomenal growth was achieved on the back of phenomenal levels of investment. In the latter part of the last century, and early part of this, that investment paid off with rapid growth and an unprecedented rise in living standards for hundreds of millions of people but, over the last ten years that, investment has shown progressively poorer levels of return and the country is now saddled with hugely indebted corporations, falling growth and banks with growing levels of unpaid loans. Loans that privately many admit will never be repaid.

Defaults Inevitable

We wrote this week about Bohai Steel Group and it’s likely default on part or all of its nearly $30 billion in debt. The Bohai Group is not alone as a recent article by Bloomberg explains.

Source Bloomberg

Source: Bloomberg

China’s big corporate entities were already overstretched. According to Bloomberg, record corporate debt levels have left many firms struggling to meet their basic liabilities, with corporate insolvencies jumping by 25% in 2015, quoting Euler Hermes.

The trade credit insurer sees another 20% increase in Chinese bankruptcies this year, the most among 43 major markets. As major firms struggle to meet bank debts, their suppliers are being left even further behind. Read more

The cracks are beginning to show in China’s steel sector.

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Falling steel prices last year were matched more or less by falling input costs as iron ore and coking coal prices collapsed but, even so, margins remained under intense pressure as the overall metric tonnage produced dropped for the first time in decades.

Steel mills Molten iron smelting furnace production line

Chinese steel mills are under pressure to cut their debts. It’s inevitable that some will not survive. Source: Adobe Stock/zjk.

The position of steel companies differs depending on their cost of production, debt commitments and level of efficiency, but China’s steel sector as a whole lost money last year. According to the Financial Times, China’s biggest 101 steel companies, lost a combined 72 billion RMB ($11bn) in the first 10 months of 2015 but that doesn’t tell the whole story.

State-Owned Problems

48, Mostly state-owned, enterprises bore the brunt of the losses, while the balance are mostly more-efficient private sector firms that managed to squeeze out a marginal profit. Since then, the situation has gotten worse in spite of a short-term rally in prices over recent weeks. Li-Gang Liu, chief economist focused on China at ANZ, was quoted in the Financial Times as saying that year-on-year steel output fell 12% in both December and early January, putting further pressure on steel mills’ cash flows. Read more

China posted a message attacking the European Union’s anti-dumping efforts in regard to steel production.

Just as oil hit $40 per barrel, U.S. shale drillers are activating their drilled-but-not-yet-completed wells to increase supply at a margin at which they can make money.

China Decries EU Anti-Dumping Actions

The European Union’s call to step up measures on cheap imports of Chinese steel products will not solve the problems facing the global steel industry but will affect the international trade order, China’s Commerce Ministry said on Monday.

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“The whole global steel industry is going through pains due to weak economic recovery and cooling demand… The real reason for the EU’s steel industry’s difficulty is shrinking competitiveness,” the ministry said in a statement on its website.

The European Commission announced plans on March 16 to speed up trade defense cases against cheap imports from China and urged EU member states to end measures that could block higher duties on dumped and subsidized products.

As Oil Prices Increase, U.S. Drillers Unleash Their DUCs

Some U.S. shale oil producers, including Oasis Petroleum and Pioneer Natural Resources Co. are activating drilled but uncompleted wells (DUCs) in a reversal in strategy that threatens to bring more crude to a saturated market and dampen any sustained rebound in prices.

When oil prices started their long slide in mid-2014, many producers kept drilling wells, but halted expensive fracking work that brings them online, waiting for prices to bounce back.

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But now, with crude futures hovering near multi-year lows and many doubting recent modest gains that brought oil prices around $40 a barrel, the backlog of DUCs is already shrinking in some areas. The backlog in the Eagle Ford Shale in South Texas has fallen by as much as a third over the past six months, according to data compiled by Alex Beeker, a researcher at Wood Mackenzie.