Ferrous Metals

Anyone looking at the seaborne Asian Iron ore market? A cursory glance at China’s iron ore market and one has to ask, “what’s going on?”

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Iron ore prices have been on a roller coaster this year, yet reports abound of excess iron ore supply, excess steel production, excess steel capacity and falling property prices and, by extension, excess appetite for construction steel.

There is still mine oversupply. Source: Adobe Stock/nikitos77.

There is still mine oversupply. Source: Adobe Stock/nikitos77.

This week, reports of rising port stocks, up 1.6% to 100.45 million metric tons or five weeks of supply should have depressed prices, but the prevailing mood among traders seems to be one of cautious optimism that iron ore consumption and, hence, steel production will continue strongly this year, so much so that iron ore prices actually rose 2.7% to $54.98 per mt late last week. Read more

The MetalMiner monthly GOES MMI reading dipped slightly from 202 to 195 against smaller import volumes. Market participants report to MetalMiner that grain-oriented electrical steel prices have fallen a bit in China, as well, though non-grain-oriented electrical steels have increased.

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However, AK Steel did add a surcharge of $65 per metric ton effective with June orders, the first higher surcharge since January.

GOES_Chart_May_2016_FNL

According to recent comments made by Roger Newport, CEO of AK Steel, demand appears solid for high-efficiency electrical steel. He also pointed to stronger housing starts, though they remain below historical norms. In addition, Newport indicated the new transformer efficiency standards would help with overall demand. AK Steel also received a boost when ATI closed its Bagdad facility in Gilpin, Pa., driving approximately 35,000 tons of new business to AK Steel.

Steel Rising

In the meantime, the steel market price rise, in general, appears more supply-driven as opposed to demand-driven. Many have questioned whether any more new demand will appear during the second half of the year which means that for prices to stay supported, producers will need to remain vigilant about managing capacity. Some believe prices will flatten during the summer and then start slipping toward the end of the year.

Although GOES markets don’t closely correlate with underlying steel markets, some of the drivers of steel prices also apply to electrical steel. These drivers include: China’s ability to hold prices higher (we have started to see some cracks in that foundation). Unlike in the U.S., Chinese producers work together to set market prices, a recovery in products and materials used in the oil and gas industry on the basis of a rising oil price and, finally, the overall health of commodities markets and base metal prices.

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U.S. shredded scrap prices started 2015 at $350 per long ton delivered to Midwest steel mills.

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Barring a very brief rally in June, the price fell every month over the year and dropped to $170/long ton in December. Indeed, if we look at the chart, U.S. ferrous scrap prices have been in a downtrend since late 2013.

U.S. Shredded Scrap Prices ($/long ton delivered US Midwest Mill)

steel_insight_scrap_300_050116

Source: Steel-Insight.

When prices fall every month, scrap yards and steel mills reduce their purchases to the bare minimum as they expect to be able to procure material at a lower price the very next month. Read more

The stock market has reacted positively to dovish comments from the Federal Reserve and Tata Steel’s bid to sell its U.K. branch could set off a rash of mergers and consolidations in the European steel industry.

Yellen Stresses Caution

Janet Yellen, the Federal Reserve chairwoman, said on Tuesday that the U.S. economy remained on track despite a rough start to the year because of the drag from weak growth in other countries, although she noted that the drag was being offset by lower borrowing costs.

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Yellen told the Economic Club of New York that the economy “had proven remarkably resilient,” and that the Fed expected better days ahead. She said the Fed still intended to pursue a careful, patient course toward higher interest rates as the economy improved, yet the cautious tone of her remarks, however, suggested no rate increase was likely at the Fed’s next meeting, in April.

More Consolidation for European Steel?

Tata Steel’s plan to sell its U.K. steelmaking business has raised expectations of a long-awaited consolidation in the European steel sector, which is suffering from years of unaddressed overcapacity.

Since the multibillion-euro takeovers of Europe’s Arcelor and Corus by Indian giants Mittal and Tata in 2006 and 2007, dealmaking in Europe’s steel industry has been all but paralyzed as cash-starved producers battled the global economic crisis and a slowdown in China that encouraged it to export cheap steel.

Building owners and other construction project stakeholders should anticipate non-residential construction costs to increase 3% to 4% on average this year with most markets reporting robust activity and healthy employment in Q4 2015, according to Mortenson’s Construction Cost Index.

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The Minneapolis-based general contractor releases the index quarterly and it prices representative non-residential construction projects in six representative geographies throughout the U.S.

Mortenson-Graphic-Q4-2015_550_032216

Source: Mortenson Construction.

Mortenson Chief Estimator Dennis McGreal and Director of Design Phase Development Nathan Lingard recommended building owners and other stakeholders expect cost increases of 3.5 to 4% in 2016 for construction components such as structural steel and steel framing.

Still, according to the report, all of the markets studied are considered healthy according to data from the U.S. Bureau of Labor Statistics. The Mortenson Construction Cost Index tracks building component trends in 30 categories with many component prices flat to moderately up in the fourth quarter of 2015.

Employment Situation

“There continues to be a lot of activity in the markets we track although average project size is reduced relative to recent years,” said Clark Taylor, vice president of estimating at Mortenson. “Construction employment is leveling out and price escalation should be more consistent with long-term averages. We believe this should allow customers to more accurately plan for increases in the next year.”

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The labor shortage was a huge problem in construction in 2015. While the cost increases predicted likely won’t shelve any projects, the bigger news is that Mortenson is reporting construction employment growth has slowed in most of the metros it followed. A respite from the shortage could do wonders for labor costs for construction projects.

Anti-dumping actions dominated the metals world again this week as the U.S. government promised to get even tougher on subsidized imports of foreign steel, aluminum and other products.

Wednesday: Hot-Rolled Flat Dumping

The Commerce Department placed tariffs on hot-rolled flat products from Australia, Brazil, Japan, Korea, the Netherlands, Turkey, and the U.K. on Wednesday This started the ball rolling on what looks to be a contentious fight over duties as high as 49% (the U.K.) and 36% (Brazil).

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Previously, most of the duties placed on hot-rolled steel products had involved China. Now, it’s other producer-nations in the crosshairs. While China’s the source of most of the overproduction, why should they get all of the duties? As this result shows, Brazil and the U.K. are no slouches at sending steel they can’t sell at home over here.

Semi-Finished, Fully Melted

In aluminum, Commerce has finally been convinced that that it needs to investigate aluminum “semi-finished products” which are really just slabs welded together. Seriously, that’s what the whole case is about. Apparently welding the slabs together keeps them from being taxed when leaving China, which, in turn, keeps them from being eligible for import duties in the U.S. Most are melted back into ingots upon their arrival in the U.S., anyway.

It was another week of import duties.

It was another week of import duties.

Good luck, domestic extruders! The “semi-finished” scam was one of the more insidious dumping tactics we’ve seen in the past few years. Read more

Our Stainless MMI remained steady at 51 points. However, we currently see some factors that could lift prices in the short term.

Stainless Anti-dumping Case

On March 4, the U.S. Commerce Department launched an anti-dumping and countervailing duty investigation into Chinese imports of stainless steel sheet and strip, for possible illegal subsidies and selling prices at below cost to illegally gain market share. A preliminary determination of injury to U.S producers is scheduled by March 28.

Stainless_Chart_March-2016_FNL

China’s Ministry of Commerce didn’t respond well to the this new case, arguing that simply restoring prices via protectionist means is not the solution. Chinese steel firms have already been impacted by trade cases. Recently the Commerce Department had imposed 266% preliminary duties on imports of cold-rolled steel from China, punishing Chinese steel makers for dumping or selling below cost. In December, China received a dumping margin of 266% on corrosion-resistant steel products.

Compare Prices With The February 2016 MMI Report

These tariffs have helped U.S. imports come down this year. That led to lower inventory levels here and have given U.S. mills the ability to rise prices. Steel prices climbed over the past few weeks, and stainless prices could follow. With the threat of anti-dumping lawsuits looming, the volume of imported stainless sheet and strip had already been diminishing, which should be seen in the upcoming months. The lack of imports has already pushed out domestic lead times and could create a supply shortage once service center restocking starts. However, it’s still questionable whether prices will hold just on import tariffs alone. Low international prices will add downside pressure if stainless domestic prices rise, especially since China is the only named party.

Nickel Prices Could Rise Short Term

Nickel is the worst performer among base metals this year. However, we are seeing some price strength in the industrial metal complex that could push nickel prices higher in the short term, especially if the US dollar continues to weaken.

Indonesia’s energy minister said in February that the country could ease the ban on nickel ore exports. Indonesia was China’s top nickel ore supply country prior to the ban, which enabled the Philippines to catch up.

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Back in 2014 when the ban was implemented, nickel was trading above $15,000 per metric ton. However, Indonesian companies didn’t expected that nickel would be trading today at half that price.

Indonesia Might Ease Export Ban

Because of falling nickel prices, many of the smelters that miners intended to develop have not materialized. Now, the government is going to review its export ban policy as miners struggle and Indonesia´s smelting capacity will not be sufficient by next year amid miners’ unwillingness to develop those costly smelting operations.

The removal of the export ban would add more nickel supply to international markets, possibly driving prices down while demand is weak, especially in the energy sector.

What This Means For Metal Buyers

Stainless prices could experience a short-term bounce on new import tariffs and overall strength across the base metal complex. However, prices will likely struggle to rise longer term while demand remains weak and producers don’t cut production in a big way.

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The Raw Steels MMI held steady at 47 this month. Although international steel prices remained depressed in January, domestic prices drew a different picture.

US Mills Increase Prices

US steel mills began raising prices in December, leading to higher domestic prices in January. Domestic supply had declined significantly in 2015, with capacity utilization close to 60%.

Raw-Steels_Chart_February-2016_FNL

At the same time, with the uncertainty regarding anti-dumping actions, finished steel imports have slowed.

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Finally, steel companies’ shipments were impacted over the past few months as service centers focused on destocking and now that inventory has finally come down, service centers will finally need to start restocking activity. This combination of factors left US mills in a sweet spot in 2016 to increase prices.

Sustainable Increase?

Domestic prices might continue to rise in the coming weeks. After the huge price slump in 2016, domestic prices deserve a bounce in Q1. However, mills won’t likely succeed in raising prices for too long.

The world remains oversupplied and demand is weak. Due to the political backlash from job losses spurred by mill closures, China wants to keep its mills running. With the ongoing Chinese yuan devaluation, Beijing has made its intention clear. China wants its exports even more competitive in global markets, especially in the steel industry as China continues to seek a home for its excess steel.

Compare With The January 2016 MMI Report

If domestic prices stayed higher, that would attract more imports, resulting in more material coming into the US and depressing prices as a result. In addition, it’s hard to imagine steel prices bucking the falling trend across the industrial metal sector. It will be hard for US mills to convince buyers to pay higher prices while commodities nearly universally fall.

Falling Raw Material Costs

Another important factor that will keep a lid on steel prices is the slump in input costs. In January, oil prices fell below $30/barrel. Falling energy prices will cause companies in the energy sector to reserve capital to keep on their balance sheets, rather than spending money on new exploration. This will continue to hurt steel demand from the energy sector. At the same time, while raw material prices keep falling, it will be difficult for US steel mills to justify their price increases for long.

Actual Raw Steel Prices

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By next week, Iran is likely to declare its “Implementation Day.”

With so much else grabbing the headlines, it could pass largely unnoticed but that would be a mistake. The day is meant to signify when Iran is deemed to have complied with all its obligations in dismantling those parts of its nuclear program intended to produce a nuclear bomb. As The Economist explains, all nuclear-related sanctions, including the freezing of $100 billion of Iranian assets, will be lifted, assuming full ratification by the Iranian parliament of safeguard agreements given to the International Atomic Energy Agency.

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One obvious benefit will be the release of Iranian oil exports, expected to gradually ramp up from current levels of about 1.1 million barrels per day by an additional 500,000 bpd within months. But the wider economy, particularly the metals and mining sector could be a major beneficiary in the medium term.

Economic Potential

As the Economist reminds us, the prospects in a post-deal Iran are vast. It is the world’s 18th-largest economy. The population of 80 million is well-educated. The country’s oil and gas reserves are huge. The Tehran stock exchange is the second-biggest in the Middle East — with a capitalization of about $150 billion — but at the end of 2014 foreigners owned only 0.1% of listed companies’ shares, compared with 50% on Turkey’s main exchange in Istanbul.

red-hot molten steel in a iron and steel enterprise production scene

Iran could be a major steel exporter once sanctions are removed. Source: Adobe Stock/Inzyx.

In the metals sector, the state owns 90% of all mines and related large industries but the country desperately needs foreign investment and know how. Iran is already a relatively large producer of iron ore, but a combination of rising domestic demand and low global iron ore prices have severely curtailed exports.

Read more

Both the USA and India’s steel mills are running at less than capacity thanks to the worldwide steel surplus. US steel mills continue to be buffeted by cheap, mostly Chinese imports and lukewarm demand and no one is willing to bet on when, or if, they will ever come back to full production.

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On the other hand, the future of India’s steel industry is tied to the percentage of expenditures on infrastructure that the government is expected to provide. The difference between the two is that India’s economy is merely in revival mode, while the US economy is growing at a rapid pace.

Rating Agencies Weigh In

A recently released report by Fitch Ratings titled, “2016 Outlook: Indian Steel Sector,” says that increased spending on infrastructure projects, such as housing and smart cities is the key to the revival of India’s steel industry.

Welded carbon steel pipe

Indian and US steelmakers both face a glut of imports and low prices in their struggles to get back into the black. Adobe Stock/Sasint

Indian steelmakers, however, have to face the onslaught of cheap imports just as their counterparts in the US do, especially imports from China. The difference is, the imports work, to an extent, in Indian producers’ favor, as opposed to how badly they harm US steelmakers.

In India, abundant steel only increases domestic demand in India as low prices and more supply are likely to spur government action as costly infrastructure investments are more likely to be seen as relative bargains.

“Spending by the Indian government on infrastructure will be the catalyst for any meaningful improvement in domestic steel demand. The agency expects India’s steel consumption to improve modestly by 7-8% in 2016,” according to the Fitch report.

No doubt, high imports and soft steel prices globally in 2016 might bring up sales in India, but that will still eventually result in far lower prices, meaning less profit for Indian steel producers despite more sales. Steel companies’ margins are likely to be lower in 2016 but could improve, incrementally, in 2017, supported by “(an) improving domestic demand and the imposition of safeguard duty on imports on certain steel products for 200 days,” according to the Fitch report.

The Effect of Tariffs and Duties

As with steelmakers worldwide, the prices of Indian steel dropped almost a quarter year-on-year as of the end of September. The imposition of a 20% duty on certain steel product imports, effective September 14, has saved the day for some Indian steel companies.

In a similar vein, another global ratings agency, Moody’s Investors Service, cautioned that failure to implement reforms in India could hamper investment amid weak global growth.

According to Vikas Halan, a Moody’s vice president and senior credit officer, a healthy 7.5% GDP growth for India for the fiscal year that will end in March 2017 (FY2017) and a pick-up in manufacturing activity will broadly support business growth.

The ratings agency expects upstream oil and gas companies to benefit from lower fuel subsidy burdens, although low crude and domestic natural gas prices will continue to hurt profitability.

Another Negative Outlook

The agency’s negative outlook for the steel industry reflects elevated leverage and an extended period of low prices due to continuing low steel import prices, while the negative outlook for metals and mining companies reflected bleak global commodity prices.

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While India’s steelmakers are banking on growth to see them through these difficult times, one of the biggest challenges that the US industry faces is the growth of steel imports. Its best bet is to reduce  imports and pray that the domestic market will swing back to buying for US mills.

Earlier this year, steel companies including AK Steel, Nucor and U.S. Steel filed trade cases to stem the flow of steel products entering the US. The only silver lining was that steel imports into the US have started to come down on a year-over-year basis for the last five months.

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