Ferrous Metals

The industrial metals complex saw prices slip nearly across the board in August as volatility
returned to stock markets and investors lost confidence in central banks’ ability to increase
growth.

MM-IndX_TRENDS_Chart_September2016_FNL-TOPVALUE100

Even the vaunted Global Precious MMI, which has enjoyed large gains this year due to safe
haven status, dropped this month. It experienced a 4.5% loss. Our Construction MMI and the Grain-Oriented Electrical Steel MMI indexes saw increases this month, but every other sub-index either saw a 2-5% loss or held flat.

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This was somewhat expected as metals such as steel and aluminum remain in a global oversupply situation and metal prices don’t move in a straight line. They zig-zag. Our metal price benchmarking service has thousands of transaction prices to reference as evidence of that.This could be merely a one-month correction or it might signal that the weakness in metals markets is finally denting the bull run of strong price performers such as gold and platinum. Stay tuned next month for more.

Republican Presidential Nominee Donald Trump recently said he would scrap some controversial EPA plans and rules and allow more drilling for oil and gas on federal lands. Steel companies applauded the Senate’s passage of a new water reclamation bill.

Trump Would Scrap Clean Power Plan

Republican presidential nominee Donald Trump released details Thursday of his proposed energy policy, which includes scrapping the Environmental Protection Agency‘s controversial Clean Power Plan and Waters of the United States rule.

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He also promised to open more federal lands and waters to oil and gas development.

Steel Companies Praise Water Bill

The American Iron and Steel Institute (AISI) recently applauded the U.S. Senate’s passage, by a vote of 95-3, of the Water Resources Development Act (WRDA), which will authorize more than $10 million worth of projects to improve navigation, replace and restore aging locks and dams, and provide aid to Flint, Mich. and other communities in need of replacing pipes, sewers and other drinking water infrastructure.

U.S. steel companies applauded as tariffs were upheld on hot-rolled steel flat products and the London Metal Exchange took a hit when it had to move its open-outcry trading to another location when its new office wasn’t ready this summer.

ITC Upholds Hot-Rolled Steel Tariffs

The U.S. International Trade Commission handed another victory to American steelmakers on Monday, affirming most of the recent anti-dumping and anti-subsidy duties on hot-rolled flat steel imports from Australia, Brazil, Britain, Japan, the Netherlands, South Korea and Turkey.

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The commission rejected anti-subsidy duties of about 6% against hot-rolled steel from Turkey, but affirmed anti-dumping duties of about 6 to 7% against Turkish-made hot-rolled steel. The rest were all upheld.

LME Trading Move Hit Volumes Hard by Move

The temporary relocation of open outcry trading at the London Metal Exchange (LME) to a disaster recovery site due to problems at its new offices hit volumes hard during the already quiet summer months, brokering sources said.

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For all contracts traded on the LME, volumes fell more than 9% year-on-year in August to 12.18 million lots, after a drop of nearly 18% in July. Volumes for aluminum and copper fell nearly 22% and seven percent respectively in August from the same period a year ago.

Many grain-oriented electrical steel market participants know that macroeconomic drivers and general steel price trends often diverge from GOES trends.

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Comments from the most recent Steel Market Update summit at the end of August suggest it may be hard to “buck the trend.”

Macro Trends

What are these macro trends?

  • Steel demand looks weak overall and overcapacity will continue unabated. According to Tony Taccone, Partner at First River Consulting, “global steel demand has stalled and there will be no growth going forward.” In addition, Taccone indicated the world has 700 million metric tons of overcapacity and the problem is set to become worse.
  • Trade cases will put the kabash on Chinese export growth. China has produced too much steel at unsustainable prices and has exported materials at the marginal cost of production, according to Taccone.
  • Automotive demand may have peaked and aluminum demand may weaken steel demand.

Despite weak demand in some sectors, others paint a more positive picture. According to Alan Beaulieu, Principal of the Institute for Trends Research, many factors look more positive for demand including light vehicle production, U.S. industrial machinery production (recently turned positive), a booming office building construction market, a stabilized oil and gas extraction market and healthy global demand for crude oil.

GOES_Chart_September_2016_FNL

In addition, Beaulieu pointed to rising mining, electricity generation and manufacturing sectors, that certainly bodes well for power equipment production and demand.

Micro Trends

With the loss of Allegheny Technologies, Inc. capacity for GOES, the uptick in electricity generation and construction, and the more bullish outlook for other commodities and non-ferrous metals, we might expect GOES prices to creep up accordingly.

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Though the macro trends paint a slightly more negative picture for steel prices in general (negative for producers, positive for buying organizations) for the near term, GOES markets don’t cleanly align with steel markets. September marks the second month of a rising price trend.

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Our Raw Steels MMI fell 7% to 53 points last month. This is the first time we have seen a significant decline in steel prices this year. August brought some interesting developments for the steel industry.

Raw-Steels_Chart_September-2016_FNLUS prices Down, While China’s Prices Rise

By the end of the first half, domestic hot-rolled coil prices had risen 70% while prices in China were up by just 30%. The main driver of this price gap was trade cases, which made U.S. steel imports plunge this year, inflating prices domestically. Read more

U.S. construction spending during July came in at an annualized rate of $1,153.2 billion, nearly the same as the revised June estimate, which was $1,153.5 billion, the Census Bureau reported ahead of the Labor Day holiday. Even so, the July 2016 figure is 1.5% higher than the July 2015 construction spending total.

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July’s numbers could be attributed to spending on private construction projects, which was up 1% compared to the revised June total. Public construction spending, by contrast, was down for the month by 3.1%. For the year, private construction spending gained 4.4%, while public spending dropped 6.5%.

Construction_Chart_September_2016_FNL

The Construction MMI reflected healthy U.S. demand for construction metals and jumped nearly 5%. Economists polled by Reuters had forecast construction spending rising 0.5% in July but keeping its gains from June is still good news for construction.

The upward revisions to the May and June construction spending data could see the second-quarter gross domestic product estimate revised up from the 1.1% annual pace reported last month and economic growth is good for construction and the economy as a whole.

Aluminum, Surcharges Up

Construction received a boost from the aluminum components of the sub-index, which posted strong gains despite the Aluminum MMI turning in an overall flat performance this month. Fuel surcharges were up across the board as oil’s taken a bit of wild ride lately. Products such as rebar and H-beam steel were also up.

Despite individual product strength, steel remains a very bifurcated market with prices up in the U.S. and down globally. Despite promises to wind down production in the second half of the year, China is buying up coal for steel production. The price of coal needed to make steel has surged more than 45% over the past three weeks, to its highest level since early 2013.

Major Shipper Close to Insolvency

South Korean shipping giant Hanjin Shipping Co. appears to be sailing toward oblivion as we’re writing this, a move that reflects weaker global steel demand or overall excess capacity. In the past week, creditors pulled the plug after $900 million (1 trillion Korean won) in support failed to keep the company afloat, forcing Hanjin to file for bankruptcy protection. Seoul Central District Court, which will decide the fate of the company, has set a Nov. 25 deadline for it to develop another restructuring plan, but many experts think liquidation will be the most likely outcome.

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Even though construction product demand looks strong, there are a lot of other factors that could plague these metals in the near future.

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Two major manufacturing indexes fell in July, prompting concern about the U.S. economy and nine steel trade organizations praised recent G20 action on overcapacity.

Manufacturing Indexes Fall

The Institute of Supply Management‘s manufacturing index turned negative in July for the first time since February. And the services gauge fell last month to the lowest level since early 2010.

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The manufacturing index dropped to 49.4% from 52.6% in August and the ISM services gauge retreated to 51.4% from 55.5%. The combined reading of two indexes was also the weakest in six years.

Steel Groups Praise G20 Action on Steel, Express Cautious Optimism

Nine steel groups in North, South and Latin America, and Europe, expressed cautious optimism for the outcomes at the G20 leaders meeting that concluded Monday in Hangzhou, China.

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“We are grateful that the leaders of the G-20 governments have recognized the severe impacts that global steel overcapacity in the steel sector around the world are causing to our industry. This is an important first step, but it must be followed with concrete policy actions by governments to reduce excess capacity, end subsidies and government measures that distort markets, and guarantee a level playing field driven by market forces in the near term. We appreciate the commitment expressed in the G-20 leaders’ statement for ‘collective responses’ to address excess capacity in the steel industry. This excess capacity and the government interventionist policies that have fueled it are the root cause of the surge of steel imports currently being experienced in many of our home markets,” the industry groups said in a news release.

“We are encouraged that the G-20 leaders are committed to forming a Global Forum on steel excess capacity, and that the leaders expect a continuing relationship with the Global Forum at relevant upcoming G-20 ministerial meetings.  We are hopeful that the creation of a robust Global Forum, that includes participation by all major steelmaking economies, will be a substantive outcome of the meetings later this week in Paris of the OECD Steel Committee,” the groups continued.

“Our industry is at a crossroads. Governments must take action or we will remain in crisis. It is now up to the governments and the industry to work in partnership to create the Global Forum and define an agenda and process that will result in substantive policy actions to solve this crisis. The Global Forum has to start working as soon as possible, as the G-20 Leaders’ Communique clearly states that a progress report has to be ready for the relevant G-20 ministers in 2017,” the industry groups concluded.

The industry group includes representatives of the American Iron and Steel Institute (AISI), EUROFER (European Steel Association), the Steel Manufacturers Association (SMA), the Canadian Steel Producers Association (CSPA), CANACERO (the Mexican steel association), Alacero (the Latin American Steel Association), the Brazilian Steel Institute, the Committee on Pipe and Tube Imports (CPTI) and the Specialty Steel Industry of North America (SSINA).

 

U.S. Automakers sales numbers were down substantially in August. The drop is something that’s usually expected as the summer sales season winds down, but the steepness of said drop is what’s more concerning to economists and automotive executives.

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Ford Motor Co. saw the biggest drop, down 8% year on year for the month of August to 214,482, General Motors was down 5% to 256,429 vehicles and Volkswagen was the most down 9.1% to 29,384 vehicles. Of the majors only Fiat Chrysler showed any growth, buoyed by a strong line up of SUVs to post a 3% increase to 197,000.

Automotive_Chart_September-2016_FNL

While automotive metals remain a lucrative and sought-after market for both steelmakers and aluminum smelters, the pace of sales is slowing. Sales are still on a pace to beat last year’s record of 17.5 million, but the seasonally adjusted annual sales rate dropped to 17 million last month, according to Autodata Corp. That’s the slowest pace for an August since 2013, and far below the 17.9 million pace set in July and 17.7 million in the same month last year.

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Increases in precious metals had buoyed the Automotive MMI for much of this year, but the catalytic converter metals stalled this month and that was the cause of much of the drop in our index. Steel prices remain bifurcated between U.S. and global prices and a summer of uncertainty over U.S. Steel‘s section 337 case has led to little clarity for metal buyers of Chinese automotive steel. U.S. Steel’s case centers on an allegation that Chinese steel companies stole the formula and process for an automotive alloy.

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The price of domestic flat steel products declined in August. Interestingly, cold-rolled coil prices (CRC) declined less than hot-rolled (HRC), widening the unprecedented price gap that we are witnessing between these two.

Domestic CRC-HRC price spread at record highs. Source: MetalMiner Index

Domestic CRC-HRC price spread at record highs. Source: MetalMiner Index.

The supply-demand equation for CRC (and hot-dipped galvanized) appears better than for HRC since CRC goes into consumer products such as automobiles and appliances which have seen stronger demand this year.

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Moreover, the lead times for CRC products are longer than for HRC products. But the main driver of this spread involves the high duty imposed on Chinese CRC since China accounted for more than half of CRC imports. Read more

The terrible Samarco mining disaster was caused, according to owners BHP Billiton and Vale SA, by design flaws in the dam that burst and Chinese steel mills may have more customer demand after the G20 summit ends.

Samarco Disaster Caused by Design Flaws

The deadly collapse of a tailings dam last November at the Samarco mine, owned by Vale SA and BHP Billiton, was caused by drainage and design flaws, a report into Brazil’s worst-ever environmental disaster showed on Monday.

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The 76-page report commissioned by the companies responsible for the spill, which killed 19 people, attributed the dam burst to a chain of events dating back to 2009, but did not assign blame or highlight specific errors in corporate or regulatory practice.

Chinese Steel Mills Could Get Unexpected G20 Boost

When Beijing ordered hundreds of industrial plants to close ahead of China’s first-ever G20 summit next week, the government wanted to spruce up the host city of Hangzhou and ensure world leaders would gather under clear blue skies.

Free Download: The August 2016 MMI Report

In doing so, China’s leaders may have given the nation’s stricken steel mills an inadvertent leg-up, helping to restore profitability after a years-long downturn caused by weak prices as a global glut swelled and local demand slowed. Some Chinese steel plants are turning in the best margins in at least three years.