Steel

Construction costs fell further in August, according to IHS Inc. and the Procurement Executives Group (PEG).

IHSPegAugust550

The current IHS PEG Engineering and Construction Cost Index (ECCI) registered 45.7 this month, down from 48.8 in July and well below the neutral mark of 50. The headline index has not indicated rising costs since December.

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The pricing environment appears to be deteriorating with the current materials/equipment index registering its lowest reading since. The underlying detail shows falling prices for nine of the 12 individual components tracked by the survey.

Prices for steel products continued to fall and showed particular weakness with the indexes for fabricated structural steel, carbon steel pipe, and shell and tube heat exchangers all indicating that prices are falling and that price declines have become more widespread.

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“Steel is a buyers’ market and will remain so,” said John Anton, principal economist, IHS Pricing and Purchasing, “Current import prices are far cheaper – up to 40% – than domestic prices, but if you are doing public projects with Buy America requirements, you cannot use them. However, imports can drag down prices your rivals pay, putting pressure on mills to give you similar deals.”

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Well for one thing it means our retirement funds will likely be worth less, at least in the short to medium term. On the plus side, our mortgage will likely stay cheaper for longer and metal prices will remain lower for longer.

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Why? well if the Fed was worrying about a China slowdown in July, they must be in full-on panic mode by now. If the Federal Reserve was to raise rates next month, to stave off the possibility of inflation picking up next year, it would strengthen the dollar, making imports more attractive and making life tougher for US exporters.

China’s Deep Slowdown

The collapse of stock markets around the world has been precipitated by fears of a China slowdown becoming far deeper and more prolonged than previously thought – although why this appears to be such a surprise to investors today compared to 2-3 weeks or even 2-3 months ago I fail to see, the writing has been on the wall all year.

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The signs that China’s economy could lose steam were there, but it still caused global stock market panic.

However, as the herd mentality sets in all those stop orders get hit and the fancy algorithms cut in selling stocks and becoming self-fulfilling as they drive prices down. Hedge funds have been aggressively shorting the market, not just for stocks but for commodities too. It would be a brave man who bet any pause was the start of a bounce back, markets could have a lot further to fall.

Back to the Fed and China: weaker demand from China will mean lower demand for commodities. For a few commodities, China has become a net exporter but across the board the world’s largest consumer is reversing what was once a one-way bet on demand.

Lower prices feeding into the US market will keep inflation low and may even put the US into a deflationary situation for a short while. Does the Fed really want to be increasing interest rates against that backdrop? No. September’s long-anticipated rate hike isn’t going to happen, indeed even one before November seems very unlikely now.

What Does This Mean for Metal Buyers?

Commodity bulls, if any exist, will say producers are operating below the cost of production and that can’t last, sooner or later capacity will close and prices will rise.

In part, they are right. 17% Of copper mines are producing at a loss according to the Financial Times, but with producers aggressively doing all they can to move down the cost curve it could be some time before enough capacity is closed to impact prices.

The situation is worse for aluminum. Chinese producers are still bringing new capacity on stream and with state-of-the-art technology they have some of the lowest production costs in the world. There is no prospect of a recovery in aluminum prices anytime soon even though demand has continued to rise robustly.

What Does This Mean for Oil Users?

Nor are oil prices likely to rise unless OPEC has a dramatic change of policy. China has been a bigger contributor to oil demand growth than any other nation in the past decade, so any slowdown in the Chinese economy may spell bad news for crude consumption the FT opines. Saudi Arabia, Iraq, Russia and others are pumping oil like its going out of fashion – which, in a way, it is. Just as significantly, though, the US shale industry has been more resilient than expected, and is now on the brink of potentially exporting, adding to global supply.

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All in all, a rise in Fed rates seems about as unlikely as a rise in commodity prices. This would all be good news if it wasn’t for the fact that what’s driving both is a fear of a global slump, and that would most certainly not be good for anyone.

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The selloff in Chinese stocks continued today and a major Japanese automaker has turned low steel prices into a cut in its supply costs.

Chinese Stock Market Still Falling

Chinese stocks plummeted Monday, erasing gains for the year, as fears about the deepening effects of a slowdown in the world’s No. 2 economy rattled investors world-wide.

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The Shanghai Composite Index closed down 8.5% at 3,209.91, bringing its losses since its mid-June peak to nearly 38%.

China’s main stock index has now tipped into negative territory for the year after gaining as much as 60% through its June peak. Benchmarks in Japan and Australia both shed nearly 4%.

At the heart of the selloff is the concern that the once-strong Chinese economy may be slowing down dramatically, which has triggered steep losses in global stock markets, commodities and emerging markets.

Toyota, Steel Suppliers Agree to Price Cut

Toyota Motor Corp. and major Japanese steel makers have agreed to lower prices for steel sheet for the April-September period, marking the first price cut in a year, industry sources told the Japan Times on Thursday.

Toyota and the steelmakers, including Nippon Steel & Sumitomo Metal Corp., reached the agreement as prices for iron ore and coal have dropped precipitously and are not expected to rise soon.

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John Correnti, an American steel executive who helped shift the domestic industry geographically and technologically, died Tuesday in Chicago.

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Correnti, 68, was chairman, founder and chief executive officer of Big River Steel LLC and was in Chicago for a board meeting of Navistar International Corp., the company said in a statement. The cause of death was not immediately provided.

Correnti was leading Big River Steel to build a $1.3 billion mill in Osceola, Ark., near the Mississippi River. The facility is planned to supply high-quality steel products to customers including automakers and energy companies.

Correnti served as CEO of Nucor Corp. from 1996 to 1999 and helped move the US steel industry away from its regional roots by expanding its reach to the South. Correnti also opened a steel mill for Severstal in Mississippi which was later sold to Steel Dynamics.

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Big River Steel released a statement saying, “Big River Steel will be one of many legacies John leaves with us all. John was a visionary, an innovator and a leader who dedicated his career to improving the steel industry and creating opportunities for those that worked within it.”

USW, ATI Digging in For Long Lockout

Picket lines staffed by locked out union workers appeared at several Allegheny Technologies, Inc. facilities this week. ATI has vowed to staff the plants with management and replacement workers and the United Steelworkers of America personnel locked out will be eligible for unemployment benefits during the lockout.

The two sides disagree about healthcare contributions for the union workers.

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Indian steel companies are asking for safeguards and some US hedge funds are placing big bear bets on domestic oil prices.

Tata, SAIL Want Safeguard Duties

Indian steel companies reeling under mounting imports from China, South Korea and Japan have urged the government to impose safeguard duties, to protect the domestic industry from the onslaught of cheaper imports, the Economic Times reports. Safeguards are measures designed specifically to protect local industry that go beyond anti-dumping or countervailing duties as outlined by the World Trade Organization.

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Safeguard duties are levied on imports as a temporary measure by the government to protect the local industry when they perceive a threat from a sudden surge in imports. State-owned Steel Authority of India (SAIL) and private steel makers such as Tata Steel have jointly filed a petition with the Director General of Safeguards (DGS) seeking the duties.

Hedge Funds Betting Against Oil

A relatively small group of hedge fund managers has placed a record bet on US oil prices declining further in the months ahead.

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Hedge funds and other money managers had accumulated gross short futures and options positions totaling 163 million barrels in the main NYMEX light sweet crude contract by Aug. 11, according to data released by the Commodity Futures Trading Commission.

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Allegheny Technologies Inc. said Friday it was locking out more than 2,000 unionized workers at various facilities across five states.

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ATI said it will continue to operate the affected plants with ATI salaried and nonunion employees and temporary professional staffing until a new contract can be finalized with the United Steelworkers of America union. ATI is a Pittsburgh-based specialty metals company that is one of only two US companies that manufactures grain-oriented electrical steel. ATI also produces a full range of steel products, titanium and titanium alloys, nickel-based stainless alloys and superalloys.

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The two sides have been in contract talks since before the previous agreement expired June 30. ATI and the USW began formal negotiations in May for contracts for new contracts for about 2,200 employees of ATI’s flat-rolled products division. Until Friday’s lockout announcement, the union was working under the terms of the previous contract.

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Gold demand fell to a six-year low last quarter and US steel shipments jumped in June, although the 2015 numbers are still down year-over-year.

Gold Demand Plummets

Gold demand hit a six-year low in the second quarter, a World Gold Council report showed on Thursday, as sluggish prices and the prospect of better returns in equities curbed interest. Demand fell 12% to 914.9 metric tons, with declines in China and India accounting for nearly half of the drop, the WGC said.

US Steel Shipments Up in July

The American Iron and Steel Institute (AISI) reported that for the month of June 2015, US steel mills shipped 7,758,087 net tons, an 8.1% increase from the 7,175,211 net tons shipped in the previous month, May 2015, and a 6.4% decrease from the 8,291,823 net tons shipped in June 2014. Shipments year-to-date in 2015 are 43,980,293 net tons, a 9.8% decrease vs. 2014 shipments of 48,777,146 net tons for six months.

A comparison of June shipments to the previous month of May shows the following changes: hot-dipped galvanized sheets and strip were up 14%, hot-rolled sheet was up 12% and cold-rolled sheets, up 9%.

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The Commerce Dept. has begun an anti-dumping investigation of imports of heavy walled rectangular welded carbon steel pipes and tubes from South Korea, Mexico, and Turkey, and a countervailing duty investigation of imports from Turkey.

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The products subject to the investigations are heavy walled rectangular welded steel pipes and tubes of rectangular (including square) cross section, having a nominal wall thickness of not less than four millimeters. Such pipes are used as structural members in construction and industrial manufacturing.

The products include, but are not limited to, the American Society for Testing and Materials (ASTM) A-500, grade B specifications, or comparable domestic or foreign specifications.

The domestic manufacturers petitioning for the investigations are Atlas Tube, a division of JMC Steel Group; Bull Moose Tube Company; EXLTUBE; Hannibal Industries, Inc.; Independence Tube Corporation; Maruichi American Corporation; Searing Industries; Southland Tube; and Vest, Inc.

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They are alleging dumping margins of 53.8% for imports from South Korea, 11.9% from Mexico and 102.1 to 113.7% for the Turkish welded carbon steel pipes. Turkey is also accused of illegally subsidizing its exports, hence the countervailing investigation.

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Chinese steel output fell last month. In Chile, investment funds have agreed to to buy the Mantoverde and Mantos Blancos copper mines being sold by major miner Anglo-American.

Chinese Steel Output Falls

Chinese crude steel output fell 4.6% to 65.84 million metric tons in July from a year ago, government data showed on Wednesday, as steel mills in the world’s top producer faced tumbling prices and faltering demand.

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Average daily output stood at 2.124 mmt, down 7.6% from June, its lowest since November 2014, according to Reuters calculations based on data from the National Bureau of Statistics (NBS).

Softer demand caused by slowing Chinese economic growth has pushed steel prices down 26% so far this year, plunging many mills into the red and forcing them to cut output or ship more to overseas markets.

Someone is Betting At Least $500 Million on Copper

Chilean press reports say that investment funds have agreed to buy the Mantoverde and Mantos Blancos copper mines being sold by major miner Anglo-American. The price for the deal will reportedly be significant. Coming in at between $500 million and $1 billion, according to Business Insider.

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The papers didn’t name the particular groups involved in the sale. But did note that an “English investment fund” would be the buyer of the two mines.

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There is growing speculation that a hot-rolled trade case will be filed by US producers next week. US oil refiners, however, has found a sweet spot.

Hot-Rolled Dumping Case Next Week?

The anticipated filing next week of a hot-rolled trade case may yet perk up US flat-rolled pricing, Platts reported, though conditions are steadily deteriorating, market sources said Thursday.

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One buyer told Platts “All this stuff is adding up, but the buyer is yawning because it’s not affecting the market,” he said. “But it will, and they’re going to get caught. It’s almost like the fuse has been lit, but it’s a long fuse.”

Perfect Conditions for US Oil Refiners

Low crude prices and strong demand for gasoline are creating near-perfect conditions for oil refineries across the United States, especially those geared towards maximizing gasoline production.Valero, the country’s largest independent refiner, made a gross margin of more than $13 on every barrel of oil processed in the second quarter, and a net margin of almost $8.50, both the highest since 2007.

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