Steel

Seven EU nations asked the European Commission to intervene to stop cheap imports of steel, particularly from China and Russia and the London Metal Exchange is giving its warehouses the chance to cut rent prices.

Help From Cheap Steel Imports

Seven countries including France, the UK and Germany, in a letter, urged the European Union to step up action to relieve an ailing steel industry suffering from tumbling prices and cheap imports from China and Russia.

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Ministers from the three countries, along with Italy, Poland, Belgium and Luxembourg, sent the joint letter on Friday to the European Commission.

The letter also argued that in order to safeguard the competitiveness of sectors such as steel, the most efficient plants should not be subject to what it called undue carbon costs.

LME Gives Warehouses Option to Cut Rent

The London Metal Exchange is giving its approved warehouses the chance to cut rent and free-on-truck levels for the year starting April 1, after saying last year it would look at capping charges due to plans for large increases.

Last Week for The January 2016 MMI Report

Those that want to submit lower rates should do so before February 19 and the LME will publish the revisions by March 1.

This week, the Bank of Japan introduced negative interest rates in the latest attempt to goose the Pacific nation’s stalled economy.

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Essentially penalizing people for saving money seems like a curious thing to do to try to turn around a struggling economy, but it’s not the first time banks have gotten a push to force them to lend. The European Union has done it, too, in recent memory.

Shorter supply chains for in-demand products could benefit retailers around the holidays. Source: Adobe Stock/cacaroot.

Boy does Toyota Motor Corp. ever wish it had a bigger supply chain this week. Source: Adobe Stock/cacaroot.

My colleague and metal price analyst Raul de Frutos wrote that, “negative interest rates mean that depositors must pay regularly to keep their money in the bank. This measure encourages people and businesses to spend, invest and lend money rather than pay a fee to save it and keep it safe.” Read more

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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China vowed to cut its steel production over the next five years and the Trans-Pacific Partnership is now officially signed.

TPP Signed, Legislative Fights Ahead

Trade ministers for the 12 Trans-Pacific Partnership nations formally signed the massive accord on Wednesday in New Zealand and vowed to throw their weight behind surpassing the various legislative hurdles necessary to actually put the deal into place.

Free Download: The January 2016 MMI Report

The 12 nations account for some 40% of the world’s economy. They now have two years to ratify or reject the pact.

China Vows to Cut Steel Production

China will cut crude steel capacity by 100 million to 150 million metric tons within the next five years in a bid to tackle a crippling glut that has dragged prices down to multiyear lows and saddled firms with huge debts, the nation’s cabinet said recently.

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The State Council also said it would ban new steel projects and work to eliminate so-called stricken “zombie” mills, which have stopped producing steel but have not formally shut down.

Toyota Motor Corp. said on Saturday it may halt production at its domestic plants early next month due to a steel shortage, following an explosion at a steel plant operated by one of its affiliates.

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The blast at an Aichi Steel plant has curbed production of steel parts, which may impact output at the world’s best-selling automaker which produces around 40% of its global output in Japan.

“At the moment, there is enough supply inventory to keep our domestic plants running until Feb. 6,” a Toyota spokesman told Reuters, adding that overtime and weekend shifts for next week had been canceled.

“After that, we will be monitoring our supply situation on a day-by-day basis and decide accordingly.”
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Aichi Steel said that the Jan. 8 explosion at its Chita plant in central Japan dented production of specialty steel parts. It added that it aimed to resume operations in March.

Our Automotive MMI held steady for the third month in a row at 68.

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Considering that other metals prices are still falling, it’s quite a feat that automotive has been able to even hold steady for this long. Prices of stainless, aluminum and copper are all down in their individual MMI sub-indexes this month and our Raw Steels MMI was flat.

Automotive_Chart_February-2016_FNL

Low prices simply have not been enough to entice larger raw material purchases by automakers. U.S. auto sales fell slightly in January because of the East Coast snowstorm, but analysts say end user demand remains strong and buyers will likely head back into dealerships this month. Sales fell less than 1% to 1.1 million, according to Autodata Corp.

Low gas prices and even lower interest rates are continuing to fuel sales and most automakers are optimistic that they can break last year’s sales record by the end of the year. The problem facing metal producers is that there is still so much oversupply out there that even the market hunger for new cars, trucks and SUVs can be sated several times over by the stockpiles that currently exist.

Producers Targeting Automotive

Automotive is still a coveted market for most producers. Nucor Corp. recently opened an office in Detroit as part of a push to increase its sales to the auto industry by 40% to 50% over the next two years. Charlotte-based Nucor saw its sales to the automotive industry increase 20% last year — 1.4 million tons of steel products — over 2014’s numbers.

Alcoa, Inc. is even coming closer to realizing its previously announced split by naming new directors for its new automotive and aerospace company, all of them with experience in the fields.

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The fundamental strength of the sector will likely still be there when stockpiles finally dwindle and we see prices rise. Many are predicting that rebound for later this year, but there’s very good reason to believe 2016 could be another low-price year as there is still no definitive deal to reduce oil production and many miners and metal producers are not curtailing production.

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A major steel merger happened in Japan over the weekend and, despite assurances from Russia’s oil minister, details on a global oil production slowdown are still not forthcoming.

Nippon Steel Acquires Nisshin Steel

Japan’s top steelmaker, Nippon Steel & Sumitomo Metal Corp., unveiled a plan on Monday to take control of fourth-ranked rival Nisshin Steel and trim some of their combined steel output in the face of a global supply glut. A deal would be the latest in a series of consolidations and plant closures as producers ace a slump in prices due to falling demand and competition from export of overproduced Chinese steel.

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Nippon Steel, which already holds 8.3% of Nisshin, said the two firms struck a memorandum of understanding on Monday to turn Nisshin into a subsidiary. Nippon Steel said it is considering extending its stake to 51% to 66%.

No Details on Oil Production Cutbacks

Talk of a deal among major oil exporters to cut production has lifted oil prices back to around $35 a barrel in recent days. Still, it remains far from clear whether a deal between OPEC and non-OPEC producers, mentioned by Russia’s energy minister, is possible.

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With Iran and Iraq determined to boost output, the pressure to cut production has only intensified.

This week in metals, the US Census Bureau reported initial numbers for steel imports into the US last year.

Free Download: The January 2016 MMI Report

The finished steel import market share was an estimated 26% in December and is estimated at 29% for the full year. If the 29% figure holds up, it will be a record for the proportion of finished steel imports coming into the US from elsewhere in one year.

How to combat steel imports? Why not just ban them all?

How to combat steel imports? Why not just ban them all? Source: Jeff Yoders

For all of 2015, US steel production hit 86,843,000 net tons, or about 71% of capacity. That’s down 9.3% from the 95,706,000 net tons in 2014 when the industry ran at nearly 78% capacity.

Read more

As sanctions against Iran came down this week, a flurry of business deals were announced by the Islamic Republic and steel production was a major beneficiary of Iran being welcomed into the world community.

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Iran is the largest steel producer in the Middle East and Northern Africa and is among the 15 largest producers in the world. Even with significant domestic production capacity, Iran remains a net steel importer. Over 50% of downstream industries are currently non-operational or unable to operate at optimal capacity. This has led to a high demand, low supply situation. It is estimated that the country imports around 8 million metric tons of steel every year, mainly from China and Turkey.

Steel Deals

That all could change, though, as Iran is in the mood to make a deal and South Korea’s Pohang Iron & Steel Co. (POSCO) and Italy’s Danieli both made announcements that they will go into business with Iran this week.

Steelmakers are eager to make deals with Iran but can new demand outstrip new supply? Source: AdobeStock/icarmen3.

Steelmakers are eager to make deals with Iran but can new demand outstrip new supply? Source: AdobeStock/icarmen3.

POSCO plans to sign a preliminary agreement with Iranian steelmaker PKP in March to buy a stake in a $1.6 billion steel mill project in the Middle Eastern country. Read more

Can the US steel industry finally catch a break? Source: Adobe Stock/Inzyx.

Source: Adobe Stock/Inzyx.

The plan put in place by China to reduce crude steel production capacity could have far-reaching consequences, including job cuts and social instability.

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Bloomberg Business reported the move could cost the Far East nation as many as 400,000 jobs and may well fuel social imbalance. Citing the China State Council, steel production capacity is expected to be cut by 100 million to 150 million metric tons. The individuals who lose their jobs as a result will be assisted by the Chinese government, according to the Xinhua News Agency.

“This is a positive sign for China’s adjustment to a slower, more efficient economy, but we should wait to see how many of these job cuts are real,” Andrew Collier, an independent China analyst and former president of the Bank of China International USA, told Xinhua. “The high levels of debt in China would be better used to support real and growing businesses.”

According to the source, the iron and steel sectors employ more than 6 million people in China, or roughly 4% of total industrial employment.

Commodity Demand on the Rise?

Our own Stuart Burns wrote last week that despite record exports from China of steel and other commodities, combined with a global market overflowing with oil and other commodities, the popular mindset is that we are in a slump when it comes to commodity demand, but the reverse is true.

“Commodity demand has remained robust and positive,” Burns wrote. “The collapse in prices is not about a lack of demand. It is, rather, self-inflicted by miners and oil producers, who, for diverse reasons, are producing far too much product compared to actual demand.”

How will base metals fare in 2016? You can find a more in-depth steel price forecast and outlook in our brand new Monthly Metal Buying Outlook report. For a short- and long-term buying strategy with specific price thresholds: