Steel

President Trump announced last week that his administration is investigating whether imports of steel threaten the U.S. national security. This follows earlier administration plans to initiate trade enforcement cases involving countries such as China, Germany, Mexico, Japan, Canada (yes, Canada) or South Korea. Shares of U.S. steelmakers rallied on the news that the Trump administration could widen the probe against imported steel products.

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There is almost no difference in steel whether it’s produced domestically or in China, at least for the more commodity-grade steel products. The main difference, as many argue, is that the production of steel in the U.S. causes less environmental damage due to stricter environmental regulations.

The U.S. placed several anti-dumping and countervailing duty orders on steel products, but they had not substantially reduced the amount of steel entering the country. Steel imports account for roughly a fourth of total steel consumption in the United States. Now, import numbers are down 30%-plus from recent years but the impact has been more modest than many market participants would have predicted.

Cold-rolled coil spread US-China. Source Raul De Frutos analysis of MetalMiner IndX.

The potential of a blanket import tax comes as U.S. prices trade at unsustainable levels compared to international prices. That’s because since March, domestic prices have risen while prices in China have fallen sharply. The sell-off coincided with a big sell-off in seaborne iron ore. The declines come amid concerns that previous rallies had taken prices too far. In addition, China’s crude steel output surged to a record 72 million metric tons in March. However, prices could recover if China’s promises to address rampant, persistent overcapacity take hold sooner rather than later.

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The point is, that although a wider international price spread is partly justified by more stringent import tariffs, this phenomenon has historically led to rising import volume. Unless the new investigation materializes into something, U.S. steel prices will likely find downward pressure if world export prices continue to slide.

What This Means For Metal Buyers

Momentum in U.S. steel prices has cooled down. This is because the international price spread has widened to record levels. If the U.S. imposes a new import tax on steel, that will likely keep this price spread wide. However, Chinese steel consumption and higher steel prices is what really represent a sustainable improvement to market fundamentals. Even with a new import tax, U.S. prices are already expensive and U.S. mills will still need a recovery in Chinese prices if they want to be able to justify higher prices. Ultimately, protectionist trade policies might provide only fringe benefits to U.S. steelmakers.

This week, President Donald Trump and the Department of Commerce used executive orders, new anti-dumping investigations, memoranda invoking national security concerns and other executive branch tools to get tough on foreign steel imports.

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Although Trump or Commerce Secretary Wilbur Ross never overtly stated it, the target is clearly China and the global steel overcapacity that it’s the main culprit in creating. China’s steel exports hit a record 112.4 million metric tons in 2015, then dropped slightly to 108.49 mmt last year, as Chinese mills have been chastened by threats of a trade dispute.

Fre trade

The Trump administration is using every tool in the box on steel overcapacity. Source: Adobe Stock/Argus.

To date, the Global Forum on Steel Overcapacity hasn’t caused overcapacity to come down very much. Can a section 232 investigation or other U.S.-only actions change that? The U.S. steel industry certainly seems to think so. Or it’s at least saying, “why not try?”

Steelmaker executives such as U.S. Steel CEO Mario Longhi and SSAB Americas President Chuck Schmitt flanked Trump and Ross at the memorandum-signing ceremony calling for the Section 232 investigation yesterday. The praise was universal from steel producers as one might expect, too. Still, Trump’s latest salvo on trade will renew concerns that China may retaliate.

China’s Foreign Ministry spokesman Lu Kang said today the country needed to ascertain the direction of any U.S. investigation before it could make a judgment. There’s also the fact that Trump now claims that he and Chinese President Xi Jinping are the best of friends.

Chinese steel executives also repeated their mantra that overcapacity is not just China’s problem and it needs global coordination to resolve it, but also said it would be tough to rein in the sector.

“The Chinese government will not set export limits for the steel mills and could not keep track of every mill,” Li Xinchuang, vice chairman of the China Iron and Steel Association, told Reuters.

What may be more effective is rising steel prices in China and what looks more and more like a very real crackdown on pollution and dirty air in China. An early-year surge in Chinese steel prices has lifted the prices of its export products and China has lost its competitiveness with other markets. With coking coal prices increasing, Chinese steel prices could increase even more, which our Lead Forecasting Analyst, Raul de Frutos, pointed out this week.

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On a personal note, this will be my last MetalMiner week-in-review. I have thoroughly enjoyed informing all of you wonderful readers and site users about the latest developments in metals markets these last three years. Thank you for taking advantage of our services. It has been an honor.

 

UPDATED 11:47 AM with Comments from President Trump, Commerce Secretary Wilbur Ross and the American Iron & Steel Institute.

President Donald Trump will sign a directive asking for a speedy probe into whether imports of foreign-made steel are hurting U.S. national security, two administration officials told Reuters on Wednesday.

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Trump signed the memorandum related to section 232 of the Trade Expansion Act of 1962 at the White House with leaders of some domestic steel companies, such as U.S. Steel‘s CEO Mario Longhi and SSAB Americas President Chuck Schmitt in attendance. The law allows the president to impose restrictions on imports for reasons of national security. The order would only task the Commerce Department with starting a probe into the imports and if they, indeed, harm national security. Reuters reported that Commerce Secretary Wilbur Ross has already tasked Commerce personnel with starting the probe.

Trump said Ross and Commerce would be back “very, very soon” with recommendations about how to protect the American steel industry. He also repeated campaign trail criticism of the North American Free Trade Agreement and said that farmers in Wisconsin are also suffering from cheap imports of dairy products from Canada.

“Times of crisis call for extraordinary measures. Massive global steel overcapacity has resulted in record levels of dumped and subsidized foreign steel coming into the U.S. and the loss of nearly 14,000 steel jobs,” said Thomas J. Gibson, president and CEO of the American Iron & Steel Institute, the largest trade organization of North American steel producers. “The Administration launching this investigation is an impactful way to help address the serious threat posed by these unfair foreign trade practices, and we applaud this bold action.”

According to Ross, the investigation was “self-initiated” by Commerce and will consider “the domestic production (of steel) needed for the projected national defense requirement” and if domestic industries can meet that requirement. It will also look at “the impact of foreign competition on specific domestic industries and the impact of displacement of domestic product because of foreign imports.”

There are national security implications from imports of steel alloys that are used in products such as the armor plating of ships and require a lot of expertise to create and produce.

The Department of Commerce started investigations of imports of carbon and alloy steel wire rod from Belarus, Italy, South Korea, Russia, South Africa, Spain, Turkey, Ukraine, the United Arab Emirates, and the United Kingdom, and companion countervailing duty investigations of imports of carbon and alloy steel wire rod from Italy and Turkey. The investigations cover hot-rolled products of carbon and alloy steel.

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The alleged dumping margins range from 18.89% (Italy) to 756.93% (Russia) and both of the alleged countervailing subsidies are above de minimis (less than 2%). The U.S. International Trade Commission is scheduled to make its preliminary injury determinations on or before May 12, 2017.

The petitioners are Gerdau Ameristeel US Inc. in Florida, Nucor Corporation based in North Carolina, Keystone Consolidated Industries of Texas, and Charter Steel in Wisconsin.

President Donald Trump (R-N.Y.) is set to sign an executive order this afternoon ordering enforcement and review of the H-1B visa program, popular in the technology industry, on a visit to the headquarters of Snap-On Inc., a tool manufacturer in Kenosha, Wis., according to senior administration officials.

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He will also use what the White House called the “Buy American and Hire American” order to seek changes in government procurement that would boost purchases of American products in federal contracts, with one aim being to help U.S. steelmakers.

The moves show Trump once again using his power to issue executive orders to try to fulfill promises he made last year in his election campaign, in this case to reform U.S. immigration policies and encourage purchases of American products.

“Strong Buy America domestic procurement preferences for federally funded infrastructure projects are vital to the health of the domestic steel industry, and have helped create manufacturing jobs and build American infrastructure,” said Thomas J. Gibson, president and CEO of the American Iron and Steel Institute, the largest trade group for North American steel manufacturers. “The foundation of a strong Buy America program is the longstanding requirement that all iron and steel-making processes occur in the U.S. for a product to be Buy America compliant — from the actual steel production to the finishing processes. This ‘melted and poured’ standard has been successfully applied since 1983 and must continue to be the standard used in federal Buy America rules for steel procurement. We applaud President Trump for affirming his commitment to full and effective enforcement of our Buy America laws, and to addressing the issue of unfairly dumped and subsidized steel, in signing this Executive Order today.”

Coking coal has more than doubled in two weeks on the back of disruption to Australia’s coal exports associated with Cyclone Debbie, which caused the evacuation of several mines and damaged coal trains supplying export terminals, forcing some miners to declare force majeure on their deliveries.

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It is estimated that shipments accounting for 50% of the global coking coal supply will be delayed and that Australia will need at least two months to regularize its coking coal exports following the natural disaster.

Australian coking coal’s free-on-board price in US dollars per metric ton. Source:mining.com.

Coking coal prices rose sharply in the second half of last year when China reduced allowable work days at the country’s coal mines, which reduced output and tightened the global coking coal market. These events added fuel to rising steel prices in China. But a slump in coking coal prices since December added pressure to steel prices, especially in China since the country strongly depends on the commodity to make steel.

Can Higher Coking Coal Prices Give a New Boost to Chinese Steel Prices?

The Chinese cold-rolled coil price. Source: MetalMiner IndX.

Australia is the world’s biggest coking coal exporter and is China’s largest supplier. The recent disruptions are forcing China to look for alternative supplies. Russia, Mongolia and Indonesia are other potential sources of coking coal for China’s hungry mills. Meanwhile, North Korea is out of China’s exporter list after Beijing ordered an import ban following North Korean missile tests.

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Higher coking coal prices translate into higher input costs, particularly in China. Chinese steel prices set the floor for international steel prices, a topic that we discussed recently. Steel buyers should monitor the recent surge in coking coal prices closely as  since steelmakers will potentially pass on the increase to consumers, giving a boost to weakening steel prices in China.

Global steel prices tend to find a floor based on the price of Chinese steel. If Chinese prices fall, domestic U.S. prices also tend to fall. However, grain-oriented electrical steel continues to beat to its own drum, often not aligned with underlying steel prices.

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March is no exception.

Although U.S. domestic steel prices continued to rise in March, the GOES M3 price fell and fell rather significantly dropping by nearly 7%.

GOES MMI

Meanwhile, according to a couple of recent TEX Reports, GOES prices from Baosteel increased by $38/metric ton in April after increases of $168/mt from January through March. Baosteel acts as the price leader and according to a recent report, and will likely stand pat until or unless others also increase their prices. Those “others” may have a near-term opportunity to do so as a large tender from Bharat Heavy Electricals for 20,000 mt will bring in the global GOES producer community. As China tends to set the “market floor” for global steel prices, the TEX Report suggests that this tender will serve as the global price floor for GOES for the balance of 2017.

Supporting the rising price theory, TEX Report also suggests that prices have risen by $200-300 per mt in the Middle East and India.

Ironically, prices for steel rebar on the Shanghai Futures Exchange have declined by 5% according to a recent MetalMiner story on the back of declining coking coal (4%) and declining coke prices (5%), as well as falling iron ore futures. Some, including MetalMiner, believe the price declines are due to speculators unwinding bullish bets.

Chinese HRC

Source: MetalMiner Forecasting

Regardless, Chinese prices for hot-rolled coil are falling and though GOES prices often diverge from underlying steel market trends, upward price movements may be elusive.

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China will offer the Trump administration better market access for financial sector investments and U.S. beef exports to help avert a trade war, the Financial Times reported on Sunday, citing officials familiar with the matter.

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China is prepared to raise the investment ceiling in the Bilateral Investment treaty and is also willing to end the ban on U.S. beef imports, the newspaper also reported.

Commerce Secretary Wilbur Ross said on Friday that President Donald Trump and Chinese President Xi Jinping have agreed to a new 100-day plan for trade talks on Friday.

Steel Shipments Down in February, But Up Year-Over-Year

The American Iron and Steel Institute recently said that for the month of February 2017, U.S. steel mills shipped 7,232,341 net tons, a 6.2% decrease from the 7,708,416 nt shipped in the previous month, and a 2.4% increase from the 7,059,442 nt shipped in February 2016. Shipments year-to-date in 2017 are 14,940,757 nt, a 6% increase vs. 2016 shipments of 14,090,749 nt for two months.

A comparison of February shipments to the previous month of January shows the following changes:  hot rolled sheets, down 3%, hot-dipped galvanized sheets and strip, down 6% and cold-rolled sheets, down 8%.

The signals the U.S. is sending in the steel sector really worry Germany, so said Brigitte Zypries, German Economy Minister, according to Reuters in a recent article.

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This isn’t the first time the European Union has had a trade spat with the U.S. over steel but it is unusual for one party or the other to take the case to the World Trade Organization, claiming “accounting tricks” and “protectionism” designed to give domestic producers an “unfair competitive advantage.”

The E.U.’s position is this issue should have been addressed through bilateral negotiations giving them the opportunity to show Germany, French and Austrian steel producers are not dumping steel and are not being subsidized, but President Trump signed executive orders last Friday aimed at identifying abuses causing the huge U.S. trade deficit, and Germany is deemed one of the worst culprits.

Port Talbot steel plant

British Steel and its Port Talbot plant could be the next company in line for carbon and alloy steel plate tariffs from the U.S. Source: Adobe Stock/Petert2

However, by issuing a final finding that European and Asian producers dumped certain carbon and alloy steel cut-to-length plate in the U.S. market, the Department of Commerce says it is allowed to impose duties ranging from 3.62 to 148%, but the E.U. claims the decision has been determined on the basis of dodgy accounting estimates and the correct place to discuss them is at the negotiating table or via the WTO, not by applying duties which will then take months to address and impact trade for a year or more, essentially shutting European mills out of the U.S. market. Read more

Our Raw Steels Index rose 4.3% in March. Steel prices in the U.S. resumed their upward trend, with products like cold-rolled coil hitting a five-year high. However, not everything was bullish in March. Prices in China fell sharply. Let’s look into this U.S.-China price divergence:

Trump’s Rally

U.S. steel prices have been on a joyride since Donald Trump won the U.S. presidential election. Markets’ reaction to the election results wasn’t really surprising given the president’s stance on curbing imports and boosting domestic infrastructure.

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The Trump effect wasn’t the only factor driving this rally but it definitely helped prices to accelerate. However, markets now wonder if Trump can deliver what he pledged.

Raw Steels MMI

In March, officials said an executive order approving two pipeline projects and mandating the use of American-made steel won’t apply to the construction of the Keystone XL oil pipeline, contradicting prior statements by Trump that it would. A spokesperson for the administration said Keystone XL was grandfathered even though almost all of it has yet to even begin pre-construction.

In addition, Trump has so far failed to get his healthcare bill through Congress. After the healthcare failure, markets now question if Trump will get Congress to approve spending of large sums on the infrastructure sector, too.

China’s Prices Fall

In our view, falling Chinese steel prices are a bigger risk for U.S. steelmakers compared to the concerns over President Trump’s proposed infrastructure investments. Currently, China isn’t a major exporter to the U.S., but Chinese steel prices impact steel prices all over the world, as they put a floor under international steel prices.

Chinese hot-rolled coil (HRC) prices have fallen almost 15% since their February 2017 highs. March’s divergence has made U.S. prices expensive again relative to Chinese prices. In the case of cold-rolled coil, the price spread has now widened to $350 per ton, which is high compared to historical levels.

The conclusion is that for this rally in U.S. steel prices to continue, we would need to see rising prices in China as well. This is something we’ll be monitoring closely in the next few weeks. The biggest risk for the U.S. steel industry could be a further slide in Chinese steel prices. Even infrastructure spending may not be of much help in that case.

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