Steel

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Last month, China announced plans to build a new megacity from scratch. Since the city will be twice the size of New York City, analysts expect the project to require huge amounts of steel and other industrial metals such as aluminum and copper.

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According to Citi Research analysts, 12-14 million tons of extra steel will be required annually to build this new development. Since the country’s current domestic demand is about 700 million tons, that would lift Chinese steel demand by 2% per year over the next 10 years.

But are the analysts correct? Should we expect a steel demand boost over the next 10-15 years?

Although building this city from scratch will indeed require a lot of steel, analysts are making the mistake of missing the forest for the trees. The key driver for steel demand in China is the net migration from the countryside to cities. It doesn’t really matter whether China builds a new megacity or it expands its city limits. The key measure is the rate of urbanization in the country at a national level.

Urban and rural population in China. Source: China’s Economy book by Arthur R.Kroeber

China’s urban share has grown quickly over the past two decades since its rural population peaked in 1995. Last year, China’s urban population share reached 57.9%. The share, however, is still small given the country’s income level. Read more

This doubtful week, a Stanford economist made the bold proclamation that electric vehicles will completely displace their petrol and diesel counterparts by 2025, and India’s plan to triple steel production by 2030 was met with more than a few raised eyebrows.

Grand Plans

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Speaking of India, its ascent as a promising market for renewable energy has been truly impressive. Consultancy EY recently published its 2017 Renewable Energy Country Attractiveness Index (RECAI), and India took the number two spot, beating out the U.S., which slipped to third place.

India had been number nine in 2013, before Narendra Modi, who views developing renewable energy to wean India off coal as a top priority, became prime minister. Modi aims to boost India’s renewables capacity to 175 GW by 2022 (currently capacity stands at 57 GW).

India has similarly high ambitions for steel, as Sohrab Darabshaw reported earlier this week. The country aims to triple its steel production capacity by 2030, which would mean adding 182 million tons of capacity. Read more

As I pointed out two weeks ago, U.S. steel prices had no choice but to decline as the spread between U.S. and international prices had widened to unsustainable levels.

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That’s exactly what I’ve seen so far in May, and I suspect that the recent price decline is just the beginning of a deeper correction that could easily extend to the rest of the second quarter.

U.S. hot-rolled coil prices fall in May. Source: MetalMiner IndX

Hot-rolled prices have fallen around 5% since they peaked in April. Meanwhile, steel prices in China have started to stabilize after a slump during March/April. As the chart below shows, the price spread appears to have peaked near the same levels as it did last summer. U.S. steel prices will likely continue to fall, bringing this price arbitrage down.

Hot rolled coil price spread US vs China. Source: MetalMiner IndX

U.S. Steel Imports Hit a Two-Year High

Although the U.S. doesn’t import steel directly from China, Chinese steel prices set the floor for international prices. Therefore, when China’s steel prices fall, imports become more appealing to U.S. buyers. That’s exactly what’s happening now. In March, U.S. steel imports rose 31% year-over-year, hitting the highest level since May 2015. Read more

There have been some doubts over India’s stated plans to triple its steel production capacity by 2030. The Indian cabinet recently passed a revamped policy to the extent.

While some have welcomed the document, other sector experts have expressed uncertainty over the projections in the policy.

Free Download: The May 2017 MMI Report

Ratings agency Crisil, for example, said in a statement that the ambition to add 182 million tons of new steel capacities over the next 14 years under the National Steel Policy was unlikely to be achieved. Crisil’s doubts seem logical. After all, India has managed to add capacity at the annual rate of 55 million tons in the last decade.

The National Steel Policy 2017 projects crude steel production capacity of 300 million tons by 2030-31 from the present level of about 120 million tons and per-capita consumption of 158 kilograms of finished steel as against the current consumption of 61 kilograms. The policy also sees an increase in domestic availability of washed coking coal by 2030-31.

Crisil Research said that it expects 24-26 million tons of steel capacities to be added over the next five years, leading to aggregate steel capacity to rise to 140-145 million tons by 2021-22. Beyond this, Crisil said, the key factors that would determine the pace of capacity addition would be demand growth, continued government support, and pricing environment against the backdrop of global overcapacity led by China. Crisil has also projected a 6-6.5% growth in steel demand in India over the next five years, lower than the 7% annual growth rate projected by the government till 2030. Read more

Here’s What Happened

  • The Construction MMI, tracking metals and raw materials used within the construction industry, slipped 1.3% to a value of 79 for May.
  • Chinese steel prices — for forms such as rebar and H-beam — dropped precipitously this month.
  • Based on the last few months’ values, the last time this sub-index has performed this well was the start of 2015 — back when California was the first state to pass a carbon tax and Bill Gates turned human waste into potable water.

What’s Going On in the Background?

  • We’re in the salad days for the U.S. construction sector, at least as far as 2017 is concerned. According to the Associated General Contractors’ analysis, “Construction spending is at record levels for the second straight month in March [in spite of the month’s slip] and is up 4.9% for the first three months of year compared to the same period in 2016,” as quoted by com.
  • Better days for Chinese construction markets may be coming down the pike as well. Beijing recently announced plans to build a new megacity “the size of New England,” which should result in quite the appetite for industrial-grade steel, aluminum and other materials. For example, the government approved $36 billion to build 700 miles of rail within the next three years, according to this article. More salad days for the global construction industry to come, perhaps?

What Metal Buyers Should Look Out For

  • The latest drops in Chinese steel prices may have a knock-on effect on U.S. and other Western steel, which make the latter ‘pricier,’ comparatively. This could lead to lower prices on both sides of the ocean hanging around for a while.
  • We’ll see if President Trump’s 232 investigation begins to have any medium-term effect on steel once the determinations come down on whether imports constitute a threat to national security. In the meantime, “iron ore and Chinese steel prices could recover if China cuts overcapacity later this year,” as we write in our latest Monthly Outlook Report. (Free two-month trial here.)

Key Price Movers and Shakers

  • The China rebar price plummeted, the U.S. shredded scrap price fell below a key threshold to start the month for the third time this year, and weekly U.S. bar fuel surcharges for the Midwest, Gulf Coast and Rocky Mountain regions all fell slightly from April to May. Exact numbers in the membership-only article:
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No one factor has led to the turnaround in the fortunes of Europe’s steelmakers. While still not spectacular, global growth is certainly broader-based and better distributed that it was a few years ago. The fortunes of the European steel industry have improved markedly since their low point in late 2015, with prices rising some 45%, according to Reuters.

As with virtually every ferrous and non-ferrous metal, China has been a key component. Responsible for over 50% of global production capacity, China’s steel industry was undoubtedly a contributor to low prices around the middle of the decade. Beijing’s decision to cut capacity while boosting infrastructure spending has certainly resulted in increased domestic demand and reduced Chinese exports.

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China announced its intention to cut 100 to 150 million tons of steel capacity by 2020 in part to tackle pollution. It was also to address a rising tide of protectionism around the world fearful of the impact China’s excess supply was having on producers in home markets. According to Reuters, China cut 60 million tons of steel capacity last year and plans to cut another 50 million tons this year. There remains considerable debate as to how much of last year’s capacity closures really curtailed production and how much was simply the permanent closure of already mothballed or idle plants.

But either way, in conjunction with the $700-billion stimulus package targeted mostly at infrastructure and construction, Chinese steel prices jumped over 70% last year, while exports fell 3.5%. Even better news for overseas producers has been exports dropped a further 25% this year in part many would argue due to some 39 anti-dumping and anti-subsidy measures introduced in Europe over recent years of which 17 are directed at China and some 150 similar duties in place in the U.S. Read more

President Donald J. Trump has completed his first 100 days in office and thus far has signed into law 28 pieces of legislation.

While Trump has made traction in some respects, the fate of the nation’s steel industry was still up in the air — that is, until Trump signed a Presidential Memorandum in late April calling on Department of Commerce Secretary Wilbur Ross to prioritize an investigation into the effects of steel imports on U.S. national security.

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Here are three things you should know about this directive and what it could mean for the nation’s steel industry.

The Trade Expansion Act of 1962

The investigation is being conducted under Section 232 of the Trade Expansion Act of 1962. According to the Department of Commerce, Ross is tasked with determining the following:

  • “Whether steel imports cause American workers to lose jobs needed to meet security requirements of the domestic steel industry;
  • Any negative effects of steel imports on government revenue; and
  • Any harm steel imports cause to the economic welfare of the U.S.”

The Current Situation

Despite an existing steel industry, steel imports saw a 19.6% year-over-year increase in February, and, currently, imported steel accounts for 26% of the U.S. market share, according to the Department of Commerce.

Further, the U.S. steel industry is only operating at 71% capacity, and jobs in the industry has continued to take a steady hit. Read more

Here’s What Happened

  • The Automotive MMI, our sub-index of industrial metals and materials used by the automotive sector, dropped by one point for a May reading of 8, a 1.1% drop.
  • This is the third straight month of declines for this index. Back in February 2017, the Automotive MMI hit 92 — its highest level since November 2014. But now, flagging HDG steel, copper and shredded scrap prices are dragging on the rest of the index.

What’s Going On in the Background?

  • The U.S. auto market is officially slowing. Car sales dropped 4.7% to 1.43 million units, according to Autodata Corp. That is a bigger drop than forecasted by both Edmunds and Kelly Blue Book, according to several news outlets.
  • Meanwhile in China, the first quarter of 2017 saw a 7% overall increase in car sales. As we reported in our Monthly Metal Buying Outlook (free trial here), that was the strongest showing since 2014. The Chinese government has extended tax cuts for small vehicles, which should keep citizens buying cars through the year.

What Metal Buyers Should Look Out For

  • Many factors coming down the line — including increased construction projects in China — portend longer-term support for key automotive constituent metals such as HDG steel.
  • Even though HDG has slipped a bit this month, prices for that metal form in China could see room for improvement.

Key Price Movers and Shakers

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In preparing our new Monthly Metal Buying Outlook for May, we’ve seen that prices in both industrial metal markets and commodity markets have fallen over the past month.

What’s the deal?

Well, a few things are happening that stirred up that pot:

  • The U.S. dollar fell to a five-month low. The dollar’s movement usually has an inverse relationship with that of commodity prices, but not lately. Election season across the pond in France is heating up, and the outcome of the first round of presidential voting had eased concerns about the future of the euro, which rose against the dollar.
  • Interestingly, China’s annual GDP growth increased to 6.9% during Q1 2017, the fastest growth rate since the second half of 2015. Not only that, but the country also announced that it will build a “new megacity” — two things that would usually portend higher industrial metals prices. And yet…here’s what China’s economy has been doing since 2012 (the overall trend is pretty clear):

  • President Trump ordered two investigations, one for steel and one for aluminum, into whether imports of those metals threaten U.S. national security.

Check out how these types of events and trends are affecting six non-ferrous metal markets and four specific forms of steel — HRC, CRC, HDG and plate — in our detailed monthly analysis.

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International trade hasn’t been this contentious since before the Great Depression, and it is causing free traders much concern. We’ve seen a number of trade cases affect some U.S. imports such that the U.S. steel industry effectively implemented a full ground stop on many steel products (though that ground stop has been short-lived). Some political appointments have caused a backlash amongst some free-trade Republicans, importers, traders and manufacturers.

FREE REPORT: How Circumvention Impacts Both Downstream, Value-Added Manufacturing

This administration’s stance on trade has helped galvanize both the case for and against trade. These arguments are centered on several themes related to the notion that China’s loss is U.S. value-added manufacturers’ gain — if China chooses to “dump” its products at a loss, then shouldn’t value-added manufacturers take the opportunity to purchase [steel and/or other commodities] to increase their overall cost competitiveness on finished goods?

Read more