The trigger to the recent increases in steel prices may have been a report by the World Steel Association that reasoned in its short-demand demand report that the increasing output and capacity utilization rate from February to March 2016 could be indicative of a recovery in the primary steel market’s fundamentals in both the European Union and North American Markets.
Global investment bank Credit Suisse, in its report highlighted four “major changes” that had taken place of late, indicative of a cycle turn. It said one of them was that the inventory cycle had bottomed out globally. Given the extent of destocking and current inventory levels. Restocking could last more than the usual six-to-nine months. Any uptake in demand could further prolong restocking. Read more
In a complaint filed Tuesday with the U.S. International Trade Commission, U.S. Steel Corp.demanded penalties on Chinese steel imports which could include a total ban on imports into the country. U.S. Steel said that Chinese steelmakers conspired to fix prices, stole trade secrets and circumvented duties with false labeling in filing a section 337 petition.
“We have said that we will use every tool available to fight for fair trade,” said Mr. Longhi. “With today’s filing, we continue the work we have pursued through countervailing and anti-dumping cases and pushing for increased enforcement of existing laws.”
How to Prove Unfair Competition?
But what, exactly, is a section 337 petition? What law is U.S. alleging Chinese producers Hebei Iron & Steel Group, Anshan Iron and Steel Group and Shandong Iron & Steel Group Co. violated? The ITC provides us with a handy frequently asked questions page. It reports that “most Section 337 investigations involve allegations of patent or registered trademark infringement. Other forms of unfair competition, such as misappropriation of trade secrets, trade dress infringement, passing off, false advertising, and violations of the antitrust laws, may also be asserted.”
Chinese black hat hacker steals password. Source: Adobe Stock/beebright.
China has been implicated in stealing trade secrets before, and U.S. Steel was one of the victims. In 2014, a U.S. grand jury indicted five members of China’s People’s Liberation Army on charges they stole information from U.S. Steel and other American firms. Computer hacking, espionage and other charges were alleged in federal court in Western Pennsylvania (U.S. Steel is headquartered in Pittsburgh). Other victims of the alleged hacking included the U.S. arm of SolarWorld AG, Westinghouse Electric Co., Allegheny Technologies Inc. and Alcoa, Inc.Read more
U.S. Steel is accusing Chinese steelmakers of intellectual property theft and Germany is subsidizing its electric car industry.
U.S. Steel Files Section 337 Petition
U.S. Steel Corp. has launched a campaign to prevent imports from China’s largest steel producers, it said on Tuesday, the boldest step yet by a U.S. company as a trade brawl with the world’s largest steel producer escalates.
In a complaint to the U.S. International Trade Commission, the domestic steelmaker called on regulators to investigate dozens of Chinese producers and their distributors for allegedly conspiring to fix prices, stealing trade secrets and circumventing trade duties by false labeling.
The petition, known as Section 337 is used to protect against intellectual property theft, listed some of China’s top producers, including Hebei Iron & Steel Group and Anshan Iron and Steel Group and Shandong Iron & Steel Group Co.
“We have said that we will use every tool available to fight for fair trade,” said U.S. Steel Corp President and Chief Executive Officer Mario Longhi in a statement.
Germany Subsidizes Electric Car Development
Germany’s auto industry risks being overtaken by foreign competitors unless it receives greater domestic support, the country’s economy minister said today, announcing a 1 billion euro ($1.13 billion) plan to subsidize electric cars that are seen as the technology of the future.
Electric vehicles have had a sluggish start in Germany, the country where the combustion engine-powered automobile was born. A government plan to get 1 million e-cars on the streets by 2020 is far behind schedule, with just 50,000 sold so far.
“After a long debate we have agreed to a subsidy program that aims to show on the home market that we can master these new drive trains, from plug-in hybrid to battery-powered vehicles, and make them suitable for the mass market,” Economy Minister Sigmar Gabriel said at a news conference in Berlin.
The Financial Times wrote this week that a key driver of bullish sentiment for many asset classes, particularly emerging markets and commodities, has been the U.S. Federal Reserve lowering its estimate of policy tightening this year, but for metals the knock-on effect of that has been a weaker U.S. dollar which — as my colleague Raul De Frutos has written recently — remains a key driver of both price direction and sentiment.
Equally, if not more important, though, has been the sugar rush of China’s not-so-mini fiscal stimulus, initiated late last year which has really picked up momentum in the first quarter. Across a number of metrics, China’s economy has surged this year driving a risk on sentiment among investors, the strength of which has caught many by surprise.
Stimulus-Driven Bull Market
Chinese speculative investors have piled into the country’s commodity markets betting the upturn has the potential to boost demand for those materials. Wider sentiment has helped, according to the London Telegraph, new home sales jumped 64% in March from a year earlier. Housing prices have risen 28% in Beijing, 30% in Shanghai, and 6% in the commercial hub of Shenzhen. Read more
The recent steel rally seen in China is triggering some warning signs. Fitch Ratings recently announced prices for the metal increased, in part, due to rising speculation about an inevitable slump.
According to a report from Bloomberg, the sharp increase in steel prices isn’t sustainable as mills are expected to fall back on idled capacity, thus increasing supply. The steel price rally has been driven, in part, due to a seasonal recovery that was further supported by increased speculation in the futures market.
“The rapid increase in Chinese steel prices so far this year is not sustainable, as it is largely due to a seasonal pick-up in construction and elevated speculation in the steel futures market,” the Fitch report said. “With prices now surging, many of the suspended plants have resumed production.”
Steel prices have risen dramatically in 2016 with rebar up 48% after Chinese policy makers touted growth and added stimulus, boosting property prices, according to Bloomberg. These gains have helped mills’ profitability bounce back.
Meanwhile, aluminum prices have joined the broader metals rally, hitting a nine-month high this week. Our own Raul de Frutos wrote: “The data shows us that many signals suggest that this rally in commodity markets could continue. Aluminum prices are starting to pick up and so are other industrial metals. Watch oil prices, the U.S. dollar, commodities markets and the price performance of other industrial metals. Don’t get caught as prices find momentum. In this period it is extremely important to understand the big picture and have a defined purchasing strategy.
You can find a more in-depth steel price forecast and outlook in our brand new Monthly Metal Buying Outlook report. Check it out to receive short- and long-term buying strategies with specific price thresholds.
The Steel Authority of India Ltd. and JSW Steel & Essar Steel India filed a complaint with India’s Directorate General of Anti-Dumping and Allied Duties, seeking an anti-dumping investigation as well as the imposition of tariffs on steel imports from six countries. Soon thereafter, the DGAD said it had prima facie evidence of dumping of steel originating from China, Japan, Russia, Korea, Brazil and Indonesia.
Chinese Production vs. Indian Production
China is the world’s biggest steel producer, accounting for around 822 million tons a year. Driven largely by a fast track economy in the past quarter century, China’s steel output has grown by more than 12 times it’s size in the ’80s. By comparison, the EU’s output fell by 12% while U.S. output has remained flat. Of late, China has found itself in the midst of dumping controversies involving many countries it sends exports to, including the U.S., the European Union and Australia.
Chinese steel production is the target of India’s anti-dumping probe. Source: Adobe Stock/zjk.
The Indian probe’s purpose is to establish the “existence, degree and effect of dumping” by the six nations. If found to be true, it will then recommend a minimum amount of anti-dumping duties. The probe covers hot-rolled flat products of alloy or non-alloy steel in coils, as well as hot-rolled flat products of alloy or non-alloy steel not in coils. Most of these products are used in the the automotive, oil and gas line pipes/exploration, cold-rolling, pipe and tube manufacturing industries.
Trade between China and India has been growing but individually, the two are polar opposites so far as global exports are concerned. India’s exports account for just 1.7% of world trade, compared with nearly 12% for China’s. China exported 112 million metric tons of steel in 2015, which was 25% more than India’s total production of steel. India produced 92 mmt of steel in its 2014-15 fiscal year, while it imported over 9.32 mmt of steel, of which, an estimated 30% came from China.
Meanwhile, on the other side of the globe in Belgium, international steel producing countries, too, called for urgent action to curb overproduction.
A joint statement from the U.S., Canada, the E.U., Japan, Mexico, South Korea, Switzerland and Turkey, called calls for “ongoing international dialogue” to remove “market-distorting policies.”
But China rejected suggestions that it subsidized its loss-making steel companies.
India has often used anti-dumping duties and also imposed safeguard duties due to such import surges.
A few days ago, the Indian government extended the safeguard duty on steel imports until March 2018, after having first imposed them in September 2015. There will be no safeguard duties on steel imported at or above the minimum import price (MIP) stipulated by the government.
Anti-Dumping or Countervailing Duties?
Both, anti-dumping and countervailing duties try to rectify the same issue: low-priced imports. But the difference between the two is the real cause of the low price.
Anti-dumping duties are used to tackle “dumping,” a legal definition for imports whose price is lower than their production cost. An exporter sets steel prices lower than production costs and floods other markets with such steel products. If a Chinese producer spends $120 per mt to make cold-rolled steel, and then sells it in the Indian market for $90 mt, while his Indian counterparts are selling their produce for $110, then these imports are based on a predatory pricing model that is either indirectly subsidized in the originating country, or takes advantage of a lower-valued currency and production costs back home.
On the other hand, countervailing duties seek to counter low prices that are an outcome of direct subsidies. The Chinese government, like some others, offers subsidies on exports in the form of tax breaks. As a result, exporters can offer lower prices than domestic producers. Countervailing duties level the playing field by negating the advantage of direct government sponsorship by increasing import tariffs to level the playing field.
Such duties are allowed by the World Trade Organization under the General Agreement on Trade and Tariffs (GATT) but only if dumping is established. Anti-dumping duties have to be removed if the margin between the domestic price and imported price goes below 2%, or when the imports of product from a country account for less than 3% of total imports of the product.
Also, the WTO says safeguard and anti-dumping duties cannot be country specific. So, if India or the U.S. imposes duties on imports from China, the latter can also impose duties on imports from those two nations.
This is what China is now pointing out to India. A few days ago, the world’s top steel maker asked India not to resort to “trade protection measures” and to “strictly follow” WTO rules while investigating cases of dumping by Chinese iron and steel exporters. Steel overcapacity is a worldwide problem which requires a joint effort from all countries, an unnamed Chinese official was quoted as saying by the official Xinhua news agency.
The main engine of global demand growth for the past several years, Asian demand, starts to sputter amid signs of a gasoline glut in both Japan and China.
Steel Imports Into the U.S. Up in March
Based on preliminary Census Bureau data, the American Iron and Steel Institute reported recently that the U.S. imported a total of 2.5 million net tons (nt) of steel in March 2016, including 2.097 million nt of finished steel (up 12.9% and down 0.1%, respectively, vs. February final data).
On the year-to-date, through three months of 2016 total and finished steel imports are 7.49 million and 6.424 million nt, down 36% and 34% respectively, vs. the same period in 2015. Annualized total and finished steel imports in 2016 would be 30 and 25.7 million nt, down 23% and 18% respectively vs. 2015. Finished steel import market share was an estimated 24% in March and is estimated at 25% YTD.
MetalMiner Editor Jeff Yoders recently had a chance to discuss the broad commodities rally, individual metals markets and other related news with Morningstar Senior Equity Research Analyst Andrew Lane, (here he is talking about Alcoa, Inc. on CNBC). The Chicago-based, independent investment research firm recently released its Basic Materials Observer.
Morningstar warns that basic materials stocks look somewhat overvalued, with the average company under its coverage trading at a 12% premium to their analysts’ fair value estimate. That’s not to say that Morningstar’s analysts don’t see pockets of significantly undervalued companies in the sector. Key takeaways:
Despite the recent rally in some commodity prices, Morningstar analysts’ outlook for commodities related to Chinese fixed-asset investment remains negative.
Price outlooks are relatively better for commodities related to the Chinese consumer. However, Morningstar analysts would preach caution on the recent safe-haven gold rally.
With faltering Chinese growth likely to wreak havoc on investment-oriented commodities, the analysts look to U.S. housing as a pocket of opportunity. Morningstar analysts believe housing starts will be driven higher during 2016.
In discussing the ongoing steel overcapacity issue, Lane said that any real recovery in demand in the Chinese economy is still far away, hindering the demand outlook from what was once the main driver for worldwide production.
“Any real recovery can’t come until past 2020 which is as far our long-term outlooks go,” he said. “The funding for these loss-making facilities, it has to run out at some time. It remains to be seen how far the local governments in China can kick the can down the road by keeping their local and provincial capacity open with access to this (loan) capital. It’s a game that can’t go on forever but… we tend to think that they can maintain current production levels for a lot longer than most people give them credit for.” Read more
Even as world steel powers gathered in Brussels this week to discuss the massive overcapacity problem and exchange accusations, particularly between the U.S. and China, steel prices continued to rise globally.
In China, that means zombie steel mills are rising from the dead. While Beijing has engineered some steel capacity cuts, its efforts are being undermined by a rise in domestic steel prices that has seen mills ramp up output. Even those zombies, which had stopped production but were never officially closed down. They have clawed their way back from the grave and are producing steel again. Such is life in the people’s republic.
The zombie steel mills are back from the grave! Source: Adobe Stock/James Thew.
Steel wasn’t the only metal threatened by imports, though, this week. The United Steelworkersfiled a safeguard action against imports of aluminum, mostly from China. If found to be in violation of section 201 of U.S. trade law and impose tariffs of up to 50% on primary unwrought aluminum (read, ingots welded together to form “semi-finished products”).
Hey, maybe the zombie mills are just “semi-finished,” too! That is, shut down but never really out of business. Here in the U.S., when a company is in trouble it files for bankruptcy protection. That’s exactly what once high-flying renewable energy company SunEdison, a major supplier of solar power, did this week.
There’s simply no mechanisms to deal with losses that way for these Chinese zombie mills. Yet, China claims to be committed to changing to a market-based economy. That’s why it’s so ridiculous that the World Trade Organization and other international trade authorities are even considering market-based economy status for the evolving Chinese economy.
Russia said it will increase oil production without a deal with Saudi Arabia and other Organization of Petroleum Exporting Countries members and the U.K. has reluctantly agreed to subsidize a deal to help sell Tata Steel‘s on-the-block U.K. mills.
Russia Says It’ll Increase Oil Production
Russia said on Wednesday it was prepared to push oil production to historic highs, just days after a global deal to freeze output levels collapsed and Saudi Arabia threatened to flood markets with more crude.
Venezuela predicted prices could crash in the next few weeks if producers failed to resume dialogue and urged that non-OPEC participants be observers at a June OPEC meeting, as the specter of oversupply loomed once more.
Cameron Government Supports Nationalizing U.K. Steel Mills
Great Britain could part-nationalize Tata Steel‘s remaining U.K. interests by taking a 25% equity stake, as part of a support package worth hundreds of millions of pounds designed to attract a buyer and save at least 10,000 jobs.
The Conservative Cameron government, which privatized the steel and other industries under former Prime Minister Margaret Thatcher, is seen as being anxious to avoid an imminent closure of the U.K.’s biggest steel works at Port Talbot in South Wales just before a referendum on European Union membership in case of a protest vote.