Steel

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.

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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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AdobeStock/khwaneigq

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.

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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

Port Talbot steel plant

Source: Adobe Stock/Petert2

Pittsburgh-based U.S. Steel saw its market value reduced by 27% from investors following a surprising first quarter loss.

According to a recent report from the Pittsburgh Post-Gazette, U.S. Steel also announced plans to spend more than $1 billion in upgrades to plants in Mon Valley and beyond.

Want a short- and medium-term buying outlook for aluminum, copper, tin, lead, zinc, nickel and several forms of steel? Subscribe to our monthly buying outlook reports!

“This is not a quarter-to-quarter play,” David Burritt, president and chief operating officer, told investors, concerning investment in the mills. “We’re in this for the long haul. It takes more than a little bit of courage to take this action right now.”

Analysts are encouraged by the investment, but they are also concerned the time frame for the project will prevent U.S. Steel from taking advantage of the surging demand in steel that many are expecting on the heels of President Donald Trump’s promises to support the steel industry.

Chinese Demand for Steel Growing?

Our own Raul de Frutos recently wrote about the current industrial metals bull market and whether or not he still sees an upside. Pertaining to steel specifically, de Frutos wrote that China’s government recently announced plans to build a new urban metropolis from the ground up, which would significantly boost the demand for steel and other metals.

De Frutos wrote: “This growth translates into solid demand for industrial metals at the same time as China applies stricter anti-pollution rules and supply-side reforms designed to cut capacity in energy-intensive sectors like steel and aluminum. Overall, while we continue to see strength in Chinese markets, we are not ready to call peak in this industrial metals bull market.”

How will steel and base metals fare in 2017? You can find a more in-depth copper 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:

India’s steel story continues to shine. The country’s consumption of finished steel goods is expected to grow by 6.1% in 2017 compared with 2016.

According to the World Steel Association (WSA), India’s steel product demand could reach 88.6 million tons in 2017, up from 83.5 million tons in 2016. WSA was also quite positive on India’s steel demand in 2018, projecting a growth of 7.1% to 94.9 million tons.

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Steel consumption in India’s neighboring country China, however, would remain flat in 2017. The WSA estimated a 2% slump in demand for 2018.

The Indian Steel Association, too, has said publicly that the country was well on its way to becoming the second largest consumer of steel, beating the United States to the second spot.

The WSA said in its report that the U.S. was expected to continue to lead the growth in the developed work in 2017-18, based on strong fundamentals, newly announced measures related to fiscal stimuli, and rising infrastructure spending. It has estimated that steel demand in the U.S. will grow by 3% in 2017 to 94.3 million tons and then by 2.9% in 2018 to 97.1 million tons.

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In India, in a further fillip to steel production, the government was contemplating making the use of Indian steel compulsory in all government or public sector funded projects. This would raise the per-capita consumption from 61 kilograms (134.5 pounds) to 160 kilograms (353 pounds) and increase production from 120 million ton to 300 million ton by 2030. The indication of this was recently given by Union Minister for Steel Chaudhary Birender Singh.

After reviewing the performance of Rashtriya Ispat Nigam Limited (RINL), the minister told reporters that “stringent measures” like imposing anti-dumping duty and minimum import price (MIP) had led to imports falling by 39% and exports increasing by 57%.

He added that the India’s national policy on steel would be unveiled soon, after receiving approval of the Union Cabinet.

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The move to make use of “Make in India” steel mandatory by government bodies comes in the wake of the central government’s commitment to support the domestic steel sector, which has been incurring losses during the last couple of years due to excess production and dumping of steel products from China into India.

Incidentally, India was aiming for a steel production capacity of 300 million tons by 2030, while the current capacity is 120 million tons and production was 90 million tons.