Author Archives: Fouad Egbaria

Before we head into the weekend, let’s take a look back at the week that was and some of the stories here on MetalMiner:

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  • What’s up with aluminum? After a strong 2017 the metal hasn’t seen as much upward movement as some other base metals. Our Stuart Burns looked into why that might be.
  • Meanwhile, the British steel industry could be due for a jolt of investment, leading to some signs of a recovery, Burns writes.
  • There’s a new name entering the electric vehicles fray, Burns writes, and it might not be a brand you’d associate with the automotive sector.
  • In light of the markets’ recent volatility, Irene Martinez Canorea surveyed the relationship between the VIX — the ticker symbol for the CBOE’s Volatility Index — and commodities.
  • In case you missed it, last Friday the Department of Commerce made public it Section 232 reports and recommendations on steel and aluminum (the reports had already been sent on to the president last month). Lisa Reisman and Irene Martinez Canorea broke down the reports and their implications for aluminum, specifically. Check out the three-part series at the following links: Part 1, Part 2 and Part 3.
  • Lithium is a material that’s both rare and increasingly coveted for applications like electric vehicle batteries. So, is the world doomed to run out of it, or will demand encourage investment in finding new supply? Burns delved into the matter earlier this week.
  • The U.S. International Trade Commission voted last week that imports of carbon and alloy wire rod from South Africa and Ukraine are injurious to the domestic industry.
  • We touched on Section 232 aluminum above — what about steel? Reisman added her thoughts on the steel investigation, ranging from capacity utilization rates to trade remedies to talks of a looming trade war.

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This morning in metals news, the U.S. Department of Defense recently indicated it would prefer targeted tariffs as opposed to a blanket strategy, Australian Prime Minister Malcolm Turnbull will press President Donald Trump on an assurance last year that Australia would be exempted and London copper is down for the week.

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DoD Espouses Targeted Tariffs Approach

In light of the pending Section 232 probes of steel and aluminum imports, the Department of Defense said it would favor a more targeted approach to tariffs.

In addition, the DoD prefers a delay to any measures curbing aluminum imports, according to a Reuters report.

Turnbull Looks for U.S. to Honor Tariff Assurances

Australian Prime Minister Malcolm Turnbull plans to discuss with President Trump on Saturday the assurances given last year that Australia would be spared from Section 232-related steel and aluminum tariffs, according to the Financial Review.

The recently released Section 232 reports make no mention of an exception for Australia. According to the Financial Review report, Turnbull will seek to revisit assurances made last July vis-a-vis a carve-out for Australia.

Copper Down on the Week

London copper and zinc dropped this week as a result of profit taking, Reuters reported. In addition, the dollar strengthened and uncertainty about demand in China contributed to the drop this week.

MetalMiner’s Annual Outlook provides 2018 buying strategies for carbon steel

According to the report, LME three-month copper dropped 0.7% to $7,110 a ton in official open outcry trading on Friday.

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This morning in metals, zinc and nickel dropped to their lowest prices in over a week, another country hints at retaliation vis-a-vis potential U.S. Section 232 tariffs and Chinese steel mills are looking to increase output before future cuts take hold.

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Nickel, Zinc Post Drops

Zinc and nickel prices posted their lowest prices in over a week as the Shanghai Futures Exchange opened back up for business on the heels of the Chinese New Year break, according to a Reuters report.

LME benchmark nickel fell 1.9% in official open outcry trading to $13,580 a ton, according to the report, while LME zinc fell 1.7% to $3,482 a ton.

Turkey Warns of Retaliation to 232 Tariffs

Turkey is the latest country to allude to retaliatory plans should the U.S. enact steel tariffs, according to Turkish news source Ahval.

According to the report, Economy Minister Nihat Zeybekçi that if there are complaints from Turkish producers regarding future 232-related steel tariffs, the country will look into retaliatory measures.

Chinese Steel Mills Look to Get Output Up Before Next Round of Cuts

According to a Reuters report, Chinese steel mills are looking forward to an increase in their output once government-mandated winter cuts end in March.

MetalMiner’s Annual Outlook provides 2018 buying strategies for carbon steel

The cuts, instituted from Beijing, aimed to bring down pollution in the country. According to the report, the country shut down half of all steel production in 28 cities this winter.

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While the Department of Commerce’s release of its Section 232 report on steel and aluminum stole most of the headlines last Friday, the United States International Trade Commission (USITC) voted that imports of carbon and alloy steel wire rod from South Africa and Ukraine pose harm to domestic industry.

According to the USITC release, the U.S. Department of Commerce (Commerce) has determined the products “are sold in the United States at less than fair value.”

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The products included in the order are “certain hot-rolled products of carbon steel and alloy steel, in coils, of approximately round cross section, less than 19.00 mm in actual solid cross-sectional diameter.”

The vote in the case was unanimous, with Chairman Rhonda K. Schmidtlein, Vice Chairman David S. Johanson, and Commissioners Irving A. Williamson and Meredith M. Broadbent all voting in the affirmative.

Now, the Department of Commerce will issue antidumping duty orders for the imports from the two countries.

Imports of the two products from the countries in question were valued at $67.5 million in 2016, according to a USITC fact sheet. The domestic petitioners in the case were: Charter Steel, of Saukville, Wis.; Gerdau Ameristeel US Inc., of Tampa, Fla.; Keystone Consolidated Industries, Inc., of Peoria, Ill.; and Nucor Corporation, of Charlotte, N.C.

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According to the announcement, the USITC’s report on the investigation will be made available online March 22 at the following link:

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This morning in metals news, China’s scrap steel exports surged last year, two popular American non-metal products could be affected by steel and aluminum tariffs, and a miner of gold and silver looks to get into copper and zinc.

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Chinese Scrap Steel Exports Jump in a Big Way

Scrap steel exports from China amounted to 2.2 millions tons in 2017, according to a Reuters report citing the Xinhua news agency.

Bourbon, Cheese Getting Caught in a Hypothetical Trade War?

As President Donald Trump mulls steel and aluminum tariffs — as part of the Department of Commerce’s Section 232 probes — many have pondered if such tariffs would mark the start of a new trade war.

According to a report by NPR, Kentucky bourbon and Wisconsin cheese could be affected in such a trade war. While China is often the primary focus of the 232 discussion, according to the report European allies are warning of possible retaliation.

Hochschild Looks to Get Into Copper, Zinc

Hochschild, a miner of gold and silver, is interested in moving into other sectors, like copper and zinc, according to a Reuters report.

MetalMiner’s Annual Outlook provides 2018 buying strategies for carbon steel

Gold and silver will continue to buy the miner’s top priority, according to the report.

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This morning in metals news, U.S. raw steel production in the year to date is down 1.9%, South Korea announced it would consider going to the World Trade Organization (WTO) if the Trump administration goes with through with steel tariffs and copper prices slide as the U.S. dollar continues its recovery from last week’s three-year low.

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U.S. Raw Steel Production Falls

U.S. raw steel production fell 1.9% in the year to date as of Feb. 17 compared to the same period in 2017, according to the American Iron and Steel Institute’s weekly report.

The capability utilization during that time frame this year has been 73.6%. In the recently released Section 232 aluminum and steel reports, the Department of Commerce issued recommendations that included a stated desire to hit at least 80% in capability utilization for both steel and aluminum.

South Korea Could Take Case to WTO if U.S. Imposes Steel Tariffs

One question many have asked is what actions Section 232 tariffs might inspire from other countries.

In the case of South Korea, it announced it would consider appealing to the WTO if the U.S. decides to impose tariffs on steel, according to a Nikkei Asian Review report.

Copper Falls as Dollar Rebounds

The price of copper fell as the U.S. dollar strengthened Tuesday, according to Reuters.

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LME copper fell 0.7% to $7,071 per ton, according to the report.

A recent article in  Crain’s examining an alleged manpulation of the VIX, otherwise known as the Volatility Index, prompted MetalMiner to take a deeper look at the relationship between the index, commodities and industrial metals.

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As a reminder to readers, trading activity and the sentiment behind trading activity determines the movements of any exchange-traded product, from soybeans to gold to oil. Therefore, buying organizations may want to better understand the relationship between the VIX and industrial  metals.

What is VIX?

VIX is the ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index. The VIX is a popular measure of the stock market’s expectation of volatility implied by S&P 500 index options. Traded on the CBOE, the VIX is known as the “fear gauge,” or the “fear index.”

As a measure of expected volatility, the VIX is calculated as 100 times the square root of the expected 30-day variance of the S&P 500 rate of return. Using this math, the variance is annualized and the volatility can be expressed in percentage points.

VIX and Commodities

Concerns for traders, however, started as a result of a recent spike in the VIX that drove investors toward billion-dollar losses. Before the index spiked, the VIX traded mostly sideways. The latest spike drove the VIX to 2015’s highs.

VIX (CBOE Volatility Index). Source: CBOE

The VIX and the CRB commodities index share a long-term negative correlation. A negative correlation means that when one index increases, the other tends to decrease. The opposite also holds true. Therefore, when commodities trade in an uptrend, the VIX tends to trade in a downtrend.

However, this correlation does not appear as strong as the commodities and base metals correlation (for example). The negative correlation between the CRB and the VIX indexes falls in the 0.7 to -0.7 range. The closer to +-1, the stronger the correlation. However, the 0.7 to -0.7 correlation still serves as a good indicator for buying organizations.

Commodities in black. VIX index in green. Source: MetalMiner analysis of StockCharts

The longer the time period, the stronger the correlation. Therefore, spikes and short-term movements may not affect the other index.

The recent spike in the VIX does not have a meaningful impact on the CRB index. Buying organizations may wish to use the VIX as another indicator of the commodities trend, particularly for the longer term.

VIX and Industrial Metals

Since commodities and base metals have a positive correlation (meaning that both move in the same direction), the VIX can serve as another road sign for base metal price movements (albeit in an inverse relationship).

Base metals in black. VIX index in blue. Source: MetalMiner analysis of StockCharts

The negative correlation also applies to the Industrial Metals (DBB index) and the VIX.

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However, the negative correlation appears stronger for commodities, particularly for the longer term. The chart above highlights the industrial metals and VIX index correlation as even stronger than the VIX-commodities correlation. Therefore, buying organizations will want to follow the VIX, particularly for the longer term.

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This morning in metals news, Japan urges caution in steel Section 232, Kazakhstan’s output of a number of metals jumped month over month in January and Russian billionaire Oleg Deripaska will step down as president of Rusal and En+ Group.

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Japanese Steel Industry Asks for Caution in U.S. Section 232 Case

The Japanese steel industry called for caution from the United States in its upcoming Section 232 decision on steel, and appealed to the principles of free trade in the process, Reuters reported.

According to Kosei Shindo, chairman of the Japan Iron and Steel Federation, the recommendations laid out in the U.S. Department of Commerce’s Section 232 steel report — which was released Friday — “violate the principles of free trade.”

Kazakhstan’s Cooper, Steel, Zinc Output Up in January

Output of copper, steel and zinc rose in Kazakhstan last month, according to Reuters.

Copper output, for example, jumped 11.1% year over year, according to the report.

Russian Billionaire to Step Down as President of Two Companies

Russian billionaire Oleg Deripaska will step down as president of Rusal and En+ Group, Reuters reported.

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The decision comes on the heels of En+ becoming a publicly listed company after a share sale in November, according to the report.

When the Department of Commerce announced  last month that Secretary of Commerce Wilbur Ross had forwarded his Section 232 steel report (and the following week, aluminum) to President Donald Trump, the details of the report were not made public.

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That changed Friday, as the department released the reports outlining the potential strategies recommended to Trump (who met with lawmakers earlier this week to discuss potential tariffs on steel and aluminum imports).

“The United States is the world’s largest importer of steel,” Ross said during a briefing Friday morning. “Our imports are nearly four times our exports.”

Section 232 of the Trade Expansion Act of 1962 grants the president authority to limit or restrict imports that are determined to have an impact on national security. The last 232 investigation came in 2001, when the George W. Bush administration investigated semi-finished steel and iron ore imports. (The Department of Commerce ultimately determined the imports did not negatively impact national security.)

The U.S. currently has 169 anti-dumping and countervailing duty orders in place for steel, which some critics have argued has served as only a patchwork defense. Of those 169 orders, 29 are against China, Ross added.

Laying the background for the proposals, Ross cited findings of the report, including the global rise in steelmaking capacity, which is up to 2.4 billion metric tons (a jump of 127% since 2000). In addition, global excess capacity is 700 million tons, with China’s excess capacity exceeding the total U.S. steelmaking capacity, according to the report.

“Excessive steel imports have adversely impacted the steel industry,” the report states. “Numerous U.S. steel mill closures, a substantial decline in employment, lost domestic sales and market share, and marginal annual net income for U.S.-based steel companies illustrate the decline of the U.S. steel industry.”

Steel Recommendations Include 24% Tariff on All Products From All Countries

The 232 steel report lays out a trio of options, ranging from a blanket, all-encompassing tariff structure to more targeted approaches:

  1. A global tariff of at least 24% on all steel imports from all countries
  2. A tariff of at least 53% on all steel imports from 12 countries (Brazil, China, Costa Rica, Egypt, India, Malaysia, Republic of Korea, Russia, South Africa, Thailand, Turkey and Vietnam) with a quota by product on steel imports from all other countries equal to 100% of their 2017 exports to the United States
  3. A quota on all steel products from all countries equal to 63% of each country’s 2017 exports to the United States

When asked how the department created the list of 12 countries included in the second option, Ross said the selection process wasn’t “formulaic,” but they considered things like the rate of expansion of capacity in recent years and the nature of the products being shipped to the U.S., among other things.

“Anything in trade is very, very complex,” Ross said. “And therefore [there’s] not a single factor. The  rate of increase in exports to the U.S. was in each case a big factor.”

Administration Looks to Provide Jolt to Aluminum Industry

As for aluminum, the three recommendations were:

  1. A tariff of at least 7.7% on all aluminum exports from all countries
  2. A tariff of 23.6% on all products from China, Hong Kong, Russia, Venezuela and Vietnam, with all other countries be subject to quotas equal to 100% of their 2017 exports to the United States
  3. A quota on all imports from all countries equal to a maximum of 86.7% of their 2017 exports to the United States.

According to Ross during a Friday morning briefing, the goal is to up the domestic aluminum industry’s capacity, currently hovering around 48%, to 80%. According to the aluminum report, the U.S. imported five times as much tonnage of primary aluminum as it produced in 2016, with the import penetration level rising to 90% from 65% in 2012.

As with steel, the aluminum report pointed to Chinese excess capacity.

“China’s industrial policies encourage development and domination of the entire aluminum production chain,” the report states. “These policies are further intended to stimulate the export of aluminum processed into sheets, plates, rods, bars, foils and other semi-manufactures and to target development of increasingly sophisticated and high-value product sectors such as automotive and aerospace.”

According to Section 232, Trump has 90 days as of receipt of Ross’ report to act. In the case of steel, that makes for an April 11 deadline, with an April 19 deadline set for aluminum.

The Section 232 investigations were launched last April, after which it seemed as if the administration would be set to release its reports by the end of June. But, June came and went without an announcement, as did the remainder of the calendar year. During that year, steel imports rose 15.4% year over year, according to American Iron and Steel Institute report citing U.S. Census Bureau data, leading some domestic industry figures to point out the delay’s impact on import levels.

Ross admitted that timeline was overly ambitious.

“We were a little bit over-optimistic about how quickly such a complicated topic could be brought to a head,” Ross said. “Government tends to move slowly. It’s one of the many lessons I’ve learned coming down here.”

The president does have the authority to revise any of the proposals and come to the table with a different policy solution.

“He will decide what he is going to do,” Ross said of Trump. “It’s not for me to speculate what action he might take. But I do reemphasize that he is not bound by these exact recommendations. He can do something totally different.”

In a release, Scott Paul, president of the Alliance for American Manufacturing, urged action.

“We believe the action must be broad, robust and comprehensive, and the Commerce Department report makes a compelling case for immediate action. Any exclusions deserve appropriate scrutiny. Otherwise, the Washington swamp will be filled with importers trying to undermine American jobs.

“American workers are counting on President Trump to stand up for them.”

In its own response to the release of the reports, the Aluminum Association reiterated past statements, chiefly to ask for a solution that specifically addresses China and does not harm market economy trading partners like Canada and the European Union.

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“We look forward to working with the president on a final decision that helps support continued growth in the U.S. aluminum industry,” said Heidi Brock, president and CEO of the Aluminum Association, in a prepared statement. “Ultimately, we favor a negotiated, enforceable government-to-government agreement with China on overcapacity.”

On the subject of retaliation and challenges to any potential trade action at the World Trade Organization, Ross pointed to other nations’ import barriers, citing the automobile tariffs among the U.S. (2.5%), E.U. (10%) and China (25%) as an example.

“There already are extreme protectionist measures,” he said. “I don’t believe there’s a country on the targeted list that we have that doesn’t have far more protective features on its industry than we do already.”

The full steel report is available on the Department of Commerce website, as is the full aluminum report.

The European Steel Association’s (EUROFER) recent steel market overview hailed 2017 as an “expansionary” year for the industry while also issuing positive sentiment about 2018 and 2019.

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The overview said apparent steel consumption in Q3 2017 rose 1.1% year over year in the European Union.

As for imports, it was a tale of two halves.

According to the report, imports rose 8% year over year in the first half of 2017. That reversed in the second half, however, and imports ultimately fell 14% for the year as a whole.

“This decline has occurred in the context of improving in global steel prices – largely driven by the Chinese market – which narrowed the gap between EU domestic prices and imports,” the Eurofer market overview states. “Other restraining factors include the moderation of imports, particularly from China, but also other countries affected by the imposition of anti-dumping and anti-subsidy measures by the European Commission. However, other third country suppliers have triggered increased exports to the EU, substituting for this drop.”

Eurofer estimated steel demand jumped by approximately 1.9% in 2017. The association indicated positive feelings that that upward momentum can continue in 2018 and 2019.

“Prospects for the continued recovery of EU steel demand are positive,” said Axel Eggert, director general of Eurofer. “The expected strength of most steel-using sectors bodes well for the demand side of the EU steel market. The supply side situation could, however, continue to be negatively affected by import distortions.”

Last year was an expansionary one for steel-using sectors, according to Eurofer, with notable growth in Central Europe, in particular.

“The outlook for 2018 and 2019 is positive, although activity in steel-using sectors will settle back into a more moderate pace of expansion owing to waning momentum in the tube sector and automotive industry,” the report states. “Underlying economic conditions remain supportive to a steady pace of expansion in other sectors.”

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The full market overview is available on Eurofer’s website.