Just over a year ago, MetalMiner commented on the acquisition of most of ArcelorMittal USA’s assets by Cleveland-Cliffs (including potential impacts on steel prices).
At the time, the MetalMiner analyst team suggested, “The deal strengthens the company’s position in the automotive sector. The company likely controls 60%-65% of exposed auto sheet supply (think steel used on the outside of a car).” The analyst team continued, stating, “Biggest loser? Automotive OEMs like General Motors, Ford, Honda and Toyota.”
Fewer suppliers always results in less competition. Always.
Also as predicted by MetalMiner and confirmed by several people familiar with the matter, Cleveland-Cliffs has implemented firmwide standard pricing across all of its assets. As such, any “lower” pricing available previously in the market — through AK Steel, for example — now sells at the ArcelorMittal price (seemingly higher price level). MetalMiner identified that as an obstacle to automakers at the time. The reduction of three behemoth integrated mills to two drastically lowers competition.
At the same time, all of the steel mills have taken a very disciplined approach to adding (or rather, not adding) capacity to the market. The headline capacity utilization rate remains well above 80%. However, the numbers relate to the actual lines in operation, not total U.S. steelmaking capacity.
According to Bloomberg, U.S. steel consumption is estimated to reach 104 million tons this year and 108 million tons in 2022. However, domestic production was forecast to reach 87 million tons, a shortfall of 17 million tons.
Most of the mainstream press’ coverage of U.S. Steel’s giant Mon Valley plant upgrade project cancelation focuses on several issues, from permitting delays to U.S. Steel stating that a competing steelmaker plans to build a facility in another state.
Игорь Головнёв/Adobe Stockk
The project, an anticipated $1.5 billion investment across the Mon Valley works sites, would have added an endless casting and rolling facility at the Edgar Thomson plant. In addition, it would have created a cogeneration facility at its Clairton Plant.
The combined investments would have allowed U.S. Steel to produce thin gauge HRC at CRC gauges.
Buying organizations would have the opportunity to pay less per ton for this material than the cold rolled coil alternative. In other words, the price of steel from this line would have likely fallen somewhere between hot rolled and cold rolled prices.
Today, only Nucor and Steel Dynamics have this kind of capability.
In theory, these innovations would have helped U.S. Steel boost margins for HRC and garner rapid market acceptance for those premium products.
Allocation markets cause sleepless nights for procurement professionals because, without material, lines get shut down and businesses fail to operate profitably.
Undoubtedly, the dreaded “A” word is upon us, particularly for steel markets.
Back in May of this year, toward the end of the last COVID-19 “surge,” MetalMiner contemplated what could happen to steel prices once demand came back onstream.
MetalMiner saw two scenarios: a gradual increase in demand followed by panic buying or a rather dramatic increase in demand led by the automotive industry, combined with slow mill restarts and historically low starting inventory levels held by service centers.
We assumed the first scenario, but obviously the second ensued.
GM workers this week went on a nationwide strike, the first since 2007 at the Big 3 automaker (pictured: the ACDelco and GM Genuine Parts processing center in Burton, Michigan, which opened in August 2019). Photo by Jeffrey Sauger for General Motors
Nothing entertains me more than receiving an oddball inbound phone call, email or, in this case, text message when something hits metals markets.
A great inbound came in yesterday regarding the nationwide strike at General Motors, which could have an impact on steel prices.
The question, “Do you think the GM strike will pull the market down further?” resulted in an immediate reply, “I don’t follow the stock market as closely as I do commodity markets.”
To which this large steel buyer replied, “I’m talking steel market, not stock market.”
Let’s do a quick calculation to assess impact. I feel like I’m interviewing for a big consulting firm and they have given me my first case study — “how would you calculate the GM strike’s impact on steel demand?”
So, here goes:
GM produced 8.4 million cars in 2018.
According to the God of Google, 2,138 pounds of steel (on average) are in every car/truck produced by GM.
So, 8.4 million cars annually multiplied by 2,138 pounds of steel — we converted the 2,138 to 1.069 short tons — equals 8.98 million short tons of steel.
The average automotive OEM operates 365 days a year, less a mandatory two-week shutdown — so, 365 minus 14 equals 351 operating days.
That means GM’s strike would hinder steel usage by 25,582.9 tons (on average) per day.
Given that the U.S. market consumes about 110 million tons annually, and GM’s share represents about 8% of domestic steel production, it would take a 39-day strike to lower demand by 1 million tons, or 1%.
Does that mean the GM strike could cause steel prices to plummet or fall further?
However, coming into annual contract negotiation season, buying organizations should certainly take heed of underlying steel price momentum.
Fundamentals do not drive metal prices, as we have long noted, but they may provide some leverage to other large buying organizations.
A 15-year trade dispute between Airbus and Boeing could send copper prices skyrocketing, with an even greater impact on U.S. manufacturers than the Section 232 tariffs had on steel and aluminum. MetalMiner has long covered this current dispute between Airbus and Boeing.
Last year, the U.S. claimed victory in the dispute, essentially setting the groundwork for retaliatory tariffs against European imports. Though it took some time to go through an appeals process, Bloomberg has reported that tariffs appear imminent and, as a result, the U.S. copper industry has been galvanized into action.
The tariffs apply to a wide range of products, including hundreds of items unrelated to airplane parts, including cheese, whiskey and wine.
However, the following copper alloys and products could face a 100% — that is not a typo — duty if coming from the E.U.:
7407.10.50: Refined copper, bars and rods
7407.21.90: Copper-zinc base alloys (brass), bars and rods nesoi, not having a rectangular cross section
7409.11.50: Refined copper, plates, sheets and strip, in coils, with a thickness over 0.15 mm but less than 5 mm
7409.21.00: Copper-zinc base alloys (brass), plates, sheets and strip, in coils.
7409.29.00: Copper-zinc base alloys (brass), plates, sheets and strip, not in coils.
7409.31.50: Copper-tin base alloys (bronze), plates, sheets and strip, in coils, with a thickness o/0.15 mm but less than 5 mm and a width of 500 mm or more
7409.31.90: Copper-tin base alloys (bronze), plates, sheets and strip, in coils, w/thickness o/0.15 mm but less than 5 mm and a width of less than 500 mm
7409.40.00: Copper-nickel base alloys (cupro-nickel) or copper-nickel-zinc base alloys (nickel silver), plates, sheets and strip, w/thickness o/0.15 mm.
7409.90.90: Copper alloys (o/than brass/bronze/cupro-nickel/nickel silver), plates, sheets and strip, w/thickness o/0.15mm but less than/5 mm and width less 500 mm
7410.11.00: Refined copper, foil, w/thickness of 0.15 mm or less, not backed
These alloys cover 16% of the U.S. copper market, according to the Precision Metal Forming Association, and go into a broad range of industries, including electronics, automotive, aerospace, agribusiness, defense and home appliances.
In fact, the Bureau of Economic Analysis estimates these sectors represent approximately $1.7 trillion in U.S. output annually, according to testimony delivered Aug. 5 by ABC Metals President Dan Kendall.
In the Section 232 steel and aluminum exclusion requests, some companies received exemptions where no domestic supply exists. That scenario certainly applies to some copper alloys — nobody produces the C101, C102, C103 up to C110 (oxygen-free copper) grades, nor does the U.S. cast C500 series (phosphor bronze).
The copper industry, unlike the steel and aluminum industries, has already heavily consolidated. As Kendall explained at the hearing with regard to a monopoly in copper supply:
“On July 16th, Wieland Metals, headquartered in Germany, completed its acquisition of Global Brass & Copper, the last remaining US-owned brass and copper strip manufacturer. Prior to that, on May 28, Olin Brass, a division of GBC (which was about to be acquired by Wieland), petitioned the USTR for inclusion of these metals for tariff protection that are sourced in Europe.”
Wieland has petitioned to essentially create a virtual U.S. monopoly of more than 23 copper alloys. Furthermore, Wieland has no quoted ABC Metals. (Wieland did ship 10,000 pounds, though certainly not enough to fill an order!)
Trump can’t be blamed for this set of tariffs. However, this 301 WTO case has the power to wreak havoc throughout many manufacturing supply chains.
OEM manufacturers will act quickly to reconfigure their supply chains to continue to access copper products competitively. They will likely move offshore for electronic production. In addition, the remaining domestic copper suppliers will raise prices because they can.
Product substitution in copper remains limited compared to other metals, such as aluminum and steel, particularly due to the tough mechanical and chemical performance criteria demanded by consumers such as Aptiv, Lear, Molex, TE (Tyco Electronics), Ford, Chrysler, Denso, etc.; few suppliers can meet such demands.
MetalMiner gives these tariffs a 50% probability based on the USTR recommendation to the administration, expected in September.
Domestic suppliers have already raised prices.
We remind readers, however, that nothing kills high prices like high prices.
Monopoly Pricing on the Horizon?
The Copper Monthly Metals Index (MMI) moved sideways in July, maintaining its value of 74.
While prices in the index lost some value, the declines were modest.
LME copper prices moved firmly sideways since early June. In July, the price hit a brief low of $5,823/mt and a brief high of $6,067/mt, trading within a band between $5,850/mt and $6,050/mt during most of the month.
Source: MetalMiner analysis of London Metal Exchange (LME) and FastMarkets
Copper tends to be a beacon for industrial metals trading, typically experiencing more pricing volatility due to macroeconomic conditions than other metals.
With the trade uncertainty around the U.S.-China relationship following the U.S. announcement of more tariffs, the copper price reacted and dropped in early August.
What This Means for Industrial Buyers
Trade conditions deteriorated somewhat in early August on the heels of the latest U.S. announcement of tariffs on an additional $300 billion in Chinese goods. As a beacon industrial metal, copper prices reacted by dropping.
Meanwhile, the U.S. implementation of 301 WTO tariffs of up to 100% on European copper product imports may result in serious ramifications for copper prices and related industrial organization needs.
In light of the shifting trade environment, industrial buyers will need to keep on their toes in August and as we move into the annual planning season for industrial metals buying.
Copper prices across the index weakened slightly this month.
The Indian copper cash price dropped 1.7% to $6.42 per kilogram.
Korean copper strip dropped 1.4% to $8.17 per kilogram.
U.S. prices in the index decreased in the range of 1.6%-1.7%, offsetting last month’s gains of a similar magnitude. U.S. producer copper grade 110 decreased to $3.43 per pound, grade 102 priced at $3.62 per pound and grade 122 at $3.43 per pound.
Chinese prices decreased in the range of 0.3%-1.7%. China’s copper wire price dropped by 1.3% to $6,802/mt. The primary cash price dropped 1.7% to $6,779/mt. Copper bar dropped by 1.7% to $6,767/mt.
In procurement school, we are taught to treat suppliers as commodities (OK, they call it procurement and supply chain management at university). However, in all truthfulness, we know that every company must have something special that makes them great.
JDM Steel is no exception.
When asked that specific question, Joe Orendorff, JDM’s vice president of purchasing — who could easily double as a Chicago restaurant tour guide — told us his company’s claim to fame is its ability to stretcher level flat-rolled steel, as well as their ability to clean coils on their SCS Line. The SCS Line is a mechanical brushing system that provides JDM customers with an alternative to pickled and oiled material. JDM also brushes P&O material, which ultimately provides the cost advantages of hot-rolled steel, but with the appearance, along with forming and fabricating characteristics, more closely resembling cold-rolled steel.
Not every company needs to care about surface finish and flatness, but certain industries — including rail car and tank manufacturers, and electricity box makers, among others — require it.
What Orendorff and Account Manager Erin Wright didn’t know on our tour is that we like to probe to better understand how well the service center buys and whether that service center can come to the market from a cost-advantageous position.
Here are a few questions that we covered on our visit:
What do you consider to be a good CRU discount?
Do you have the mills quote you in dollars or percentages, and which do you use for contracting purposes?
From how many mills do you source material? (We always ask how many tons are purchased annually.)
How do you use scrap prices when making purchasing decisions?
How does a smaller player buy as well as a larger player? (I will preemptively answer this by stating that JDM Steel joined the North American Steel Alliance as a founding member; thus, JDM aggregates its steel buy with other smaller service centers.)
Of course, we can’t disclose JDM’s responses, but suffice it to say that this company punches above its weight class, so to speak.
We also typically conduct a rapid fire “what did you learn?” session among ourselves after a field trip. Here is what members of our team had to say after the trip to JDM:
Belinda Fuller (Forecast Analyst): “It was a great experience to visit JDM in person to watch as commodity grade steel gets metamorphosed into specific steel sheet products as needed for various applications, including getting to see beautiful, application-ready finishes made directly from coil.”
Marcos Brioni (Principal Data Analyst): “Based upon high-end quality management and conscientious supplier selection, JDM offers high-standard steel products for its customers. JDM’s machinery balances novel and traditional procedures for exceptional, tailor-made offerings.”
Cassandra Weiler (Client Services Manager): “The staff at JDM are very knowledgable on the industry and metal market trends. They have found a niche market with their HRC scrubbing technology to make beautiful pieces of metal. All this, plus a good sense of humor from every staff member we met!”
Fouad Egbaria (MetalMiner Editor): “It is always enlightening to see how companies of all kinds leverage their processes to, as Lisa put it, ‘punch above their weight class.’ JDM is certainly an example of just that.”
Lisa Reisman (Executive Editor): “What in the world was I thinking about wearing white jeans to a service center?”
After fielding hundreds of calls from metal-buying organizations this past year, we here at MetalMiner can definitely say that metal-buying organizations have felt “tariff pain.”
But at the same time — and there is a big but — many companies mitigated much, if not all, of that price risk by deploying effective sourcing strategies.
The recent press attention given to the alleged “harmful effects” of Section 232 tariffs on aluminum and steel on consumers and businesses appears to be ill-informed.
Before we dive into the details, let’s set the record straight on where steel and aluminum prices appear today, where they were when tariffs went into effect and where they were before tariffs.
Let’s start with hot-rolled coil (HRC):
Source: MetalMiner IndX(SM)
Wait a Second, Rewind…
Two points if you said “wow, it looks like steel prices reached similar highs in 2011.”
To be fair, tariffs did lift steel prices in 2018 to 10-year highs, but prices have declined steadily since last July (four months after tariffs went into effect).
Today’s price levels now appear within the same range in which they traded back in 2011-2015. It’s hard to see how the consumer faces a hefty bill for HRC prices due to tariffs now or for any prior extended length of time.
A similar price dynamic applies to cold-rolled coil (CRC), with a little twist:
The only trade study published on tariffs that measures actual impact — as opposed to using models to support claims — sheds some light.
As previously reported by MetalMiner, a 2003 study used primary research with 419 steel-consuming companies, as opposed to econometric modeling. At the time, this represented fully 22% of all steel purchased by companies in the U.S. That study concluded “overall employment of steel-consuming industries generally fell or remained flat in 2002-03” compared with the previous two years, but that productivity and wages increased over the three-year period.
Moreover, the study noted a $30.4 million GDP loss — not nothing, but insignificant against the total.
Perhaps most ironically among steel-consuming companies, “overall sales and profits increased, while capital investment fell, for most steel-consuming industries in 2002-03 – the period after the implementation of the safeguard measures.”
Not all results were positive.
Half of industry respondents reported higher steel prices and 43% said that they could not pass those costs onto their customers. Some reported that producers broke contracts.
Finally, 32% of respondents saw higher lead times, while 46% of respondents noted difficulties in obtaining materials.
Which Brings Us Back to the ‘Model’ Studies…
The use of models remains inherently flawed because most models require the use of forward-looking data and assumptions.
The Coalition for a Prosperous America conducted a trade study that generated different results from the Koch study, primarily by taking into consideration actual baseline GDP and total employment data, and CBO forecasts for GDP and employment (the CBO is considered by policy wonks to be the most neutral of all economic reporting government entities).
That study also factored in industry plans and announcements from the steel industry and used the Regional Economic Modeling Inc’s (REMI) model, which is used widely by think tanks, state and local governments, etc.
Other Government Research Debunks Broader Negative Tariff Impact Claims
A Congressional Research Service (CRS) analysis points to negative impacts from the tariffs on steel and aluminum. That analysis, however, suggests a much narrower range of impacts from higher prices of steel and aluminum to lower imports of those same commodities.
The study also claims input costs will rise for downstream manufacturers. Certainly, prices have risen with the imposition of the tariffs. However, nobody has conducted research to determine if manufacturers could pass down costs and/or if their profits were lower, higher or about the same as prior to the tariffs.
In other words, have the higher prices actually impacted GDP and employment data?
The CRS study suggests the two biggest variables to consider relates to downstream prices and availability of imports, which will depend upon the range of product and country exclusions and the degree to which other countries retaliate.
Regardless, the ISM Report on Manufacturing released in December, which also relies upon primary research with downstream manufacturers, reported: “Despite U.S. tariffs on foreign steel and aluminum, prices for those key materials have declined, executives said.”
Those price declines mirror current commodity market conditions in which the overall bull market appears to have run out of steam. MetalMiner’s long-term outlook for both commodities and industrial metals shifted from bullish to bearish back in December 2018 and January 2019, respectively.
It’s easy to glob onto the mainstream trade war discourse and assume the widely circulated studies must serve as the whole truth. The truth, however, requires the media and the public to acknowledge real anti-tariff media bias, the actual overcapacity conditions that led to the imposition of Section 232 in the first place, and the impacts measured post-tariff as reported by those that actually, as opposed to theoretically, felt the impact (e.g. downstream manufacturing organizations).
[Editor’s Note: This is the second part of our three-part series on how tariff impacts — positive or negative — are perceived, the history of Section 232, and China’s role in the global steel marketplace (and how that has affected the U.S.). In case you missed it, Part 1 can be read here.]
The Bush tariffs of 2002 came as a result of a Section 201, as opposed to a Section 232 investigation. The Trade Act of 1974 covers Section 201 investigations, whereas Section 232 derives its authority as part of the Trade Expansion Act of 1962, based on national security grounds.
MetalMiner conducted an analysis of every single Section 232 case initiated since the passage of the Trade Expansion Act of 1962. The results suggest market observers need to dig into the details further to see why various presidents have taken action on imports of particular commodities, as well as what types of action they have taken.
Section 232 has been invoked 26 times.
Source: MetalMiner analysis of ITC data
Of the seven times in which a primary metal industry initiated a Section 232 investigation, in only one case — this most recent one — did the president determine action was necessary to adjust imports. However, in one of the cases, President Ronald Reagan agreed to update the National Defense Stockpile.
Of the seven times in which a derivative metal industry (nuts, bolts, bearings, parts) initiated a Section 232 investigation, in no cases did the president conclude action was necessary to adjust imports. However, in one case, for metal cutting and metal forming machine tools, Reagan deferred a decision on Section 232 and instead sought voluntary agreements with foreign suppliers; indeed, one went into effect for a period of five years and was extended for two additional years.
In all other cases, the only industry that received Section 232 relief has been petroleum or oil. Now that the U.S. has achieved energy independence, MetalMiner suspects the U.S. will not see a case made under Section 232 for this commodity (so long as the U.S. remains energy independent).
The U.S., however, is not steel independent, meaning the U.S. does require some level of imports to satisfy domestic demand.
Historical analysis suggests the U.S. has filed about the same number of anti-dumping cases today as it did in the late 1950s-1970s. The difference today, though, comes down to the imposition of duties; far more are implemented today than during that earlier time period.
Logically, as tariffs have steadily declined, imports have grown, while today the number of products targeted for anti-dumping measures has declined since the 1980s.
It wasn’t until 1996 when China first produced 100 million metric tons of steel. And the real growth happened after China ascended to the WTO in 2001, growing steel production from 128.5 million metric tons in 2000 to nearly 495 million metric tons in 2007.
Source: MetalMiner analysis of World Steel Association data
Obviously, as China’s economy began to grow, steel demand also grew. Any market observer would also expect production to increase to support economic growth.
Perhaps the more interesting statistic to examine is production against demand. By looking at the production figures above, one might assume that demand also steadily increased since 2007.
But did it?
Source: MetalMiner analysis of World Steel Association data
In a word: no.
China’s demand peaked in 2013 at 772 million tons, declined and then reached 767 million tons in 2017, whereas China produced 779 million tons in 2013 (a little higher than demand). But in 2017 China produced 831.7 million tons for a surplus of 64.7 million tons.
2018 statistics show China produced more steel than any year in its history — 923 million metric tons, according to Reuters, against a demand projection that is at best flat to slightly up from 2017, based on a MetalMiner analysis. Assuming demand of 780 million tons, that would suggest a surplus of over 140 million metric tons.
U.S. demand and production, in contrast, appears paltry.
It should come as no surprise that the Trump administration has taken significant steps to shore up the domestic industry against Chinese imports.