Author Archives: Lisa Reisman

(Editor’s Note: In case you missed the previous installments of this series, check out Part 1 and Part 2.)

What About the Impact on U.S. Production?

The U.S. Department of Commerce. qingwa/Adobe Stock

First, the recommendations from the Department of Commerce apply to both primary (or upstream) and downstream production.

The upstream production refers to unwrought production, while downstream production consists of processing aluminum into semi-finished aluminum goods (such as rods, bar, sheets, plates, castings, forging and extrusions). The U.S. remains remains the second-largest aluminum producer, just behind  China.

Section 232 buying strategies – download MetalMiner’s Section 232 Investigation Impact Report today!

The main objective of the actions proposed by the Department of Commerce focused on downstream production. As previously stated, the Section 232 outcome seeks to restore the industry to 80% capacity utilization.

Therefore, aluminum production could increase (at least, domestically). Increasing the domestic capacity utilization rate up to 80% would mean more aluminum will be produced and consumed domestically.

Aluminum Carve-outs?

President Trump has yet to determine if all the report recommendations will be applied. MetalMiner believes that even if the quotas/tariffs implemented are lower than that indicated in the Section 232 aluminum report — meaning a lower tariff and, therefore, a reduced capacity utilization rate — aluminum products may not receive as many exemptions as steel products.  

Contrary to steel, most aluminum products can be produced domestically and therefore, aluminum would potentially require fewer carve-outs than steel.

Timing becomes an issue when considering the impact of the Section 232 aluminum investigation outcome.

For the aluminum industry, restarting idled capacity takes around 9 months. After that, each smelter needs to start running toward its optimal capacity, which also takes time. Realistically it may take 12-15 months of time to reach optimal production.

Trump will need to consider that timing in his decision. Without careful consideration, reducing aluminum imports could have a negative impact for U.S. aluminum buyers in the short term. 

Therefore, the president might need to take this into account and give some time for the industry to adapt to the new measures.

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Trade Wars: Hype or Reality?

We will address this issue in an upcoming post.

(Editor’s Note: This is the second part of our series covering the recently released Section 232 aluminum report. In case you missed it, you can find Part 1 here.)

Domestic Aluminum Industry

The aluminum industry has three main steps according to the production process:

  • Upstream, or primary or unwrought production.
  • Downstream, which consists of processing aluminum into semi-finished aluminum goods (such as rods, bar, sheets, plates, castings, forging and extrusions). The U.S. is the second-largest aluminum producer, just behind China.
  • Secondary production, or production based on recycled scrap. The U.S. is the world’s leading producer of secondary unwrought aluminum. Therefore, secondary production is not the focus of the Section 232 report.

Section 232 buying strategies – download MetalMiner’s Section 232 Investigation Impact Report today!

Relevant Findings

The Department of Commerce revealed several findings in its analysis. The following help justify the 80% capacity utilization rate arguments:

  • Aluminum is essential to U.S. national security. In 2016, the U.S. imported more than 90% of the primary aluminum consumed. Therefore, total reliance of imports cannot provide an assured supply of aluminum.  
  • Imports and global aluminum production overcapacity caused by foreign government subsidies (such as China) have had a negative impact on welfare and production capacity of the U.S. Examples of this negative impact include: declining employment, poor financial status of the U.S. aluminum industry and reduction of R&D expenditures.
  • Domestic aluminum production capacity continues to decline. According to 2016 data, the U.S. produced 840,000 metric tons, becoming the sixth-largest aluminum producer in the world while ranking as the fourth-largest consumer.
  • Aluminum is a highly energy-intensive industry (based primarily on gasoline prices).  Therefore, competitive advantage goes to those who can produce in countries with lower energy costs (such as the U.S.). China, however, according to 2016 data, appears much less competitive than the U.S. based on energy costs. The cost of electricity in China was $614/mt versus $532/mt in the U.S. per metric ton. See our analysis here of the cost to produce one ton of aluminum.
  • Regarding the capacity utilization rate, in 2016 the U.S. industry operated at a 48% capacity utilization rate. Meanwhile, in 2017, the only two aluminum (upstream) producers in the U.S., Alcoa and Century Aluminum, operated at a 43% capacity utilization rate as measured in November 2017. Domestic production remains well below demand. In 2016, global primary aluminum consumption was 59.7 million metric tons (an increase of  5.4% year over year). China had  53% of global consumption, the U.S. represented 9% and Germany 4%. Chinese consumption remains well below its production level, while U.S. production is substantially lower than consumption.
  • U.S. imports of aluminum have increased while exports decreased. Imports increased by 34% in 2016 on a weight basis compared to 2013 levels. For the first 10 months of 2017, imports ran 18% above 2016 levels on a tonnage basis. Primary aluminum (unwrought) represents 63% of the total by value. The second-largest category (aluminum plates, sheets, and strips) accounts for an additional 19% of imports.  
  • Aluminum imports coming from other regions have also harmed the aluminum industry. Aluminum bars, rods and profiles coming from Vietnam have increased by over 800% between 2013 and 2016, with the trend continuing in 2017. A portion of the imports in this category from Vietnam are likely circumvented Chinese products trans-shipped to avoid duties.
  • Meanwhile, U.S. aluminum exports decreased over the 2013-2016 period. Also, for the first 10 months of 2017, U.S. exports showed a slight decrease in numbers, falling by 8%. U.S. exports go mainly to North American Free Trade Agreement (NAFTA) partners and neighboring countries.

Potential Impact on Prices

Neither the long- or the mid-term picture for aluminum prices will likely see much of an impact from the Section 232 investigation and report, as the market had already anticipated the results.

Prices in the short term, however, might, find some support.

Even without a Section 232 outcome for aluminum, aluminum prices remain bullish and the long-term trend may continue.

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Meanwhile, President Trump has yet to determine the extent of these measures. The U.S. aluminum industry will not add additional aluminum production capability until idled capacity is restarted, which takes around 9 months.

Therefore, LME aluminum prices may suffer some short-term price fluctuation, but will then trade again according to the current market trend, which is bullish, until markets receive more clarification.

Last week, the Department of Commerce released the reports accompanying the Section 232 investigations for both aluminum and steel products. The Department of Commerce initiated the investigations last April under Section 232 of the Trade Expansion Act of 1962, which grants the president the ability, along with his Department of Commerce, to determine whether certain imports are having an injurious effect on national security. 

Section 232 buying strategies – download MetalMiner’s Section 232 Investigation Impact Report today!

As reported last Friday on MetalMiner, the Department of Commerce proposed two alternative solutions for the alleged harm caused by a glut of aluminum imports. Both solutions seek to restore domestic aluminum production to 80% of capacity utilization. This data may not surprise readers, as the Section 232 steel investigation recommendations include three steel policy alternatives constructed on the same premise.

What MetalMiner found most striking about both report recommendations involves the goal of restoring both the aluminum and steel — stainless steel, too — industries to 80% capacity utilization rates.

The DOC believes an 80% capacity utilization rate reflects a healthy industry. By healthy, the Department of Commerce in the Section 232 steel report acknowledged that, “Industry analysts note that utilization of 80 percent or more is typically necessary for sustained profitability, among other factors.” Moreover the Section 232 report for steel suggested, “For most capital and energy-intensive U.S. steel producers, capacity levels of 80 percent or higher are required to maintain facilities, carry out periodic modernization, service company debt, and fund research and development.” (Sources cited in the Steel Section 232 report included Market Realist’s “Why steel investors are mindful of capacity utilization rates,” October 2, 2014.) 

The aluminum analysis looks similar.

The aluminum report pointed to several factors as driving the need for the 80% capacity utilization rate. The DOC examined employment numbers, the dangers of overcapacity, declining R&D and fewer capital expenditures.

Of these arguments, some will seek to argue that employment is somewhat less important, as gains in efficiency and productivity could lead to a decline in employment. But clearly the overcapacity issue in general has forced all but Alcoa and Century Aluminum to declare bankruptcy. By poorer profitability, the industry will not effectively invest in R&D — because it can’t afford to — which will impact future military applications and capabilities.

Therefore, as with the steel industry, the 80% capacity utilization rate reflects a “healthy” aluminum industry with regard to profitability, efficiency and innovation.

Here is the National Security Argument

When steel and aluminum industries do NOT operate at 80% capacity utilization, the economic viability of the industry to produce materials in various war-time scenarios becomes tenuous. MetalMiner will cover this point more explicitly in our Section 232 steel analysis.

Certainly, when mills do not operate at healthier 80% utilization levels, the means to innovate and develop new products, improve production capacity and further increase efficiencies becomes more challenging.

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Aluminum Products

The Department of Commerce included almost all downstream aluminum products in its recommendations.

However, the scope of the investigation does not include bauxite or alumina, or feedstock for the production of primary (unwrought) aluminum.

The investigation also does not include aluminum waste, aluminum scrap, aluminum powders and flakes.  

(Editor’s Note: In the next part of this series, we’ll look at the domestic industry, other relevant findings and the potential impact on prices.)

The GOES MMI (Monthly Metals Index), which tracks, grain-oriented electrical steels, fell one point to 188 as other flat-rolled steel products saw a price increase.

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Meanwhile, imports continue to grow, but none of the growth has come from China. In fact, Japan and the U.K. supplied the bulk of the imports in January. Buying organizations continue to report to MetalMiner they import grades of electrical steel not currently produced by the sole domestic producer, AK Steel. (See the latest import data below.)

Source: International Trade Administration and MetalMiner Analysis

AK posted a Q4 loss but CEO Roger Newport made a number of comments regarding electrical steels during the most recent earnings call that indicated why the company supports strong Section 232 import measures:

“As we previously stated, we strongly believe that the ongoing high level of imports is a threat to the national security of our country…

Imports of grain oriented electrical steels, also known as GOES have more than doubled year-over-year and these imports are coming primarily from Japan, Korea and China. In my opinion this surge of GOES imports stems from a deliberate effort on part of these and other countries to beat the clock on any future 232 remedies and also by the Chinese trade protection causing Korea and Japan to send products to the United States.”

Unlike other steel products, such as tubular goods, cold-rolled steel, hot-dipped galvanized steel, solar panels and washing machines, MetalMiner is not aware of a single circumvention case for grain-oriented electrical steels.

Meanwhile, Bank of American Merrill Lynch analyst Timna Tanners double downgraded AK Steel on weak first quarter guidance and “lack of catalysts” to improve margins.

In Other Producer News…

ThyssenKrupp and Tata Steel have finally announced a joint-venture in Europe with the goal of becoming “a leading European flat steel provider and position it as a quality and technology leader,” according to a ThyssenKrupp press release. Both ThyssenKrupp and Tata have GOES production capability.

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

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Grain-oriented electrical steel (GOES) prices do not often follow the pattern of price increases for other forms of steel. However, December’s data suggests otherwise. GOES prices increased along with HRC, CRC, plate and HDG. Benchmark Your Current Metal Price by Grade, Shape and Alloy: See How it Stacks Up In addition to prices moving in…

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Grain-oriented electrical steel (GOES) import levels appear to have peaked in March of this year at 3580 metric tons. Despite a rise in June, import levels appear lower now than during the summer months, but are clearly higher than 2016 levels.

Benchmark Your Current Metal Price by Grade, Shape and Alloy: See How it Stacks Up

With a Section 232 investigation still underway, we might expect to see declining import levels until the Department of Commerce submits a report to the Trump administration next month — at which point it remains unclear what will happen with steel imports.

The story behind GOES imports, however, looks quite different from the story behind other steel imports, particularly carbon steel – hot rolled coil, cold rolled coil and coated products.

The GOES trade story has become more complicated, particularly when one considers what types of GOES materials have entered the U.S. market.

Most of the imports did not come from China or Korea (often the targets of trade complaints) — rather, the lion’s share of the volume comes from Japan. See chart below:

Source: US ITC

Yet, Japan produces several products for which no domestic source exists – namely, “heat-proof” products, including those using domain-refined processes used “…in specialty transformers where small size, high efficiency and low noise are at a premium.” Indeed, that description appeared in the U.S. International Trade Commission’s examination of “Grain Oriented Electrical Steel from Germany, Japan and Poland” (see link above).

The domestic producers did not win that trade case. ATI subsequently shut down its GOES operations.

Japan’s JFE and Nippon Steel remain the dominant GOES players for these more technically difficult higher end grades. The Kobe Steel scandal will have little to no impact on GOES markets, since Kobe does not supply the U.S. market with GOES.

Meanwhile, the market will await for additional grain-oriented electrical steel announcements (and potentially supply of H1-B) from Big River Steel, as well as some clarity around GOES with the Section 232 investigation.

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Media coverage of the Section 232 investigations — which could potentially curb imports of steel, stainless steel and aluminum into the U.S. — have spooked importers, consumer groups and some manufacturing industries.

These fears are misplaced, according to Barry Zekelman, executive chairman and chief executive officer of Zekelman Industries. “Steel has been the most abused product on the planet,” he says.

What makes Zekelman’s point of view on trade so fascinating?

The fact that he is not a steel producer! (That, and his ever-colorful examples…our headline above is a case in point.) Take a listen to our conversation:

The Rise of Zekelman Industries

His story sounds like the American dream – a tale of how Zekelman and his brothers were thrust into their father’s fledgling business after their father’s sudden passing. He left college as a freshman to help save the pipe manufacturer.

Read more

The GOES M3 spot price index fell by 4% in October while no action has been taken on the Section 232 steel import investigation.

Benchmark Your Current Metal Price by Grade, Shape and Alloy: See How it Stacks Up

China has gone on the offensive, specifically calling foul on the U.S.’s decision not to grant China MES (market economy status). This and the Section 232 investigations have real implications for GOES markets and specifically the sole domestic producer AK Steel.

AK Steel missed its most recent earnings estimates, blaming lower automotive demand and shipments, lower average sales prices during Q3 and rising GOES imports, according to Market Realist.

But AK also cited higher LIFO charges and rising raw material costs.

According to AK Steel CEO Roger Newport in the company’s most recent earnings call Oct. 30, “Yet as the only steel manufacturer Grain Oriented Electrical Steel in United States, we’re battling some of the highest import levels in years. Imports of Grain Oriented Electrical Steel or GOES have increased by more than 260% year-over-year and these imports are coming primarily from South Korea, China and Japan.” He added imports had flooded the market in anticipation of the Section 232 process.

Source: U.S. International Trade Administration

In reality, as reported by MetalMiner previously, the import surge has come largely from Japan which supplies the U.S. with grades of GOES not currently produced by AK Steel. Moreover, for the past two years, it’s hard to see an import surge from either Korea or China.

Meanwhile, from a demand perspective, ABB has shifted its manufacturing footprint by shuttering power-transforming production in St. Louis and investing instead in its South Boston and Crystal Springs locations.

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The October GOES M3 moved up by one point to 194. Meanwhile, as MetalMiner reported last month, imports have increased throughout 2017, largely due to higher Japanese import levels.

Benchmark Your Current Metal Price by Grade, Shape and Alloy: See How it Stacks Up

This trend continued in September with a noted overall import increase of nearly 11.5% from August import levels while Japanese import levels increased by nearly 18%, according to the latest International Trade Administration data.

Last month, this publication noted that Japanese imports accounted for 55% of total monthly GOES imports. However, this number jumped in September to nearly 70% of total imports. Japanese mills primarily produce the higher grades of grain oriented electrical steel, including H1-B, as well as laser quality materials.

According to a recent TEX Report, Japanese mills will likely begin negotiations within the next week or two for 1H 2018 volumes. Many producers of these H1-B and laser quality materials have obtained price increases but at the same time, the price spread between conventional grades and high-grades has increased.

Whenever the market creates a spread wider than the historical average, buying (and selling) organizations can take advantage of arbitrage opportunities. Though we tend to see these types of trends more typically in other steel markets, such as hot-rolled coil or cold-rolled coil, market anomalies for GOES create buying opportunities.

Therefore, we could expect the Japanese mills to pay very careful attention to price levels so as not to exacerbate the current price spread between the two types of materials and to prevent buying organizations from considering alternatives.

From a U.S. import perspective, we can see that average prices from Japan have increased to the U.S.

Source: International Trade Administration

When ATI left the GOES market here in the U.S., the industry needed to reconfigure its supply chains for standard or conventional materials. Power equipment manufacturers moved production elsewhere and/or secured new sources of supply offshore.

Clearly, the demand for high-grade materials continues to rise.

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The September GOES MMI increased by a full 12 points, reaching 193. Market observers can note with interest that this rise comes on the back of increasing GOES imports, as noted by Roger Newport, CEO of AK Steel, on a recent earnings call.

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Unlike other steel markets, when sudden large volumes of imports begin to arrive typically a big spread exists (the price between the domestic and international markets).

In this case, something else appears to explain the volume of imports into the U.S.

When we examine the total volume of grain-oriented electrical steel (GOES) imports into the U.S., indeed, the assertion of increased import volumes appears correct:

But when we look at what is driving those imports, we come to a different conclusion – that Japanese GOES imports have led the increase (and in fact account for 55% of GOES imports):

One could argue these imports hardly appear “dumped” the average price for Japanese material at $2627/metric ton appears just under the MetalMiner domestic M3 spot price. In fact, by our own analysis of import prices, the average import price of Japanese material for the last six months has only diverged from our M3 spot index by no more than $68/mt, and in one month was more expensive by $64/mt!

It’s hard to see how GOES has been “dumped” into the U.S. market.

Moreover, the industry knows the Japanese produce the more technically advanced grades that allow manufacturing organizations to produce to higher efficiency standards.

Meanwhile, China’s Baoshan Iron & Steel increased GOES domestic prices seven times since the beginning of the year, according to a recent TEX Report. The same report indicates Japanese mills have held prices fairly steady.

The Section 232 investigation remains ongoing, with a report expected by mid- to late-January.

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