Author Archives: Stuart Burns

When it comes to the bidding for British Steel, it’s now out with the Turks and in with the Chinese.

Need buying strategies for steel? Request your two-month free trial of MetalMiner’s Outlook

It is all change at the sales counter in the process of hawking British Steel to the highest — or any — bidder.

Ataer Holding, a subsidiary of the Turkish military pension fund Oyak, saw its bid for the British Steel Group collapse last month when its terms were considered uneconomic.

Details are sketchy as to exactly what was the problem, whether it was the price, subsidies or conditions around employment.

But as controversial as a sale to the Turkish military pension fund would have been, a sale to a Chinese steel group is potentially even worse.

Arguably, China has been a part of the demise of the British steel industry for the last two decades and continues to depress global steel prices, perpetuating a marginal state of existence for not just British steel assets but also for much of Europe.

However, the British government — or, at least, the liquidator, no doubt with government approval, — has reached a deal with Chinese steel group Jingye. The Chinese group also operates hotels and real estate, employs 23,500 and has registered capital of 39 billion yuan ($5.58 billion), giving it the financial clout to invest, Reuters reported.

Jingye is no minnow when it comes to steel production, with a capacity of 15 million tons. Although no contractual guarantees have been given, the company has pledged to maintain as many jobs as possible. The amount being paid was not confirmed, but it is reported to be between £50 million and £70 million.

Jingye has pledged to invest £1.2 billion in the business over the next decade, upgrading the plants and machinery, the Daily Mail reported.

The government will be delighted to get British Steel off the books, as it has been costing £1 million a day to keep the group operating since May, when it collapsed and private equity owner Greybull Capital threw in the towel.

The paltry price tag — said to be no more than the operating cash in the company, probably comes with some government aid sweeteners — buys a group that includes steelworks at Scunthorpe and Teesside in northern England, as well as its European units (FN Steel in the Netherlands and British Steel France).

According to Reuters, European trade group Eurofer is looking into the deal from a state aid point of view. French authorities are considering seeking assurances from Jingye that it will guarantee supply to a factory in northeast France as a condition for its approval of the deal. The British Steel works supplies steel used to make specialized high-speed rails for France’s TGV network.

Keep up to date on everything going on in the world of trade and tariffs via MetalMiner’s Trade Resource Center.

British Steel represents one-third of the U.K.’s steel output and produces long steel products used in construction and the rail industry in the U.K. and France.

Whether Jingye will see a profit out of the company remains to be seen, but maybe that isn’t even the point.

British Steel gives the group a presence inside the European market and, as such, may give them a seat at the European steel producers table.

aldorado/Adobe Stock

Not everyone agrees with the use of tariffs to achieve changes in trade relations.

However, a recent article in The New York Times article reports the threat of 25% import tariffs on the U.S.’s main automotive trading partners could prove to be spectacularly successful.

Keep up to date on everything going on in the world of trade and tariffs via MetalMiner’s Trade Resource Center.

Autos are the soft underbelly of major auto economies like Germany, Japan, South Korea and Mexico in their trade relations with the U.S. Although the first three have invested heavily in U.S. manufacturing facilities over the years, they still ship huge volumes into the U.S. from their home countries and have largely perpetuated an unfair reciprocal relationship in terms of tariff barriers.

The E.U., for example, exported $42.8 billion worth of motor vehicles to the U.S. in 2018 — more than one-fifth of the cars imported by the U.S. — at a tax rate of 2.5%. Meanwhile, the E.U. imposes a 10% tariff for cars exported in the reverse direction.

In response to the threat of 25% tariffs, the E.U. offered to scrap tariffs in both directions, a step it has resisted in all previous negotiations.

But with carmakers’ backs against the wall, the Trump administration was not about to let up with a simple scrapping of tariffs, long overdue as that may be.

The administration is in discussions with the E.U. and its carmakers about increasing their investment and employment in the U.S. The more cars foreign carmakers manufacture in the U.S., the less they will ship in from abroad, benefiting the balance of payments and creating employment stateside.

Consumers benefit from continued access to a wide range of manufacturers without the cost implications of the threatened tariffs being imposed, estimated to be between $1,400 and $7,000 per vehicle if applied at 25%, the article notes.

Even U.S. carmakers are in favor of removing all tariffs, as they see a reduction in overseas import tariffs as an opportunity worth the increased domestic competition that foreign carmakers setting up in the U.S. may pose.

The only losers, should the deal be agreed, could be said to be foreign carmakers who will lose domestic exports, an impact that Germany is expected to feel the significance of more than any other country. Germany runs the second-largest trade surplus after China, with autos making up a sizable portion of that mercantilist trade structure.

Free Partial Sample Report: 2020 MetalMiner Annual Metals Outlook

Foreign carmakers are being asked to provide details of proposed investments and plans already in the pipeline.

The German car industry is promising to create 25,000 jobs at factories in the United States, according to The New York Times. However, the Trump administration is looking for new jobs and investments, not simply plans that were already in the pipeline before the current negotiations were started.

A deal has not yet been reached; unofficially, both sides are making encouraging noises, raising the prospects for some good trade news to lift the spirits of investors who have been disproportionately depressed by a barrage of negative media coverage on the topic in 2019.

The normally pragmatic Netherlands has been strangely agitated recently, as both the construction and agricultural industry have protested on the streets of the capital, the Hague, against the government’s measures for combating nitrogen and PFAS-based pollution.

Need buying strategies for steel? Request your two-month free trial of MetalMiner’s Outlook

In itself this would barely be newsworthy for MetalMiner if it weren’t for the impact it is having on an already subdued metals industry.

Even before the widespread disruption to the Dutch construction industry, demand for steel and aluminum was suffering from depressed German industrial consumption, largely due to a downturn in the automotive market.

But in the Netherlands, the government is struggling to resolve an issue with nitrogen emissions permitting, which Reuters reports are four times the E.U. average per capita in the small and densely populated Netherlands.

Although 61% of emissions are coming from agriculture, a sizable portion also comes from the construction industry – a big consumer of aluminum and steel products.

The impact is particularly damaging, as the country has been enjoying a boom in infrastructure and housing investment of late.

As a result of a fiasco over how permits are assessed, a review is underway and, in the meantime, new permits have been withheld, leading to delays and project uncertainty.

Aluminum extruders estimate the European market is down at least 20% from last year as a result. With steel prices also waning, participants across the supply chain are reducing inventories, adding further to the fall in demand being experienced by producers.

Lead times have come in and order books are weak, as many in the steel and aluminum supply chains find themselves overstocked relative to ongoing demand. The double whammy of weak automotive demand now being exacerbated by a fall in construction activity has caught many by surprise.

Want to see an Aluminum Price forecast? Take a free trial!

The government in the Netherlands will no doubt resolve its permitting issues. However, a return to last year’s robust level of activity is unlikely to bounce back quickly and producers remain pessimistic about demand next year.

In the meantime, prices are likely to remain under pressure and lead times will remain short into 2020.

buhanovskiy/AdobeStock

Editor’s Note: This article has been corrected to reflect the most recent AISI capacity utilization rates and the price delta between the ROW and the US.

Judging by the plunging share price of steel producers and the collapse in steel prices from $1,006 per ton just over two years ago to $557 now, it would seem that Steelmageddon — the term famously coined by Bank of America Merrill Lynch — is upon us.

Or is it?

Keep up to date on everything going on in the world of trade and tariffs via MetalMiner’s Trade Resource Center.

A recent Fortune article puts steel producers at fault for rushing to restart idled capacity and even investing in new facilities following President Donald Trump’s imposition of a 25% import duty in 2018.

The measure did meet its objective of lifting capacity utilization from 73% to 80%, as domestic steel mills became more competitive behind the tariff barrier. Though utilization rates dipped in late August through mid-October, they have since come back above 80%.

If that were the end of the story, it is possible steel producers would still be able to play the market by maximizing sales with their 25% buffer against imported steel.

As exemptions have been granted to major trading partners such as Canada and Mexico, that has minimized the benefits of the tariffs for domestic producers. Initially, U.S. producers were at best only 1-2% below the price of imported steel, taking the majority of the 25% as increased profit.

But today, the price delta between the ROW and the U.S. is virtually nonexistent.

Some would argue a global trade war waged by the president, specifically but not exclusively with China, has also contributed to a slowing of steel demand. The counter-argument suggests that while we have seen a drop from 2018, the reality is that we might be at the end of a long-running expansionary business cycle that would have seen slower demand anyway.

The article argues the rise in domestic steel prices has made some U.S. manufacturers less competitive for both domestic sales and their exports. But our own data suggests that 12 out of 18 manufacturing sectors in 2018 had record profits, despite tariffs.

Now, steel plants are being idled again as oversupply is depressing prices below the level seen even before the imposition of the 25% import tariff.

CNN reported U.S. Steel recently announced it would temporarily shut down a blast furnace at its venerable Gary, Indiana facility, another at a facility near Detroit and idle a third plant in Europe due to weak demand and oversupply.

Steel producers’ earnings have headed south in lockstep with falling demand.

Fortune states the combined earnings of U.S. Steel, AK Steel, Steel Dynamics and Nucor tumbled more than 50% in the first two quarters of this year. Capacity utilization dipped back below the 80% target primarily in September and October but has since recovered to 81.6% according to the latest AISI data for the week ending Nov. 2 and year-to-date capacity utilization reached 80.3% compared with 77.5% from a year ago.

The basis of the Section 232 justification was that the U.S. needed to maintain a level of investment and capability in the steel industry as a matter of national security, that certain steels were critical for military and strategic requirements.

Although the defense secretary at the time, James Mattis, said the military needed just 3% of U.S. production of steel and aluminum and that imports didn’t hinder its ability to protect the nation, there are some countries – the U.K. is an example — where the domestic steel industry has been allowed to wither so significantly that it now relies on imports of critical defense materials, like steel, for the hulls of its nuclear submarines.

A better counter would be to question whether tariffs were and remain the best way to protect investment and capability in those strategic areas of production.

Free Partial Sample Report: 2020 MetalMiner Annual Metals Outlook

Either way, a global slowdown, coupled with a rush to return capacity to production, has created an oversupplied market in which steelmakers have suffered.

Nor will demand return anytime soon if the World Steel Association is correct.

The association forecast U.S. steel demand will slow to 1% in 2019 (from 2.1% growth last year). In 2020, growth is expected to crawl to just 0.4%, quite possibly prompting the closure of yet more mills and a return to pre-tariff levels of profitability and capacity utilization.

That’s not what the market or the industry wanted. However, to answer the headline, until we see a crash in the steel capacity utilization rate, it’s hard to argue Steelmageddon has arrived.

The aluminum price is a contrary thing, isn’t it?

For months, aluminum prices have been falling on the basis that demand is waning due to slowing global growth (particularly in top consumer China).

Buying Aluminum in 2019? Download MetalMiner’s free annual price outlook

China’s gross domestic product growth slowed again to 6.0% year over year in the third quarter, its weakest pace in almost three decades, Aluminium Insider reports. Citing a Reuters poll, the report notes industrial activity is expected to have shrunk for the sixth month in October, quoting a Reuters poll, suggesting hardly any relief from slowing global demand and the trade war.

The latest economic data from the E.U. and the U.S. also indicate slowing growth, with Germany flirting with a recession in the manufacturing sector. Although the aluminum market was estimated to be in deficit last year and this, a Reuters poll suggests it is likely to flip into a surplus of 304,000 metric tons next year — almost a 1 million ton turnaround from the 658,500-ton estimate for this year.

The article went on to say the consensus among major producers is that global aluminum demand growth will be flat (around zero) this year. Norsk Hydro predicts demand outside China will fall by 1-2%, meaning global demand is likely to fall by 0.5%. Alcoa took a similarly pessimistic view.

So why has the aluminum price currently taken a run-up to nearly $1,800 per metric ton on the back of, Reuters reports, supply fears?

It would seem investors are somewhat jittery and struggling to read the fundamentals.

Talk of Rio Tinto having to reduce output (or worse, shut its New Zealand smelter due to high power costs) and China’s second-place Chalco closing 200,000 tons of capacity in Shandong for the same reason seem to have stoked fears a number of smelter cutbacks could lead to a shortage.

Investors also view falling LME and SHFE inventories as a sign of a tightening market.

Aluminum stocks in SHFE warehouses dropped to their lowest level since March 2017 at 278,736 tons, while LME aluminum inventories dipped to their lowest since Sept. 30 at 956,200 tons, according to Reuters.

On the flip side, top consumer China is importing more and more remelt alloy ingots as part of its raw material product mix, which is finding its way through to increased exports of low-priced semi-finished products. China exported 4.37 million tons of mostly semi-aluminum products in the first nine months of the year – 2.8% more than in the previous year.

Primary production may be marginally down, but China is still supplying the world with semis, depressing activity at domestic extrusions and rolling mills in Japan, Europe and, by extension, the U.S.

Although the U.S. doesn’t import Chinese extrusions or billet, material supplied from elsewhere that has been displaced by Chinese metal does find its way in. Extruders are suffering, as illustrated by the low billet premiums prevailing in the U.S. right now.

Keep up to date on everything going on in the world of trade and tariffs via MetalMiner’s Trade Resource Center.

While some polls have suggested aluminum prices could be back over $1,800 per ton next year if current conditions prevail, that looks unlikely.

More than just sentiment is being depressed by the trade war. With little chance of a resolution this side of the presidential election, manufacturing is unlikely to recover strongly enough to materially impact the supply-demand balance anytime soon.

Iakov Kalinin/Adobe Stock

To an external viewer, the wheels can appear to grind slowly at the world’s oldest metal exchange.

But the years have taught the London Metal Exchange about the danger of hasty rule changes — often made for the best of intentions, such changes can lead to unexpected consequences.

Keep up to date on everything going on in the world of trade and tariffs via MetalMiner’s Trade Resource Center.

In addition, as the LME is at pains to point out, the exchange’s network of warehouses operates in numerous locations around the world, each with distinct laws and regulations; new rules not carefully though out could contravene those differing sets of laws.

As frustrating as it can sometimes be to the trade, the LME’s cautious approach to changes designed to improve the experience for buyers, sellers, and stakeholders of the market — such as warehouse operators — is a methodology that in the long run mitigates the risk of “unintended consequences.”

The LME’s recent changes take just such a cautious approach.

After consultation far and wide, the LME released a Press Office statement Friday that outlined three main changes, plus additional commentary on what was proposed but the LME felt was too early to implement.

Broadly, the first change is intended to improve logistical optimization and is designed in part to guard against the structural queue model. The Queue-Based Rent Capping (QBRC) period has been extended from 50 to 80 days over a nine-month period and is intended to allow warehouse operators to compete more effectively for metal.

Queues have been probably the most sensitive issue the LME has had to address in the years since the financial crisis, so extending the permitted period took some consideration.

The exchange says it remains vigilant to such incentives not out-bidding or distorting physical market premiums and has instigated a reporting regime to monitor such risks. The LME intends to freeze rents and FOT load out charges until 2027-28 to mitigate the gulf between LME and non-LME warehouse rates.

On the topic of off-warrant stocks, the exchange is implementing a reporting regime intended to increase transparency and allow the market “to trade on the basis of a more holistic view of metal availability” – a move many of us welcome.

The LME intends to do this by requiring reporting for any metal in LME-registered sheds and/or under agreements in which the owner has a right to warrant metal in the future but is currently not on warrant.

Although the identity of the off-warrant metal owners will not be revealed, warehouse companies will gather and report the tonnage data periodically. There will still be some material that is not stored in exchange warehouses and where the owner is willing to pass the option of ever delivering such metal onto the exchange — but that is likely to be the exception.

Ultimately, the LME remains the market of last resort, as such is an option any investor would want to retain.

Do not, however, expect this data to be instantly available.

The LME caveats its plans by saying it will not release the data unless and until it is satisfied that the data is reliable and accurate – that could mean months, possibly a year, of monitoring.

Finally, of less interest to metal consumers is the seemingly arcane practice of so-called “evergreen rent deals,” whereby the owner retains an interest in warehouse rent on warrants they have sold on.

Going forward, this practice is only to be allowed on metal that is placed on warrant for the first time, not for warrants that are already registered and sold on. The intention is to incentivize metal coming onto the exchange but avoid a largely pointless ongoing cost that adds nothing to market efficiency.

Free Partial Sample Report: 2020 MetalMiner Annual Metals Outlook

As we said in the opener, these changes are an opening gambit and remain subject to monitoring and, if necessary, adjustment should any of the changes prove counterproductive or should additional steps be required.

vadiml/Adobe Stock

Mining companies are not renowned for their cutting-edge use of the latest technologies; I’m not trying to be derogatory, but mining is not the first industry you think of when talking about the digital age.

Keep up to date on everything going on in the world of trade and tariffs via MetalMiner’s Trade Resource Center.

Their association has been more in the use of their products – copper, rare earths, lithium, etc. are required for these new technological developments.

But an article by Neil Hume in the Financial Times this week reports on the world’s largest copper producer Freeport-McMoRan’s adoption of artificial intelligence (AI) to optimize production at its aging Bagdad Copper mine in Arizona.

As the report states, most of the best copper has been extracted at Bagdad, so miners are having to crush more lower-grade rock just to sustain output.

Apparently, Freeport has developed a process with McKinsey, which uses data from sensors around the mine and suggests new ways to improve the performance of its crushers and processing mills. The system found that the mine was producing seven distinct types of ore and that the processing method, which involves the use of large flotation tanks, could be adjusted to recover more copper by adjusting the PH level, the article states.

Freeport-McMoRan CEO Richard Adkerson is quoted as saying the development has been “a remarkable success.” With very little investment, it has boosted production at Bagdad by 9,000 metric tons of copper this year.

On the basis of this pilot, Freeport-McMoRan is rolling the application out to all its mines in the Americas. The miner has set a goal of increasing production by 90,000 tons, or 5% of its production, by applying this technology.

Putting this in context, the article quotes typical costs to develop 90,000 tons of new copper capacity at about $1.5 billion to $2 billion. Cost include buying new haul trucks, giant shovels and ore crushing equipment; according to the firm, this AI program costs very little.

Looking for metal price forecasting and data analysis in one easy-to-use platform? Inquire about MetalMiner Insights today!

Where the majors lead, others will follow.

Freeport’s success in using AI to optimize its extraction processes will no doubt be rapidly copied by its peers.

The board of France’s PSA, owner of Peugeot, has given chief executive Carlos Tavares approval to launch a full-scale merger with Fiat Chrysler Automobiles, creating one of the world’s largest carmakers, the Financial Times reports.

Keep up to date on everything going on in the world of trade and tariffs via MetalMiner’s Trade Resource Center.

The FCA board is expected to follow suit, paving the way for the companies to pursue a deal that would create a combined group with a market value in excess of €44 billion (U.S. $48 billion).

Shares in FCA have risen some 7% since the merger was back on the table last week in anticipation of a successful outcome, Peugeot shares have barely moved. Both movements — or lack thereof — are in sharp contrast to the preceding year, during which Peugeot’s shares have risen 38% and FCA’s just 1%.

Peugeot’s Tavares has earned widespread praise for his turnaround of car maker Opel — formerly owned by General Motors — since 2017.

FCA shareholders are maybe hoping he can do the same for them.

Read more

The British government has ended negotiations with the Turkish company Ataer Holding regarding its bid to buy British Steel, the Steel Times reported.

Keep up to date on everything going on in the world of trade and tariffs via MetalMiner’s Trade Resource Center.

Ataer owns almost 50% of Erdemir, Turkey’s biggest steel producer, and is also the investment vehicle of Oyak, the Turkish Armed Forces Assistance Fund (the pension fund for the Turkish armed forces, the article reports).

The British government has voiced concerns about Ataer’s links with the Turkish government and has now opened the bidding process for British Steel up to other interested parties.

The Financial Times suggests conditions Ataer had demanded, such as price cuts from suppliers, had also proved a hurdle in the negotiations.

Either way, the ten-week exclusivity period is not going to be extended and the bidding process is again open to all comers.

Although suggestions that Sanjeev Gupta’s Liberty House, which already owns steelmaking facilities in Rotherham and Stocksbridge in South Yorkshire and employs some 5,500 people across 30 sites, is mooted as a preferred buyer, the company previously said it would want to close Scunthorpe’s two blast furnaces and invest in new electric arc furnaces. That is a move unions fear could lead to job losses, while the government probably fears will cost them support money in one form or another.

However, Liberty remains the preferred bidder by most in the industry despite a return to the table by Chinese steel producer Jingye.

Hebei-based Jingye produces hot-rolled ribbed bars, round steel bars, medium-thick plates and hot-rolled coil; as such, it carries considerable manufacturing experience across Scunthorpe’s product range.

Although it has only produced steel since 2002, Jingye is among the top 300 firms by size in China and is said to be involved in real estate, finance, trade, pharmaceutical, hotels and tourism, according to a local newspaper closely following the prospects for the U.K. plant.

Whether Jingye would be a better steward for British Steel than Ataer Holidings is debatable.

Both firms have a strong presence in steel production, if not via the holding companies then via subsidiaries within the group.

But so did Tata Steel, the previous owners of British Steel, before it was sold to Greybull Capital in 2016 — for a nominal £1 — and eventually led to British Steel’s collapse.

Looking for metal price forecasting and data analysis in one easy-to-use platform? Inquire about MetalMiner Insights today!

Most would agree a U.K.-based and owned firm like Liberty would make more sense, even if it doesn’t have the deep pockets a state-owned overseas firm could bring.

But British Steel’s ongoing uncertainty reflects the economic challenge all steel producers in Western markets face in trying to remain viable against cheap imports, while still operating in a high-cost base like the U.K.

Prime Minister Narendra Modi’s vision for India to become a $5 trillion economy by 2024 is in danger.

The current downturn — the third since the financial crisis — looks likely to undo that objective and extend further into the future as the world’s second-most populous country strives to bring large swathes of its population out of poverty.

Keep up to date on everything going on in the world of trade and tariffs via MetalMiner’s Trade Resource Center.

In a recent Stratfor report, India’s rollercoaster economy is said to be experiencing growth of just 6.1% in this financial year. Falling tax receipts are likely to mean the government will breach its 3.3% deficit target.

The report paints a picture of an economy unable to sustain strong growth for more than a few years at a time, saying this is the third downturn following periods in 2009 and 2014 which brought previous annual averages of 9.5% growth (2005-2008) to an abrupt end.

Both investment as a share of GDP (crucial for a developing country) and manufacturing growth (crucial for a young and rapidly rising labor force to find employment) have again fallen below target.

All of this comes despite the government’s much-heralded “Make in India” policy, which is designed to force firms to develop a domestic supply chain (thus creating investment, employment and technical knowhow).

The only measure that has remained down compared to previous periods is inflation, following two bumper harvests that depressed food costs. The flip side of that is farmers, who make up some two-thirds of the population, are experiencing depressed incomes, adding to weak GDP growth.

Bank lending is also suffering. The Reserve Bank of India is enforcing stricter rules on banks to realize their non-performing loans and close down firms, as opposed to the historical practice of indefinitely kicking the can down the road, which consumed valuable funds and perpetuated zombie companies.

The new policy makes sound economic sense, but in the short term is reducing banks’ ability to lend and is shining a light on the country’s increasingly shaky shadow banking sector.

A return to strong growth is unlikely in the short term; double-digit growth may be a thing of the past in a weaker global environment. Efforts to boost investment by reducing corporate tax rates from 30% to 22%, while admirable, have deprived the treasury of revenue but failed to stimulate the desired investment.

Looking for metal price forecasting and data analysis in one easy-to-use platform? Inquire about MetalMiner Insights today!

For India’s technocrats, it must feel like they are the also-rans to China’s stellar growth engine.

However, maybe they should console themselves with the thought that while a centralized autocratic regime can achieve amazing rates of growth and market control, it has proved inconsistent with freedoms as Indians understand them; it is hard to see the Chinese model being popular among India’s pluralist democracy of 1.3 billion people.