Author Archives: Stuart Burns

There were grand words from German Chancellor Angela Merkel and Chinese President Xi Jinping, the leaders of two of the world’s biggest trading economies, on a call Saturday ahead of a Group of 20 (G20) meeting of finance ministers and central bank governors in Buenos Aires, reported the Financial Times.

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The two recently re-elected leaders have agreed to use “international channels of negotiation to tackle steel overcapacity” following the Trump administration’s decision to impose tariffs on imports of steel and aluminum. Steffen Seibert, a spokesman for the German chancellor, is quoted as saying, “They . . . were in favour of continuing to work on solutions within the framework of the G20. They stressed the importance of close multilateral co-operation in trade in this context.”

Well, they would, wouldn’t they? More than any other two nations in the world, Germany and China have the most to lose from a trade war.

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Tin plays to a different tune from most LME metals.

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It generally doesn’t attract the same speculative crowd from which copper, aluminum and zinc suffer. Its lack of any applications in jewelry keeps it firmly away from the precious metals camp. It’s termed a minor metal because the volumes are nowhere near those of its larger brethren, but for some applications it is far from minor.

As this pictorial from a recent presentation from Australian-owned Moroccan miner Kasbah Resources shows, electrical solder remains by far the most important application for tin, dwarfing tinplate (the application with which many of us most commonly associate tin).

Even tin’s use in chemicals is greater than tin plate and that application may be challenged in the years ahead by tin’s use as an additive in the manufacture of lead acid batteries. That green line disappearing to the right of the image is an arrow to a graph of projected consumption of tin in the manufacture of the perennial lead acid battery, where tin has found growing demand since the development of the sealed lead acid battery. Tin extends the battery’s life and crucially reduces the amount of antimony, deemed a toxic substance, required.

Doubters may suggest the lead acid battery is doomed, along with the internal combustion engine — in the long run, they would probably be right. But for the foreseeable future, tin is riding both horses with considerable aplomb.

The electrical complexity and consumption of electrical components in an electric vehicle (EV) is a factor of 6-10 over that of an internal combustion engine (ICE). So, not surprisingly, the amount of tin used in solder is likewise much higher.

The rise of EVs, therefore, has a direct benefit for tin consumption, even if it comes at the expense of the ICE and conventional lead acid batteries.

Kasbah’s report is crafted to bolster the case for the firm’s prospects, of course, but nevertheless makes a valid observation when it says six of the world’s top 10 tin producers reduced output last year and there has been significant underinvestment in new mines in recent years.

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Tin plate may not be the largest driver of tin consumption, but tin remains a crucial component of tin plate prices. The trend for tin prices — recent pullbacks across the metals sector excepted — has been upward since last year and the supply market remains supportive for higher prices in the future.

Not surprisingly, any discussion of iron ore prices in top consumer China inevitably involves some reference to import stock inventory.

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So when Reuters reports that the Dalian commodity exchange May iron ore contract price touched a low of 475.50 yuan per ton this week and China’s Qingdao port price dropped below $70 per ton — the lowest since Dec. 11 — analysts readily refer to record port stocks as being the cause.

Port inventory stood at 158.6 million tons at the end of last week, closer to the previous week’s record of 159.1 million times, according to a separate Reuters article. The article goes on to explain why headline port stocks are far from the whole story. China’s environmental crackdown on polluting industries this winter has driven steel mills to favor high-purity minimum 62% iron ore grades, supplied by firms like Australia’s Rio Tinto and BHP Billiton, Brazil’s Vale, and South Africa’s Kumba, over lower 58% Fe grades, such as Australia’s Fortescue Metals group and some Indian suppliers.

Much of the rise in import stocks has been a buildup of low-grade iron ore shunned by steel mills keen to avoid the pre-blast furnace upgrading needed for lower grades or the increased consumption of polluting coking coal that the protracted smelting of lower grades requires.

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Aluminum buyers are understandably nervous about the future price direction following the near 9% fall in prices from a high in early January.

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Aluminum on the Shanghai Futures Exchange closed at the lowest level this week in 14 months, particularly unsettling as the industry had become comfortable with a bull narrative for aluminum over the last year predicated on tight global supplies outside of China.

President Trump’s 10% import tariff on aluminum added another dynamic to the domestic U.S. price and considerable uncertainty as to the possible impact on prices in the rest of the world.

Not surprisingly, while the LME price barely reacted to the new tariff, domestic U.S. Midwest delivery premiums nearly doubled from 9.5 cents per pound at the start of January to the current 18.5 cents per pound. Expressed in dollar terms, the jump in premiums by some $200 dollars a ton equates to nearly 10% of the cash LME aluminum price, Reuters reported this week.

Meanwhile, delivery premiums outside of the U.S. had already been on the rise, so there was little surprise when Japanese buyers settled this week at U.S. $129 per metric ton premium for shipments in the second quarter, the highest in three years.

Although last year saw tightness in physical metal availability, the return of the contango on the LME, with cash aluminum falling below the three-month price, suggests there is now greater availability of nearby metal (at least in the rest of the world outside the U.S.).

There is certainly no shortage of metal available in the Chinese market, where Shanghai inventory has been rising for 12 months. Indeed, much of the current weakness is blamed on fears that smelter restarts following the end of the Chinese winter heating season will cause the surplus to balloon further.

Prices in China, though, are below those of the LME and industry sources are suggesting there will only be limited restarts as current prices are not enough to help some smelters break even, according to a Reuters report. Oliver Nugent is quoted by the news source as predicting prices will remain below $2,100 in the first half of the year because of Chinese surpluses, but persistent shortages outside of China would likely see the price rise again in the second half of the year.

Smelter restarts in the U.S. are unlikely to be significant enough to materially impact global supplies ,with Reuters suggesting Century Aluminum’s restart of 150,000 tons at Hawksbill, Kentucky, Magnitude 7 Metals’ restart of two out of the three pot-lines at the 263,000-ton Marstons smelter in Missouri and Alcoa’s already initiated restart of some of its idle capacity at the Warwick smelter Indiana will almost be enough to achieve the administration’s capacity 80% target mentioned in the Section 232 determination.

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The broad consensus appears to be that aluminum remains in a long-term bull trend, but in the short term will operate as a sideways market. Buyers are unlikely to see significant upside to $2,100 in the first half, but should keep the market under close review as, subject to developments, the second quarter may prove a low point for the year; therefore, that time period may represent a buying opportunity.

Cobalt may be a minor constituent of lithium ion batteries, but it is a crucial one.

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Lithium has been the metal in the news this year. Bolstered by rising demand for hybrid and electric cars, however, the supply market has been struggling to keep up with demand.

Not that the world is short of lithium, as we wrote recently — it is widely distributed and relatively abundant. But projects time to ramp up, and while many are on the planning board, not all reach production maturity.

Cobalt, on the other hand, is a much more constrained market — not just constrained, but the vast majority is from politically unstable sources.

According to Reuters, two-thirds of global cobalt comes from just one politically very unstable country – the inappropriately named Democratic Republic of Congo, with some 80,790 tons of the metal sourced from there last year out of a total market of about 119,710 tons.

Worse, the DRC is sliding back into yet another potentially bloody civil war.

Joseph Kabila was elected for a final five-year term in 2011 on a mandate that ran out in 2016, but he clings on even though no more than 10% of Congolese support him, according to the Economist. Ten of 26 provinces are suffering armed conflict, the Economist reports, with dozens of militias once again on the warpath.

Some 2 million Congolese fled their homes last year, bringing the total still displaced to around 4.3 million out of a total population of nearly 80 million. The state is tottering and the president is illegitimate, the Economist says. Ethnic militias are proliferating and one of the world’s richest supplies of minerals is available to loot.

Source: London Metal Exchange

So the rise in the price of cobalt — while it mirrors that of lithium and has so far been driven largely by battery and super alloy demand — is fragile to political unrest in a way that lithium is not.

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

Of the two, cobalt represents a bigger supply risk and may yet prove the cause of considerable volatility if the DRC’s neighbors cannot get their act together and seek a solution in the most resource-blessed but politically cursed of African nations.

gui yong nian/Adobe Stock

Li Lizhang, the chairman of state-owned mill Fujian Sangang Group Co Ltd, is quoted in Reuters as saying exports of steel products may continue to fall this year, having plunged by over 30% last year to 75.43 million tons.

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China produced 831.73 million tons of crude steel last year. The country has been trying to eliminate excess capacity, in part to assuage global concerns about excess capacity flooding global markets. But, in reality, it’s more because it realizes overcapacity in its steel industry leaves all domestic producers in a precarious position and sees logic in driving the cleanup in favor of its state-owned producers rather than leaving the market to possibly favor the private sector – not what an increasingly state-centered Beijing wants at all.

Whether Li is promoting the reduction in exports as a counter to allegations abroad that China is harming global steel markets with its exports or whether we should take his ongoing linkage to the fight against pollution at face value is up to the reader. It may be that it is a case of two birds with one stone, but one suspects the timing, straight after President Trump’s 25% tariff on steel imports, is no coincidence.

Li’s comments regarding further production curbs is interesting, though, saying the steelmaking hub of Tangshan in Hebei province will extend production restrictions for another eight months after current curbs expire next week, according to the Reuters report. Production curbs would not be limited to the smog-prone region of Beijing-Tianjin-Hebei, according to Li, who added “other regions will also see restrictions if pollution levels exceed the limits.”

Beijing’s drive to shutter production capacity across a range of environmentally harmful industries has been broadly successful.

But what is clear is that smog reduction was not the only objective.

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State-owned enterprises have benefited at the expense of the private sector with new steel and aluminum capacity coming onstream to partially replace the older shuttered plants. Permits for new plants seem to have favored the state-sector producers over the private sector; contrary to the position 18-24 months ago, the state sector is doing very well at present.

Is it just me or is there a contradiction developing at the heart of President Trump’s linkage of movement on the North American Free Trade Agreement (NAFTA) negotiations to the application of steel and aluminum tariffs on imports from Canada and Mexico?

I have been pondering this since earlier this week when the topic was raised in the MetalMiner office, but it became crystallized after reading an article by Phil Levy in Forbes this week.

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President Trump has made no secret of his dislike of the NAFTA trade agreement. He has repeatedly pointed to large trade deficits with Mexico and Canada, noting the world’s largest free-trade deal has been bad for the U.S., causing the relocation of companies and jobs. Yet at no time has there been a suggestion that close allies Canada and Mexico constitute any kind of security risk to the U.S.

However, Levy makes the very appropriate point that the new steel and aluminum tariffs are being pursued under Section 232 of the Trade Expansion Act of 1962, in which the provision deals with instances where imports threaten the national security of the U.S. It would seem that the Commerce Department has come to the conclusion that steel and aluminum imports do pose a threat to the viability of the U.S.’s steel and aluminum industries.

Fine — whether you personally agree with it or not is not the issue. That is the Commerce Department’s position and, it would seem, President Trump’s too, and therefore justifies some form of action in order to protect U.S. national security.

But this week during the seventh round of the NAFTA renegotiation talks in Mexico City, U.S. Trade Representative Robert Lighthizer presented a tweet from President Trump saying that tariffs on steel and aluminum will only come off if a new and fair NAFTA trade agreement is signed. It would seem as an incentive to strike an early deal.

But where does that leave the rationale of national security, Levy quite rightly asks?

Either sourcing steel and aluminum from Canada and Mexico poses a threat to U.S. national security or it does not. It’s hard to see how the conclusion of a new NAFTA deal would alter the security situation, suggesting the president’s linkage between an exception for Canada and Mexico and the conclusion of a renegotiated NAFTA agreement has little to do with national security and more to do with leverage and protectionism.

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This opens the floodgates for challenges, both domestically and internationally, as the legitimacy of the U.S. position depends heavily on whether the U.S. national security claim is plausible, Levy argues. Whether the pursuit of measures to stem imports of steel and aluminum were originally seen as part and parcel of the NAFTA renegotiations or whether this is an opportunistic melding of otherwise completely separate issues is hard to tell.

Without doubt, however, those opposed to the import duties and inclined to use legal action will see this as an opportunity to undermine the U.S. argument.

stockquest/Adobe Stock

In an effort to curb horrendous atmospheric pollution, particularly during the winter heating season, Beijing’s crackdown on energy-intensive and polluting industries resulted in widespread closures across the Chinese aluminum smelting industry.

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But even as expectations rise that those smelters from Shandong to Shanxi may soon restart, Reuters reports record stockpiles on the SHFE and prices that are down some 10% since last December will weigh heavily on smelters’ decision-making.

Many are already barely profitable and, contrary to expectations six months ago, national Chinese aluminum production has continued running at a high level. December’s output rose to the same level as June when countrywide smelters had been running at capacity to stockpile before the expected clampdown.

The irony is that while Beijing has clamped down on production in some regions closer to major urban areas, producers — many of them state-owned — have been free to build new, lower-cost capacity out in the provinces. Reuters quotes Paul Adkins, managing director of the consultancy AZ China, who estimates that 4.4 million metric tons of new capacity would be completed this year, mostly from state-run companies.

Despite new capacity being based on lower-cost coal and/or alumina supplies, there are question marks whether all this 4.4 million tons will make it to full capacity.

Adkins believes the actual increase may only be some 3 million tons. Even so, incremental increases will be at a cost base lower than older plants and will allow them to operate a break-even price below established plants. If prices remain weak, and the overcapacity issue suggests there is little prospect of a significant rise, then there will be a further shift of production to the state sector, as these new, largely state-owned plants thrive while older, more costly plants struggle.

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Primary metal is restrained from directly impacting the global market by 15% export taxes, but limitations on extrusions, rolled products and forgings are less constrained (in some cases supported with rebates). A lower-priced, amply supplied domestic primary market will enable semi producers to export excess capacity abroad, adding to an already fractious trade situation following the U.S. announcement of its intention to levy a 10% import tariff on semi-finished aluminum products.

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It wasn’t long after President Donald Trump’s tariffs announcement was made that battle lines started to be drawn.

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President Donald Trump has spoken to world leaders about his planned tariffs on steel and aluminum. According to Reuters, quoting Commerce Secretary Wilbert Ross this weekend, the president is not considering any exemptions to the 25% import duties on steel and 10% import duties on aluminum. Despite concerns being raised that the imposition of the import tariffs will spark tit-for-tat retaliation by America’s trading partners, the president so far seems adamant there will be no special carve-outs by country of origin.

However, Kevin Brady, chairman of the U.S. House of Representatives Ways and Means Committee, while speaking on the sidelines of the latest round of North American Free Trade Agreement (NAFTA) talks among the United States, Canada and Mexico, is quoted by Reuters as saying that all fairly traded steel and aluminum should be excluded from the proposed tariffs. Brady specifically called out materials supplied by NAFTA partners Canada and Mexico, saying material supplied from elsewhere could also qualify for exemptions.

Meanwhile, Bill Pascrell, the senior Democrat on the Ways and Means trade subcommittee, said “We don’t have a major trade deficit with Canada, if you look at all the products that are coming into the United States from Canada and Mexico, this is an ally. If we can’t make an exception there, then how are we going to get a NAFTA deal?”

The answer may be NAFTA could be allowed to fail.

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President Trump’s announcement that the U.S. intends to impose 25% import tariffs on steel and 10% import tariffs on aluminum following the Departments of Commerce’s section 232 review has been met with mixed reactions.

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Steel and aluminum producers in the U.S. applauded the move. Meanwhile, U.S. stock markets reacted negatively with the Dow plunging 586 points at one stage before managing something of a recovery to close more than 400 points down yesterday.

Markets will adjust, but foreign governments have reacted with equal dismay.

Not surprisingly China was the most diplomatic, expressing “grave concern” and according to The Guardian newspaper, adding “China urges the US to exercise self-restraint, not to implement trade protection tools, confront multilateral trading rules and make a contribution to global trade regulations,” quoting Hua Chunying, a foreign ministry spokesperson.

Japan was more specific, saying “The 25% across the board tariff on foreign steel is ill advised and naïve. Rather than saving American jobs it will destroy many tens of thousands of good, well-paying manufacturing jobs from steel consuming industries. It will inevitably invite retaliation from America’s most reliable allies, ultimately hurting American non-manufacturing industries as well.,” according to the Japan Steel Information Centre.

But the strongest criticism came from some of the U.S.’s closest allies.

CNBC quoted Canadian officials who pledged to respond to U.S. tariffs with their own measures. Canadian Trade Minister Francois-Phillippe Champagne called tariffs “unacceptable,” according to the news site, adding a pledge to defend Canadian workers in the steel and aluminum industry.

Chrystia Freeland, Canada’s minister of foreign affairs, is quoted as saying trade restrictions would hurt workers and manufacturers on both sides of the border. She raised a point that came up during the appraisal process by the Department of Commerce, saying it is inappropriate for the U.S. to view any trade with Canada as a national security threat. Both economically and politically, the two countries are such close allies it seems likely a carve-out may yet be made for the northern neighbor’s steel and aluminum industries.

As CNBC observes, Canada would be hit particularly hard by the tariffs. Between 2013 to 2016, Canada was the largest source of steel and aluminum imports to the U.S., with the trade critical to both countries.

Meanwhile Europe has reacted with similar annoyance, feeling it has been caught up in a move against China, where the E.U. is as much a victim as the U.S. from emerging market dumping.

European Commission President Jean-Claude Juncker issued a strongly worded statement, saying the E.U. “will not sit idly” following the U.S. leader’s decision to slap tariffs on all imports. The E.U. had been hoping for a carve-out similar to that expected by Canada. CNBC quotes Juncker saying “we strongly regret this step, which appears to represent a blatant intervention to protect U.S. domestic industry and not to be based on any national security justification.”

Most countries say they will take cases to the World Trade Organization (WTO), but that has always proved to be a long, drawn out affair.

In the meantime, you can be sure there is intense diplomatic activity going on to make special cases of just about everyone.

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The probability is this is far from the end of this story. There will likely be adjustments to the blanket position indicated as an opening gambit, so this is more like the beginning of a much longer  — and possibly increasingly acrimonious — process.