Government’s ambitions to reduce atmospheric pollution and consumers’ increasing desire for low or net-zero emission products is driving a rapid transformation in issues around aluminum smelter power supply.
Nowhere is this likely manifesting itself as dramatically as in China. Environmental pollution is one of few issues Beijing actually feels vulnerable about as a source of public unrest. The government’s latest five-year plan calls for dramatic reductions in emissions. The news has already hastened a move to hydro-rich Yunnan province, Reuters reported. The government effort against pollution could herald the closure of capacity elsewhere.
The challenge for China is that so much of its aluminum smelting uses coal-fired power production.
Yet, the turmoil being experienced by the industry is much more about the stop-go of last year.
Rather than cause a retrenchment, the pandemic has helped accelerate the move to electrification.
The greatest spur, however, has undoubtedly been government legislation.
EU penalties on carmakers that fail to meet emission reduction targets are driving a mass migration from internal combustion engines (ICE) to hybrids and fully electric vehicles. After a slow start, European carmakers are adopting aggressive transition plans.
Volkswagen goes all in on electric vehicles
Just this past week, Volkswagen announced — to the joy of its shareholders, who piled in to push shares up 20% — that the German automaker aims to become the global leader in electric cars by 2025. The automaker is placing heavy bets on next-generation lithium-ion batteries, the Financial Times reported.
Volkswagen says it will sell 1 million electric or hybrid cars this year, a tenfold increase from 2019, with half being fully electric vehicles and the rest plug-in hybrids.
But following the release of details in China’s new Five-Year Plan calling for wide-ranging and ambitious targets to reduce environmental pollution, iron ore prices experienced a sharp sell-off. Investors took profits at the prospect that steel production could be restricted by Beijing in an effort to reduce pollution.
Steelmaking is a major source of pollution in China. The steelmaking process is estimated to account for about 15% of the country’s total emissions.
So it is hardly surprising investors took profits at the prospect of the steel industry potentially facing significant environmental controls and increased efforts by Beijing to close excess steel production.
What the Five-Year Plan may well accelerate is adoption of electric arc furnace (EAF) steelmaking as blast furnace operators switch to scrap consumption to reduce pollution.
EAFs are a significantly less polluting production method than traditional blast furnaces. However, that is only the case if the electric energy source is not totally from coal. Unfortunately, much of China’s still is.
Still, if pollution is measured at the point of production rather than mine to finished product, EAF will be a winner.
Beijing has already reclassified and eased steel scrap imports late last year, possibly with an eye on encouraging adoption of such less-polluting technologies.
Higher-purity iron ore
There will likely also be greater use of high-purity iron ore and pellets, with Fe purity percentages in the mid- and upper-60s. Both offer a route for blast furnace operators to reduce their pollution levels. For more modern, efficient mills they can mitigate penalties or meet threshold targets.
The premium for high-grade iron ore is already a record above low-purity material. This is in part because supply sources are limited. Those with the highest purity resources are charging a premium. One reason why imported iron ore volumes are so high — domestic production is generally of low Fe purity material, which consumers have shunned more and more.
Peak iron ore price?
For the time being, mills are making good money and can afford the cost.
However, if steel demand were to drop this year, iron ore prices could see further falls.
As such, have we reached peak iron ore?
The short answer? Maybe. Much will depend on how enthusiastically (and how quickly) Beijing and state governments apply the edicts of the new Five-Year Plan. In addition, it will depend on how quickly last year’s stimulus measures begin to lose their impact on the economy.
China’s bounce-back has been impressive. Beijing, however, is doing a lot behind the scenes to slow the growth of debt and give the property market a gentle landing.
For the first time in decades, the US could have a higher rate of growth this year than China.
But the US is not a market for seaborne iron ore, so China remains the principal driver of price direction.
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Previous administrations’ focus on China — first on extrusions in 2011 and then foil and sheet in 2018 — succeeded in bringing down imports from 620,000 metric tons in 2017 to 170,000 tons last year, Reuters reported.
However, the wider Section 232 10% tariff is so riddled with exclusions and special exemptions that imports from the rest of the world have continued to make up a significant proportion of the market supply landscape.
Imports of sheet, plate and strip totaled 1.3 million metric tons in 2019. That represented about 62% of total aluminum product imports that year, according to Reuters. Although volumes shrunk sharply to 836,000 tons last year, this was due to the broader COVID-19 disruption to the U.S. manufacturing sector.
Total semis imports last year fell by 20%. Domestic shipments dropped by only 13% through November, suggesting the imposition of preliminary duties in October was already impacting buyers’ decisions.
According to Reuters, the new duties hit seven of last year’s top 10 product suppliers to the U.S. market, including South Korea, Germany and Turkey.
Canada, Saudi Arabia avoid aluminum tariff
The duties spared Canada, however, from which imports increased by 17%. They also spared Saudi Arabia, where Alcoa retains a close relationship with the Ma’aden smelter and rolling mill, despite having divested its 25.1% shareholding in 2019.
That Alcoa and its Saudi partner should essentially get an exemption comes as no surprise.
This time last year, Saudi Arabia all but announced war on America’s fracking industry and major OPEC+ partner Russia by releasing a flood of oil onto the world market just as the pandemic was getting underway.
The pandemic, among other impacts, led to a plunge in oil demand. The unprecedented collapse in prices took oil prices down to an 18-year low.
Within months, led by Saudi Arabia, the OPEC+ group agreed to production cutbacks of some 10 million barrels a day. The move kickstarted what has since been a sustained price recovery despite still weak demand.
Since then, output has been allowed to rise. However, some 7 million barrels per day of cutbacks remains in place. Earlier this month, OPEC agreed on only a modest increase of 130,000 barrels per day for Russia and 20,000 per day for Kazakhstan. The rest of the group would forgo the planned 1 million barrel per day increase previously planned from April, the Financial Times reported.
Oil price support
Two further factors have supported prices this month.
During the winter season in recent years, power production that runs on coal and polluting industries such as steel and cement, many of which are not only large emitters themselves but also draw electricity from polluting sources of power generation, have been closed in phased programs to reduce air pollution.
But this is much more than those short-term remedies to peak smog levels.
The Financial Times suggests Beijing’s new Five Year Plan focuses on pollution. The plan will require legislation that will result in an unavoidable decline in steel output.
Apparently, local governments have already begun to impose curbs.
The media loves stories of the rise of underdogs, of entrepreneurial spirit and corporate derring-do — so has been the story of Sanjeev Gupta and the meteoric expansion of his GFG Alliance in recent years.
That rise has almost defied the gravity of conventional business in a string of acquisitions, often of defaulting or bankrupt entities, and their seemingly miraculous turnaround into viable businesses.
We have covered the GFG Alliance’s takeover of various enterprises, including the $500 million purchase of Rio Tinto’s Dunkirk aluminum smelter — still the largest in Europe — in late 2018. More recently, we covered the group’s purchase of several former British Steel assets, including its Rotherham steel plant and various downstream operations, including the Ascoval steel works in northern France and its rail mill.
Ascoval uses electric arc furnace technology to process scrap steel. The plant has an annual capacity of 600,000 tons. It supplies raw material to Hayange, which produces over 300,000 tons of rail track a year and is considered a strategic asset by the French government because of its position as prime supplier to the French railways.
Media reports last week indicating that the GFG Alliance’s main source of finance, Greensill Bank, is on the brink of collapse will probably not come as a total surprise to anyone following the history of what has always been a very opaque, almost murky source of finance.
The speed of events has spurred competitors to circle in the hope the more saleable bits of Gupta’s empire may shortly be up for sale as the group seeks to bolster its finances.
News that China’s Tsingshan Holding Group has signed a one-year contract to supply nickel matte to Huayou Cobalt Co and CNGR Advanced Material Co, on March 3 prompted a sharp sell-off.
Under the agreement, Tsingshan will supply 60,000 tonnes of nickel matte to Huayou and 40,000 tonnes a year to CNGR, starting from October 2021. Tsingshan is China’s largest producer of stainless steel.
Just this morning, news sources like MetalBulletin were still promoting the bull narrative, saying nickel premiums continue to rise in China, while ore prices set another record high (even as the European cut cathode premium rises a further 5%).
But almost simultaneously, Reuters reported hot-off-the-press details of the Tsingshan deal and a sharp sell-off ensued. The post noted nickel fell 8.5% to $15,945 per metric ton on the LME for the biggest intraday loss since 2016. Shanghai prices fell by the most in nine months. The SHFE June nickel price ended 6% lower at RMB 130,510 ($20,181) per ton, according to Reuters.
Investment and the supply outlook
The Economic Times posted further details, reporting Tsingshan plans to expand investments in Indonesia. Tsingshan plans for its nickel equivalent output to reach 600,000 metric tons this year. Meanwhile, it has a target of 850,000 tons in 2021 and 1.1 million tons by 2023.
Nickel’s narrative has largely been predicated on a shortage of battery-grade metal driven by EV demand.
However, Tsingshan’s supply contract and capacity announcements suggest there will be sufficient supply. As a result, the nickel market reflected a sharp rethink of the deficit view.
Demand undoubtedly remains robust for nickel. Its medium- to longer-term outlook remains positive on the back of stainless and battery demand.
Indonesia’s efforts are finally paying off. The country is ramping up refined metal output, albeit under Chinese control. As a result, output of battery and refined grades of nickel is increasing. Meanwhile output of lower grade nickel pig iron is declining.
Nevertheless, the world does not seem quite as short of nickel today as it did yesterday.
When we first started reporting on global freight costs in Q4 last year, we expected that the pandemic bounce-back would probably be a relatively short-term effect, easing around the Chinese Lunar New Year. Around then, Chinese manufacturers closed down and the shipping industry had a chance to catch up on backlogs.
Unfortunately, in the meantime, the situation has not gotten better.
According to the Financial Times, the cost of shipping goods from China to Europe has more than quadrupled in the past eight weeks. Costs have hit record highs as a result of a shortage of empty containers disrupts global trade.
The post states the cost of shipping a 40-foot container from Asia to northern Europe has increased from about $2,000 in November to more than $9,000, quoting shippers and importers.
MetalMiner’s own research has found the worst increases are on the China to US West Coast and Northern Europe routes. Other origins, such as India, have doubled but not tripled since spring 2020, with the largest increase coming in the last 3-4 months.
The Chinese Lunar New Year closedowns barely happened this year. New COVID-19 outbreak containment measures in China encouraged Beijing to dissuade all but essential travel. As a result, a majority of workers in the cities were available to work over what would normally be a near two-week holiday period.
Product, therefore, continued to be delivered to the docks. Demand on shipping lines barely abated.
The Brent crude oil price has continued a dramatic recovery this year.
Brent crude last week briefly crossed $66 a barrel (where it started 2020). A recovery in demand has stoked oil prices. That demand surge is largely coming from the prospects of an acceleration in transport activity as vaccine programs roll out.
Many commodities have been boosted this year by both the reality and the expectation of increased demand.
Copper has been one of the stellar performers, topping $9,000 per metric ton for the first time since 2011. This largely seems to follow on the strength of rising electric vehicle demand. As such, it seems almost counterintuitive that an investment dynamic, electrification, that is driving one commodity, copper, to decade highs is also driving oil — whose greatest threat is electrification — to also rise strongly.
But that’s commodity markets for you. One common denominator for both is perceived tight supply, for oil in the short term and copper in the longer term.