Author Archives: Stuart Burns

According to the Financial Times, China’s President Xi Jinping surprised the global community by announcing last month a hugely ambitious plan to improve China’s environment and make the country carbon-neutral by 2060.

In addition, he said the country’s emissions would peak before 2030.

But does this really mean anything? If it does, what impact will it have on the country’s massive steel industry? The steel industry, of course, is the source of a significant proportion of the country’s carbon emissions?

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China’s environment and emissions figures

Firstly, let’s look at the scale of the proposition.

China is the world’s largest emitter of greenhouse gases (such as carbon dioxide and methane).

Last year, China’s emissions accounted for roughly 27% of the global total. The country’s total accounted for more than the U.S., Europe and Japan combined, the Financial Times reported.

Furthermore, the country consumes more coal than the rest of the world put together. In addition, China continues to commission new coal power plants.

On the one hand, China also leads the world in the deployment of solar power, wind power and electric vehicles. Its energy-efficiency policies are ambitious and successful. Significantly, there are no known climate change deniers in the Chinese leadership.

But is the pledge meaningful?

It contrasts poorly with that made by almost 70 countries and the E.U. Those countries have already pledged to make their economies “net-zero” greenhouse gas emitters by mid-century, or 10 years earlier than China’s pledge.

And the 2030 peak emissions date is a rehash of a commitment made back in 2014, suggesting peak emissions could be reached well before 2030 and the authorities are simply back-sliding.

Difficult changes

The scale of the challenge vis-a-vis China’s environment and emissions is considerable.

More than 85% of China’s primary energy last year came from coal, oil, and natural gas, all of which produce carbon dioxide. This came despite massive investment in solar and wind.

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China

Zerophoto/Adobe Stock

A relatively swift exit from pandemic lockdowns and the impact of stimulus-led infrastructure investment have powered China’s metals rebound. Furthermore, the Shanghai Futures Exchange has continued its summer disconnect from the London Metal Exchange aluminum price, which started in April of this year.

The resulting arbitrage window has sucked in imports of aluminum primary and remelt alloy casting ingot. As a result, China’s imports are at levels not seen since the aftermath of the financial crisis in 2009.

Are rising MW premiums causing concern? See how service centers take advantage of that. 

China leads the metals rebound as aluminum imports surge

Combined imports of primary metal and unwrought alloy totaled 393,000 tonnes, just shy of the previous record of 394,000 tonnes in April 2009, according to Reuters. Furthermore, cumulative net imports reached 653,000 tonnes so far.

Alloy imports should be seen as in part as a replacement for lower scrap imports. However, even so, the disconnect has continued through the third quarter. Although that disconnect is expected to narrow in the run-up to year’s end, it underlines the current two-speed nature of the global manufacturing economy.

Meaning, there’s China and then there’s the rest of the world.

China tightened up on scrap grade import controls last year and precipitated a switch to imports of refined remelt alloy over scrap, even before the pandemic took hold.

Southeast Asian regional remelters have taken in the displaced scrap and exported alloy ingot to China. A similar trend is taking place with copper scrap and alloy ingot, possibly suggesting a structural shift that is here to stay.

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There is a looming crisis in the nickel market.

Some would argue it’s a good problem to have. Demand is set to rise on the back of increasing uptake of electric and hybrid vehicles through this decade. More and more governments will mandate the production of electric vehicles (EVs) over internal combustion engine (ICE) autos. In parts of Europe, there will be outright bans on new ICE vehicles inside 10 years.

However, if nickel supply becomes constrained, consumers are going to pay the price.

Nickel market numbers

It should be said that today the problem barely registers as a price lever.

According to a recent McKinsey report, the stainless steel industry consumers 74% of nickel produced today, dwarfing the 5-8% going into batteries.

But the type of nickel required for battery production is what makes supply so sensitive in the future.

As the report explains, there are two types of nickel. Class 1 predominantly comes from the concentration, smelting and refining of sulfide ores. Meanwhile, Class 2 comes from ores, called saprolites and limonites, with higher iron and other (for batteries) levels of contaminants, such as copper.

So, whereas the stainless steel industry, to a large extent, can use a mix of Class 1 and Class 2, the battery industry draws its raw material from just Class 1, representing a more restricted 46% of the nickel supply market.

Worse, after the all the focus on the cobalt market — with its environmental, social, and corporate governance (ESG) concerns from countries like the Democratic Republic of the Congo — major consumers like Tesla are keen to establish long-term supply arrangements with nickel producers in sustainable locations with more robust ESG standards.

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oil price chart

Sodel Vladyslav/Adobe Stock

The oil majors are not having a great pandemic.

Consumers reacted to earlier lockdowns and continued pandemic restrictions, leading to a massive drop in demand. On the other hand, prices initially collapsed after Saudi Arabia led an assault on the U.S. shale market and engaged in a spat with Russia over prices.

Set that against an acceleration in the longer-term trend away from fossil fuels in favor of renewables. Oil companies are facing a perfect storm of low prices, low demand and long-term questions about the viability of their product. Those realities will inevitably push up the cost of capital.

As readers of the MetalMiner Annual Outlook report know, oil prices constitute one of three macroeconomic price drivers embedded in our metals price analysis.

Oil majors struggle

Two of the largest oil majors, Chevron and Exxon, have between them lost $9.4 billion in the second quarter alone.

“The demand destruction in the second quarter was unprecedented in the history of modern oil markets. To put it in context, absolute demand fell to levels we haven’t seen in nearly 20 years,” the Financial Times quoted Neil Chapman, Exxon senior vice-president, as telling analysts. “We’ve never seen a decline with this magnitude or pace before, even relative to the historic periods of demand volatility following the global financial crisis and as far back as the 1970s oil and energy crisis.”

Oil companies’ share prices reflect their fall from grace. They were once the largest sector in the S&P 500. However, now they make up just 3%. Furthermore, Exxon fell from the Dow Jones Industrial Average after almost a century.

As if this were not bad enough the oil and gas industry, indeed the whole fossil fuel industry is facing long-term decline. Economies, at varied paces, are moving toward a lower-carbon future.

Greener future

A significant feature of stimulus measures around the world is a heavy bias toward so-called green energy and/or carbon emission reduction.

Goldman Sachs estimates investment in decarbonizing the energy industry alone — renewables, carbon capture, hydrogen, and the upgrading of power infrastructure — will reach $16 trillion over the next 10 years.

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aluminum ingot stacked for export

Olegs/Adobe Stock

Just the rumor that producers in the United Arab Emirates and Bahrain could win a Section 232 aluminum tariff exemption was enough to ease prices for U.S. consumers.

The Trump administration imposed the 10% tariff under Section 232 back in March 2018. Now, however, the removal ostensibly comes as a reward for the two Arab states establishing formal ties with Israel.

The benchmark U.S. Midwest physical delivery premium collapsed from $335 per ton in mid-September to $263 per metric ton on the back of the rumor, according to Reuters.

The MetalMiner 2021 Annual Outlook consolidates our 12-month view and provides buying organizations with a complete understanding of the fundamental factors driving prices and a detailed forecast that can be used when sourcing metals for 2021 — including expected average prices, support and resistance levels.

Section 232 tariff exemption for major producers

Both countries are significant aluminum producers and suppliers to the U.S. market.

Bahrain’s Alba mill produced more than 1.36 million tons of aluminum last year. The mill supplied 11%, or 150,000 metric tons of its output (mainly billets) to the U.S. market.

Of its sales last year, 44% were value-added products (or VAPs, as they are termed in the trade). Those products include rolling slab, billet, primary foundry alloy and wire rod.

Primary mills try to boost their output of VAPs over standard ingot because they earn higher returns, over and above the cost of manufacture. For their customers, VAPs avoid the need to remelt ingot and cast into those forms before they can consume the primary mill’s products, saving energy and, hence, costs.

Emirates Global Aluminium (EGA) sold a total of 2.60 million tons of cast metal in 2019, of which 87.4% was VAPs, according to Reuters. Although they declined to be specific, their U.S. value-add exports have been estimated at about 550,000 tons last year.

U.A.E., Bahrain producers could gain market share

The fall in the MW premium is good news for consumers. However, U.S. producers will not view it as positively, as they are already facing a significant resumption of Canadian imports.

Usually, when government grants an exemption — as Canadian producers enjoy — it will impose a quota to prevent a flood of metal from the newly tariff-exempted supplier.

That will likely be the case for EGA and Alba. As such, the sharp drop in the MW premium is reflecting an expectation that the two substantial producers will be in a position to use their newfound competitiveness to take market share.

If, for example, EGA has a quota set at last year’s 550,000 tons, it could export 750,000 tons and pay the 10% duty on the excess amount. As a result, it would effectively incur only a 2.7% duty overall.

If the mill felt long-term positioning would be helped by greater market share, the tradeoff may be considered acceptable.

What’s next for domestic mills?

Domestic mills, whether aluminum or steel, generally position themselves at or around the import price when the government imposes tariffs.

Generally, however, they do not seem to add more capacity to take long-term advantage of the extra margin the tariff provides. Why? Possibly because they do not expect the tariffs to exceed more than one or, at most, two cycles of administration.

They only lasted a little over a year and a half under the Bush administration from 2002 to 2003. While they have lasted two and half years under Trump, their efficacy at stimulating a resurgence of domestic production has been limited.

Last year Canada remained the U.S.’s largest external aluminum supplier in all forms, with China coming in second.

Chinese supply, however, has been falling rapidly with tariffs and duty action over recent years. As a result, the actions of third-placed U.A.E. and sixth-placed Bahrain have become progressively more important in influencing market prices. It is a role in which it looks like they just got helped to have even more impact.

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India

Zerophoto/Adobe Stock

No, we don’t mean that much-vaunted but still distant dream of India becoming a second China economically — the disparity expands rather than contracts with time — but rather could India become a pariah state after China in terms of feeling the pain of anti-dumping duties, quotas, and tariffs (particularly with respect to Indian metal exports)?

It has already happened in Europe on stainless steel long product. The E.U. has imposed an annual quota and punitive 25% tariffs for every kilogram over that limit in a bid to protect its domestic producers.

Are you under pressure to generate aluminum cost savings? Make sure you are following these five best practices!

With rise to No. 2, could Indian metal exports be next to face tariffs?

Last year, India ranked the second-largest steel producer in the world behind China. (However, India’s production totaled not much more than a tenth of China’s output.)

India is becoming a global force in many ferrous and non-ferrous metals.

Originally, the rationale was India’s huge population and low per-capita consumption of metals suggested growth prospects on a Chinese scale.

Such potential has led to considerable investment. A good level of domestic resource — iron ore in particular — has meant economies of scale have favored domestic growth prospects.

But slow GDP growth, a bureaucratic business environment and tortuous legal environment over land ownership have slowed what should otherwise have been a meteoric rise.

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The widely, if not universally, held belief that globalization is a win-win panacea for growth has never looked shakier.

While President Donald Trump has led the charge on calling out the failings of unfettered engagement with China and all that entails in terms of loss of manufacturing capability and sharing of hard-won technology, he is by no means alone.

The MetalMiner 2021 Annual Outlook consolidates our 12-month view and provides buying organizations with a complete understanding of the fundamental factors driving prices and a detailed forecast that can be used when sourcing metals for 2021 — including expected average prices, support and resistance levels.

Globalization and China

There is a growing groundswell of opinion that the long-held liberal beliefs that engagement would change China’s behavior have proved flawed.

China today is arguably more centrist, more actively and belligerently nationalistic and worryingly less influenced by world opinion than it has been for decades.

And yet it has, from an economic point of view, proved remarkably successful so far.

China’s economy has bounced back faster than those in the West. Furthermore, its economy has recovered faster than even its close Asian neighbors. That is because, in part, the party’s control meant it could enforce harsh — compared to in the U.S. or Europe — lockdown measures in the face of the pandemic. That enforcement extends to continued adherence to social distancing and hygiene standards since.

It is unlikely that a change of president in January, were that to happen following the November election, would have a meaningful impact on U.S.-China relations. A Biden presidency may try to foster a more collaborative international approach. However, the direction would likely be similar.

Europe, too, is following a less bellicose but similar path.

Europe’s investments in China and reliance on China as a trading partner are greater than that of the U.S., for whom China trade still represents a modest percentage of GDP.

Yet, even in Europe, there is increasing talk of decoupling supply chains and restrictions of technology transfers to China. Furthermore, these is talk of restricting Chinese technology companies’ access to the European market.

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Europe’s steel industry appears to be at a crossroads.

Hurting before the coronavirus pandemic-induced lockdowns, the industry struggled with overcapacity, high costs, weak demand and competition from lower-cost sources (like China and Russia).

The lockdowns decimated demand. Major consumers, like the automotive sector, which takes something like 20% of European production of flat-rolled steel, according to the Financial Times, have now largely reopened.

Even so, auto sales are not expected to recover to pre-pandemic levels until 2025, according to major European component supplier Continental.

Volatility is the name of the game. Do you have a steel buying strategy that can handle the ups and downs?

Could M&A be the answer for European steelmakers?

Mergers and consolidation have traditionally been posed as solutions. Bigger is better and economies of scale will solve the challenge of profitability, the argument goes.

However, many are arguing European steelmakers should worry less about consolidation and more about rationalization.

Furthermore, politicians are among those reluctant to consider job losses in their own regions.

The steel industry employs some 330,000 people across the continent. About 40% of the workforce is currently on some form of short working or under threat of redundancies.

However, if the government does not support closures with retraining and regional enterprise policies to support alternative employment opportunities, the European steel industry will limp on with, at best, marginal profitability and poor capacity utilization.

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It is not often the world’s largest carmakers engage in mergers and acquisitions among themselves.

Fiat Chrysler and Renault Nissan announced a $35 billion plan to merge back in May 2019. The merger would have created the third-biggest carmaker, behind Volkswagen and Toyota.

But within 10 days of the announcement, FCA pulled out and it came to nothing.

The MetalMiner 2021 Annual Outlook consolidates our 12-month view and provides buying organizations with a complete understanding of the fundamental factors driving prices and a detailed forecast that can be used when sourcing metals for 2021 — including expected average prices, support and resistance levels.

Take two: Fiat Chrysler, PSA to merge

Now, still keen for a tie-up, FCA has announced it will merge with the French group PSA.

PSA is the owner of brands like Peugeot, Citroen, Vauxhall, and DS. The deal, valued at $50 billion, would form a 50/50 partnership with a turnover of some €170 billion ($200 billion) a year and annual production of some 8.7 million units.

As such, the deal would put them, again, third. By other measures, they would be fourth, behind at least Volkswagen and Toyota, and possibly the Renault–Nissan–Mitsubishi Alliance (if you consider that one entity).

The combined FCA-PSA company will be renamed Stellantis. The name comes from the Latin “stello,” meaning “to brighten the stars.” (Yes, I know, who thinks up these names?)

According to AutoExpress, based on 2018 figures, Stellantis will have approximately 46% of its revenues from Europe and 43% from North America. PSA has long held ambitions to expand into North America. As such, a merger with FCA would make that much easier.

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We may be coming out of the first pandemic lockdown and business does, broadly, appear to be picking up; however, but some sections of manufacturing, including U.K. car manufacturing, are still suffering badly.

The MetalMiner 2021 Annual Outlook consolidates our 12-month view and provides buying organizations with a complete understanding of the fundamental factors driving prices and a detailed forecast that can be used when sourcing metals for 2021 — including expected average prices, support and resistance levels.

U.K. car industry, supply chain face challenges

An article in the Financial Times starkly outlines the continued pain the U.K. car industry is experiencing and, by extension its extended supply chain.

U.K. car manufacturing fell 44% last month compared with a year earlier. Domestic orders and exports remain severely depressed. Last month’s performance marked the sector’s second-worst since car plants restarted after lockdown.

The Financial Times went on to advise that just 51,039 cars rolled off British production lines. The total fell from 92,153 in August 2019. Meanwhile, August output for U.K. buyers fell 58% to just 7,795 vehicles. The number of cars made for export fell 41% to 73,443 cars.

To be fair, several plants working during summer 2019 boosted August 2019 performance. Summer output followed a three-week closedown in the spring to prepare for the expected Brexit in 2019, which in the end did not transpire.

So, looking at the first half of each year gives a fairer comparison. Yet, even in that view the decline remains dramatic.

Between January and August, the U.K. produced 40.2% fewer cars than in the same months a year earlier. The period included several weeks of complete stoppages during the first lockdown in March and April.

Year-to-date production is now down by 348,821 units worth more than £9.5 billion to U.K. carmakers, according to the Society of Motor Manufacturers and Traders (SMMT). Furthermore, projections suggest U.K. car manufacturers are now on track to produce just below 885,000 cars this year – down 34% on 2019.

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