Articles in Category: Exports

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A new report in HSBC’s Navigator series focuses on the long-term ascendancy of the Asian region as it explores both anticipated and actual trends in India’s trade patterns with its nearby neighbors.

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India enjoys a balance of trade surplus in services but a deficit in goods with much of its services focused on Western tech and B2B markets. But that pattern is not changing, surprisingly, partly due to government encouragement and partly due to the relative size of the economies closer to home.

Largely as a result of fears of protectionism in the West, India’s policy has been to work closely with neighbors to develop regional trade opportunities.

However, despite the South Asia Free Trade Agreement (SAFTA) and the ASEAN-India Free Trade Area (AIFTA), progress in increasing trade with Asian neighbours has been slow. Now exporters are looking to the Regional Comprehensive Economic Partnership (RCEP), to which India is an intended signatory, in order to create opportunities in what will be the world’s largest trading block.

India’s exports are changing, partly under government encouragement but mostly in response to changing global demand. Traditional products like clothing and apparel are declining. Currently in third place, they are expected to slip to 10th over the next decade, as this table shows.

The reports estimates that by 2030, India will be increasingly exporting goods within the Asian region, with export growth to Asia Pacific outpacing India’s exports to Europe and North America. In terms of individual countries, the U.S. and UAE will remain the top two export destinations, but China will rise in importance and Vietnam will also join the top five list. The top 10 fastest growing exports destinations will almost all be in Asia up to 2020, with growth in some markets rising at 12-13% per year.

Firms looking to export to India will face growing competition from China. But with a rising middle class and strong demographics, India represents an important export market for Western firms in the decade ahead. Navigator estimates that the greatest opportunities will remain in machinery, as this graph illustrates:

Perhaps more surprising is the expected static nature of India’s exports. The report sees little change in the mix of destinations, with India’s top service exports destinations remaining largely unchanged between 2017 and 2030, with the U.S. and the U.K. occupying the top two spots. Read more

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This morning in metals news, India wants to get a waiver from the U.S.’s Section 232 tariffs on steel and aluminum, uncertainty for craft beverage makers, and the U.S. Trade Representative said he is hopeful a new North American Free Trade Agreement (NAFTA) deal can be reached soon.

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Another Country Wants Out of 232 Tariffs

Count India among the group of countries looking to be exempted from the U.S.’s new tariffs on steel and aluminum.

According to Reuters, Indian government officials are saying that Indian exports of steel and aluminum to the U.S. do not post a national security threat. Steel exports to the U.S. amount to 2% of India’s total steel exports, according to the report.

Craft Beer Makers Wary of Tariffs’ Effect

For craft beer makers, the new tariff on aluminum means either smaller margins or passing extra costs on to consumers.

According to a Vermont Public Radio report quoting several executives in the local craft beer industry, the tariff adds uncertainty, especially for distributors who have already seen increases this year in canning costs.

Justin Heilenbach, president and co-founder of Citizen Cider, referred to the tariffs’ impact relative to the federal tax plan passed in December.

“This whole thing is like robbing Peter to pay Paul,” Heilenbach said, “because, you know, we get a tax incentive over here, and then we pay more for materials over there. … It’s gonna net out neutral or probably be, you know, work against us.”

Lighthizer Hopeful for New NAFTA

In a television interview with CNBC on Wednesday, U.S. Trade Representative Robert Lighthizer said he is hopeful the U.S. can renegotiate a new NAFTA “in the next little bit,” Bloomberg reported.

Earlier this week, a deal was reached on an adjusted deal on the U.S.-Korea Free Trade Agreement (KORUS), which also saw South Korea receive exemptions from the steel and aluminum tariffs (in addition to a 70% quota).

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According to the report, Lighthizer also raised concerns brought up during the negotiations last year regarding the timeline for reaching a deal, given that there is a Mexican presidential election in July and U.S. midterm elections in November.

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This morning in metals news, the U.S. and South Korea reach a revised trade agreement, the E.U. started a study on possible steel import limits and copper slides to a 3 1/2-month low.

U.S. Gives South Korea Steel Tariff Exemption

The U.S. and South Korea reached an agreement on steel tariffs, with the U.S. exempting South Korea from the tariff but also imposing a quota, according to reports.

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The quota is equivalent to 70% of South Korea’s average exports to the U.S. from 2015-2017.

E.U. Studies Possible Steel Import Limits

According to Reuters, the E.U. began a study Monday looking into whether the U.S. steel import tariffs will lead to a flood of steel into Europe from Asian producers.

The European Commission said total steel imports jumped from 17.8 million tons in 2013 to 29.3 million in 2017.

Copper Fall to 3 1/2-Month Low

Copper dropped to its lowest price since Dec. 8, falling to $6,532/ton, according to Reuters.

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Rising stockpiles and increasing U.S.-China trade tensions — amid President Trump’s announcement last Thursday, which could pave the way for $60 billion in tariffs on Chinese products — led to the depression of the copper price, according to the report.

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This morning in metals news, Canadian Prime Minister Justin Trudeau says the Canadian steel industry can breath a sigh of relief after obtaining an exemption from the U.S.’s recently announced 25% steel tariff, the tariffs throw a wrench into India’s export plans and Reuters’ Andy Home opines on the way forward for the aluminum market in a post-U.S.-tariff world.

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Canadian Steel Industry Enjoys Tariff Exemption (For Now)

Canadian Prime Minister Justin Trudeau said members of the Canadian steel industry can breath a sigh of relief, CNN reported.

North American Free Trade Agreement (NAFTA) partners Canada and Mexico received temporary exemptions from the U.S.’s forthcoming tariffs of 25% and 10% on steel and aluminum imports, respectively. However, the key word is “temporary,” particularly as NAFTA renegotiation efforts continue and the U.S. hopes to win concessions from its NAFTA peers.

In an interview Monday with CNN’s Anderson Cooper, Trudeau addressed the notion that the temporary exemption would serve as a bargaining chip for the U.S. in the NAFTA talks.

“We’ll just respond the way we have, with focus on the work we do together and not too much worry about the rhetoric,” Trudeau told Cooper.

India’s Export Ambitions Complicated by Tariffs

Steel Minister Chaudhary Birender Singh said the U.S. tariff on steel could disrupt India’s efforts to become a major steel exporter, Reuters reported.

India expects a loss of $130 million due to the U.S. import tariffs, according to a note prepared by the steel ministry, Reuters reported.

What’s Next for the Aluminum Market?

Canada, Mexico and Australia have secured exemptions of some form from the U.S.’s announced tariffs, and other countries and trading blocs (namely the European Union) are lobbying for exemptions of their own.

So, given the climate of negotiations, both economic and inherently political in nature, what does that mean for the global aluminum market going forward?

Thus far, the LME price hasn’t changed much, Reuters’ Andy Home wrote, while the CME Midwest Premium has nearly doubled since the beginning of the year.

On a production level, already announced and forthcoming capacity restarts in the U.S. will inch the capacity utilization rate closer to the previously announced goal of 80%.

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The tariff, of course, will lead to a rise in costs for consumers. As Home writes, the beverage industry and can makers will seek exemptions on the grounds that domestic production won’t be able to meet their demand, while also arguing that imported aluminum for their purposes doesn’t constitute a national security threat.

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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.

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This morning in metals news, Pittsburgh-based U.S. Steel announced it plans to restart a blast furnace facility in Illinois, Trump talks tough to E.U. and Chile’s trade surplus is powered by strong copper exports.

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U.S. Steel to Restart Illinois Operations

U.S. Steel announced this week that it plans to restart a blast furnace and steelmaking facilities in Illinois as a result of President Trump’s 25% steel tariff proposal last week.

President and CEO David Burritt praised the tariffs proposal.

Our Granite City Works facility and employees, as well as the surrounding community, have suffered too long from the unending waves of unfairly traded steel products that have flooded U.S. markets,” Burritt said. “The Section 232 action announced by President Trump last week recognizes the significant threat steel imports pose to our national and economic security. The President’s strong leadership is needed to begin to level the playing field so companies like ours can compete, win and create jobs that support our employees and the communities in which we operate as well as strengthen our national and economic security. We will continue to support our customers with the high-quality products they have come to expect from U. S. Steel.”

According to a U.S. Steel release announcing the decision, the company plans on calling back approximately 500 employees to its Granite City Works, beginning this month, in a process that could take up to four months.

Trump Criticizes E.U. as Tariff Tension Rises

Trading partners around the world expressed dissatisfaction with President Donald Trump’s steel and aluminum tariffs proposal, with many implicitly and explicitly indicating they would retaliate if the tariffs are imposed.

The European Union is among the trading partners making noise about retaliation, making reference to placing duties on products like Kentucky bourbon and American cheese.

The tension grew this week, as Trump called out the E.U., saying it has been almost “impossible” to do business with, according to the Financial Times.

Chile Exports Heat Up, Lifting Trade Surplus

The Chilean economy is experiencing a trade surplus, with copper exports being a major contributor, according to a Reuters report.

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Chile had a $1.25 billion trade surplus in February according to the report, good for the South American nation’s largest surplus in four years.

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The Indian metal industry seems divided for now over the implications of U.S. President Donald Trump’s announcement of the intention to impose tariffs on steel and aluminum imports.

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News reports and statements by industry leaders, along with reports by research agencies, show no unanimity on how the decision by the U.S. government, if implemented, would affect trade in India aand other neighboring Asian countries.

A report by news agency Press Trust of India (PTI), quoting industry leaders, said India will not be impacted much.

President Trump said last week he had decided to impose a steep 25% import tariff on steel.

Quoting H Shivram Krishnan, Essar Steel commercial director, the PTI report said the U.S. decision was not compliant with World Trade Organization (WTO) regulations. Former Steel Authority of India Ltd (SAIL) chairman Sushil Kumar Roongta said that the move may impact some of India’s steel exports to the U.S.

On the other hand, Sanak Mishra, former managing director of SAIL’s Rourkela Steel Plant, told PTI the decision may not have a significant impact on India as of its total steel imports, U.S. imports only 2% from India.

Some experts in India believe if the U.S. President went ahead with his decision, it would spark off a retaliatory war between exporting nations and the US, disrupting the just-about-recovering global steel industry.

On the official front, the Indian government, without naming the U.S., has let it be known that it may not exactly be a wise move. In a nuanced statement, Indian trade envoy J S Deepak said the government shared the concerns that some members had expressed on recent developments that could lead to new tariff barriers and even a trade war.

The envoy added that application of tariffs must respect the ceiling of bound rates agreed to at the WTO.

Several countries, including the European Union, China and Japan, to name a few, have criticized President Trump’s announcement.

India has also cautioned about the threats posed by the U.S. to the WTO’s dispute settlement functions because of the continued delay in selection and appointment of members to fill vacancies in the Appellate Body, the highest limb for adjudicating global trade disputes.

The U.S. is India’s largest export destination with U.S. $42.21 billion worth of shipments sent in 2016-17. But India’s steel and aluminum exports to the U.S. remain low. While steel exports to the U.S. stood at only U.S. $330 million, export of finished steel products were U.S. $1.23 billion in 2016-17. Total exports of aluminum and aluminum products stood at $350 million.

But a report in the Business Standard said India may have to brace itself for more imports from China into India as a result of the U.S. action.

On the other hand, ratings agency Moody’s said in a report that Asia, which produced more than two-thirds of the world’s steel, would “be minimally affected” when compared to the rest of America’s trading partners. Asian exports of aluminum and steel to the U.S. typically amount to less than 1% of GDP or exports, Moody’s reported.

Moody’s said the direct impact on steel companies would be manageable for the steel sector and rated steelmakers in Asia, because steel is predominantly traded within the region.

The CEO of Japanese giant Nippon Steel, the world’s second-largest steel producer by volume, has already dubbed Trump’s decision “regrettable.”

The one area likely to be affected if Trump goes ahead is metallic scrap imports. The U.S.’s imposition of import tariff on primary metals, including steel and aluminum, was likely to hit India’s 10 million tons (MT) of metallic scrap import annually, according to this news report. The U.S. makes up 20% of this import.

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More use of scrap as raw material for metal producers in the Unites States will result into its lower availability for importers across the world. This means scrap price would move up outside the U.S., which would impact secondary metal producers into India, according to Sanjay Mehta of Material Recycling Association of India.

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This morning in metals news, domestic raw steel production for the week ending Feb. 24 was up slightly from the same week last year, Shanghai copper prices drop and Japan’s steel exports rose 24.1% in January.

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Raw Steel Production Up 0.7% Year Over Year

Raw steel production for the week ending Feb. 24 was up 0.7% compared with the same week in 2017.

Production for the week amounted to 1,783,000 net tons for a capacity utilization rate of 76.5%. Production for the week ending Feb. 24 was up 1.8% from the previous week. In the year to date, however, raw steel production is down 1.6% compared with the same period in 2017.

SHFE Copper Prices Fall

Copper on the Shanghai Futures Exchange fell Tuesday, partially a result of a strengthening dollar, according to a FastMarkets report.

The most-traded April contract on the exchange fell to $8,430 per ton, according to the report.

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Japan Zinc Exports Surge to Start the Year

Exports of zinc from Japan jumped 24.1% year over year in January, according to Reuters.

Although my colleagues have written in detail exploring the specifics of the Section 232 investigations in steel and aluminum, recently completed by the U.S. Department of Commerce, it is worth considering the likely outcomes.

This is particularly true for aluminum, because the production market is not as integrated as it is for steel. Often, primary producers and downstream are not vertically integrated, making decision-making more complex.

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One can understand why President Trump is taking his time to make a decision on the twin section 232 investigations.

Although the premise of both investigations is the same — namely that steel and aluminum imports threaten to impair the national security of the United States — the two industries and their respective supply chains differ considerably.

A Background of Decline

The U.S. aluminum industry has a primary smelting sector that has been in decline since the turn of the century, but particularly in the last five years, as this graph from Statista illustrates.

Today, the U.S. has just eight plants with a combined annual production capacity of 1.82 million tons. According to Reuters, actual production last year was 785,000 tons, translating into a capacity utilisation rate of 43.2%.

That’s dire by any industry standards and qualifies the Commerce Department’s argument that at such levels an industry cannot be profitable, cannot invest in the future, and cannot afford research, development or innovation.

Yet to get it to the 80% target espoused in the report would require only 669,000 tons of idled capacity to be brought back onstream. We will come back to that shortly, but not before we take a quick look as to where some 90% of U.S. primary aluminium imports are coming from.

Import Sources

Source: Reuters

As this graph from Reuters shows, Canada, Russia and Brazil are by far the largest suppliers of primary aluminum into the U.S. market. There is no suggestion as to clawing significant chunks of this production back to U.S. shores; 669,000 tons is just the tip of the iceberg.

Sector Snapshot

The major part of the U.S. aluminum industry is made up of downstream suppliers producing semi-finished products, from plate and bar down to sheet, foil, wires, tubular products, and cast and forged parts.

This downstream sector faces a different set of challenges from the primary producers.

Some semis manufacturers rely on competitively priced imports of primary metal or billets in order for them to compete in export markets or domestically against foreign suppliers for the same finished goods. Other semi-finished manufacturers, arguably more at the commodity end of the market, face intense competition from imported semi-finished products depressing domestic U.S. price levels. The supply base for semi-finished products is different from the primary market, as the below graph from Reuters shows.

Source: Reuters

Here China, despite previous anti-dumping actions, remains a major supplier and is likely the main target for the Commerce Department’s actions.

Winners and Losers

A blanket tariff increase across the board would clearly create massive winners and losers because of the complexity of the aluminium market.

The Commerce Department is proposing either an across-the-board import tariff of 7.7% or a quota system limiting imports to 86.7% of  last year’s levels. A third option would be to target five countries with a draconian 23.6 % tariff, with everyone else subject to a quota also set at last year’s imports. Clearly, in the primary market Canada is going to be given an exemption, so rather than across the board, any tariffs or quotas are more likely to be country specific.

Likewise, with semi-finished products China and its intermediary shipping points, such as Vietnam and Hong Kong, are also likely to be the principal targets. Not surprisingly, the prospect of China being partially shut out of the U.S. market is sending shivers through governments in other parts of the world, fearful of where those redirected trade flows will end up.

Of course, it’s entirely possible nothing will be done.

Blocking Russian and Venezuelan imports of primary aluminum will not immediately make U.S. smelters viable again. Smelter closures have more to do with power costs than solely foreign competition. In addition, as my colleagues Lisa Reisman and Irene Martinez wrote this week, to bring an idled smelter back onstream is a medium-term proposition. A decision in April would not see capacity come back onstream this year, so any action has to be timed carefully.

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The LME spiked on the release of the investigation’s findings and CME physical delivery premiums have climbed. For now that’s probably it, but be prepared for further volatility as the decision deadline of April 20 approaches.

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This morning in metals news, the U.S. Department of Defense recently indicated it would prefer targeted tariffs as opposed to a blanket strategy, Australian Prime Minister Malcolm Turnbull will press President Donald Trump on an assurance last year that Australia would be exempted and London copper is down for the week.

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DoD Espouses Targeted Tariffs Approach

In light of the pending Section 232 probes of steel and aluminum imports, the Department of Defense said it would favor a more targeted approach to tariffs.

In addition, the DoD prefers a delay to any measures curbing aluminum imports, according to a Reuters report.

Turnbull Looks for U.S. to Honor Tariff Assurances

Australian Prime Minister Malcolm Turnbull plans to discuss with President Trump on Saturday the assurances given last year that Australia would be spared from Section 232-related steel and aluminum tariffs, according to the Financial Review.

The recently released Section 232 reports make no mention of an exception for Australia. According to the Financial Review report, Turnbull will seek to revisit assurances made last July vis-a-vis a carve-out for Australia.

Copper Down on the Week

London copper and zinc dropped this week as a result of profit taking, Reuters reported. In addition, the dollar strengthened and uncertainty about demand in China contributed to the drop this week.

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According to the report, LME three-month copper dropped 0.7% to $7,110 a ton in official open outcry trading on Friday.