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In recent weeks, the Chinese yuan (CNY) has weakened against the U.S. dollar (USD). A weaker yuan makes imports cheaper, all other things holding equal.

As we can see in this chart, during the past couple of weeks the yuan weakened back to roughly December levels.

Will this currency change result in surging steel imports due to the increased attractiveness of Chinese steel prices?

Source: MetalMiner analysis of Yahoo.com data

The Price Spread Still Remains Fairly High, Apples to Apples

The chart below shows the spread between U.S. and Chinese CRC prices since January 2018.

Source: MetalMiner data from MetalMiner IndX(™)

Around the time the U.S. tariffs took effect, U.S. prices increased, while Chinese prices started to move lower.

Fast forward to mid-May 2019 and the differential still remains higher than during the pre-tariff period. The differential is down to just over $200/st — from around $400/st, the 2018 peak — as shown by the spread line in purple, which measures the straight arithmetic difference between the two prices.

Why should we look at Chinese prices? It’s certainly not because China serves a major trading partner for steel. Looking at the statistics, in fact, only around 1% of China’s steel exports come to the U.S.

The reason to study Chinese steel prices owes to the fact that China drives global production, with over 50% of global steel produced in China. In pure price trend analysis, we know it remains a key to future pricing for the U.S., as it will be for all country-level analyses.

As such, examining the Chinese CRC price offers value, regardless of whether or not an organization plans to actually import from China.

A Tactical Examination of the CRC Price Differential

In terms of a more hands-on assessment for buyers looking at importing steel from China, a second look at the spread below takes into account the 25% tariff and $90 per ton in estimated import charges (e.g., freight, trader margin, etc.).

Source: MetalMiner data from MetalMiner IndX(™)

The chart above depicts $90 in importing costs added to the Chinese CRC price only, plus the 25% tariff rate, with the extra 25% added on top only after March 23, 2018.

Adding the import tariff decreases the spread, as shown by the purple line. Subsequently, the tariff triggered a drop in the spread.

At the arrows, we see the differential shift after March 23, 2018, when Chinese prices effectively rose to around $900/st. At that point, the spread dropped significantly, as expected, as shown by the sudden drop in the purple line.

While a spread in China’s favor still remained throughout 2018, into 2019 one could say tariffs leveled the relative price difference. Additionally, U.S. steel prices dropped in line with Chinese prices (plus the tariff and import costs).

With the spread essentially flat, tariffs look to essentially “level the playing field,” as prescribed by their use.

What Does This Mean for Industrial Buyers?

With the Chinese currency weakening once more against the U.S. dollar, MetalMiner expects Chinese imports will start to look increasingly attractive to would-be U.S.-based importers.

However, once we account for the tariffs and import costs, the spread between U.S. and Chinese prices looks effectively negligible.

The fact that U.S. prices for CRC dropped very recently also offset some of the would-be increase in the spread following the weakening of the yuan against the dollar.

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Given that Chinese imports only account for a small percentage of U.S. steel imports at this time, and given the flattening of the spread, the Chinese yuan must depreciate more significantly or U.S. prices must begin to rise once more before we can expect to see a major uptick in imports of Chinese CRC steel.

According to the BBC last week, British Steel, the U.K.’s second-largest steel producer, is knocking on the door of the British government for the second time in as many months looking for support.

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In April, the firm borrowed £120 million from the government to pay an E.U. carbon bill so it could avoid a steep fine, arising when the E.U. arbitrarily withdrew the carbon credits the firm would previously have used to offset such fines. However, the E.U. decided to suspend U.K. firms’ access to such free carbon permits until a Brexit withdrawal deal is ratified.

Having survived that, the firm is apparently now back on the brink of administration and asking for £75 million to help it cope with Brexit-related issues, the news channel says. The firm cites uncertainty over the U.K.’s future trading relationship with the E.U. as a deterrent to European clients to place business with the British steel company.

That may be so, but all European steel producers have been hit with a weak market.

Prices have fallen 16% this year, according to Platts, due to rising competition from eastern Europe and China, in addition to rising costs due to iron ore, electricity and environmental compliance costs.

So far, British Steel looks like a victim of bad fortune.

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President Donald Trump announced today the removal of the U.S.’s Section 232 tariffs on steel and aluminum with resect to NAFTA partners Canada and Mexico.

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The tariffs had remained in place since June 1, 2018, when temporary exemptions for Canada, Mexico and the E.U. were allowed to expire.

Trade officials from the three countries had expressed optimism earlier this week that a deal was near to remove the 25% steel tariff and 10% aluminum tariff.

The move marks a major step toward approval of the United States-Mexico-Canada Agreement (USMCA), meant as the successor to NAFTA.

“I’m pleased to announce that we’ve just reached an agreement with Canada and Mexico and we’ll be selling our products into those countries without the imposition of tariffs, or major tariffs,” Trump told the National Association of Realtors, as reported by USA Today. “Big difference.”

President Donald Trump, Canadian Prime Minister Justin Trudeau and then-Mexican President Enrique Peña Nieto signed the USMCA during the G20 Summit in Buenos Aires late last year. However the three countries’ legislatures must ratify the deal before it can go into effect.

As such, both Mexico and Canada in recent months have indicated that they would be unlikely to approve a deal without removal of the tariffs. Likewise, members of the U.S. Congress, both Republicans and Democrats, also indicated a deal would not be approved unless the tariffs are removed vis-a-vis imports of steel and aluminum from Canada and Mexico.

U.S. Rep. Kevin Brady, the top Republican on the House Ways and Means Committee, lauded the move.

“Canada and Mexico are strong allies and have taken significant steps to assure that trade-distorting and subsidized steel and aluminum from third countries will not surge into the U.S. market,” Brady said.

“With this crucial issue resolved, now is the time for Congress to advance USMCA – delay means the United States continues to lose out on more jobs, more customers for Made-in-America goods, and a stronger economy.  Congress should take up this updated and modernized agreement, which will produce strong wins for America.”

David MacNaughton, Canada’s ambassador to the U.S., hailed the agreement to remove the tariffs.

“This is a victory for both our countries and our highly integrated steel and aluminum industries,” he said in a tweet Friday.

According to a joint statement issued by Canada and the United States, in addition to removal of the tariffs the countries will implement measures to “prevent the importation of aluminum and steel that is unfairly subsidized and/or sold at dumped prices” and “prevent the transshipment of aluminum and steel made outside of Canada or the United States to the other country.”

The joint statement also addresses situations in which imports levels surge.: “In the event that imports of aluminum or steel products surge meaningfully beyond historic volumes of trade over a period of time, with consideration of market share, the importing country may request consultations with the exporting country. After such consultations, the importing party may impose duties of 25 percent for steel and 10 percent for aluminum in respect to the individual product(s) where the surge took place (on the basis of the individual product categories set forth in the attached chart). If the importing party takes such action, the exporting country agrees to retaliate only in the affected sector (i.e., aluminum and aluminum-containing products or steel).”

Canada will also rescind retaliatory tariffs on U.S. products imposed last summer. In addition to a variety of steel and aluminum products, the list of items targeted for retaliatory duties included coffee, yogurt and orange juice.

From the Analysts: Price Impacts of Removal of Section 232 Steel and Aluminum Tariffs for Canada and Mexico

With the removal of tariffs on imports of aluminum from Canada and Mexico, announced today by the U.S. government, MetalMiner anticipates the aluminum U.S. Midwest Premium may finally drop from the current level of around $0.19 per pound due to the easing of restrictions on the flow of prime material cross-border.

Source: MetalMiner data from MetalMiner IndX(™)

As of now, the LME aluminum price does not appear to show any impact from the news, with the price still sitting close to yesterday’s closing value.

Source: FastMarkets

Given the lack of major producers of semi-finished materials in both Mexico and Canada, MetalMiner does not anticipate a flood of materials to hit the U.S. market; therefore, buying organizations can continue to expect tightness for semi-finished aluminum commercial grade sheet and coil. Buying organizations will likely not see large price drops for semi-finished sheet and coil products.

On the other hand, given that the 25% tariff on steel effectively deterred imports of that metal to the U.S., MetalMiner does expect to see an impact on steel prices as imports of steel increase.

Canada serves as the largest exporter of flat rolled steel products, as well as long products, with Mexico taking the No. 3 position. For tubular products, Canada and Mexico take the No. 2 and 3 positions. For stainless steel, Mexico serves as the fourth-largest exporter to the U.S. and Canada does not export stainless to the U.S. in a major way.

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MetalMiner does not expect to see any major changes in domestic stainless steel prices, as most of the global suppliers of stainless steel still face the 25% Section 232 tariff.

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Before we head into the weekend, let’s take a look back at the week that was and some of the metals storylines here on MetalMiner:

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• MetalMiner’s Belinda Fuller’s Raw Steels MMI report runs down the month in the raw steels sector.
• The World Bank recently launched a new fund targeting the development of sustainable mining practices to support renewable energy installation.
• Stuart Burns on steelmaker ArcelorMittal’s decision to idle production at a number of its European facilities.
• U.S.-China trade talks took a turn over the last week.
• Fuller on rising China HRC prices.
• Stocks markets have felt the pain on the heels of the latest chapter in the ongoing U.S.-China trade war saga.
• What’s next for Tata Steel after its planned joint venture with German firm Thyssenkrupp fell apart amid regulatory scrutiny?
• The International Lead and Zinc Study Group forecast a global surplus for lead this year and a zinc deficit.

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This morning in metals news, the iron ore price continues to rise, the U.S. cut its import tariff on Turkish steel in half and copper is on its way to its fifth consecutive weekly loss.

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Iron Ore Rises After Vale Warning

The iron ore price has received several supply-side boosts this year, stemming from operational failures at miner Vale’s operations in Brazil and tropical cyclones in Australia.

An update from Vale regarding its Gongo Soco mine has offered even more support to the iron ore price, which climbed over the $100 per ton mark for the first time in five years, the Financial Times reported.

Earlier this year, a dam breach occurred at Vale’s Corrego do Feijao mine in Brumadinho, killing hundreds. Now, Vale is issuing a warning about a potential breach at its Gongo Soco mine’s Sul Superior dam.

U.S. Cuts Turkish Steel Tariff

Amid a year of diplomatic tension between the U.S. and Turkey, the U.S. last year doubled its Section 232 tariffs on steel and aluminum against the latter, raising them to 50% and 20%, respectively.

This week, however, the White House announced it would cut the steel tariff in half, back to the original 25% rate.

In a statement, the White House said steel imports fell 12% in 2018 compared with the previous year, including a 48% decline in imports of steel from Turkey.

“Given these improvements, I have determined that it is necessary and appropriate to remove the higher tariff on steel imports from Turkey imposed by Proclamation 9772, and to instead impose a 25 percent ad valorem tariff on steel imports from Turkey, commensurate with the tariff imposed on such articles imported from most countries,” the White House said. “Maintaining the existing 25 percent ad valorem tariff on most countries is necessary and appropriate at this time to address the threatened impairment of the national security that the Secretary found in the January 2018 report.”

Copper Down Again

The price of copper is on its way to its fifth consecutive weekly loss, Reuters reported.

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According to the report, LME copper dropped 1.4% this week, moving near a 3 1/2-month low reached on Monday.

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This morning in metals news, the May 18 deadline for the president’s decision on potential new automotive tariffs is being pushed back up to six months, Chinese iron ore futures rose to a record high and the Trump administration reversed an Obama-era pause on mining in a northeastern Minnesota wilderness area.

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Pumping the Brakes

May 18 marked the statutory deadline for President Donald Trump to make a decision regarding whether or not to impose new tariffs on imported automobiles and automotive parts. The decision is prompted by a Section 232 investigation — launched in May 2018 — into whether those imports negatively impact U.S. national security.

However, the decision is being delayed by up to six months, CNBC reported.

China’s Iron Ore Futures Soar

China’s iron ore futures rose to a record high Thursday, Reuters reported, on the back of rising demand and tight supply.

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According to Reuters, the most-trade September iron ore contract on the Dalian Commodity Exchange rose by as much as 4.5% Thursday to reach 678.5 yuan ($98.62) per ton.

Trump Administration Opens Door to Potential Minnesota Copper Mining

The U.S. Interior Department this week renewed two mining leases near the Boundary Waters Wilderness area in northeastern Minnesota, leases which had been suspended under President Barack Obama, Reuters reported.

According to the report, the Bureau of Land Management granted the leases to Twin Metals Minnesota LLC, which is a subsidiary of Chilean copper giant Antofagasta.

Chinese HRC prices increased again this month, while other forms of steel stayed flat overall.

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Source: MetalMiner data from MetalMiner IndX(™)

Looking more closely at HRC — along with CRC, HDG and plate — prices generally remain lower than a year ago on a year-on-year basis, with the exception of HRC due to the recent price increases. However, they all are generally hovering at similar prices levels, with HDG showing the biggest change.

Source: MetalMiner data from MetalMiner IndX(™)

The spread between U.S. HRC and China HRC rests at $122/st, the lowest level since February 2018. However, recently the yuan weakened against the dollar, which will effectively increase the spread once more. A weaker yuan means Chinese prices will be cheaper.

China’s Economic Indicators Flattened in April

China’s Caixin Manufacturing PMI reading decreased unexpectedly for April, dropping to 50.2 from March’s eight-month high of 50.8. With the forecast value at 51.0, the drop surprised the market. Weakness came from decreased output and orders. Additionally, export sales dropped for a second straight month due to weaker overseas demand.

The FXI, an index of China’s large-cap companies, also showed flat growth recently after increasing since the start of the year.

Source: MetalMiner analysis of Yahoo.com data

Crude Steel Production Increases Continued in March

According to the World Steel Association, China produced around 80.3 million metric tons of crude steel during March, an increase of 10% compared to March 2018. For the sake of comparison, the U.S. produced 7.8 million metric tons of crude steel in March, an increase of 5.7% compared with March 2018.

In late April, China’s Iron and Steel Association once again issued a statement indicating the industry faces risks due to ongoing excess capacity, sluggish demand and increased raw material costs.

According to the association, fixed asset investment in the sector increased by 30.6% during Q1 2019. Some of the capacity increase harks back to less environmentally friendly induction furnace production, as companies looking to boost output turned to cheaper production methods. The industry organization came out in a public statement advocating that companies refrain from illicit capacity increases.

According to a recent Reuters report, the organization warned against structural issues in the industry as demand weakens. In addition, profitability suffered due to rising iron ore prices.

China’s Baoshan Iron and Steel Co Ltd (Baosteel) recently announced that profits fell during Q1, the first such drop since 2015. The company cited higher raw material costs and weaker automotive demand as the key causal factors, while demand for steel for infrastructure remained strong.

The company expects to produce 45.46 million metric tons of iron and 48.18 million metric tons of steel in 2019, with an expectation of strong infrastructure demand. Baosteel also expects sales of steel for automotive production to remain a challenge due to the EV transition and due to the impact of tariff-related policy changes.

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China’s automotive sales declined by 11.3% during the first quarter compared with the same period of 2018, according to the China Association of Automobile Manufacturers (CAAM).

It is often tough to discern fact from fiction, particularly when it comes to corporations and politicians.

Two developments this month in Europe raise questions about the relationship and balance of influence between major corporations and government. Are corporations reacting to markets or seeking to stimulate political action is often the question?

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Following President Donald Trump’s imposition of 25% import tariffs on steel products, Europe took action to protect its domestic markets against a flood of foreign steel looking to find a new home by imposing a range of measures to monitor imports and impose safeguards.

According to the Financial Times, a European Commission official claimed the E.U. has some 52 anti-dumping and anti-subsidy measures in force on steel products, saying: “The EU reacted swiftly to the US tariffs on steel and imposed safeguard measures to protect EU industry from trade diversion.”

These measures preserve the traditional levels of imports into the E.U., ensuring fair conditions for a sector struggling with overcapacity. Even so, ArcelorMittal has said the measures are “insufficient” and announced its decision to temporarily cut production at some of its plants on the continent.

According to the Financial Times, the company said that it would idle steelmaking facilities at its Krakow site in Poland and decrease output at Asturias in Spain. In addition, it will slow down a planned increase of shipments by its Italian unit.

In total, these actions will reduce its annualized crude steelmaking production by 3 million tons — equivalent to 7% of its European output last year.

Imports are not the sole reason for the firm’s decision. The group also blamed high energy costs and increased prices for carbon credits, which polluters must use to compensate for emissions under a Brussels scheme aimed at curbing climate change. Foreign suppliers, of course, do not have to pay for carbon credits, which is another gripe of the firm; the firm would like to see a “green” tax on imports, equivalent to the carbon charges E.U. producers face, to level the playing field.

The E.U. produces 170 million tons of steel a year, yet remains heavily dependent on imports, which have the effect of dragging down market prices. As such, domestic producers frequently struggle to make a profit.

So bad had the situation got for German group ThyssenKrupp that it has been working to separate its steel and capital goods divisions for the last few years. Central to this strategy was the merger of its steel division with Tata’s European operations to create what would be the second-largest steel group in Europe after ArcelorMittal.

According to the FT, Margrethe Vestager, E.U. competition commissioner, had been taking evidence from consumers, particularly in the automotive sector, who fear the reduction in competition would give the remaining steel groups too much pricing power.

But despite working on the plan since 2017, they were scrapped last week after regulatory scrutiny from the European Commission made a deal untenable.

E.U. regulators forced ArcelorMittal to make significant divestments to gain regulatory approval for its acquisition of Italian steelmaker Ilva last year and demanded further concessions from ThyssenKrupp and Tata in return for approval.

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Who wins in politically charged Brussels remains to be seen.

With the European elections due next month, there is even more intrigue and jockeying going on in the corridors of power than normal.

The Raw Steel Monthly Metals Index (MMI) dropped 1.2% this month, down to an index reading of 80.

Weakness in the index once again came from U.S. domestic steel prices.

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U.S. prices showed weakness of late with HRC, CRC, HDG and plate prices dropping slightly again for the second month in a row.

Source: MetalMiner data from MetalMiner IndX(™)

This brings prices back down to around February levels, when these four forms of steel initially turned around from recent price declines (after reaching historical highs in April 2018).

A Comparison of U.S. and China Steel Prices

The spread between U.S. HRC and Chinese HRC narrowed between March and April, dropping to $161/st from $183/st in March.

Based on preliminary May numbers, the gap looks poised to close further, with a preliminary drop to $120/st based on early May prices.

U.S. HRC Prices and the U.S.-China Price Spread

Source: MetalMiner data from MetalMiner IndX(™)

Compared to HRC, the spread between CRC prices remains relatively flat, with a drop of just a few dollars between March and April. However, the gap looks to narrow more significantly based on early May prices, with a gap of $223/st (down from April’s $240/st price difference).

Waning Demand in Steel-Intensive Sectors

Construction and housing showed some weakness recently, according to the most recently available U.S. Census Bureau figures.

Total construction spending for March dropped below February by 0.9%, totaling around $1,228 billion. Additionally, the sector looks flat since last year, with this March’s figure coming in below last March, when expenditures on construction totaled $1,293 billion, marking a 0.8% drop.

Q1 expenditures look essentially flat compared with last year, with a 0.2% increase.

The durable goods sector has showed strength, with new orders up for four of the previous five months through March, according to the U.S. Census Bureau, with orders for transportation equipment growing the most.

Reuters reported lower auto sales for April, with the sales decline attributed to rising prices and fewer incentives offered, especially on lower-end models.

In addition, consumers turned to the used market in larger numbers this year due to higher prices, as costs of new vehicles increased this year.

What This Means for Industrial Buyers

Steel prices showed weakness lately, with the monthly index on a gentle decline during the past two months.

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Actual Raw Steel Prices and Trends

U.S. HRC futures spot and 3-month prices both declined this month, in excess of 5%, both at $654/st.

Korea’s scrap steel price, currently at $150/mt, dropped significantly after a similarly sizable increase last month, with both the increase and subsequent drop in excess of 16%.

Chinese prices showed some strength, although not across the board. Most notably, Chinese HRC prices increased by 5% to around $600/mt, while steel billet increased over 3% to $551/mt.

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This morning in metals news, the U.S. on Friday raised tariffs on a wide variety of imports from China, a long-considered European joint venture does not appear likely to come to fruition and March steel imports fell 7%.

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Tariff Tensions

As promised earlier this week, the U.S. today raised the tariff rate on a wide variety of Chinese imports from 10% to 25%.

Despite general sentiment in recent weeks indicating the U.S. and China were nearing a deal, President Donald Trump this week said the U.S. would raise the tariff rate on Friday if a deal was not reached.

The deadline came and went with no deal, thus seeing the increase on the duties assessed to the $200 billion in imports from China announced in September 2018.

The Chinese Ministry of Commerce said it would respond to the U.S. tariff increase with “necessary countermeasures.”

Tata-Thyssenkrupp JV Falls Apart

Tata Steel and Thyssenkrupp last year agreed to merge their European operations, forming what would be Europe’s second-largest steelmaker.

However, the proposed joint venture has been under scrutiny from Europe’s competition authorities, which launched an investigation in October 2018 over concerns the merger would result in fewer choices and higher prices for consumers.

Now, over six months later, it appears the joint venture will not come to fruition.

On Friday, Tata Steel said “the feedback from the Commission based on the market test it has undertaken suggests that it is unlikely to clear the proposal in spite of the significant remedies offered.”

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U.S. Steel Imports Fall

U.S. imports of steel totaled 2.27 million tons in March, according to the American Iron and Steel Institute (AISI), marking 6.6% decrease from the February import total. Meanwhile, the U.S imported 8.18 million tons of steel in the first quarter, down 5.9% from Q1 2018.

Steel import market share in March was an estimated 19% and 21% for the first quarter.