In the week when the world pensively awaits the U.S.’s Section 232 judgement — a move promised by President Donald Trump during his election campaign and aimed largely at China — a recent Reuters report on Chinese steel exports makes interesting reading.

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Source: Reuters

China’s steel exports have been sliding for months.

According to Reuters, China’s January-May export total was 34.2 million tons, down 26% from last year’s equivalent period and the lowest level since 2014. The year drop in export tonnage amounted to 12.1 million tons — roughly equivalent to Canada’s production over a full 12-month period, Reuters reported.

Yet bizarrely enough, China produced 72.78 million tons of steel in April, an all-time record Reuters says. The following month, China tallied the second-highest monthly total at 72.26 million tons.

Meanwhile, profits on products like steel rebar have surged to $162 dollars per ton this month, as inventory levels have fallen and demand has remained robust (particularly from the construction sector). Investment in real estate is running at an annual growth rate over 6%, Reuters reports. Although there are fears of overheating in some regions, real estate has been stronger for longer than analysts outside the market expected.

As we noted in a piece yesterday reviewing the 232 probe, China’s share of the U.S. import market for steel products has been falling for the last couple of years, mainly due to successful anti-dumping cases. China no longer appears even in the top 10.

So, what exactly is going on in China with respect to steel production and demand? Can we take it that Beijing’s actions to tackle excess steel production have finally resolved China’s deflationary impact on global steel markets?

First, Reuters notes that China has been quite successful in permanently closing previously shuttered steel plants, as well as in in tackling older and more environmentally damaging mills. Those actions combined has resulted in the removal of some 100 million tons of capacity.

In addition, Beijing’s focus on environmental issues has hastened the closure of induction furnaces, which use scrap rather than iron ore as their input and are often labelled as producers of sub-standard products (and, hence, unapproved). Unapproved equates to illegal by Beijing — as such, their production and their closures does not figure in the normal statistics. A significant proportion of China’s rebar production came from these mills, which explains the record profits being earned by surviving state-owned manufacturers of the same products as they capitalize on the removal of these scrappy competitors.

Unfortunately, nobody expects China’s construction market to continue at the current pace and a slowdown is in the forecast for the second half of the year.  Replenishment of low inventory levels will maintain steel mill production runs for a while, but as Reuters notes, China’s mills have a notoriously poor record in adjusting output to demand. So, we should expect that as demand eases, inventorying levels will rise, prices will fall, and access production may well begin to leak through exports onto the international market.

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While America’s anti-dumping legislation will largely protect that market from Chinese material, the rest of the world may find itself under pressure next year from greater availability of Chinese steel at falling prices, further fueling an already rising tide of protectionist sentiment in both developed and emerging markets.

China is far from alone in worrying about an investigation by the U.S. Department of Commerce into the impact of imported steel on the U.S. steel industry (due to be announced this week).

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The Section 232 investigation is the result of a campaign pledge by President Donald Trump to protect domestic steelmakers against foreign steel imports. Section 232 uses as its test whether imports have been detrimentally harmed the U.S. ability to produce steel for its defense industry, and while it is not country-specific there was little secret at whom it was primarily aimed.

The worry in Europe, generally, and in the U.K. in particular, is that supplies from the region will be caught up in a blanket Section 232 ruling, applying onerous duties that could hit some local steelmakers disproportionately hard.

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The landmark North American Free Trade Agreement (NAFTA) went into effect 23 years ago — unsurprisingly, many in the metals industry are eyeing reforms to modernize the long-standing agreement signed by the U.S., Canada and Mexico.

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In late April, President Donald Trump signed an executive order focusing on trade-agreement violations and abuses, directing the Department of Commerce and the United States trade representative (USTR) to study the U.S.’s free-trade agreements. One month ago, the office of the USTR notified Congress of the administration’s intention to renegotiate NAFTA.

In recent months, Trump has indicated he is willing to terminate the agreement if renegotiation efforts don’t go anywhere. In April, the president said he was “psyched” to terminate the deal, but ultimately had a change of heart after speaking with Canadian Prime Minister Justin Trudeau and Mexican President Enrique Peña Nieto, per media reports.

That came three months after Trump pulled the U.S. out of the Trans-Pacific Partnership (TPP), negotiated by his Democratic predecessor Barack Obama.

When will renegotiation actually happen? The timeline isn’t clear. On Monday, Secretary of Commerce Wilbur Ross told reporters renegotiation might not happen until next year.

As uncertainty clouds NAFTA’s future, domestic metals organizations have weighed in on the ways in which they believe the 23-year-old agreement can be improved.

Metal Industry Hopes to Keep Positives, Target Problem Areas

Players in the metals industry have spoken out about how they want to see 23-year-old trilateral trade agreement modified for this new age.

In a filing June 12, The Aluminum Association, addressing U.S. Trade Representative Robert Lighthizer, urged that NAFTA should be renegotiated in a way that modernizes it without compromising the benefits of the original agreement.

In the letter to Lighthizer, The Aluminum Association underscored three ways to strengthen the agreement:

• Improving and strengthening customs procedures and cooperation to facilitate the movement of aluminum and aluminum products among the United States, Canada, and Mexico
• Working with the Canadian and Mexican governments to ensure that “NAFTA preferences are available only to aluminum articles that truly originate in the territory of a NAFTA party” and that “unscrupulous producers and exporters operating outside the NAFTA region are not improperly claiming preferential treatment under NAFTA by either making fraudulent country of origin claims or incorrectly classifying the article at issue”
• Negotiating common disciplines on the operations of State-Owned Enterprises (SOEs), which “often benefit from favorable government policies and subsidies that create significant market distortions”

Regarding the third point, the release specifically zeroed in on China, noting “massive overcapacity” encourages unfair trading practices.

In addition to the aluminum industry, steel groups are weighing in on a potential NAFTA face-lift.

The American Iron and Steel Institute (AISI), like The Aluminum Association, stressed in a letter to Edward Gresser, chair of the Trade Policy Staff Committee, that NAFTA has yielded “significant benefits” but could be modernized after nearly a quarter of a century since its passage.

NAFTA has been critical to the steel industry, as 90% of all U.S. steel mill product exports went to Canada or Mexico in 2016, according to the June 12 AISI letter.

U.S. steel exports to Canada and Mexico grew rapidly following the passage of NAFTA. Source: American Iron and Steel Institute

Like The Aluminum Association, the AISI cited rules-of-origin issues, global overcapacity and conduct of SOEs as issues needing assessment in a revamped agreement.

In addition, currency manipulation was a point of emphasis.

“Currency manipulation makes exports more expensive, imports cheaper, and can subsidize cheaper prices for exports to third-markets,” the AISI letter states. “The International Monetary Fund (IMF) has provisions against currency manipulation, but the lack of an enforcement mechanism has limited their effectiveness.”

The AISI also suggested possible improvements to “streamline” customs procedures and “to ensure that manufacturers can ship and receive steel in an efficient manner.” Part of that streamlining, AISI argues, includes updating border infrastructure.

So, in many ways, U.S. steel and aluminum seem to be on the same page with respect to NAFTA — that is, that there’s room for improvement.

NAFTA Renegotiation a Hot Topic

The USTR sent out a notice May 27 seeking public comments on the topic of NAFTA renegotiation. The period for public comments closed June 12, but not before 1,396 comments were submitted.

Clearly, NAFTA is a very important subject to many people and industry organizations. While the minutiae of free-trade agreements can sometimes make the subject seem opaque, the outcomes are decidedly human, as jobs and livelihoods are often at stake.

Leo Gerard, international president of United Steelworkers, submitted a public comment in support of renegotiating NAFTA, provided it is “along the lines identified in the comprehensive approach identified in the negotiating framework document submitted on behalf of the USW and other unions by the AFL-CIO.”

“We have felt the negative impact of the NAFTA first hand since it entered into force more than two decades ago,” Gerard wrote. “Tens of thousands of plants have shut down, millions of workers have lost their jobs and many other workers have seen their compensation stagnate or decline as a result of NAFTA.”

Looking Ahead

What’s next for the process? A public hearing will be held at 9 a.m. Tuesday, June 27, in the Main Hearing Room of the United States International Trade Commission, 500 E Street SW., Washington D.C.

As demonstrated by the volume of public comments, there is a wide range of suggestions being offered with respect to NAFTA renegotiations.

One thing, however, is clear: Many of the interested parties want change of some kind.

Free Download: The June 2017 MMI Report

Our June MMI Report is in the books, and there’s a lot to unpack.

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Out of 10 MMI sub-indexes, four posted no movement from our May MMIs. That wasn’t true for all, though, as the report shows promising signs for construction (compared with last year). Like the Construction MMI, growth in the automotive sector slowed a bit, but still performed better than at the same time last year.

In terms of policy, several things happening around the world will have macroscopic effects on these industries.

Domestically, the Trump administration’s ongoing Section 232 investigation into steel imports will have ripple effects at home and abroad (namely in the Chinese steel market).

In the U.K., the recent shocker of a parliamentary election leaves question marks regarding the way forward — is it going to be a “hard” or “soft” Brexit? Does Theresa May have the political capital to make a hard Brexit happen? It seems unlikely now, but that situation continues to develop. In terms of business and metal markets, whichever iteration of Brexit takes hold will have effects on the ways in which British companies do business with Europe.

In China, many analysts expect growth to slow in the second half of 2017 as the government aims to put the squeeze on credit growth. (Moody’s recently downgraded China’s credit rating for the first time since 1989.)

While several MMI sub-indexes did not go up or down this past month, there was still quite a bit going on in each sector. You can fill yourself in by downloading our June MMI Report, which offers all of the storylines and trends for our 10 MMI sub-indexes, presented in one convenient place.

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An article this week in Bloomberg catches the eye with a title announcing “hard-to-believe” steel shortages in China.

After years of excess supply, over-capacity and atrocious levels of resulting pollution, it would be a bit much to hear the country was short of steel — but that is what Fortescue’s CEO Nev Power is quoted as saying in an interview with Bloomberg Television in Beijing on Monday.

The gist of his claims? Closures of induction furnaces are creating a shortage of rebar, not because market demand is strong but because supply has become constrained, Power explained.

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Actually, the story is not a new one.

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The June Stainless MMI follows its prior three-month trend, dropping 3 points again this month to end up at a value of 54. With the 5.3% loss, the sub-index is coming back to the same levels as one year ago.

The steel (and stainless steel) industry has always been strongly influenced by political issues. Now that the trade cases have largely been decided, the Trump administration’s Section 232 investigation will likely have an impact on domestic steel markets, including the stainless steel sector. Recommendations will likely be released in July.

Steel capacity utilization has increased this past month, according to the American Iron and Steel Institute (AISI). We’ve also seen a healthy manufacturing PMI, indicating positive industrial development.

Notwithstanding, the Chinese Caixin manufacturing PMI index hit an 11-month low. Despite strong growth indicators here in the U.S., steel market participants should carefully monitor the powerful link between the price of steel in China and that in the United States. A rebound in the Chinese economy — and consequently in the steel market — might result in increased steel (and stainless steel) prices. Conversely, the opposite is also true.

Nickel prices have also fallen this month due to Philippine mines reopening, together with increased Indonesian exports.

What This Means for Industrial Buyers

Stainless steel prices usually move drastically in one direction and then hold steady for a little while. While we watch a possible price correction, buying organizations might want to follow the market closely to identify possible buying opportunities should prices continue to decline.

Actual Stainless Steel Prices and Trends

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Two significant developments on the steel front took place last week that will ensure that India continued on its chalked-out path of global dominance in steel production.

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Jindal Steel and Power Limited (JSPL) launched its 6 million ton per annum (MTPA) integrated steel plant at Angul in the Odisha province. The plant, one of the biggest in India, was dedicated to the nation on May 27, 2017. Naveen Patnaik, the chief minister of Odisha, said the plant would lead to an addition of 20% of steel to India’s ultimate goal of steel manufacturing capacity of 300 MTPA by 2030.

For JSPL, this was a major milestone, too. According to Chairman Naveen Jindal, the 6 MTPA steel plant at Angul was a major landmark in defining the future growth trajectory of JSPL. The latter is part of US $18 billion diversified O.P. Jindal Group.

Spread over 3,500 acres, JSPL’s integrated steel plant at Angul will provide direct employment opportunities to over 30,000 people and indirect employment to over 100,000 individuals.

JSPL’s capacity addition would further enhance the cost efficiencies of steelmaking — a continuous focus area of JSPL’s business philosophy, adding to its overall plan of debt reduction, said some of its top honchos.

In another development on the steel front, ArcelorMittal, the world’s largest steel producer, said it has agreed to make concessions to Steel Authority of India Ltd (SAIL) to jumpstart a delayed US $897 million automotive joint venture.

ArcelorMittal and SAIL, according to a report by news agency Reuters, had agreed to a proposal to export a fifth of the auto-grade steel they aimed to make as part of the joint venture.

Incidentally, the proposal was one of several made by Indian government think tank NITI Aayog, which is mediating talks on commercial terms for the delayed venture.

At present, a bulk of the high-grade steel used by India’s vehicle industry was imported from countries such as Japan. With this new joint venture all set to take off, reliance on such imported steel would fall drastically, experts say.

The Reuters report quoted a company spokesperson as saying that in the interest of the strategic partnership, some concession from ArcelorMittal on technology had been extended.

Experts believe if the deal does come to fruition, it would help SAIL compete with local rivals, such as JSW Steel and Tata Steel, which have foreign partnerships to make steel for the car industry.

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Last month, China announced plans to build a new megacity from scratch. Since the city will be twice the size of New York City, analysts expect the project to require huge amounts of steel and other industrial metals such as aluminum and copper.

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According to Citi Research analysts, 12-14 million tons of extra steel will be required annually to build this new development. Since the country’s current domestic demand is about 700 million tons, that would lift Chinese steel demand by 2% per year over the next 10 years.

But are the analysts correct? Should we expect a steel demand boost over the next 10-15 years?

Although building this city from scratch will indeed require a lot of steel, analysts are making the mistake of missing the forest for the trees. The key driver for steel demand in China is the net migration from the countryside to cities. It doesn’t really matter whether China builds a new megacity or it expands its city limits. The key measure is the rate of urbanization in the country at a national level.

Urban and rural population in China. Source: China’s Economy book by Arthur R.Kroeber

China’s urban share has grown quickly over the past two decades since its rural population peaked in 1995. Last year, China’s urban population share reached 57.9%. The share, however, is still small given the country’s income level. Read more

As I pointed out two weeks ago, U.S. steel prices had no choice but to decline as the spread between U.S. and international prices had widened to unsustainable levels.

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That’s exactly what I’ve seen so far in May, and I suspect that the recent price decline is just the beginning of a deeper correction that could easily extend to the rest of the second quarter.

U.S. hot-rolled coil prices fall in May. Source: MetalMiner IndX

Hot-rolled prices have fallen around 5% since they peaked in April. Meanwhile, steel prices in China have started to stabilize after a slump during March/April. As the chart below shows, the price spread appears to have peaked near the same levels as it did last summer. U.S. steel prices will likely continue to fall, bringing this price arbitrage down.

Hot rolled coil price spread US vs China. Source: MetalMiner IndX

U.S. Steel Imports Hit a Two-Year High

Although the U.S. doesn’t import steel directly from China, Chinese steel prices set the floor for international prices. Therefore, when China’s steel prices fall, imports become more appealing to U.S. buyers. That’s exactly what’s happening now. In March, U.S. steel imports rose 31% year-over-year, hitting the highest level since May 2015. Read more

There have been some doubts over India’s stated plans to triple its steel production capacity by 2030. The Indian cabinet recently passed a revamped policy to the extent.

While some have welcomed the document, other sector experts have expressed uncertainty over the projections in the policy.

Free Download: The May 2017 MMI Report

Ratings agency Crisil, for example, said in a statement that the ambition to add 182 million tons of new steel capacities over the next 14 years under the National Steel Policy was unlikely to be achieved. Crisil’s doubts seem logical. After all, India has managed to add capacity at the annual rate of 55 million tons in the last decade.

The National Steel Policy 2017 projects crude steel production capacity of 300 million tons by 2030-31 from the present level of about 120 million tons and per-capita consumption of 158 kilograms of finished steel as against the current consumption of 61 kilograms. The policy also sees an increase in domestic availability of washed coking coal by 2030-31.

Crisil Research said that it expects 24-26 million tons of steel capacities to be added over the next five years, leading to aggregate steel capacity to rise to 140-145 million tons by 2021-22. Beyond this, Crisil said, the key factors that would determine the pace of capacity addition would be demand growth, continued government support, and pricing environment against the backdrop of global overcapacity led by China. Crisil has also projected a 6-6.5% growth in steel demand in India over the next five years, lower than the 7% annual growth rate projected by the government till 2030. Read more