This morning in metals news, British Steel failed to secure emergency funding it had requested to stave off its collapse, tariffs have depressed steel import volumes into the Port of Tampa Bay and iron ore prices continue to rise.
Despite attempts to save it from collapsing, troubled steelmaker British Steel is set to be liquidated after an order from the High Court, Reuters reported.
The steelmaker has pointed to the uncertainty of the business climate amid the ongoing Brexit saga as a major source of its problems. The company had previously secured an emergency government loan of £120 million to pay its E.U. carbon bill, and more recently requested another loan to keep it afloat.
Steel Imports Down at Port of Tampa Bay
The Trump administration’s Section 232 tariff on steel saw U.S. imports of steel drop significantly last year, falling 12% year over year.
For example, steel imports coming into the Port of Tampa Bay fell 19% during the October-March period compared with the same six-month period the previous year, the Tampa Bay Times reported.
Iron Ore Continues to Rise
Prices of the steelmaking raw material iron ore’s mid- and higher grades reached multiyear highs this week, Business Insider Australia reported.
The E.U. approved steel safeguards in January that would extend to 2021 at the latest, an effort by the bloc to mitigate the impact of steel supplies diverted as a result of the U.S.’s Section 232 tariff on steel.
More recently, a proposed joint venture between India’s Tata Steel and Germany’s Thyssenkrupp — agreed to by the firms in September 2018 — fell apart amid regulatory scrutiny from the European Commission. The joint venture would have merged the two firms’ European operations, creating Europe’s second-largest steelmaker (behind only ArcelorMittal).
This week, British Steel is reportedly facing the risk of falling into administration, as it came to the government again in request of emergency assistance. The steelmaker, the U.K’s second-largest, has blamed the uncertainty caused by Brexit for much of its ills.
In addition, slowing economic growth and rising raw material costs have impacted the steel sector. The iron price has soared past $100 per ton, aided by supply-side disruptions in Brazil and Australia this year.
According to the Organization for Economic Co-operation and Development (OECD), the global company is expected to achieve “moderate but fragile” growth over the next two years.
“Vulnerabilities stem from trade tensions, high policy uncertainty, risks in financial markets and a slowdown in China, all of which could further curb strong and sustainable medium-term growth worldwide,” the OECD said.
According to the European Steel Association (EUROFER), a number of factors are serving as a drag on the European steel sector’s fortunes.
“Surging import volumes, stalling economic growth, high and volatile raw material costs and sharply growing carbon costs are coming together to form a perfect storm that could knock the European steel industry back into a period of severe crisis,” the association said in a release last week. “The impact of this combination of factors has already begun to affect European steel producers, with facilities being idled and production being cut back significantly across Europe.”
MetalMiner’s Stuart Burns covered ArcelorMittal’s decision to idle or cut production at its facilities in Krakow, Poland, and at Asturias in Spain. As Burns noted, in announcing the moves, ArcelorMittal characterized the E.U.’s steel safeguard measures as insufficient. The production cuts amount to 3 million tons of annualized production, or 7% of ArcelorMittal’s European output last year.
EUROFER forecasts a gloomy 2019 for global steel demand, which it estimates will fall by 0.4% this year after increasing 3.3% in 2018.
“This stalling demand coincides with import volumes rising at an ever faster rate. These grew by 12% year-on-year in 2018 – 2017 was already a record – and 2019 might see volumes increase even further,” EUROFER Director General Axel Eggert. “This import growth underlines the absurdity of a safeguard which includes programmed periodic ‘relaxations’ of 5%: in February and July 2019, and again in July 2020 – even though demand is expected to be flat. This is an overgenerous gift to steel exporters to the EU.”
Eggert underscored the steel safeguard measures’ ineffectiveness and referred to the threat to the European steel sector in existential terms.
“Despite being well-intentioned, the current steel safeguard framework has not prevented surging imports,” he said. “EU producer margins are on the floor, which undermines their ability to invest in skills, technology and low-carbon development. The alarm bells are already ringing and action is required today to prevent this flood washing the sector away.”
This morning in metals news, Britain’s No. 2 steelmaker is at risk of collapsing, U.S. aluminum maker Century Aluminum responded to the Trump administration’s decision to remove the Section 232 tariffs for Canada and Mexico, and rare earths could prove to be a weapon in China’s arsenal as trade tensions with the U.S. continue.
As MetalMiner’s Stuart Burns wrote yesterday, British Steel, Britain’s second-largest steelmaker, is in trouble, as evidenced by its multiple requests for government assistance to stay afloat.
The firm has pointed to the uncertainty engendered by Brexit as a major factor contributing to its woes.
The situation appears to be dire; according to Reuters, the company could collapse without an emergency £30 million loan. The report cites a source who states EY administrators could be appointed as early as Wednesday if the firm cannot secure the loan.
“One key aspect of it is you’ll see there’s a mechanism to ensure that Canada and Mexico don’t exceed their historical levels of imports or surge over their historical levels of imports. And this is important because it means it allows room for the U.S. industry to continue to grow,” Gary was quoted as saying.
Rare Earths Could Take Center Stage
China boasts overwhelming control over the global rare earths sector, which makes it no surprise that the Trump administration opted to remove rare earths from its final $200 billion tariff list last year.
Rare earths are coveted for their use in things like cellphones, laptops and electric vehicle batteries, among other high-tech applications.
The U.S.’s dependence on China for rare earths could be used against it. This is particularly true on the heels of the recent deterioration in the terms of trade negotiations between the two countries, as the U.S. raised tariffs on $200 billion in Chinese goods, while China retaliated with tariffs on $60 billion in U.S. goods.
According to the report, adjusted year-to-date production through May 18 reached 37.5 million net tons at a capability utilization rate of 81.8%, which marked a 6.5% increase from the 35.2 million net tons produced during the same period last year. During that period in 2018, the capacity utilization rate reached 76.6%.
In the week ending on May 18, 2019, domestic raw steel production reached 1.9 million net tons at a capacity utilization rate was 81.6%, up 5.1% from 1.8 million net tons produced during the week ending May 18, 2018 (when the capacity utilization rate was 77.1%).
Production for the week ending May 18, 2019, was down 1.4% from the previous week ending May 11, 2019, according to AISI. Production for the week ending May 11, 2019, reached 1.9 million net tons at a capacity utilization rate of 82.8%.
Production by region for the week ending May 18, 2019, broke down as follows:
North East: 197,000 net tons
Great Lakes: 738,000 net tons
Midwest: 201,000 net tons
Southern: 698,000 net tons
Western: 66,000 net tons
In policy news, last week President Donald Trump announced the U.S. would remove its Section 232 tariffs with respect to steel and aluminum imports from Canada and Mexico. The tariffs had been in place for the U.S.’s NAFTA partners since June 1, 2018, when initial temporary exemptions for those countries were allowed to expire (the E.U.’s temporary exemption also expired at that point).
The imposition of the Section 232 tariffs saw to a gradual decline in U.S. steel import market share. U.S. imports of steel fell 12% in 2018 compared with 2017, with import market share reaching 23% in 2018.
While much attention is given to China and its steel overcapacity, it is a minor source of steel for the U.S. According to the International Trade Administration, Canada, Mexico and Brazil were the top three sources of steel for the U.S. last year.
Despite the tariffs, Canada was the largest single-country source of steel imports, accounting for 19% of U.S. steel imports last year, followed by Brazil (14%) and Mexico (11%). However, by volume, U.S. imports from Canada fell 1% in 2018 compared with the previous year and increased 9% from Mexico.
“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,” MetalMiner analysts explained Friday on the heels of the news the tariffs would be remove for Canada and Mexico.
“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.”
Canada accounted for 32% of U.S. imports of flat products and 21% of long products last year, in both cases constituting the largest piece of the pie in each steel product category. In addition, 15% of the U.S.’s pipe and tube imports came from Canada last year — behind only South Korea (16%) — while Mexico accounted for 13%.
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.
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.
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.
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.
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.
“As soon as a movement was detected on the northern slope of a pit at the Gongo Soco mine in Barão de Cocais, Minas Gerais, paralyzed since 2016, Vale immediately informed the competent authorities and has taken a series of necessary measures to update the region’s population about the situation in the pit and at the Sul Superior dam, which is approximately 1.5 km from the mine area,” Vale said in a prepared statement.
“It should be noted that there are no technical elements so far that point towards an eventual slide of the northern slope of the Gongo Soco Mine, which could act as a trigger for a breach of the Sul Superior Dam. Even so, Vale is reinforcing the alert and readiness level for a worst-case breach scenario.”
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.
Automakers and consumers fearing a new U.S. tariff on imported automobiles and automotive parts breathed a sigh of relief on Friday when President Donald Trump announced he would delay his decision on the matter for up to six months.
The U.S. Department of Commerce launched a Section 232 investigation related to imports of automobiles and automotive parts in May 2018. Commerce Secretary Wilbur Ross submitted a report to the president in February, beginning the 90-day period by which the period is required to make a decision.
However, a day before the May 18 deadline, the president announced he would delay the decision and issued a proclamation directing United States Trade Representative Robert Lighthizer to begin a negotiation period with the European Union, Japan and “any other country the Trade Representative deems appropriate.”
“United States defense and military superiority depend on the competitiveness of our automobile industry and the research and development that industry generates,” the White House said. “The negotiation process will be led by United States Trade Representative Robert Lighthizer and, if agreements are not reached within 180 days, the President will determine whether and what further action needs to be taken.”
The investigation, like the probe of steel and aluminum imports, is predicated on determining whether the import levels constitute a threat to U.S. national security. The aforementioned proclamation notes domestic auto producers’ market share has fallen from 67% in 1985 to 22% in 2017, and that the volume of imports doubled during that period.
Senate Finance Committee Chairman Chuck Grassley, R-Iowa, welcomed the delay in the tariffs.
“I’m glad President Trump decided to delay these tariffs,” Grassley said in a prepared statement. “As the president knows, I’m not a fan of tariffs. And I have serious questions about the legitimacy of using national security as a basis to impose tariffs on cars and car parts.
“I’ll continue to strongly support the Trump administration’s pursuit of trade negotiations with the European Union and Japan. I encourage Ambassador Lighthizer to pursue comprehensive trade agreements that benefit all Americans, including farmers, manufacturers and service providers.
“In the meantime, I’m continuing to work on bipartisan legislation to update Section 232 to give Congress, which has constitutional authority to regulate international commerce, a meaningful role in the process.”
This morning in metals news, President Donald Trump has instructed the United States Trade Representative to begin the process of raising tariffs on the remaining approximately $300 billion in Chinese imports, Germany’s Thyssenkrupp is looking for new partners after the planned merger of its European operations with Tata Steel fell apart and China announced retaliatory tariffs against the U.S.
USTR to Begin Process to Raise Tariffs on All Imports from China
In a move that delivered a shock to the ongoing trade talks between the U.S. and China, President Donald Trump opted to more than double the tariffs on a previously announced set of $200 billion in Chinese goods.
As talks continued last week, Trump set a Friday, May 10 deadline for a deal, threatening to raise the tariff rate on those goods from 10% to 25%. The deadline came and went without an agreement; as such, the tariff rate increased as of 12:01 a.m. ET Friday, May 10.
However, the escalation might not be stopping there.
Trump previously said he was considering imposing tariffs on essentially all remaining imports from China, which the Office of the United States Trade Representative (USTR) confirmed in a statement.
“Earlier today, at the direction of the President, the United States increased the level of tariffs from 10 percent to 25 percent on approximately $200 billion worth of Chinese imports,” the USTR said. “The President also ordered us to begin the process of raising tariffs on essentially all remaining imports from China, which are valued at approximately $300 billion.”
Thyssenkrupp Moves Forward After Tata Merger Collapse
German steelmaker Thyssenkrupp is looking for new partners after its planned 50-50 joint venture with Tata Steel collapsed under scrutiny from European competition authorities, who were concerned the European JV would yield higher prices and fewer choices for consumers.
Thyssenkrupp CEO Guido Kerkhoff told the Handelsblatt business daily’s online edition that the firm is assessing consolidation options, but that he doesn’t foresee the possibility of “bigger mergers” due to the “current position of the European Commission,” Reuters reported.
China Strikes Back
On the heels of the U.S.’s tariff rate increase, China vowed last week to take “necessary countermeasures” in response.
Last year, China imposed a total of $110 billion in tariffs on imports from the U.S. in response to the U.S.’s tariffs.
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%.
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.”
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.