Articles in Category: Macroeconomics

June housing starts in the U.S. fell 0.9% compared with May levels, according to the monthly housing start report by the U.S. Census Bureau and the Department of Housing and Urban Development (HUD).

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June housing starts reached a seasonally adjusted annual rate of 1,253,000, down from the revised May estimate of 1,265,000.

However, June starts increased 6.2% on a year-over-year basis, up from June 2018’s rate of 1,180,000.

Single-family starts hit a rate of 847,000, up 3.5% from the May’s 818,000.

Meanwhile, the rate for units in buildings with five units or more reached 396,000.

Building Permits

Privately owned housing units authorized by building permits reached a seasonally adjusted annual rate of 1,220,000 in June, marking a decrease of 6.1% from May’s 1,299,000. June 2019 building permits also declined 6.6% on a year-over-year basis from June 2018’s rate of 1,306,000.

Permits for single-family homes jumped 0.4% from the previous month, rising to a rate of 813,000.

Permits for units in buildings with five units or more reached 360,000, according to the report.

Housing Completions

Privately owned housing completions reached an annual rate of 1,161,000 for June, according to the Census and HUD report.

The June completions figure marked a 4.8% drop from the May total and a 3.7% drop on a year-over-year basis.

In addition, single-family housing completions, at 870,000 in June, fell 1.8% from the previous month. The June rate for buildings with five units reached 283,000.

Pending Home Sales

According to the National Association of Realtors (NAR), pending home sales increased 1.1% in May over the previous month.

NAR’s Pending Homes Sales Index, which is based on contract signings, jumped 1.1% to 105.4, up from 104.3 in April.

Lawrence Yun, NAR’s chief economist, pointed to lower mortgage rates in explaining the uptick in sales.

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“Rates of 4% and, in some cases even lower, create extremely attractive conditions for consumers,” Yun said in an NAR release. “Buyers, for good reason, are anxious to purchase and lock in at these rates.”

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This morning in metals news, Federal Reserve Chairman Jerome Powell hinted interest rate cuts could be coming later this month during testimony before the House of Representatives, Southern Copper Corp received authorization from the Peruvian government to build a $1.4 billion mine and U.S. steel shipments in May fell 0.8% from the previous month.

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Fed Chairman Testifies Before House

In much-anticipated testimony by Federal Reserve Chairman Jerome Powell, Powell cited trade tensions and the global economic outlook as factors weighing on the U.S. economy, CNN reported.

According to the report, he also hinted at possible interest rate cuts this month. Powell has come in for criticism from President Donald Trump for raising interest rates back in December, arguing the increase has prevented further economic growth.

Powell is scheduled to testify again Thursday before the Senate.

Southern Copper Gets OK on Long-Delayed Mine

Southern Copper received authorization from the Peruvian government to move forward with a planned $1.4 billion mine, Bloomberg reported.

According to the report, construction of the mine has been delayed since 2010.

May Steel Shipments Down

U.S. steel shipments fell 0.8% in May compared with the previous month, according to the American Iron and Steel Institute (AISI).

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May shipments totaled 8.14 million net tons, down 0.8% from the 8.21 million net tons shipped in April but up 1.1% from the 8.06 million net tons shipped in May 2018.

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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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During his presidency, Donald Trump has taken on friend and foe alike — often with equal vigor — if he believes some degree of unreasonable behavior has been going on to the detriment of the U.S.

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The E.U. has experienced its fair share on that front: tariffs on steel and aluminum (along with much of the rest of the world), threats to the automotive industry (particularly the German car industry) in the form of heightened tariffs and threats to pull out of NATO if Europe doesn’t pay its way.

So far, much of the aforementioned has proved to be bluster. Subsequent negotiations have watered down some of the threats and/or postponed implementation to allow for some form of a negotiated settlement.

But according to a report in The Telegraph, the latest object of the administration’s ire could result in a much more serious breach between the old allies.

That the Euro is undervalued and the dollar relatively overvalued is no secret.

That both are where they are, it has to be said, is also not due to one or two simple actions but to a combination of circumstances — some deliberate and often coming with both intended and unintended consequences.

The dollar, for example, has hit a 17-year high, according to the Federal Reserve’s broad dollar index, The Telegraph reports. Trump’s tax cuts came at the top of the cycle and pushed the budget deficit to 4% of GDP, encouraging the Fed to prematurely raise rates last year.

Meanwhile, the manufacturing trade deficit has ballooned to $900 billion as U.S. manufacturers struggle against a strong dollar and the imposition of import tariffs raising raw material costs. After an initial boost, this is now having a toxic mix of depressing economic growth while holding up the dollar, making an export-led recovery harder.

The Euro has gone in the opposite direction.

Quantitative easing (QE) has depressed the Euro for the last five years. The trade-weighted index fell 14% a year after Mario Draghi, president of the European Central Bank, signaled bond buying was coming in 2014. That has been a powerful stimulus, such that Germany is now running a current account surplus of 8.5% of GDP and Europe as a whole is running a surplus of $300 billion-$400 billion per annum.

Since QE stopped last year and hastened by a slowing China, growth in Europe has slumped; the ECB is desperate to get it going again.

But the ECB will have to be a lot more radical than it was with previous measures.

Yields on 10-year German Bunds are -0.3%, in the paper’s words, and the bond markets are signaling an ice age. Inflation expectations — and, by association, growth — have collapsed, but the ECB will have to get radical if it is going to achieve any impact, which will be seen as currency manipulation in Washington (a position that, for once, lawmakers on both sides can agree on).

The president will have plenty of support for retaliatory action.

The article suggests one measure is playing Europe at its own game. The Economic Policy Institute in Washington proposes buying the bonds of any country engaged in currency manipulation to neutralize the effect by driving up the value of its currency (in this case, the Euro). Used in conjunction with the president’s favorite approach of slapping on tariffs, the most likely target being cars, that type of response would have a deeply damaging impact on the European economy.

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Battle lines are being drawn — all eyes are now on the ECB’s next move.

U.S. housing starts in May were down once again, falling 0.9% compared with April and down 4.7% from May 2018, according to the U.S. Census Bureau and the Department of Housing and Urban Development.

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Housing starts in May totaled a seasonally adjusted annual rate of 1,290,000, down from 1,281,000 in April and 1,332,000 in May 2018.

Meanwhile, the May rate for units in buildings with five units or more reached 436,000.

As for building permits, privately owned housing units authorized in May reached a seasonally adjusted annual rate of 1,296,000, which marked a 0.3% increase from April’s 1,290,000 units but a 0.5% decline from May 2018’s 1,301,000 units.

Single‐family authorizations in May reached 815,000, up 3.7% from April’s 786,000. For buildings with five units or more, authorizations reached 442,000 in May.

Lastly, privately owned housing completions in May reached 1,213,00 units, marking a 9.5% decrease from April’s estimated 1,340,000 completions and a 2.8% decrease from May 2018’s 1,248,000 units.

Single‐family housing completions in May reached 890,000, down 5.0%  from the revised April rate of 937,000. Meanwhile, the May rate for buildings with five or more units reached 319,000.

In other housing market news, the National Association of Realtors (NAR) reported May 30 that April pending home sales fell in that month after posting growth in March.

NAR’s Pending Home Sales Index, which is based on contract signings, dropped 1.5% in April, down to 104.3 from March’s 105.9. On a year-over year basis, the Pending Home Sales Index dropped 2.0%, marking the 16th consecutive month of annual decreases, according to NAR.

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“Though the latest monthly figure shows a mild decline in contract signings, mortgage applications and consumer confidence have been steadily rising,” said Lawrence Yun, NAR’s chief economist. “It’s inevitable for sales to turn higher in a few months.

“Home price appreciation has been the strongest on the lower-end as inventory conditions have been consistently tight on homes priced under $250,000. Price conditions are soft on the upper-end, especially in high tax states like Connecticut, New York and Illinois.”

(Editor’s note: This is the second of a two-part series. Read Part 1 here.)

The International Monetary Fund (IMF) recently lowered its 2019 growth forecast for China from 6.3% to 6.2%.

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China’s current economic slowdown shows in the FXI, a large-cap market index. After showing unexpected strength early in the year and rising through the first part of April, performance turned around and the index began to fall once more.

After falling back to nearly start-of-year values, gains managed to hold at around 40 points. This seems to coincide roughly with press reports that stimulus measures from early in the year had begun to wane.

Crude Steel Production Remains High as Prices Weaken

According to the monthly Caixin report numbers, steel production totaled 85 million metric tons, apparently the highest monthly production total on record and about 5 million metric tons higher than the previous month.

Demand from the construction sector remains robust, but Wu Jingjing, a deputy director for the China Iron and Steel Association (CISA), warned demand growth from the sector will wane during the second half of the year. CISA maintains its 2019 forecast for 1-2% demand growth. However, demand from the automobile, household appliances and energy sectors looks weaker.

CISA reported a 1% steel price drop in May and an iron ore price increase of 7%. Higher iron ore prices hurt operational profitability, with CISA’s members reporting a 19.38% year-on-year decrease in profits for the January to April period (despite an 11% increase in sales revenue).

Consolidation of the Steel Industry is Underway

According to Reuters, the Chinese government is seeking to consolidate its steel industry to some extent by 2020 in order to boost the industry’s efficiency.

If government plans to constrain production through consolidation succeed, this would support higher prices for the industry. U.S. prices would also benefit, given that China’s prices tend to lead U.S. prices by about one month.

China Baowu Steel Group, the second-largest steel producer worldwide in 2018, announced its intent to acquire a majority stake in Magang Group Holding Co Ltd, of which Maanshan Iron & Steel Co Ltd, the 16th-largest producer, is a listed entity.

Baowu Steel Group produced 67.43 million metric tons in 2018, according to the World Steel Association, while Maanshan produced 19.71 million tons in 2018.

Raw Material Inputs Continue to Face Supply Issues

Iron ore prices remain high as supplies remain tight. According to customs data, imports recovered to some extent during May, rising by 37% to 83.75 million tons. Overall, shipments dropped by 11% compared with May 2018. Imports for the first five months of the year dropped by 5.2% compared with the same period in 2018.

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According to the Xinhua News Agency, as reported by Reuters, all coke plants that do not meet special emissions standards slated to go into effect on Oct. 1 in Shanxi — China’s top coke-producing region — will be closed.

Additionally, the government is seeking to reduce capacity for 2019 by 10 million tons. The region failed to comply with similar capacity reduction goals in the recent past.

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It almost sounds like an oxymoron, doesn’t it: how can an event be good for the economy but bad for the country?

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As former President Bill Clinton’s campaign strategist James Carville quipped, “it’s the economy, stupid,” meaning if the country is doing well then everyone benefits, and that that’s all voters care about.

Where better to focus solely on the economy than the second-most populous country in the world that is still ranked only No. 124 on the list of wealthiest countries by Global Finance?

Narendra Modi’s Bharatiya Janata Party (BJP) has its critics, even regarding the economy. While there have been failings, there have also been significant gains, some of them not so readily reflected in GDP figures.

Anyone accustomed to dealing in India will attest to the transformation in business attitudes and practices over Modi’s first term. Corruption has been tackled head-on; further work needs to be done, but the landscape is changing fast to the benefit of both domestic consumers and foreign firms trying to do business there.

Decision-making in a notoriously bureaucratic country has also significantly improved. Middle-ranking officials still prevaricate, a national pastime only exacerbated by the clampdown on corruption as lesser officials fear to make decisions on their own. But the more dynamic individuals, both in private and public office, have risen faster and meritocracy is overtaking political connections, with the cream rising to the top as a result.

So, more of the same should be good, right?

Well, India still faces considerable challenges, as Edward Luce recently wrote in his Financial Times Swamp Notes.

India is facing serious economic challenges, including slowing growth, a persistently high fiscal deficit, tepid private investment, and weakness and instability in the financial system.

Modi achieved some gains in his first term, such as introducing universal GST in place of state taxes and the aforementioned clampdown on corruption. However, he remains widely criticized for not doing more to tackle long-standing challenges, such as selling unprofitable state enterprises, relaxing restrictive labour laws, modernizing the land market or tackling the state-dominated banking system.

Such moves, if he had the courage to tackle them, could begin to unlock long-term growth in an economy that has brief spurts of growth, but in the medium to longer term disappoints repeatedly.

It remains to be seen, with a single-party majority, if Modi has the vision and courage to effect real change in these areas.

He has a mandate for change — even 15% of Muslims are said to have voted for the BJP despite its overtly Hindu overtones.

What is worrying is that running as an undercurrent, not just to the election but increasingly throughout the first term, is a progressively more nationalistic, Hindu- centered philosophy that, according to the Financial Times, breaks ranks with the vision laid out by anti-colonial leader Mahatma Gandhi and his political heir Jawaharlal Nehru, the country’s first post-independence prime minister. They believed India’s interests were best secured by a secular state, governing a religiously and linguistically diverse society whose members all had an equal claim as citizens.

The BJP and its close cousin, the right-wing Rashtriya Swayamsewak Sangh, clearly stand for something different.

The RSS was founded in 1925 and is based on the belief India should primarily be a Hindu nation, where the rights of the Hindu majority should trump those of Muslims and Christians, seen as alien religions that pose existential threats to Hindu society, the Financial Times asserts. Modi himself may not be a signed-up member, but BJP President Amit Shah is — and so are many other party leaders.

Much like populist parties elsewhere, the BJP is not averse to bending the truth to present the message it would like its voters to hear.

India’s swift and decisive response to Pakistan’s killing of scores of Indian military personnel earlier this year clearly contributed to Modi’s popularity at the polls, despite the fabrication of the news to suggest terrorist camps had been struck when in reality all the air force managed was to lose a plane and leave two craters in a field.

To be fair to the BJP, such tactics are regularly used, even in the U.S., with “fake news” fighting real news for credibility. However, the extensive use of social media to spread influence has sinister undertones, particularly as it is used as much for promoting a Hindu nationalist agenda as it is simply boosting the party’s standing.

MetalMiner’s Annual Outlook provides 2019 buying strategies for carbon steel

Modi’s majority could be either a great opportunity to force through real economic and structural change, or it could allow the BJP/RSS to push society further toward nationalism and the ostracization of minorities.

Let’s hope common sense prevails. Despite — or rather, because of — the landslide victory, the country has testing times ahead, in more ways than one.

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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.

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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:

Need buying strategies for steel? Request your two-month free trial of MetalMiner’s Outlook

Want to a see Cold Rolled price forecast? Get two monthly reports for free!

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This morning in metals news, the International Monetary Fund (IMF) released a slightly more positive 2019 growth forecast for China, a fire led to damages at one of Rio Tinto’s Pilbara iron ore operations, and Polish copper producer KGHM said it may freeze operations in Canada and the U.S.

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IMF Sees 6.3% Growth in China This Year

The IMF has revised its 2019 growth forecast for China, up to 6.3% from 6.2%, CNBC reported.

The world continues to wait for some sort of resolution to the ongoing trade talks between the world’s preeminent economic powers, the U.S. and China.

Growth has been slowing around the world, and China was no exception, posting its lowest growth level in 28 years, CNBC reported.

Fire Hits Rio Tinto Iron Ore Mine

Miner Rio Tinto announced a fire had damaged one of its Pilbara iron ore operations in Australia, Reuters reported.

According to the report, the fire broke out Saturday night at the miner’s East Intercourse Island port operation.

Recently, Rio Tinto declared force majeure on some contracts after Tropical Cyclone Veronica battered the northwest Australian coast, damaging the Cape Lambert A port terminal.

KGHM Could Freeze U.S., Canada Mines

Polish silver and copper producer KGHM said it doesn’t have plans to sell its assets abroad, but it would consider freezing its mines in Canada and the U.S. if they require major investments, Reuters reported.

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“We are not currently thinking about selling foreign assets. We’re considering strategies for the next few years,” KGHM Chief Executive Marcin Chludzinski told Reuters.