Proposals based on environmental grounds to limit polluting industries in the greater Beijing area during next winter’s primary heating period (November to March) gave a boost to the aluminum market from the moment they were first mooted last year.

Beijing’s robust implementation of environmental audits and regulation of aluminum plants this year have added to a sense that the authorities are getting serious about pollution and the environmental impact of energy intensive industries like aluminum smelting. But, as Reuter’s columnist Andy Home opined, it is protectionism in the rest of the world that is going to add backbone to these trends and act as the driving force behind further action on Beijing’s part.

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In an article this week, Home explained how the latest investigation into aluminum imports, along the same lines as an earlier steel case, has been launched under Section 232(b) of the Trade Expansion Act of 1962, which lets a president act against imports on national security grounds. The reasoning is the U.S. has but one smelter left in operation, Century’s Kentucky smelter, capable of producing the high grades required for defence and aerospace companies making combat aircraft and the like.

China supplies almost no primary aluminum to the U.S. market. Following U.S. smelter closures, surging imports are being increasingly met by Russia and the United Arab Emirates, while the bulk continues to be supplied by Canada, as the graph below from Reuters shows.

Where China has an impact is in semi-finished products, such as sheet, plate, foil, bars, tubes and sections. Here the growth of Chinese exports to the world — and U.S. imports — has been much more significant. According to Home, on that measure China has been by some margin the largest-volume supplier to the U.S. market in recent years. Read more

Our Stainless MMI took another dip in April, amid a broad sell-off in industrial metals. In addition, at the beginning of May, the Philippine parliament rejected Regina Lopez’s bid to be appointedas environmental minister. In a matter of weeks, nickel’s story has shifted from a clear supply shortfall to a rather complex narrative, ruining nickel bulls’ party.

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Nickel prices on the LME fell by 5% in the next two days after the news.

Here’s What Happened

• The Construction MMI, tracking metals and raw materials used within the construction industry, slipped 1.3% to a value of 79 for May.
• Chinese steel prices — for forms such as rebar and H-beam — dropped precipitously this month.
• Based on the last few months’ values, the last time this sub-index has performed this well was the start of 2015 — back when California was the first state to pass a carbon tax and Bill Gates turned human waste into potable water.

What’s Going On in the Background?

• We’re in the salad days for the U.S. construction sector, at least as far as 2017 is concerned. According to the Associated General Contractors’ analysis, “Construction spending is at record levels for the second straight month in March [in spite of the month’s slip] and is up 4.9% for the first three months of year compared to the same period in 2016,” as quoted by com.
• Better days for Chinese construction markets may be coming down the pike as well. Beijing recently announced plans to build a new megacity “the size of New England,” which should result in quite the appetite for industrial-grade steel, aluminum and other materials. For example, the government approved $36 billion to build 700 miles of rail within the next three years, according to this article. More salad days for the global construction industry to come, perhaps?

What Metal Buyers Should Look Out For

• The latest drops in Chinese steel prices may have a knock-on effect on U.S. and other Western steel, which make the latter ‘pricier,’ comparatively. This could lead to lower prices on both sides of the ocean hanging around for a while.
• We’ll see if President Trump’s 232 investigation begins to have any medium-term effect on steel once the determinations come down on whether imports constitute a threat to national security. In the meantime, “iron ore and Chinese steel prices could recover if China cuts overcapacity later this year,” as we write in our latest Monthly Outlook Report. (Free two-month trial here.)

Key Price Movers and Shakers

• The China rebar price plummeted, the U.S. shredded scrap price fell below a key threshold to start the month for the third time this year, and weekly U.S. bar fuel surcharges for the Midwest, Gulf Coast and Rocky Mountain regions all fell slightly from April to May. Exact numbers in the membership-only article:
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No one factor has led to the turnaround in the fortunes of Europe’s steelmakers. While still not spectacular, global growth is certainly broader-based and better distributed that it was a few years ago. The fortunes of the European steel industry have improved markedly since their low point in late 2015, with prices rising some 45%, according to Reuters.

As with virtually every ferrous and non-ferrous metal, China has been a key component. Responsible for over 50% of global production capacity, China’s steel industry was undoubtedly a contributor to low prices around the middle of the decade. Beijing’s decision to cut capacity while boosting infrastructure spending has certainly resulted in increased domestic demand and reduced Chinese exports.

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China announced its intention to cut 100 to 150 million tons of steel capacity by 2020 in part to tackle pollution. It was also to address a rising tide of protectionism around the world fearful of the impact China’s excess supply was having on producers in home markets. According to Reuters, China cut 60 million tons of steel capacity last year and plans to cut another 50 million tons this year. There remains considerable debate as to how much of last year’s capacity closures really curtailed production and how much was simply the permanent closure of already mothballed or idle plants.

But either way, in conjunction with the $700-billion stimulus package targeted mostly at infrastructure and construction, Chinese steel prices jumped over 70% last year, while exports fell 3.5%. Even better news for overseas producers has been exports dropped a further 25% this year in part many would argue due to some 39 anti-dumping and anti-subsidy measures introduced in Europe over recent years of which 17 are directed at China and some 150 similar duties in place in the U.S. Read more

Here’s What Happened

• The Renewables MMI spiked upwards for the month of May (but not a terribly huge spike in the scheme of things; see the bullet below), ending at a value of 71.
• * Editor’s note: We’ve recalibrated the index to better take into account cobalt price fluctuations, hence the spike from 54 in April to 71 in May.
• However, the Big Heavy of our sub-index that tracks metals and materials going into the renewable energy industry is the U.S. steel plate price. That price point took a 4.8% dive.

What’s Going On in the Background?

• Several stories from the solar sector have been making waves lately. “Growth has slowed in the rooftop solar industry in the past year,” writes Jessica Goodheart in this piece, “but many see the evolution of battery storage technology and vehicle electrification as promising for the long-term health of the residential solar industry.”
• And the policy picture? “Industry leaders have been cautiously optimistic that Republicans will leave be the federal Solar Investment Tax Credit (ITC), a major policy driver of rooftop solar, in spite of Trump’s efforts to roll back the Clean Power Plan,” Goodheart notes.

What Metal Buyers Should Look Out For

• Keep an eye out on steel plate’s raw material inputs — iron ore prices surged in April, as we reported in our May Monthly Buying Outlook, while coking coal prices swelled due to supply disruptions in Australia.

Key Price Movers and Shakers

Industrial metals for the most part fell in April, but that wasn’t the case for aluminum. The lightweight metal outperformed its peers as aluminum is expected to be the next target of supply-side reform in China, according to Goldman Sachs.

The New Steel?

While China tries to transition from a manufacturing economy to a service-driven one, it is aiming to cut industrial overcapacity due to environmental problems. China previously indicated its strong intentions to implement supply-side reforms in the steel industry. As a result, steel prices in China rose by 70% in less than a year.

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China’s energy intensive aluminum smelters receive nearly 90% of their energy needs from coal. In addition, China has received a lot of international pressure to reduce its aluminum capacity. For these reasons, aluminum could be the new steel this year.

To start, China announced in late February that it would cut as much as 30% of its aluminum production over the winter months. As my colleague Stuart Burns put it, “Beijing has shown solid intent in this direction, already denying planning approval to 2 million tons of new capacity in China’s northwest province of Xinjiang and clamping down hard on plants elsewhere that it deems to be failing environmental standards.” In addition, industry watchers believe that this might just be the beginning as more closures are expected to come in heavily industrialized provinces.

Few metals have as controversial a supply side as tin. Cobalt also springs to mind, largely due to the relative importance of the Democratic Republic of Congo as a supply source. But tin likewise seems to come from areas prone to military unrest, where illegal mining of the ore provides an opportunity to fund said unrest. Even in established producing countries like Indonesia, supply is hampered by extensive illegal mining, and the authorities have been engaged in a long running struggle to control illegal mining, principally to avoid environmental damage that occurs at unregulated mines.

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Tin has benefitted from a broader commodity rebound this year. Prices are rising and LME inventory is falling as demand from the electronics industry, particularly in China, remains solid. However, one of the key supply-side variables is Myanmar, China’s new source of supply. As the graph below from Thomson Reuters shows, Myanmar is the only significant global source that has been on the rise in recent years. All others by and large have remained static or fallen.

Source: Thomson Reuters

Indonesia has the potential to export more concentrate. Its drive to control illegal mining and encourage greater domestic value-added refining has limited export volumes in recent years, encouraging China to increase imports from neighbouring Myanmar.

Reuters reports that almost all Chinese tin ore and concentrate imports now come from Myanmar, following the 2013 discovery of high grade reserves at Man Maw in northeast Myanmar. Annual production is now estimated at about 33,000 tons of tin concentrate, which Reuters reports is more than 10% of the metal’s global output. Read more

Here’s What Happened

• The Automotive MMI, our sub-index of industrial metals and materials used by the automotive sector, dropped by one point for a May reading of 8, a 1.1% drop.
• This is the third straight month of declines for this index. Back in February 2017, the Automotive MMI hit 92 — its highest level since November 2014. But now, flagging HDG steel, copper and shredded scrap prices are dragging on the rest of the index.

What’s Going On in the Background?

• The U.S. auto market is officially slowing. Car sales dropped 4.7% to 1.43 million units, according to Autodata Corp. That is a bigger drop than forecasted by both Edmunds and Kelly Blue Book, according to several news outlets.
• Meanwhile in China, the first quarter of 2017 saw a 7% overall increase in car sales. As we reported in our Monthly Metal Buying Outlook (free trial here), that was the strongest showing since 2014. The Chinese government has extended tax cuts for small vehicles, which should keep citizens buying cars through the year.

What Metal Buyers Should Look Out For

• Many factors coming down the line — including increased construction projects in China — portend longer-term support for key automotive constituent metals such as HDG steel.
• Even though HDG has slipped a bit this month, prices for that metal form in China could see room for improvement.

Key Price Movers and Shakers

Our Raw Steels MMI fell seven points* due to the slump in China’s steel prices in April.

Raw Steels MMI

(*Note: We changed one of the data elements of our index to map the underlying market more effectively. That change contributed to a lower number this month.)

Benchmark Your Current Metal Price by Grade, Shape and Alloy: See How it Stacks Up

Since their peak in February, China’s steel prices have fallen by more than 20%, while U.S. prices have continued to climb. But guess what, things changed towards the end of April. Prices in China started to recover (see how we predicted that) while U.S. prices fell (yes, we predicted that too). In this post, I’ll analyze what this price divergence means and how you — assuming you buy or invest in steel — can take advantage of it.

China HRC price. Source:MetalMiner IndX

This morning in metals news, we’ve seen prices for copper and gold reach three-week highs and lows, respectively.

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Threat of Supply Disruption Has Driven Up Copper Prices

Copper prices reached a three-week high today, Reuters reported, driven by potential supply disruptions. This news comes after yesterday’s rally near the Grasberg copper mine in Indonesia. Thousands of workers from the Indonesian unit of Freeport McMoRan Inc. took part, protesting against layoffs that resulted from the company’s contract dispute with the government.

Freeport had laid off 10% of its workforce, with potentially more layoffs to come. As a response, the union representing the workers has threatened to strike for the month of May.

A Three-Week Low for Gold Prices

In contrast, gold prices fell on Monday as the threat of a U.S. government shutdown faded and the U.S. dollar edged slightly higher. The metal has dropped to $1,255.50 per ounce, the lowest gold prices have been since April 10, according to FactSet data. Political tensions in Europe had kept gold prices up so far this year, but that trend seems to have been reversed.

In related news, S&P Global Platts reported that gold production in China, the world’s top gold producer as well as consumer, fell significantly in Q1 2017. In this past quarter, China produced 101.2 tons of gold, which is a 9.3% drop compared with 111.6 tons in Q1 2016.

Bernanke Argues in Favor of a Border Adjustment Tax

Former Federal Reserve Chair Ben Bernanke came out in support of the proposed border adjustment tax (BAT), suggesting to CNBC that the GOP had not presented the idea well. Bernanke argued that a stronger dollar would negate any negative effects of the BAT – which would tax imports and exempt exports – by increasing U.S. companies’ purchasing power and lowering the cost of overseas manufacturing.