- Chinese supply-side reforms generally have a big impact on metal prices — such was the case for copper, as our Stuart Burns wrote early this week.
- In case you missed it, the fourth episode of our podcast series, Manufacturing Trade Policy Confidential, dropped this week. This time, we spoke with Heidi Brock, CEO of the Aluminum Association.
- With 2018 just under way, many publications are making predictions for the year with respect to the markets and how they will perform (among other things). Burns rounded up some of the predictions being made for the year, ranging from the political to the economic.
- After a solid 2017, Tata Steel has big plans for 2018, Sohrab Darabshaw writes.
- Speaking of supply-side actions, Burns touched on oil output cuts led by OPEC.
- We kicked off our monthly round of Monthly Metals Index (MMI) posts with the Automotive MMI.
- Gold and Bitcoin, in terms of finance, sit on opposite ends of the spectrum, with the former representing tradition and the latter representing the rise of modern cryptocurrencies. However, their relative fortunes are more connected than you might think, Burns writes.
- For our second MMI post, we surveyed the month in construction trends and prices.
Everyone loves a forecast, a prediction, even a few ideas on what the future holds, and we become particularly obsessed with such ideas at the start of a new year.
So, we thought it would be fun to review a few sources’ suggestions on what 2018 may hold, some as specific predictions like those in the Financial Times, and some as possible standout black swan events that could catch us off guard, such as those in The Telegraph newspaper.
Firstly, some of the Financial Times’s suggestions. They came up with 20 of them, but many are political and somewhat niche for our readership, like whether or not Britain’s Prime Minister Theresa May still be in power by the end of 2018. It’s a topic only the Brits are obsessed with and as it’s not exactly going to roil international markets one way or the other, we will ignore it here, as will non metal-market issues, like whether the AT&T-Time Warner merger will go through without big changes to both.
However, of more interest are questions like “Will Trump trigger a trade war with China?” Yes, in the FT’s opinion. The paper believes Trump will deliver on his protectionist campaign rhetoric and take punitive actions against China in 2018, resulting in China either imposing retaliatory measures or taking America to the World Trade Organization (WTO). (While on the Trump train of thought, another ditty from the FT is “Will the president will be impeached in 2018?” — or, at least, whether or not proceedings will be brought against him by the end of the year.)
Back to China, the driver for metal markets will be Chinese demand and Chinese GDP growth. At least officially, growth will continue to headline at 6.5% throughout 2018, the FT believes, although it clearly does not believe the official figures and makes the point real growth will be somewhat lower. Emerging market growth overall is expected to rise above 5% through 2018 despite the U.S. Federal Reserve increasing rates, which could spark taper tantrum spoilers (as in 2013). Even so, emerging market growth is expected to remain robust, aided by ongoing strong growth in the U.S. and Europe.
Political Turmoil Shakes Things Up Worldwide
Politically, 2018 could be an interesting year.
It is often easier to criticize from the outside than to resolve from within — that is as true of boardrooms as it is of government.
It should come as no surprise that President Trump’s well-intentioned claims during his election campaign to bring American jobs back to American steel mills — “When I’m president, guess what, steel is coming back to Pittsburgh,” he said during an April 2016 rally — have proved much harder to achieve in office than may have appeared to him and his supporters on the campaign trail.
Some believe the protectionist, low-hanging fruit of withdrawing the U.S. from the Trans-Pacific Partnership and ordering investigations into trade pacts such as NAFTA and the KORUS FTA have, if anything, exacerbated problems for domestic steel mills by prompting a flood of steel imports from firms trying to bring in steel before tariffs are hiked or other barriers are imposed. The New York Times has been accused — with some justification — of running an agenda counter to the Trump administration’s policies, but the facts are clear: steel imports have boomed since Trump came into power.
U.S. steel imports were up 19.4% in the first 10 months of 2017, compared to last year’s figures, according to the American Iron and Steel Institute (AISI). The New York Times points to ArcelorMittal’s decision to close a furnace at its Conshohocken, Pennsylvania steel plant in the new year, laying off 150 of the plant’s 207 workers as evidence of the impact. ArcelorMittal blamed low-priced imports, as well as low demand for steel for bridges and military equipment — both areas Trump promised he would make a key focus for investment if elected.
Although progress on trade issues has come too late for workers at Conshohocken, it is not too late for the industry as a whole.
The administration appears at odds over how to achieve control over imports, with some advocating hefty tariffs, others quotas, and all awaiting the results of the Department of Commerce’s 232 investigation by Jan. 15. The president will then have 90 days to decide what to do, the New York Times states.
If supportive and the report is acted on, plants like Conshohocken stand to benefit the most. Although underutilized at present, its speciality is ultra-strong, military-grade steel (a national security requirement if ever there was one).
Blocking imports, though, is not universally popular.
The auto industry frets that reducing imports will raise prices and impact competitiveness among domestic automakers, resulting in job losses worse than those experienced by the steel industry.
The steel industry itself has largely maintained employment over recent years after recovering from the financial crisis of 2008, despite investing in automation, which has helped improve efficiencies and productivity in the face of significant imports from Canada, eastern Europe and elsewhere (China features less nowadays and is well down the list due to earlier anti-dumping legislation).
Quite how the administration balances these competing priorities of domestic steel producers versus domestic steel consumers remains to be seen. Rhetoric so far this year suggests sympathies lie firmly with producers, but legislation needs to be finessed enough not to cause more damage than it intends to avoid.
As we say, criticizing from the outside is much easier than finding solutions from within. Coming up with viable solutions will be the administration’s big challenge in 2018.
The U.S. Department of Commerce ruled Wednesday, Dec. 20, that Quebec-based Bombardier sold 100- to -150-seat large civil aircraft at less than fair value in the U.S., and also benefited from unfair government subsidies.
“This decision is based on a full and unbiased review of the facts in an open and transparent process.” Commerce Secretary Wilbur Ross said in a prepared statement. “The United States is committed to a free, fair, and reciprocal trade and will always stand up for American workers and companies being harmed by unfair imports.”
The Department of Commerce determined that exporters from Canada sold the aircraft at 79.82% less than fair value and that Canada is providing unfair subsidies to producers of the aircraft at a rate of 212.39%.
The ruling makes for a big win for Boeing, the petitioner in the case.
It has been a busy year for the Department of Commerce. In its releases announcing trade cases throughout 2017, the department has touted the significant uptick in anti-dumping or countervailing duty cases taken up compared with last year.
From Jan. 20 until Dec. 18, the department launched 79 anti-dumping and countervailing duty investigations. That total amounts to a 52% increase from last year’s total during the same time period, the department release announcing the Bombardier ruling stated.
The United States International Trade Commission (ITC) is scheduled to make its final determinations on or about Feb. 1, 2018.
If the ITC makes affirmative final determinations that the imports of aircraft from Canada “materially injure, or threaten material injury to, the domestic industry,” the Department of Commerce will issue anti-dumping and countervailing duty orders. If the ITC makes negative determinations of injury, however, the investigations will be terminated.
This morning in metals news, the top copper producer in China was forced to stop production on account of a pollution order, Chinese steel futures are down, and Chinese officials falsified data in order to avoid steel and aluminum capacity cuts.
Jiangxi Gets the Government Red Light
Jiangxi Copper Co., China’s top copper producer, had to halt its production after a local government order related to pollution from its facility’s activities, Bloomberg reported.
According to a company official Tuesday, the local Chinese government made the order in an effort to cut pollution in the area. The halting of production is set to last for at least a week, according to the report.
Chinese Steel Futures Drop
Chinese steel futures fell as a result of dropping output during the winter season, Reuters reported.
A drop in demand during the cooler season also contributed to the futures decline. According to Reuters, the most active rebar contract on the Shanghai Futures Exchange (SHFE) dropped 3% to close at 3,787 yuan ($578.54) a ton.
Chinese Officials Fake Data to Avoid Capacity Cuts
According to the state-run China Youth Daily, officials in China’s northern Shandong province used fake data to help aluminum and steel producers avoid mandatory production curbs.
According to the Ministry of Environmental Protection, officials in Binzhou used fake certificates and false data to obtain approval for the construction of 2.4 million tons of new aluminum production capacity in 2014.
Just as there is a circle of life for, well, living things, there is also a circle of life for inorganic waste.
Perhaps not as majestic as the “circle of life,” but the “circular economy” is the goal being sought by E.U. institutions and member states with a recently announced raft of waste rules reform, a subject that has been in the discussion phase among European institutions and member states for two years.
The agreement, announced Dec. 18, reached between European institutions and member states includes a target recycling rate of 65% by 2035 (55% by 2025 and 60% by 2030). In addition, the agreement also features a 10% cap on landfill.
Materials are used and, eventually, might be headed toward landfills or incineration — or, in a more environmentally friendly fate, they can be recycled and thus repurposed for additional uses.
According to the European Steel Association (EUROFER): “Measuring recycling at the waste collection stage, which is how it has been done until now, generates significant losses later on in the recycling value chain. This means there has been a need for targets for ‘real’ recycling that correctly measure how much material is really recovered from waste and actually reprocessed.”
Steel is one example of a metal that is widely used and capable of being recycled for reuse.
“Steel recycling is essential to the creation of a European circular economy; the establishment of this circular economy requires harmonised and coherent waste legislation,” the EUROFER release states.
Axel Eggert, director general of EUROFER, said the agreement represents a “step forward.”
“The agreement reached by the European Parliament and Council is a step forward because it proposes a methodology measuring recycling rates when waste materials are reprocessed into new products – we cannot accept that recyclable material is lost on the way to final recycling in steel production facilities,” Eggert said.
Even so, he admitted there’s still work left to do.
“However, the proposal only goes part of the way towards accurate, harmonised measurement of real recycling because a derogation allows member states to declare material as ‘recycled’ even after an early waste sorting stage,” Eggert said in the EUROFER release. “This will give vastly different results than measuring recycling at the stage of reprocessing into new products.
“This outcome means that, despite the welcome ambition shown by the member states, the legislation will remain incomplete and will allow for disparate recycling rates between the member states. The role of the Commission will be even more important during the implementation phase in ensuring greater harmonisation and reducing data gaps, tasks which are in the interest of all the member states.”
Meanwhile, the European Environmental Bureau (EEB) used the word “timid” to describe the steps taken toward the s0-called circular economy.
“This is not the outcome we all hoped for, but it is nonetheless a significant improvement compared with the laws that are currently in place,” said Piotr Barczak, waste policy officer at EEB, in a release. “We are happy the discussions are now over. Now member states and EU institutions need to build on this decision to fully transition to a circular economy.”
According to the EEB, less than 50% of E.U. waste is recycled. It remains to be seen whether E.U. member states will hit the recycling goals included in this latest batch of reforms and if the concerns Eggert raised become an issue.
Before we head into the holiday weekend, let’s take one last look at the week that was:
- It was a busy week for the Department of Commerce, which issued a ruling on Chinese cast iron soil pipe fittings.
- Prior to the approval of the GOP tax bill, our Stuart Burns wrote about Europeans’ reactions to the tax reform discussion in the U.S.
- The electric vehicle industry is on the rise in India, Sohrab Darabshaw writes.
- The Fed increased interest rates recently, but how is the U.S. dollar doing? Our Irene Martinez Canorea wrote about trends in the U.S. dollar this year.
- What will the surge in electric vehicle interest do for base metals?
- The U.S. and the World Trade Organization are a bit at odds.
- Aluminum’s excellent 2017 has been tempered somewhat by a price pullback of late.
- China recently decided to boost steel products by cutting export taxes, a decision that is sure to frustrate producers around the world already concerned about global oversupply.
- In a second post on the subject, Martinez Canorea expanded on the connection between base metals and electric vehicles.
This morning in metals news, senior executives at Kobe Steel were aware of the company’s data tampering, copper drops from its two-month and a subsidiary of ArcelorMittal is paying $1.5 million to settle a lawsuit regarding pollution from its western Pennsylvania coke plant.
Kobe Admits Executives Knew Abut Data Cheating
Kobe Steel admitted for the first time that senior level executives were aware of the data falsification going on at the company, Reuters reported.
As a result, three executives were “reassigned,” according to the report — in other words, demoted.
According to the steelmaker, about 500 customers received products with falsified specifications.
Copper Falls Off Two-Month High
After approaching a two-month high in the previous session, copper dropped Thursday, Reuters reported.
LME copper closed at $6,924 per ton on Wednesday.
ArcelorMittal Subsidiary Pays $1.5M in Pollution Suit
A subsidiary of ArcelorMittal is paying $1.5 million to settle a suit that its western Pennsylvania coke plant “showered the area with soot and other pollutants almost daily,” the Associated Press reported.
PennEnvironment, the environmental advocacy group behind the suit, said it believes the penalty is the largest secured by a citizen lawsuit in Pennsylvania history under the federal Clean Air Act, according to the Associated Press report.
This morning in metals news, global steel output rose last month, Chinese aluminum smelter cuts have fallen short, and a Trump administration official said the president’s new security strategy backs the case for potential tariffs on steel and aluminum.
Global Steel Output Up
Although Chinese capacity cuts are on the horizon, global crude steel output rose by 3.7% in November, Reuters reported.
China’s goal of cutting capacity, in an effort to reduce pollution in the country, is expected to eat into that global output total.
November crude steel output in China hit a nine-month low, according to the report.
Meanwhile, in Aluminum Cuts…
How about Chinese efforts with respect to aluminum smelter closures?
According to Reuters, that has fallen short, as China has failed to implement closures for the winter season. As a result, the aluminum price has struggled in the face of record inventories in China.
New Security Plan Boosts Case for Steel, Aluminum Tariffs
As the metals industry waits for a resolution to the Trump administration’s Section 232 probes of steel and aluminum imports, a Trump administration official on Tuesday said the president’s new security strategy supports the case for steel and aluminum tariffs, Reuters reported.
The Section 232 probes, launched in April, “are being discussed in the context of national security,” the official told Reuters. “The strategy highlights the importance of industrial strength, and that is also an element of the 232 analysis.”
As befits a letter from European treasury ministers to U.S. Treasury Secretary Steven Mnuchin, the wording is couched in polite and respectful terms. The letter acknowledges the U.S. has every right to set its internal tax code, but draws attention to proposals they fear could have serious consequences for global trade.
According to an article in The Telegraph, the letter asks the U.S. government to consider certain issues raised by a series of measures President Donald Trump has put forward that would increase the tax burden on foreign companies operating in the U.S. and distort domestic U.S. manufacturers’ behaviour.
“It is important that the US government’s rights over domestic tax policy be exercised in a way that adheres with international obligations to which it has signed up,” the letter is reported to say. “The inclusion of certain less conventional international tax provisions could contravene the US’s double taxation treaties and may risk having a major distortive impact on international trade. We would therefore like to draw your attention to some features of the proposals being discussed that cause significant concerns from a European perspective.”
The diplomatic terms mask serious worries in the treasury departments of the signatories: Britain, France, Germany, Italy and Spain. President Trump’s intention is to encourage reshoring and the return of American jobs perceived to have been lost in the process of globalization.
But the fear is the proposals would seriously hamper trade and investment — not just between the U.S. and Europe but also between the U.S. and the rest of the world, without achieving the president’s desired outcome.
According to the article, one of the issues is a proposed cut in corporation tax from 20% to 12.5%, specifically for income derived from exported goods. The treasury ministers (not unreasonably as that’s clearly what it is designed to do) believe the tax cut would violate U.S. obligations under World Trade Organization (WTO) rules, which ban countries from introducing fiscal incentives that distort trade by making exports cheaper or imports more expensive.
The ministers are also quoted as saying that a 20% “excise tax” on financial transactions, including on a U.S. firm importing goods from its own factories abroad, could “discriminate in a manner that would be at odds with international rules.”
The U.S. Senate has already agreed to moves that would lower the corporate tax rate from 35% to 20%, and some Europeans have objected, saying it would go against a series of agreements between the U.S. and Europe to keep corporate tax rates broadly in line with each other.
That argument, however, is on shakier ground. The U.K., for example, already has a 19% corporate tax rate and some smaller European states have even lower rates.
Whether the U.S. will take notice of Europeans’ concerns remains to be seen. The president’s ambivalence to the WTO is well known, but even he can see such extreme moves as differential taxation for domestic and imported goods could kick off a tit-for-tat reaction; that is no more in the U.S. interest than it is for other major trading blocs, like Europe.