Commentary

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A new report in HSBC’s Navigator series focuses on the long-term ascendancy of the Asian region as it explores both anticipated and actual trends in India’s trade patterns with its nearby neighbors.

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India enjoys a balance of trade surplus in services but a deficit in goods with much of its services focused on Western tech and B2B markets. But that pattern is not changing, surprisingly, partly due to government encouragement and partly due to the relative size of the economies closer to home.

Largely as a result of fears of protectionism in the West, India’s policy has been to work closely with neighbors to develop regional trade opportunities.

However, despite the South Asia Free Trade Agreement (SAFTA) and the ASEAN-India Free Trade Area (AIFTA), progress in increasing trade with Asian neighbours has been slow. Now exporters are looking to the Regional Comprehensive Economic Partnership (RCEP), to which India is an intended signatory, in order to create opportunities in what will be the world’s largest trading block.

India’s exports are changing, partly under government encouragement but mostly in response to changing global demand. Traditional products like clothing and apparel are declining. Currently in third place, they are expected to slip to 10th over the next decade, as this table shows.

The reports estimates that by 2030, India will be increasingly exporting goods within the Asian region, with export growth to Asia Pacific outpacing India’s exports to Europe and North America. In terms of individual countries, the U.S. and UAE will remain the top two export destinations, but China will rise in importance and Vietnam will also join the top five list. The top 10 fastest growing exports destinations will almost all be in Asia up to 2020, with growth in some markets rising at 12-13% per year.

Firms looking to export to India will face growing competition from China. But with a rising middle class and strong demographics, India represents an important export market for Western firms in the decade ahead. Navigator estimates that the greatest opportunities will remain in machinery, as this graph illustrates:

Perhaps more surprising is the expected static nature of India’s exports. The report sees little change in the mix of destinations, with India’s top service exports destinations remaining largely unchanged between 2017 and 2030, with the U.S. and the U.K. occupying the top two spots. Read more

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Higher is the simple answer. The world with the exception of China was in deficit before U.S. sanctions against Oleg Derispaska and his aluminum company Rusal.

So when the three million tons of primary metal Rusal exports outside of Russia are taken out of a market already worried by the recent partial closure of Norsk Hydro’s Alunorte alumina plant and Albras primary smelter, one should not be surprised by price increases and panic.

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Not only is the market deprived of new deliveries by the sanctions, but according to Bloomberg some 36% of global stockpiles on the LME and up to one million tons of metal held in inventories outside of China supporting financing deals is currently in limbo as buyers, traders, banks and brokers refuse to handle it for fear of falling foul of sanctions.

Part of the problem is that a large percentage of Rusal’s metal is traded and resides in stock financing deals, compared to top metal from other producers like Norsk Hydro and Alcoa. This is a legacy of the flood of metal that started to swamp the global market from the 1990s onwards after the collapse of the Soviet Union.

Technically there is no legal restriction on buying metal produced and sold by Rusal before the sanctions were applied, according to Bloomberg. Even so, the products have become less desirable in the U.S. and Europe as consumers are unsure of the status.

In addition, this week the LME has banned any further deliveries into its system, raising the question of what Rusal is going to do with with the three million tons of metal it is churning out every year. There will be buyers out there, especially in Southeast Asia, but they will demand a discount to handle the brand. With restrictions of sales of its alumina, Rusal could simply cut production rather than try to dump metal into less well regulated overseas markets.

Maybe more of a risk is the fate of Rusal’s alumina production as the firm supplies other smelters than just its own, potentially depriving alternative producers from supplying an already tightening market. Alumina prices have surged to over $600/ton as the LME primary metal settlement prices have risen to over $2,500 per ton.

So where to now? Have buyers missed the boat? It’s impossible to say. There could well be a short-term correction, but Bloomberg quotes CRU analysts as saying that prices could reach $2,800-3,000/ton, levels not seen since 2008.

Alunorte’s alumina production cuts, forced following allegations of river pollution, could be resolved later this month like the resulting cuts at downstream Albras. But that would only return the primary plant from 230,000 tons to its capacity of 460,000 tons, a drop in the ocean next to Rusal’s three million tons. Brace yourselves: aluminum remains firmly in bull territory.

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Happy Friday, MetalMiner readers! Here’s a look back at this week’s top stories.

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  • A number of aluminum associations around the world wrote a joint letter urging G20 leaders to hold a forum on global aluminum overcapacity at this year’s G20 Summit, scheduled to take place from Nov. 30 to Dec. 1 in Buenos Aires.
  • After a steady downward trend, LME aluminum prices recovered, rising more than 13% in a week.
  • The U.S. International Trade Commission will advise the U.S. Trade Representative on proposed modifications to the U.S. Korea Free Trade Agreement (KORUS).
  • The EU is demanding compensation at the WTO for the U.S.’s Section 232 tariffs on steel and aluminum, arguing that the tariffs were imposed to protect U.S. industry. What is behind the U.S.’s national security argument?
  • Irene Martinez Canorea’s mid-month metals analysis shows aluminum as April’s top performer so far. Prices for copper and nickel have also risen, while other base metals have fallen.
  • U.S. and India have announced a joint task force on natural gas.

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As my colleague Sydney Lazarus reported yesterday, even though the European Union has a temporary exemption from the U.S.’s Section 232 tariffs on steel and aluminum, it is demanding compensation at the World Trade Organization as shown in a filing by that trade body two days ago, according to Reuters.

The EU is arguing that the U.S. tariffs were imposed only to protect U.S. industry, rather than for security measures.

MetalMiner Executive Editor Lisa Reisman took readers through how the U.S. Department of Commerce did its homework on the Section 232 steel investigation, in a top-read post originally published Feb. 23, 2018. Read the full text of Lisa’s article below.

By now most MetalMiner steel producers and steel buying organizations have pored over the Section 232 steel report published by the Department of Commerce. In case you missed it, here is a link to the full report.

At its core, the Section 232 investigations represent the only public policy solution put forward by any major government to address the fundamental crisis involving extensive and pervasive global overcapacity for steel, stainless steel and aluminum.

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This overcapacity, the Department of Commerce believes, threatens U.S. national security interests because unfairly traded imports have caused substantial financial harm to U.S. producers.

Before you scream “protectionism!”, read on.

Read more

We could love reading these murky tales about Russian businessmen and their dealings if the reality was not that some of them at least are rather too close to the truth and rather too close to home, (many of them living, as they do, at least part of their time in Western capitals).

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Donald Trump’s latest round of sanctions against Russian oligarchs has again thrown a spotlight on those closest to the throne in Moscow. With so much disinformation around, it is impossible to sift fact from fiction.

Caught up in the latest list identified for sanctions is Oleg Derispaska, boss and major shareholder in Basic Element, owner of Rusal (among other power and metals businesses).

In and of itself, that may not be tectonic for the metals markets, were it not for the cloud it casts over the trade and consumption of Rusal’s aluminum when its boss is on a sanctions list.

Derispaska has stepped back from Rusal recently, a move that predated the sanctions but now looks timely as the firm seeks to keeps its brand acceptable to banks and foreign authorities.

First indications are encouraging for the firm.

Read more

The state sector has benefited better than most in China from Beijing’s environmental crackdown, which resulted in enforced closure of steel, aluminium, coke, alumina and coal-burning power plants.

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The extent to which the resulting rise in prices benefited domestic aluminum smelters was revealed last week when Aluminum Corporation of China Ltd (Chalco), filed its results for the year in Shanghai. Chalco, the listed arm of state-run aluminum producer Chinalco, made net income of 1.38 billion yuan ($218 million) last year, against a revised net profit of 368.4 million yuan in 2016, according to Reuters.

Revenue came in at 180.1 billion yuan, up from an adjusted 144.2 billion yuan a year earlier. Although Reuters did not quote any tonnage figures for the firm, it is safe to say Chalco didn’t produce less than the year before; the state firm was largely protected from the closures enforced on others.

But reports that despite closures in some quarters smelters were still producing near-record output is being taken by many as a reason why Shanghai Futures Exchange (SHFE) stock have been rising inexorably during the year; the reading is the market remains in significant surplus.

But Andy Home, writing in Reuters last week, suggests the rise in SHFE inventory may have more to do with tightening credit and the pull of high SHFE prices in Q3 sucking metal from trade inventory.

If that is the case, then we may have been reading a distorted view of the market.

The realization that the winter closure program was not having as significant an impact as had been expected led to a fall in prices during the fourth quarter, from a peak of RMB 17,165 per metric ton in September that has continued into this year to stand at below RMB 14,000 today.

Not surprisingly, Chalco’s numbers were weak for Q4. The already meager margin for last year of 0.77% was further diluted in Q4, and many smelters are said to be at breakeven or less this year.

That factor is probably the only thing keeping aluminum prices in China at current levels. If smelters were making money, the restarts now that the winter heating season is over would be stronger and the overhang of stock would be worse (a precursor of further falls). The market is expecting restarts to be muted, restrained by the unprofitable prices and Beijing’s new-for-old program restricting the addition of substantial new capacity on top of existing production.

With exports likely to be impacted by President Trump’s 10% import tax, prospects for excess metal to find its way into export markets in the form of semis are less positive. But, anyway, falls in the LME have meant Chinese semis exporters have less of an advantage than they had in Q4.

The next 4-6 weeks may indicate the trend for the rest of this year. In a normal market, if primary prices fall further, the domestic market would move toward a more balanced position as smelters are idled.

China, however, isn’t a normal market, and regional or state support could keep plants running.

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Watch the domestic SHFE price via MetalMiner’s Indx. The trend this month has remained downward and inventory has continued to climb – whether it is new metal or repositioned metal previously in finance deals is not immediately clear to the market – they just see rising inventory and draw their own conclusions.

There were grand words from German Chancellor Angela Merkel and Chinese President Xi Jinping, the leaders of two of the world’s biggest trading economies, on a call Saturday ahead of a Group of 20 (G20) meeting of finance ministers and central bank governors in Buenos Aires, reported the Financial Times.

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The two recently re-elected leaders have agreed to use “international channels of negotiation to tackle steel overcapacity” following the Trump administration’s decision to impose tariffs on imports of steel and aluminum. Steffen Seibert, a spokesman for the German chancellor, is quoted as saying, “They . . . were in favour of continuing to work on solutions within the framework of the G20. They stressed the importance of close multilateral co-operation in trade in this context.”

Well, they would, wouldn’t they? More than any other two nations in the world, Germany and China have the most to lose from a trade war.

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The revival of steel production in mature markets does not need to be all about state aid and protection. Although some would argue the steel industry in the U.K. would not be in the condition it is now if it had state aid and protection in previous decades.

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But years of underinvestment by corporate owners Corus and Tata Steel have left the U.K. steel industry technologically behind rivals in mainland Europe, according to an article in The Telegraph last week.

After considerable M&A activity over the last 2-3 years, there are now three major commodity steel producers in the U.K., although some 600 firms are active in the industry. Apart from what is left of Tata, there are two new contenders. First, the newly formed British Steel Limited, a long products steel business founded in 2016 from assets acquired from Tata Steel Europe by Greybull Capital. Secondly, there is Liberty House, a more diversified metals producer owned by entrepreneur Sanjeev Gupta and (at least as far as the steel part is concerned) formed largely out of the specialty steel division of Tata Steel Europe last year, when Tata sold off various assets prior to its current merger with ThyssenKrupp of Germany.

The question on everyone’s lips when Greybull and Liberty stepped in to buy parts of the Tata group was how they were going to make money out of these assets if Tata could not.

Somewhat to the market’s surprise, Greybull posted a profit of £47 million ($66 million) in the first 12 months following years of losses under Tata, but last year fell back into loss when production at its Queen Victoria blast furnace in Scunthorpe was temporarily halted in the summer due to technical problems, The Telegraph reports. The furnace, which is capable of producing 1.5 million tons of iron per year, was out of action for several weeks and cost the firm tens of millions of pounds. Although Greybull only paid £1 for the business. it clearly has faith in its long-term future, announcing this month plans to raise £100 million of funding to upgrade existing plant and invest in new technology. The margins are in value add and years of under investment have left the firm not just with creaking infrastructure, but outdated technology that deprives them of the opportunity to compete in more lucrative market segments.

Liberty was not quite so fortunate in buying Tata’s castoffs on the cheap. Liberty paid £100 million last year for the specialty steel division, but has already brought back capacity previously mothballed. The most recent example of that is an 800,000-ton electric arc furnace in Rotherham, fired up in a ceremony attended by the Prince of Wales this month, according to the BBC.

Even Tata is investing in upgrading plants. Just last November, it announced it was investing £30 million ($42 million) in its Port Talbot steelworks with the installation of a new 500-ton steelmaking vessel and would make other upgrades as part of a £1 billion, decade-long deal agreed with unions in return for their support for agreement to spin off the £15 billion ($21 billion) pension attached to Tata’s U.K. steel business.

How this long-term investment plan will shake out following the merger with ThyssenKrupp remains to be seen. Many still see Port Talbot as a prime candidate for closure for the enlarged group, particularly if Brexit changes the economics of the plant by putting tariff barriers in place between the U.K. and E.U.

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Berlin and the E.U. will not favor preservation of Port Talbot over closure of continental steel plants, as the combined group looks to achieve cost savings and streamline the merged businesses.

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If you thought China’s environmental crackdown on polluting industries during this winter heating period was a one-off effort, think again.

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Liu Youbin, a spokesman at the Ministry of Environmental Protection, is quoted by Reuters as saying that Beijing intends to extend its policy over the 2018-2022 period.

“The new three-year plan will continue to make Beijing-Tianjin-Hebei its key focus but it will also focus on other major regions like the Yangtze river delta, the northeast and Chengdu-Chongqing,” he is quoted as saying.

China’s previous effort, covering 2013-2017, was a largely unmitigated disaster.

Concentrations of hazardous particles known as PM2.5 were supposed to be reduced by 25%, Reuters reports, but with near-record PM2.5 readings in January and February last year, it was clear more drastic action was required.

Northern China only managed to meet 2013-2017 air quality targets by the end of 2017, largely thanks to a campaign that forced polluting factories in 28 cities to reduce output over the winter, Reuters reports. The resulting clampdown on the worst offenders among steel mills, coke plants and aluminum smelters has had a profound impact on supply, demand and prices in those markets. So, news that Beijing intends to roll out the program to include the Yangtze and Pearl River deltas further south, in addition to regions in the northeast, means the story has much further to go.

Concentrations of PM2.5 have fallen by up to 70% to 36 micrograms per cubic meter, almost meeting the state standard of 35 micrograms. Readings in the Yangtze and Pearl River regions, which include Shanghai and Guangzhou, actually increased. As a result, readings for the whole of China only dropped by 20% for the month of January to an average of 65 micrograms, underlying the scale of the challenge ahead.

Still, where there is a centralized will there is a centralized way. You can be sure Beijing will prosecute this campaign with considerable vigor in 2018.

When the current heating period ends in late March, controls will be relaxed but the indications are it will not be business as usual. Although the low-hanging fruit of coal-fired domestic and small commercial premises will be the primary target, greater attention will also be given to larger enterprises and, indeed, whole industries.

China continues to need steel, aluminum, zinc and a range of other energy-intensive metals, so the most likely outcome is tighter regulations and investment in more advanced, and, hence, cleaner technology.

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That is admirable, of course, but it will also encourage a more rapid move up the value chain for producers looking to get payback on their new kit.

Normally when supply is constrained prices will rise, but China’s steel market is presently at the mercy of several dynamics.

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On the one hand, Beijing is constraining polluting industries like steel and coke production. Those same policy decisions, however, are hitting industries that consume finished products, such as construction (at least in the industrial northeast, where environmental pollution action has been most active).

Arguably, steel prices would have fallen further as a result of the constraints put upon the construction industry if it were not for the the constraints put on steel production, which has restricted supply. What is difficult to gauge from official figures is quite how much impact restrictions due to environmental measures have caused and what, if any, impact of a relaxation of those restrictions will have.

Average Daily Steel Output Drops in December, Still Up 5.7% for 2017

According to Reuters, China’s average daily steel output fell by 1.9% in December to 2.16 million tons per day from 2.205 million the previous month. Even so, full year output in 2017 still rose 5.7% to 831.73 million tons.

In part, this is due to higher output earlier in the year boosting the annual number, but also because the National Bureau of Statistics has altered what it does and doesn’t include in its numbers. China closed an estimated 140 million tons of illegal induction furnace capacity in the first half of 2015, a sector that has not been included in production numbers because it is not approved.

The sector was significant though, and its loss during 2017 was a significant factor in the strength of rebar prices as conventional blast furnace producers ramped up rebar production and prices to take the place of lost output from these illegal induction furnace producers. Since then, Beijing has been encouraging state mills in the installation of modern electric arc furnaces (EAF), in large part because of their lower environmental impact. It is the growth of these EAF facilities that lifted production in the latter part of the year and contributed to a switch from pig iron to scrap as a raw material source.

Iron Ore Prices Show Volatility

Although China’s iron ore imports rose 5% in 2017, hitting a record of 1.075 billion tons, iron ore prices have show considerable volatility of late as speculators struggle to gauge what demand is going to be like once heating season restrictions are lifted.

Both iron ore and coking coal prices have been sliding in recent days, but the expectation is they will bounce back during the first quarter.

What happens after that remains to be seen.

With steel output restrictions lifted by late March, steel production will almost certainly increase, finished steel prices could weaken and steel mill margins could suffer. Q2 and beyond will depend on the strength of domestic demand, particularly from the construction sector.

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With new iron ore supply continuing to come onstream, it will be interesting to see if miners are able to maintain prices as demand picks up or if current concerns about port stocks prove right and an excess of inventory and supply results in prices falling further.