Commentary

It’s first-year economics: everything comes down to supply and demand. Historically, the push and pull between these two massive market forces are cyclical, and that includes steel. When you have more demand than supply, prices go up. Eventually, the prices get so high that people stop buying. After a while, the steel supply builds up, and prices plummet, leading to a surge in demand once again.

It’s a familiar dance – at least, it used to be. That was before the war in Ukraine, China’s ongoing lock downs, and global supply chain issues. Suddenly, having enough steel supply to meet even lowered demand is not a foregone conclusion. Still, economists aren’t the sort to simply throw up their hands and say, “whatever happens, happens.” Instead, they are constantly mapping out potential scenarios.

In this article, we’ll talk about some of the facts and factors at play.

Is Demand Really Dropping?

We’re one-third the way through 2022, and it seems that no global crisis is too great to completely stave off steel demand. After a year in which steel prices hit historical highs and demand grew by an unexpected 2.1%, many insiders pointed to a “return to center.”

Indeed, in April, the World Steel Association forecasted a meager 0.4% increase in global demand. However, the organization added that they expected this number to slowly increase to 2.2% in 2023. The problem?  Most of these estimates were made long before the current conflict, lockdowns, and supply chain failures.

Is demand really shrinking as much as forecasts predicted, or is the reduction in supply simply making it appear that way? It’s still too early to call. What we do know is that 2022’s supply woes are pushing up steel prices from the back end. This means that the cost relief we all expected simply isn’t coming. Of course, this raises a lot of questions about that 2.1% prediction for 2023.

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Steel Supply Remains the “X Factor”

Considering all the predictions that 2022 would be a “dead spot” for steel demand, the price action has been stunning thus far. As expected, the year kicked off, with prices quickly retreating from 2021’s historic highs. But by the time March arrived, steel prices had seen their biggest month-over-month increase ever.

This reversal mostly hinged upon Russia’s invasion of Ukraine. The WSA ranks Ukraine as the 13th largest steel producer in the world, as well as the fifth largest exporter of iron by volume. Obviously, the war has devastated the country’s ability to produce. In fact, at the time of this writing, the Azovstal Iron and Steelworks in Mariupol – once capable of putting out 5.9 million tons of product per year – is serving as a shelter for besieged Ukrainian citizens.

The effects of the war have also led to major embargos, sanctions, and boycotts on Russian energy and commodities. Russia is #5 in global steel production, and its metal and coal exports were one of the first things on the chopping block when the EU started imposing sanctions. This means less Russian steel in Europe and less Russian power for European countries to make their own steel.

This would all be bad enough news for steel supply if it weren’t for the recent reports coming out of China, which produces some 56% of the world’s crude steel. Even back in 2021, the steel demand forecast was lowered based on weak economic data. But COVID lockdowns, crowded ports, and decarbonization efforts are choking the eastern giant’s production beyond our wildest fears.

Filling Gaps in Steel Supply

Just last week, MetalMiner posted an article about how India might further establish itself on the global steel stage. After all, despite having a firm grasp on the #2 spot in global steel production, the subcontinent puts up a mere around 1/10th of China’s numbers.  In short: there’s room for improvement. And if there was ever an opportunity to grow market share, this is it.

According to representatives from the Indian steel industry, the problems plaguing Europe and Asia have put the pinch on other major producers. They also claimed that India is currently the only one of those producers stepping up to the plate. In fact, a report from the India Brand Equity Foundation (IBEF) stated that the country’s crude steel production should increase 8-9% year over year in 2022.

So far, that number has averaged closer to 6% due to the increased costs associated with production. Still, with Japan, South Korea, Germany, and other Top 10 producers reporting negative growth, India’s efforts are commendable. How far will this go in making up for the shortfall caused by Russia, Ukraine, and China? Only time will tell.

Second Tier Steel Suppliers Need to Step it Up

Obviously, there’s no timeline in place for either the war or China’s economic woes. This means that other countries will need to join the effort to replenish global steel supply. If consumer demand remains, strong, (a big if) prices could continue to remain supported, at least in theory.

Many of these countries (Taiwan, Italy, Vietnam, Mexico, and France) have their own economic and supply chain woes. Still, Brazil – arguably one of the most imperiled economies in the West – has managed a rather impressive recovery after dropping the ball at the beginning of the year. With any luck, this will help ignite a trend.

Stay informed about fluctuating global steel prices with MetalMiner’s monthly MMI Report. Sign up here to begin receiving it FREE of charge. However, if you want to get a real edge on the metals industry, you can sign up for a demo of our revolutionary insights platform here.

 

Recent key shifts in macroeconomic indicators could significantly impact both aluminum and steel prices. Historically, the best way for companies to protect themselves during times of uncertainty is to change buying strategies.

Most commodities have traded in a bull market for the past one and a half years. This has allowed companies of all sizes to see where their supply chains face the greatest gaps. Still, anecdotal evidence suggests that the fear of rising steel prices and ongoing supply chain constraints have caused buying organizations to “stock up” on materials. This has not only helped build inventory but also shore up supply. Now, many companies are seeing their orders slowing down.

Economic Indicators Suggest Slowing Demand

For instance, last month, the ISM Manufacturing Report or PMI continued its expansion. However, one troubling reading came from the new orders subindex, which dropped from 61.7% in February to 53.8% in March. According to MetalMiner, that data, along with falling durable goods orders and other key macroeconomic indicators, suggests a slowing economy.

To see our take on macroeconomic indicators, subscribe to the free MetalMiner Weekly update email. This week, the newsletter covers the three main macroeconomic drivers while analyzing their likely impact on metal prices.

ch;anging metal prices mean new buying strategies

Petr Ciz/Adobe Stock

Success Means Shifting Buying Strategies

It’s common knowledge that buyers are recovering from more than a year of supply woes and shipping constraints. Still, should the US economy slow, these organizations will need to reevaluate their sourcing tactics. Of course, the same would be true if we were to enter a recession.

Luckily, these companies can adapt using a wide range of buying strategies. Many of these can then mitigate holding high priced inventory during a slower or recessionary business cycle.

Some Strategies to Consider

  1. Move off a scrap steel contract and consider contracting using a long-term index.
  2. Avoid locking into long-term fixed-price contracts. This is especially important if metal macro trends change from bull to sideways or bull to bear.
  3. Communicate conservative demand forecasts with suppliers on a longer-term outlook. However, they should share actual demand data for 4 and 8 weeks out (or further, if possible)
  4. In rising markets, it makes sense to lock in contracts earlier vs. later as prices could still rise. In recessionary markets, the exact opposite holds true. That’s why companies should hold off on locking anything in for as long as possible.
  5. Identify the KPIs that serve as their company’s “early warning signal” of slower demand. That means paying close attention to sales pipelines, time to close deals, pockets of softness, etc.
  6. Companies should keep watch on their +/- volume tolerances from mills and service centers. A lot of people got squeezed on that when materials were in short supply. Now is a good time to re-examine those tolerances and work with suppliers to shore up a wider +/-.
  7. Those companies that did stock up on inventory should see the next few months as an opportunity to burn through it. The market remains pretty strong, but it could look a lot softer three months from now. In other words: if you added a cushion to your safety stock, now’s the time to use it!
  8. Mills and service centers that “acted incorrectly” with customers during the shortage phase should come back looking for business again. This would be a great chance to barter lower prices off the decreased demand. Likewise, suppliers that handled the bad times particularly well should be rewarded. After all, it’s all about relationships!

There’s Always More to Learn

No matter what the future has in store for the marketplace, there will always be opportunities to save and make money. In the end, it always comes down to preparedness, know-how, and a little willingness to innovate.

MetalMiner CEO Lisa Reisman and VP of Business Solutions Don Hauser will be offering up additional insights during a Wed, May 4 workshop. To learn even more strategies for dealing with a slowing economy, sign up to attend here.

 

 

 

 

 

Although the West issued a new round of sanctions late on Sunday, it remains unclear what effect they will have. The new sanctions, including the prohibition of Russia flying over European airspace, as well as the funding of arms for Ukraine, came on Sunday. Nobody at MetalMiner believed the earlier sanctions through Friday would put an end to the invasion or cause Russia to turnaround and head back home. The additional sanctions announced on Friday, including a freeze of some of President Putin’s and some Russian oligarchs’ assets, still suggest little to no impact.

Perhaps surprisingly, the bravery of the people of Ukraine defending their homeland, has created the biggest impact. It certainly has made Russia look bad.

In two words: oil and gas

With its heavy reliance on Russian oil and gas, Europe simply can’t cut off Russia via sanctions due to its nearly total reliance upon Russian supply. Moreover, the sanction that called for cutting Russia out of the SWIFT banking system also didn’t occur. Germany and Italy put a hard stop to that one and categorically refused to adopt it. However, a compromise solution came into effect over the weekend, kicking out several Russian banks from participating in the SWIFT system.

Many traders think the sanctions are a joke as they report normal dealings with regard to import/export trade. So, business with Russian suppliers still appeared to operate normally as of last week. RusHydro, a Russian bank, named in one of the sanctions, along with Sberbank, used by suppliers in Europe, reports “business as usual,” as well with effectively, no change or impact. Freezing bank transactions and access to western markets will work just like anti-dumping cases – Russia will find plenty of workarounds. Moreover, Russia will run transactions through China if necessary.

Join the MetalMiner team for a 30-minute briefing on the aluminum and carbon steel markets and other key developments from the Russian invasion of Ukraine. The webinar runs from 11:00-11:30 central time on Wednesday, March 2.

In fact, China accidentally leaked some information in terms of how the Chinese media will cover the Russian invasion (hint: nothing negative about Russia).

As for a sanction covering US oil…

Surprisingly, the Biden administration did not add a sanction dealing with Russian oil at all. Had the US stopped buying Russian oil completely, that could have created some financial hardship. In addition, by bringing US domestic production back on, that too would help lower the price of oil. By stopping Russian oil imports, and helping tank the market, Russia would struggle to sell oil to China as well. 40% of Russia’s revenue comes from oil and gas which has increased in price nearly 50% from Jan 1 2021.

MetalMiner will include an oil forecast and adjust all long-term forecast ranges for non-ferrous and ferrous metals in its soon-to-be released Annual Outlook Q1 quarterly update.  

In addition, Biden should have issued immediate sanctions against Putin himself, as opposed to waiting a day. Furthermore, the US should also establish sanctions against China for helping Russia.

Putin betted on a gutless West that would not stand up to an invasion. He’s won tactically as of last week. And his latest nuclear threats suggest he feels threatened by how long it has taken to take control of Ukraine. How it pans out in the long term remains unknown. Ukraine is a large country to occupy. The going theory/end state involves the installation of a puppet regime by Moscow with Russia backing out within months. Ukraine will remain as a vassal state under Moscow’s control.

The markets appear to have started a recovery. Pity for the Ukrainians – the West has initially led them down the river only to appear to abandon them. The Ukrainians themselves appear to have launched a strong guerilla counterattack. Now the funding of arms from the West and the Starlink satellite turned on by Elon Musk to enable critical communications, may turn the tide and thwart Russia. Let’s hope someone has a strategy to de-escalate the nuclear talk.

 

In 2018, a pair of us on the MetalMiner team attended the “premier aluminum conference in Europe” — Aluminum 2018 Dusseldorf. Although Dusseldorf felt like a charming Ohio blue collar town with good beer, one of us left the event with a deep cough (obviously pre-Covid). Oddly enough, the weather alert app kept displaying daily ozone levels in the “high” or “extremely high” range. As a puzzled American, one of us appeared confused and the other, thankfully knowledgeable. The cough comes down to the type of energy now used in Germany, coal. MetalMiner’s European colleague quickly explained that after the Japanese Fukushima nuclear disaster, Germany implemented a plan to shut down its entire nuclear operations no later than 2022. 

Source: MetalMiner CEO Lisa Reisman

In hindsight, that decision by Germany appears both foolish and ironic. Foolish because Germany has lost its negotiating power (pun intended) with Russia for which it relies.  It’s ironic because the country already had “clean energy” but now must turn back to dirty energy to avoid blackouts.

Join the MetalMiner team on Wed March 2, 2022 at 11:00-11:30 for a market outlook on the impact of the Russian invasion on aluminum and steel prices.

In the meantime, while the world watches the Russian invasion and also the impact of sanctions, (we’ll venture a guess that they will have minimal impact), the MetalMiner analyst team discussed Europe’s energy situation and the impact on various metals markets.

On stability of the electric power grid in Europe

Have you ever stood in a field and felt a constant breeze for hours with no interruption at all? Well, we haven’t either. However, if you think wind comes and goes how about relationships with other countries like Russia?  Perhaps one can conclude that renewables serve best as supplemental energy sources, certainly not primary sources. When Texas needed to fly helicopters with jet fuel derived from oil to thaw out windmills, clearly the grid did not perform as planned. This begs the question: will the move to green energy continue and will it pull up metals prices needed to support green energy initiatives? If the trend does not continue, one might expect a sharp reversal for several metals. 

Evidence that the US power grid has weakened

Home and commercial generator manufacturer Generac has seen a big uptick in home generator sales according to this recent article. Heck, even one of our analysts recently purchased a natural gas generator from Generac to shore up a weaker local power grid. And CEO Aaron Jagdfeld confirmed rising sales in Russia and the Ukraine by stating, we’re seeing interest in Russia and Ukraine which arguably might be related to some of the security concerns short term.”  

To us, this represents a sure sign that people know the grid appears unsustainable. The green narrative centers around climate change as the root cause of more severe weather but the other factor relates to the unreliability of green energy and power companies have failed to make the investments in back-up energy sources needed to support wind and solar. Green energy goes down far more often than either nuclear or coal plants.

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The Rare Earth Metals Index (MMI) rose by over 17% month over month.

MetalMiner launched the entire MMI series in January, 2012. At that time, all of the rare earth metals began with an index reading of 100. By June of 2013, the rare earth metals MMI  plummeted to 29 and reached a low in 2016 of 16. In addition, the bear market for the entire complex lasted for over four years and didn’t really start to move until April, 2021. That four year bear market outlasted all other metal price slumps for both ferrous and non ferrous metals.

The Rare Earths MMI has continued to increase since April of 2020.

Buying organizations can track actual rare earth prices with a MetalMiner Insights subscription. 

Beginning in 2008, the media went mad for rare earths and the looming crisis of America’s dependency on China. Everyone knows rare earth metals go into green technologies – from batteries to electronics. The U.S. military also heavily relies on these metals and that’s why the DoD has added many of these metals to the nation’s strategic stockpile. 

The relationship between metal prices and mining projects

Most of the junior mining firms that launched projects back in 2008 – 2010 to help alleviate the world’s reliance on China, went belly up. Crashing rare earth metals prices never support mining projects and investments. Of course, at the same time, Molycorp, once America’s only producer of rare earth metals at its Mountain Pass location in California, also closed. The company sadly shipped “some of its most profitable assets” to China-linked Neo Materials Corp. Jeffrey Green, the author of that linked story probably serves as one of the most prolific commentators in rare earth metals circles. In addition, Green offers specific recommendations to alleviate American reliance on the Chinese. 

In addition, Green suggests a series of actions that the U.S. government can take. First, he suggests that the U.S. government reduce the red tape and bureaucracy in bringing new projects to market. This mostly refers to the permitting process. In addition, American rare earth producers would have a huge leg up in fundraising and market acceptance if the U.S. military awarded take or pay agreements. These agreements commit volume to producers for military systems requiring these metals. Last, instead of product substitution, Green suggests the US invest in “production technologies to increase its supply.” 

Some of these recommendations have come to fruition. Moreover, many of these suggestions also appeared in the Biden-Harris supply chain disruption task force.  The task force recommended incentives to support “sustainably produced strategic and critical materials”. Furthermore, the administration ordered the Department of energy to release a lithium battery “blueprint” to help develop a domestic lithium battery supply chain.

Unfortunately, moving to clean energy and green technologies will take a whole lot of money and commitment. Many of the components of the President’s plan have landed nowhere as the $7b earmarked in Build Back Better has not come to fruition.

MetalMiner Insights will launch a series of battery indexes in H1 2022. Sign up for Gunpowder, our quarterly newsletter to receive MetalMiner Insights product updates.

Actual metal price trends

The biggest mover includes terbium oxide up by nearly 22% to close at $2174/kg. 

Neodymium oxide increased by nearly 17% rising to $178389/mt.

 

The Automotive Monthly Metals Index (MMI) dropped by 2.5% for this month’s reading, following last month’s 3.4% decline.

However, from a historical perspective, the Automotive MMI sits just off its all-time high. For nearly all of 2021, the entire automotive industry has felt pain. That pain has come in the form of high prices, lack of material availability, and logistics delays. 

Steel mills, in particular, took a very aggressive negotiation approach with automakers during Q4 2021. In fact, MetalMiner stated that the mills’ aggressive approach would likely lead to demand destruction. Automakers then and now always have options. MetalMiner outlined a few of those options previously. Options include: moving tons to other suppliers, PPAP (qualifying new suppliers for new parts) new suppliers, among others. 

MetalMiner did not consider changes to boiler plate purchase order terms and conditions. But Stellantis opted for that strategy.

FWIW, this quick-read strategy brief outlines the “5 Best Metal Sourcing Strategies

Steel mills took the first shot 

At the time, steel mills wanted to force automakers to adjust their 2022 contract pricing to better reflect the then-current spot market (+$1500/st for HRC). Mills, because of high demand and supply constraints, dictated all sorts of terms and conditions. These included: minimum tonnages, premium pricing for items the mills did not want to produce, adders and extras etc.  Negotiations took a “take no prisoners” attitude. 

Steel industry consolidation, most notably Cliffs buying up AK Steel as well as much of Arcelor’s automotive business, further tilted the negotiation balance toward suppliers.

Then the market started to shift

Several automakers in discussions with MetalMiner revealed frustration over the heavy handed negotiation approach taken by the steel mills. A few weeks later, prices had started to slip as new capacity came online and imports started to arrive in greater volumes. So far, steel prices have not reached a price floor.

Here is how metal buying organizations know precisely when markets shift out of trend.

Stellantis rebels with a big hammer

So it should come as no surprise that Stellantis recently released an extensive update to its standardized terms and conditions. Perhaps they did this in response to what it saw from suppliers. Many auto producers have reported significantly higher raw material price increases throughout 2021. In a recent Ford interview, the company indicated that it spent an additional $2-3b last year and will see another $1-1.5b in additional costs this year. Ford went on to say that the supply chain will loosen up during the second half of 2022 due to new chip capacity coming online and Covid impacted workers returning to work. 

As a result, MetalMiner speculates that Stellantis changed many aspects of its terms and conditions to counter what the company perceived as strong arm tactics across its supply base. Warner Norcross and Judd, a law firm, published a summary of those contractual changes

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As an example of how trade disputes often have little to do with trade, the announcement this week that the US and UK would sit down for talks to resolve the Trump era “trade dispute” over steel and aluminium tariffs serves as a case in point.

Back in March 2018, when the former US president first imposed section 232 import tariffs of 25% on steel and 10% on aluminium imported from nearly everywhere, the UK belonged to the EU. While the application appeared heavy handed, strong arguments for action existed. Capacity utilization among the US steel industry had dropped to record lows and the industry as a whole had struggled to make a decent return since the financial crisis. But late last year, the EU successfully negotiated the removal of the tariffs in return for a quota agreement with the US.

UK and Europe no more

The UK, however, exited the EU on January 1, 2021, and so could not avail itself of that agreement. In fact, to make matters worse, clauses in the US-EU agreement make trade between the UK and EU harder because the US-EU agreement states steel originating in the UK will still attract the tariffs even if worked on and exported by EU companies.  This has the effect of making its use in components destined for the USA uneconomic for EU manufacturers.

Where does the UK rank?

Naturally, US steel producers remain opposed to any deal. And, likewise for Japan, with whom the US has opened discussions in parallel, arguably the industry has cause for anxiety. Japan ranked 5th in 2020 among suppliers to the US steel market at just under $1bn according to Statista.com. However, the UK doesn’t even feature in the top ten. Nor does it qualify as either a country that does not support free and fair trade or one that has lax environmental legislation. Both of these arguments do not support relaxing imports from countries like China. What the UK does have involves an unresolved thorny problem with the EU specifically, Northern Ireland, and its trade agreement with Eire, a member of the EU.

Possibly because the current President claims distant Irish ancestry, or possibly as a sop to the EU, the current Biden administration has exacerbated tensions in the province over resolution of the border issues. In addition, the administration has used issues like the steel and aluminium 232 tariffs as a lever that it perceives gives it influence over the EU-UK negotiations. In the meantime, countervailing action by the UK penalizes US exports of various products, some like whisky producers have seen volumes fall, others like Harley Davidson have seen profits vanish.

Too many jobs remain on the line and company futures at stake for politicians to play games with trade. The UK’s application for equivalent treatment to its European neighbors should address whether any additional UK tons poses a serious threat to US producers. It’s hard to see how it does with the EU industry ten times larger given free reign, but that’s the measure.

The pandemic certainly created a challenging environment for business in 2021.

Lockdowns hampered operations. Metal scarcity and rising metal prices caused immense cost pressures, loss of profits and, in some cases, bankruptcies.

One, although by no means the only issue, was disruption to global supply chains.

Research into the causes and potential solutions will be the stuff of analysts and pundits for years to come. A thoughtful report by Citi Bank entitled “GLOBAL SUPPLY CHAINS, The Complicated Road Back to ‘Normal’” holds out a feasible road map back to normality that deserves some scrutiny.

Request a 30-minute demo of the MetalMiner Insights platform.

Supply chain issues for metals, mining

supply chain chart

cacaroot/Adobe Stock

For MetalMiner readers, a graph on page 37 illustrates the disproportionate impact supply chain issues have had on the metals and mining industry, reports of disruption are a factor of twice more than the next nearest industry and a multiple of several times more widely covered issues, like retail and auto, that tend to dominate the media.

Rather than dwell on the question of how we got here, we would rather explore how these issues unwind.

When do global supply chains get back to normal?

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(Editor’s note: The following is a guest post from C.J. Nord, C.P.M., CSCP, founder of the nonprofit Supply Chains for Good, and Harry Moser, founder and president of the Reshoring Initiative.)

Don’t hold out hope for the U.S.’s stainless steel shortage to get better until you know of new supply coming online.

There appear to be no plans in the works to increase domestic production. Supply may tighten even more than we have seen. This is similar in scale to the chip shortage.

Stainless steel shortage factors

ATI logo

Casimiro/Adobe Stock

Like almost all factory shortages, multiple factors have led to the stainless steel shortage.

The shortage became a national concern in January 2021, when ATI Metals took 304 stainless offline and shifted production to 316 grade.

The news of that change didn’t make it downstream. Our nation is still underinformed about the shortage of this type of steel. Stainless is critical for multiple applications in a broad range of industries.

The ATI change took roughly 30% of our nation’s supply offline. Furthermore, only about 10% has come back online (these are rough numbers based on our surveys of users and distributors).

If a mill decides to bring 304 online, it could take as much as a year for supply to reach the distributor level.

This is a long-term, painful shortage.

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Metals will play a significant role in helping governments and companies to address climate issues by aiding the transition to cleaner energy and ultimately decreasing carbon emissions, industry watchers said.

“The metals industry is crucial to facilitating this,” one analyst told MetalMiner.

“If you want energy transition, it is not going to happen without metals and mining,” the analyst added.

His and other analysts’ comments come as the 2021 United Nations Climate Change Conference, also known as COP26 (Conference of the Parties), which took place in Glasgow from Oct. 31-Nov. 13.

Are you under pressure to generate steel cost savings? Make sure you are following these five best practices

Phasing out coal

carbon emissions

kamilpetran/Adobe Stock

The conference ended with an agreement to work towards limiting an increase in global temperature to 1.5 degrees Celsius. Chief amongst the steps to achieve that is the limiting of coal.

Up to 40 countries had originally planned to “phase out” coal usage in the next 10-20 years. However, the world’s largest users — China, India and the United States — were able to change the wording to “phase down.”

Much depends on China and what it does with coal, however. That includes running power stations and providing feedstock for steelmakers’ coking ovens, the first analyst said.

“I don’t doubt that China will wean itself off of coal,” the first analyst said, “but the reality is that coal will be around in another 30 years.”

Other parts of the climate agreement included 100 countries’ agreement to achieve a 30% cut in methane levels by 2030. Indian Prime Minister Narendra Modi also announced at the conference his country’s plan to achieve net-zero carbon emissions by 2070 as well as to achieve some reduction by 2030.

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