CommentaryMarket Analysis

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Last week, MetalMiner reported on the challenges India’s steel companies face in the form of cheaper imports, and their desire for the Indian government to impose an import tax.

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The woes of India’s aluminum producers, too, are similar.

Primary and secondary producers have started grumbling about cheaper imports eating into their aluminum business.

The ongoing trade war between the U.S. and China has seen the dumping of aluminum finished products in India, not only from China but also from nations with whom India has a free trade agreement, including Vietnam, Malaysia and Japan.

Anil Agarwal, of the Aluminium Secondary Manufacturers Association, was quoted by the Business Standard newspaper recently as saying that the import of finished aluminum products into India had eroded the margins of medium and small players by as much as 7%.

According to estimates, such imports have gone up by over 50% year on year, which has put the small and medium-sized enterprises (SMEs) businesses in peril. Total aluminum imports have grown 21% year over year.

Between April and October 2018, aluminum imports into India increased 24% year over year. In addition, low prices and rising production costs have also made life difficult for the domestic aluminum industry. Production costs, for example, have gone up as much as 30% over the past approximately four years.

Primary and secondary aluminum producers, like their steel counterparts, have been asking the Indian government to hike the import duty on primary aluminum to 10% from the current 7.5%, according to the Business Standard.

India’s domestic aluminum industry has about 3,500 MSME players, the Business Standard notes, while there are three large primary producers —Hindalco Industries, Vedanta and the state-owned National Aluminium Company (Nalco).

Scrap aluminum imports, too, have gone up dramatically.

But imports of aluminum scrap carry a 2.5% import duty, even though imports have gone up by about 27%, by the industry’s reckoning.

Indian producers lament they cannot compete with countries like China. The latter is able to produce aluminum at a cheaper rate because it follows the Shanghai Metal Exchange for price, which is U.S. $250-300 per ton lower than that on the London Metal Exchange.

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Incidentally, India has set a target of producing 10 million tons of aluminum by 2030, up from the present-day 3.4 million tons.

Steel imports are once again threatening India’s steel sector, spurring major steel companies to ask the government to impose steel import duties.

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In the past few months, representatives of steel companies like Tata Steel and JSW Steel have met steel ministry officers with a request that the Indian government look at the present steel import-export scenario and impose duties.

According to a Reuters report, Indian domestic producers are facing not only the issue of cheap imports from China, Japan and some Southeast Asian countries, they are also been buffeted by low domestic prices.

Now, there are reports coming in that the steel companies are seriously contemplating increasing prices, which seems like a contrarian position since consumers have the option of buying cheap, imported steel. At the start of the present financial year, India had turned into a net steel importer for the first time in two years. By June, imports had increased by as much as 15%.

JSW Steel has already hiked the prices by over $100 per ton; others are thinking of following suit.

The reason? An increase in some raw material prices and growth in international steel prices. Indian companies have explained their proposed hike was to be in sync with rising international prices.

Imports, however, are what are causing Indian steel majors a major headache.

Imports of stainless steel from Indonesia, for example, has grown by nine times, according to the Indian Stainless-Steel Development Association (ISSDA). ISSDA also feels that countries like Indonesia, Malaysia and others are allegedly abusing the Association of Southeast Asian Nations (ASEAN) free trade agreement.

The steel ministry is sympathetic to the demands of local producers, and may be contemplating some measures to curb the situation.

But it’s not clear exactly what the government plans to do.

Some reports said the new measures may be more in the nature of non-tariff measures. It’s a case of once bitten, twice shy for India on this matter. In 2016, it lost a dispute against Japan at the World Trade Organization (WTO) on charges that New Delhi unfairly imposed import duties to safeguard its steel industry.

JSW Steel’s Joint Managing Director Seshagiri Rao was quoted last month as saying there was an urgent need to raise duties on steel imports, dubbing them a “major threat” to domestic industry.

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In the first nine months, while exports from India fell by 38%, imports grew faster, Rao pointed out.

The aluminum price has been fluctuating between around $50/ton above and below a median of $1,900 for several months now.

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There is considerable uncertainty as to where it is going to go in 2019, yet some commentators, such as ING Bank, are predicting prices will hit U.S. $2,250/ton by the end of the year on the back of constrained supply.

Of course, we should define what we mean by constrained supply.

There are two aluminum markets: one in China and the other being the rest of the world. They no longer operate quite in parallel universes as Alcoa’s ex-boss Klaus Kleinfeld once suggested, their intersection being Chinese exports of semi-finished metal – that metal that both exists within the Chinese market and the rest of the world.

How that volume of semi-finished exports varies tells us a lot about the state of the Chinese and global markets.

Although lifted by record November exports, the January-November figure is up 20.2% from a year earlier, to 5.28 million tons. That figure is on track to hit almost twice the total production of the world’s largest producer outside of China: Rusal.

Much of Rusal’s production is primary, of course, and China’s exports are semis. However, semis flooding the Southeast Asian and wider markets depresses or replaces local demand for primary metal, so the comparison remains valid.

China’s exports are often not given the attention they deserve as a dynamic in the global aluminum price.

Despite the primary metal deficit persevering in the world outside China, premiums have weakened, with ING noting European premiums have edged lower for several months now. As a result, inflows of material into LME warehouses have increased — since early December, LME inventories have increased from 1.04 million tons to around 1.3 million tons.

In Asia, premiums have also been weaker.

Japanese spot premiums are trading at around U.S. $77/t, down from over U.S. $90/t in October, with quarterly premiums for 1Q 2019 of U.S. $83-$85/t, compared to U.S. $103/t in the previous quarter.

Meanwhile, cost pressures have eased with fears of disruption from Rusal’s alumina refineries now removed and an expectation that Norsk Hydro’s Alunorte refinery could be back to full production in the first half, reducing supply-side fears.

At the same time, China has moved from being a net importer to a net exporter of alumina. As a result, alumina prices have fallen from levels as high as U.S. $640/t over parts of 2018 to around U.S. $370/t currently. The alumina/aluminium price ratio has also fallen from a peak of 31% in September 2018 to 19% currently.

Even so, according to U.S. producer Alcoa’s advice last week reported by Reuters, at current prices some 30-40% of the world’s smelters are losing money, which explains why supply-side primary metal growth flatlined in the second half of last year. Even Chinese smelters reacted to the low price environment.

Under the circumstances, ING’s $2,250/ton looks optimistic for the year end. As with every prediction this year, that has to come with the caveat that it depends what happens to trade talks, as so much expectation on the direction of global GDP growth appears to depend on that issue.

The longer uncertainty goes on, the more of a drain it will be on investment and the potential for continued positive growth in H2 and next year. For now, the U.S., China, emerging markets and even Europe appear to remain in positive GDP growth mode (although it has to be said, Europe’s numbers are meager).

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Positive demand growth and continued constrained supply suggest a lift in prices this year is in the cards. However, rising Chinese exports remain a worry.

If the domestic market is not absorbing this tonnage and the SHFE price remains depressed due to oversupply then the deflationary impact of those exports is unlikely to simply go away.

Some call them safeguards, some call them protectionist barriers, and some love them and some hate them.

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Few measures divide like import tariffs.

We have seen it in the U.S. While Europe would claim its own measures are a reaction to the impact of imports following the U.S. Section 232 action, the reality is domestic European producers — led by their trade group, the European Steel Association (EUROFER) — are very much in favor of the European Union’s decision to put in place permanent safeguard measures on steel imports (in place of the provisional ones which have been applied since July 2018).

The new measures differ from the provisional arrangements in part because they were arrived at after careful monitoring of imports in the intervening period. As such, they are so are more targeted, at some 26 product categories, Pan European Networks reports in its publication Government Europa. The tariff of 25% applies to imports that exceed a certain threshold and are designed to ensure sufficient supply is available to consumers without allowing the market to be swamped by excess material, severely depressing prices.

A report in Steel Times quotes Eurofer saying imports have surged by 12% last year, making the need for an effective defense mechanism essential.

Axel Eggert, director-general of EUROFER, is quoted as saying “For every three tonnes of steel blocked by the US’ section 232 tariffs, two tonnes have been shipped to the open EU market.”

The measures do appear to partially reflect consumers concerns, EUROFER says that the final measures include an immediate “relaxation,” increasing the size of the quota by 5% (calculated on the base years of 2015-2017), with a further 5% relaxation in July and another 5% in July 2020, subject to review. Steel demand in 2019 is expected to increase by just 1%.

But, not surprisingly, not everyone is in favor of the measures.

European auto manufacturers association ACEA has called the measures protectionist. It has said that steel exports to the United States have only dropped slightly, and so little extra steel has been diverted to Europe. EUROFER puts the figure at an increase from 20% import penetration historically to 25% import penetration during the monitored period last year – hardly the “significant volumes” touted by UK Steel Director General Gareth Stace.

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If the U.S. reaches a sufficiently attractive trade deal that it decides to remove the Section 232 measures – unlikely, but a possibility – to what extent will Europe remove its new measures?

We will see. In an increasingly protectionist world, barriers are quick to be adopted and slow to be removed.

[Editor’s note: This is the third and final part of our series on tariffs. In case you missed them, read Part 1 and Part 2.]

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2002 Bush Section 201 Steel Tariffs

All of this background analysis brings us to the heart of the current debate: are the tariffs “bad” for the economy and manufacturing?

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The only trade study published on tariffs that measures actual impact — as opposed to using models to support claims — sheds some light.

As previously reported by MetalMiner, a 2003 study used primary research with 419 steel-consuming companies, as opposed to econometric modeling.  At the time, this represented fully 22% of all steel purchased by companies in the U.S. That study concluded “overall employment of steel-consuming industries generally fell or remained flat in 2002-03” compared with the previous two years, but that productivity and wages increased over the three-year period.

Moreover, the study noted a $30.4 million GDP loss — not nothing, but insignificant against the total.

Perhaps most ironically among steel-consuming companies, “overall sales and profits increased, while capital investment fell, for most steel-consuming industries in 2002-03 – the period after the implementation of the safeguard measures.”

Not all results were positive.

Half of industry respondents reported higher steel prices and 43% said that they could not pass those costs onto their customers. Some reported that producers broke contracts.

Finally, 32% of respondents saw higher lead times, while 46% of respondents noted difficulties in obtaining materials.

Which Brings Us Back to the ‘Model’ Studies…

The use of models remains inherently flawed because most models require the use of forward-looking data and assumptions.

The Coalition for a Prosperous America conducted a trade study that generated different results from the Koch study, primarily by taking into consideration actual baseline GDP and total employment data, and CBO forecasts for GDP and employment (the CBO is considered by policy wonks to be the most neutral of all economic reporting government entities).

That study also factored in industry plans and announcements from the steel industry and used the Regional Economic Modeling Inc’s (REMI) model, which is used widely by think tanks, state and local governments, etc.

Other Government Research Debunks Broader Negative Tariff Impact Claims

A Congressional Research Service (CRS) analysis points to negative impacts from the tariffs on steel and aluminum. That analysis, however, suggests a much narrower range of impacts from higher prices of steel and aluminum to lower imports of those same commodities.

The study also claims input costs will rise for downstream manufacturers. Certainly, prices have risen with the imposition of the tariffs. However, nobody has conducted research to determine if manufacturers could pass down costs and/or if their profits were lower, higher or about the same as prior to the tariffs.

In other words, have the higher prices actually impacted GDP and employment data?

The CRS study suggests the two biggest variables to consider relates to downstream prices and availability of imports, which will depend upon the range of product and country exclusions and the degree to which other countries retaliate.

Regardless, the ISM Report on Manufacturing released in December, which also relies upon primary research with downstream manufacturers, reported: “Despite U.S. tariffs on foreign steel and aluminum, prices for those key materials have declined, executives said.”

Those price declines mirror current commodity market conditions in which the overall bull market appears to have run out of steam. MetalMiner’s long-term outlook for both commodities and industrial metals shifted from bullish to bearish back in December 2018 and January 2019, respectively.

It’s easy to glob onto the mainstream trade war discourse and assume the widely circulated studies must serve as the whole truth. The truth, however, requires the media and the public to acknowledge real anti-tariff media bias, the actual overcapacity conditions that led to the imposition of Section 232 in the first place, and the impacts measured post-tariff as reported by those that actually, as opposed to theoretically, felt the impact (e.g. downstream manufacturing organizations).

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The “war” on trade requires all of us to dig deeper and perhaps seek to learn what we don’t know.

[Editor’s Note: This is the second part of our three-part series on how tariff impacts — positive or negative — are perceived, the history of Section 232, and China’s role in the global steel marketplace (and how that has affected the U.S.). In case you missed it, Part 1 can be read here.]

The Bush tariffs of 2002 came as a result of a Section 201, as opposed to a Section 232 investigation. The Trade Act of 1974 covers Section 201 investigations, whereas Section 232 derives its authority as part of the Trade Expansion Act of 1962, based on national security grounds.

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MetalMiner conducted an analysis of every single Section 232 case initiated since the passage of the Trade Expansion Act of 1962. The results suggest market observers need to dig into the details further to see why various presidents have taken action on imports of particular commodities, as well as what types of action they have taken.

Section 232 has been invoked 26 times.

Source: MetalMiner analysis of ITC data

Of the seven times in which a primary metal industry initiated a Section 232 investigation, in only one case — this most recent one — did the president determine action was necessary to adjust imports. However, in one of the cases, President Ronald Reagan agreed to update the National Defense Stockpile.

Of the seven times in which a derivative metal industry (nuts, bolts, bearings, parts) initiated a Section 232 investigation, in no cases did the president conclude action was necessary to adjust imports. However, in one case, for metal cutting and metal forming machine tools, Reagan deferred a decision on Section 232 and instead sought voluntary agreements with foreign suppliers; indeed, one went into effect for a period of five years and was extended for two additional years.

In all other cases, the only industry that received Section 232 relief has been petroleum or oil. Now that the U.S. has achieved energy independence, MetalMiner suspects the U.S. will not see a case made under Section 232 for this commodity (so long as the U.S. remains energy independent).

The U.S., however, is not steel independent, meaning the U.S. does require some level of imports to satisfy domestic demand.

Historical analysis suggests the U.S. has filed about the same number of anti-dumping cases today as it did in the late 1950s-1970s. The difference today, though, comes down to the imposition of duties; far more are implemented today than during that earlier time period.

Logically, as tariffs have steadily declined, imports have grown, while today the number of products targeted for anti-dumping measures has declined since the 1980s.

What Has Changed and Why Should Anyone Care?

In a word: China.

In 1960, China produced a total of 18.5 million tons of steel, whereas the U.S. produced about 6 million tons. Incidentally, the price of a ton of steel in 1962 was $144/ton — or $1,180/ton in today’s dollars!

It wasn’t until 1996 when China first produced 100 million metric tons of steel. And the real growth happened after China ascended to the WTO in 2001, growing steel production from 128.5 million metric tons in 2000 to nearly 495 million metric tons in 2007.

Source: MetalMiner analysis of World Steel Association data

Obviously, as China’s economy began to grow, steel demand also grew. Any market observer would also expect production to increase to support economic growth.

Perhaps the more interesting statistic to examine is production against demand. By looking at the production figures above, one might assume that demand also steadily increased since 2007.

But did it?

Source: MetalMiner analysis of World Steel Association data

In a word: no.

China’s demand peaked in 2013 at 772 million tons, declined and then reached 767 million tons in 2017, whereas China produced 779 million tons in 2013 (a little higher than demand). But in 2017 China produced 831.7 million tons for a surplus of 64.7 million tons.

2018 statistics show China produced more steel than any year in its history — 923 million metric tons, according to Reuters, against a demand projection that is at best flat to slightly up from 2017, based on a MetalMiner analysis. Assuming demand of 780 million tons, that would suggest a surplus of over 140 million metric tons.

U.S. demand and production, in contrast, appears paltry.

It should come as no surprise that the Trump administration has taken significant steps to shore up the domestic industry against Chinese imports.

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The only study that takes into consideration these factors, such as actual demand and actual supply, involved the original Department of Commerce studies on Section 232.

The Raw Steels Monthly Metals Index (MMI) posted a one-point increase this month, moving to an MMI reading of 80.

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Source: MetalMiner data from MetalMiner IndX(™)

As reported last month, steel prices continued to fall from their historically high levels reached back in the spring of 2018.

CRC and HDG prices are back to June 2016 levels, while HRC is still slightly higher than the price point hit following the spring 2016 raw steel price surge.

Source: MetalMiner data from MetalMiner IndX(™)

Steel plate, however, bucked the trend with a price gain into February. It remains to be seen if it will break the previous price resistance point hit earlier in the month, a historical high of $1,004/st for the MetalMiner Index.

While raw materials, such as coking coal and iron ore, typically trade in the same pattern, in January they traded differently.

Coking coal prices moved sideways, while iron ore prices increased sharply this month on the back of a 10% production cut announced by Brazilian iron ore miner Vale SA.

Moreover, iron ore prices may continue to rise if the Chinese government prohibits expansion of iron ore and steel projects in 2019.

China continues to struggle with industrial pollution in the top steelmaking city of Tangshan and in the industrial province of Henan.

What This Means for Industrial Buyers

Plate prices may be at or close to their peak.

Meanwhile, buying organizations will want to pay close attention to any price changes, particularly to the upside (in fact prices have notched up for HRC, CRC and HDG in the opening days of February) to determine if the current downtrend shifts to a sideways trend.

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Actual Raw Steel Prices and Trends

Chinese coking coal prices continued to climb this month, increasing another 15.5% on top of last month’s 23% increase, ending at $315.18/mt, which was still lower than October’s $348/mt.

Korean standard scrap steel also increased in price again this month, adding a 12% increase on top of last month’s 6% increase, ending the month at $175.33, also recovering and still lower than the recent October high of $193.69/mt.

Chinese steel slab increased 7% to $566/mt.

U.S. shredded scrap fell 11% to $314/st.

[Editor’s Note: This is the first part of a three-part series that will analyze the state of mainstream perspectives of the impact of tariffs, as well as delve further into the history of Section 232 and China’s role in the current trade dialogue.]

Consultants internally often pose a question to one another – do you want a client who knows he doesn’t know something, or would you rather have a client who doesn’t know what he doesn’t know?

It turns out that phrase came from the famed economist John Kenneth Galbraith, who actually used it to describe forecasters: “We have two classes of forecasters: Those who don’t know … and those who don’t know they don’t know.”

Most consultants (and forecasters) would likely argue one would rather have the former — it’s better to work with someone who knows he doesn’t know something than one who doesn’t know what he doesn’t know.

The same argument applies to trade and tariffs.

The mass media and much of the public has embraced the notion that tariffs are bad and continued “free trade” — with China — is good.

But is it? Does the mainstream press know what it doesn’t know?

We will come to this question shortly — but first, the conventional thinking.

Koch Companies Trade Study

According to a recent Koch Companies study on trade, the U.S. economy will see some very negative impacts on the economy as a result of President Donald Trump’s trade war, including:

  • Macroeconomic losses, which project declining GDP of 1.78% and a long-term impact in 2030 of 1.25%
  • Household financial losses of $2,357 per household in 2019, which compound to $17,276 in spending power over a 12-year time frame (2018-2030) in the form of lower wages, higher prices and lower investment returns
  • Increased unemployment
  • Production losses by 2030 modeled as a loss of 1% against the baseline for agricultural and services sectors and a manufacturing production decline of 2.5% from baseline

All of the above appear as reasonable conclusions one might make based on a standard methodology using the GTAP model and database, which ironically was the very same model used by the Department of Commerce to come up with the rationale for imposing Section 232 tariffs in the first place! Other countries have also used the GTAP model to formulate trade policies.

The Koch Companies’ study stands in good company. Multiple additional governmental and pay-to-play studies have come out arguing similarly against tariffs. Here are just a few:

So why in the world should we question these studies?

Because the studies don’t tell the whole story.

Media Bias, Not Fake News

Forget about fake news: legitimate studies have confirmed anti-tariff media bias.

A study conducted in 2005 — after the Bush steel tariffs of 2002 — sought to test a prediction that, “newspapers will devote more space to the costs of tariffs than to their benefits…” The study sampled 123 stories on trade from The New York Times and 177 stories from the Wall Street Journal (the stories ran during the Bush steel tariffs of 2002 from Jan. 1 through Sept. 10).

The WSJ also showed a “slant” toward free trade as measured by more sentences criticizing tariffs than supporting them, compared to The New York Times, according to the study methodology.

Not surprisingly, the results showed newspapers covered the “costs” of steel tariffs more than the benefits and the authors concluded the results suggest “that mass media will weaken the power of special‐interest lobbies relative to unorganized interests.”

Simply put, one should expect more anti-tariff media coverage than pro-tariff coverage.

Before we dive further into the studies, let’s re-examine the history of Section 232 and what cases have resulted in presidential trade action.

Part 2 of this series will be published Friday, Feb. 7. 

The February Aluminum Monthly Metals Index (MMI) edged up this month by 1.2% for an index value of 86. The index increased one point from January’s reading and has remained near the low last seen in February 2017, when the index hit a value of 84.

 

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LME aluminum prices trended upward at the start of January but lost some momentum and are moving sideways to start February. Prices continued to show weakness by failing to breach the price resistance point of $1,970 during January (the support price for most of 2018).

Source: MetalMiner analysis of Fastmarkets

With only a weak uptrend followed by some sideways movement, prices have grown weaker at $1,783/mt this month. The politics of trade and financial uncertainty in China, rather than supply and demand in the aluminum market, continue to direct LME price levels into early 2019.

Source: MetalMiner analysis of Fastmarkets

Typically, SHFE prices move similarly to LME prices, but with a lag.

As January played out, SHFE prices stayed weaker — within the pricing trendlines identified by MetalMiner in the January MMI report — with clear sideways movement, especially during the second half of the month.

U.S. Domestic Aluminum

The U.S. Midwest Premium continued to move sideways in January at $0.18/pound, ending the month at the same price point. As previously pointed out by MetalMiner, the Midwest Premium remains at a historical high. According to some analysts, the outlook on the U.S. Midwest Premium is bearish and expected to fall through April.

The European Premium fell from $150/ton to $60/ton, attributed to the removal of sanctions on Rusal. Japanese Q1 aluminum premiums also dropped significantly (by 17-19%).

Sanctions on Rusal Lifted

The U.S. lifted sanctions on aluminum giant Rusal on Jan. 27 following the company’s compliance with the removal of the Russian oligarch Oleg Deripaska — along with several other influential Russians, identified due to their ties with Russian President Vladimir Putin — from its board and parent company En+.

Given that Section 232 tariffs on imports of aluminum remain in place, this should limit ingot price decreases from the removal of sanctions on Rusal; this could be bearish for ingot prices.

But that does not explain what is happening in the commercial alloy/semi-finished market.

Due to the increased use of flat-rolled aluminum in the automotive industry, supplies of the semi-finished metal have grown tight in the U.S. marketplace. The usage of aluminum in vehicles will likely continue to increase due to the need for automakers to adapt to 2025 Corporate Average Fuel Economy (CAFE) fuel economy standards. Some additional vehicle lines, especially those with greater sales volume, could convert to aluminum “white bodies.” For 2018, the Ford Expedition and Lincoln Navigator now also use aluminum bodies.

To give some sense of what this means in terms of aluminum usage, a single Ford F150 truck uses an estimated 676.3 pounds of aluminum per vehicle. With sales of 909,330 units in 2018, that translates to around 608 million pounds of aluminum sheet. Add in the two additional models (the Ford Expedition and the Lincoln Navigator) and it’s easy to see why flat-rolled tightness exists.

What This Means for Industrial Buyers

Aluminum prices are trending slightly upward this year; however, at this time, prices are in a short-term sideways trend. Tariffs and supply concerns linger and should continue to support prices.

Only the MetalMiner Monthly Outlook provides a continual snapshot to aid buying organizations with the pricing data that can help determine when and how much of the underlying metal to buy.

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Actual Aluminum Prices and Trends

LME aluminum prices rose during January, but the uptrend lost steam as the month played out. LME primary 3-month prices ended the month at $1904/mt, around 3% higher than December’s closing price of $1,846/mt.

SHFE aluminum prices continued to fall overall, with sideways movement during the second half of January.

Chinese aluminum bar prices rose by 3.1% to $2,152/mt. and the Chinese aluminum primary cash price increased by 2.52%. However, Chinese aluminum billet decreased this month by 1.69% to 2052.47/mt.

Korean commercial grade 1050 sheet continues to decline at a slower rate, ending about 0.91% lower at the end of January. The Indian cash price increased 3.78% from $1.85 to $1.92, retracing some of the price decrease of 6.6% reported last month.

Venezuela at a Crossroads

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We wouldn’t be the first to say Venezuela is at a crossroads, and we may not be the last, but rarely in the last decade has this once-thriving economy had the chance to seize a brighter future from the wretched state it finds itself in today.

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Juan Guaidó, the 35-year-old leader of the National Assembly, has the support of the United States, much of Latin America and the European Union for his claim to legitimacy as president of Venezuela. The incumbent, Nicolas Maduro, who has presided over the collapse of the economy, has the backing of the army and a range of authoritarian regimes around the world who see in Guaidó’s populist rise the unhelpful assertion of the people over autocratic rule.

Russia, Turkey and China are all positioning themselves to prevent what they see as the U.S.’s meddling. But as The Economist points out, the world should not stand idly by and let the Venezuelans struggle with this on their own.

There is a real danger the army will simply impose martial law to maintain the status quo. After five years of wretched inflation and growing poverty, what was once one of Latin America’s richest countries has been reduced to its poorest.

With the world largest reserves of oil and gas, and sitting in America’s backyard, it is hardly in the West’s interest to allow this festering boil to erupt into civil war, let alone perpetuating the humanitarian disaster that is unfolding.

As The Economist observes, Maduro has presided over an inexorable decline in the economy. Annual inflation is now running at an unimaginable 1.7 million percent, which means that bolívar savings worth $10,000 at the start of the year dwindle to $0.59 by the end.

Venezuela has vast reserves of oil and gas; however, starved of investment and plundered by Maduro’s corrupt generals, production has tumble to 1.1 million barrels a day from nearly 3.0 million less than five years ago. According to The New York Times, the National Assembly estimates that some U.S. $30 billion has gone missing from state oil company PDVSA’s coffers in the last few years.

Even allowing for much of this being due to mismanagement and populist price controls, it still suggests corruption on a large scale.

In an increasingly isolationist America, some will ask: is this America’s problem?

Well, quite apart from the humanitarian disaster – over 3 million people have fled the country due to hunger, repression and to escape dire poverty – if America doesn’t step in, Russia will.

Venezuela has the oil and gas reserves to once again become a major economic power in the region — do we want that to be an open liberal democratic society or a puppet of Moscow or Beijing? It is reported by the paper that Russia has already moved 400 “private military personnel” to the country in moves that echo of Crimea.

Thankfully, so far the Trump administration is playing an economic, not a military game.

The Treasury Department has in effect put a U.S. embargo on Venezuelan oil by saying funds arising from payment for oil exports cannot be repatriated to PDVSA but must be held pending Guaidó’s appointment. It has also promised U.S. $20 million in food and medical aid to ease economic hardship for the country’s citizens (but payment is contingent on Guaidó coming to power).

Maduro, meanwhile, is busy selling what’s left of the country’s assets, a report in the Times states his administration is selling a fifth of his country’s gold reserves for cash to keep his regime solvent. Twenty-nine tons of gold are being sold to the United Arab Emirates — three tons were shipped last month and 15 tons were in the process of being sold last week (the balance will be sent shortly). The Times states the sale represents about a fifth of Venezuela’s previous total reserves of 132 tons.

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Venezuelans no doubt hope the end game is fast approaching, it is up to the West to help manage that process without bloodshed and, if possible, with an international consensus as to what is to follow.