CommentaryIndustry NewsMarket Analysis

AK Steel on Monday reported its Q4 2018 and full-year earnings, posting net income of $33.5 million in the fourth quarter and adjusted net income of $48.0 million (compared with a loss in Q4 2017).

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For the full year, AK Steel reported net income of $186.0 million and adjusted net income of $200.5 million (up 25% from 2017).

“We made good progress in 2018, generating our highest net income and adjusted EBITDA in a decade and further strengthening our balance sheet,” CEO Roger K. Newport said. “Additionally, during the course of the year we expanded our portfolio of steel solutions, as our advanced steel operations accelerated collaboration with our downstream stamping, tooling and tubing businesses at Precision Partners and AK Tube.

“As we enter 2019, we are well positioned after the successful renegotiation of our annual customer contracts and expect another solid year.”

The company posted adjusted earnings before interest, taxation, depreciation and amortization (EBITDA) of $563.4 million in 2018, up from $528.5 million in 2017.

“Higher steel selling prices and shipments during 2018, particularly to the distributors and converters market, more than offset higher costs for certain raw materials and supplies, including graphite electrodes, compared to a year ago,” the company’s earnings release stated.

In operational news, the company announced it would close the “largely-idled” Ashland Works facility by the end of 2019 to “increase utilization” at its other U.S. operations. The plant employs 230 people and the closure would yield approximately $40 million in annual cost savings, according to the company.

“More than three years ago, AK Steel idled most of the Ashland Works operations, including the blast furnace, but continued to operate a single hot dip galvanizing coating line with 230 employees,” the company release stated. “The company plans to increase its operating efficiency and lower its costs by completing the shutdown of the blast furnace and steelmaking operations within the next several months, and by working with its customers to transition products coated at Ashland Works to other AK Steel operations in the United States with available capacity before the end of this year. This will increase those operations’ utilization rates.”

The company plans to offer the Ashland Works employees positions at other facilities, the release stated.

The company touted the cost savings from the plant closure and the Trump administration’s trade policies as beneficial to its long-term growth picture.

“These savings, combined with the positive impact of the Administration’s policies to address unfair trade practices, will help facilitate the company’s longer term growth plans,” the release stated. “It will also help maintain and enhance the company’s more cost effective steelmaking facilities and further drive growth and innovation.”

In other earnings report news, the company announced it will begin providing guidance on an annual basis, and will no longer provide quarterly guidance.

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The company expects 2019 net income to be between $160 million and $180 million, with an expected adjusted EBITDA range of $515 million to $535 million.

Late last week, a CMO of a B2B mobile technology company published a lightly scathing take on the mainstream media’s characterization of the current “trade war” (a “farce,” according to the headline), by making the case for, among other things, reshoring.

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Ostensibly reporting from the World Economic Forum in Davos, Switzerland, where representatives from participating countries such as Vietnam are worried about high-skilled manufacturing jobs skipping over them en route from China back to the Western world, the author writes that “we’ve really missed the point giving the trade war so many column inches.”

“While the cost of aluminum may sting now if you are importing,” he writes, “it’s an effect of the death throes of a model of production from the end of the last century,” going on to conclude that the future will belong to manufacturers who reshore their operations.

The article cites stats coming from the Reshoring Initiative, a firm that we at MetalMiner have had on our radar since roughly near the end of the Great Recession, and whose founder has been a key source for us in keeping our finger on the pulse of reshoring trends over the last several years.

That founder, Harry Moser, joins us as the first guest in conversation with Lisa Reisman on our new podcast series, “The Maker-to-User Trend in the Time of Tariffs.”

Maker-to-User in the Time of Tariffs: Background

After the U.S. Commerce Department’s Section 232 findings in early 2018, President Trump took action — and the rest is history.

This new podcast series takes a closer look at the U.S. manufacturing landscape in our present time of trade tariffs, and how manufacturers themselves are affected by the tariffs (winners and losers).

For example, just over 90% of manufacturing industry respondents in a recent, informal MetalMiner poll indicated that the Trump tariffs have hurt their respective businesses, via increased material costs, inventory woes and longer lead times, among other effects.

However, other manufacturers — for example, Honda — have posted healthy profits over the last year.

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Ultimately, we’re interested in what all of this means for the “maker-to-user” trend that we’ve seen gain steam the past several years.

For an excellent primer on the “maker-to-user” movement and trends, download our free white paper on the topic here.

Listen to more episodes and follow the MetalMiner Podcast here.

According to a World Steel Association report, global crude steel production increased 4.6% last year compared to 2017.

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Crude steel production increased in every region except the E.U. E.U. production declined 0.3% year over year.

Overall, production growth slowed from the 6.3% year-over-year increase in 2017.

Global steel production in 2018 reached 1,808.6 million tons (MT). Asia produced approximately 70% of that total at 1,271.1 MT, up 5.6% year over year. China produced the bulk Asian production at 928.3 MT, marking a 6.6% year-over-year increase.

China’s piece of the global steel production pie increased from 50.3% in 2017 to 51.3% in 2018.

India’s crude steel production jumped 4.9% to 106.5 MT. Of note, India surpassed Japan as the second-largest steel-producing country in the world last year.

Japan produced 104.3 MT in 2018, down 0.3% compared to 2017. South Korea produced 72.5 MT of crude steel in 2018, an increase of 2.0% compared to 2017.

As mentioned, E.U. production fell 0.3%, down to 168.1 MT of crude steel in 2018. Germany’s production fell 2.0%, down to 42.4 MT. Italian production rose 1.7% to 24.5 MT. France’s production fell 0.7%, while Spain’s production fell 0.1%.

North American production hit 120.5 MT, up 4.1%. U.S. steelmakers, buoyed by the Trump administration’s Section 232 action, churned out 86.7 MT, a 6.2% jump from 2017.

The Commonwealth of Independent States (CIS) produced 101.3 MT, up 0.3%. Russia produced 71.7 MT of that total, marking a 0.3% year-over-year increase. Ukraine’s production fell 1.1% to 21.1 MT.

South America saw its production tick up 1.3% to 44.3 MT. Brazil accounted for 34.7 MT of that total, good for a 1.1% increase.

The Middle East produced 38.5 MT of crude steel in 2018, up 11.7% from 2017. Iran accounted for 25.0 MT in 2018, up 17.7%.

Turkey’s crude steel production, in what was a tumultuous 2018 for the Turkish steel sector, hit 37.3 MT, down by 0.6%. Amid a diplomatic row with the U.S. over the detention of American pastor Andrew Brunson, in August 2018 the Trump administration doubled its Section 232 tariffs on steel and aluminum vis-a-vis Turkish imports (raising the rates to 50% and 20%, respectively).

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By country, the top 10 steel-producing countries of 2018 were:

  1. China: 928.3 MT
  2. India: 106.5 MT
  3. Japan: 104.3 MT
  4. U.S.: 86.7 MT
  5. South Korea: 72.5 MT
  6. Russia: 71.7 MT
  7. Germany: 42.4 MT
  8. Turkey: 37.3 MT
  9. Brazil: 34.7 MT
  10. Iran: 25.0 MT

buhanovskiy/AdobeStock

Domestic steel prices have been in a downtrend since August, when prices started to show the first signs of weakness.

All forms of steel, except plate, have showed downward price momentum.

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Source: MetalMiner data from MetalMiner IndX(™)

Historically, steel prices move lower during Q3 and part of Q4. When the budgeting season starts, mills begin to raise steel prices.

For the past three years, steel prices have increased at the end of Q1, just a little delayed from the general Q4 increase.

However, this year the price increase remains in hibernation.

Steel prices continue to move lower and lead times have not increased. In fact, lead times remain the shortest in a year.

Therefore, steel price increases do not seem justified for HRC, CRC and HDG.

Plate Prices — Why Are They Moving Differently?

Meanwhile, plate prices have followed their own trend.

Plate prices have remained well-supported so far. While other forms of steel have seen price declines since August, plate prices continue to trade sideways.

In fact, plate prices have increased during this time.

Source: MetalMiner data from MetalMiner IndX(™)

Plate prices in general have less volatility than other forms of steel. Plate prices often trade sideways in one direction for a long time, then suddenly shift and move into a different trend.

Lead times combined with strong demand have supported plate prices. Most steel producers see lower automotive numbers, but demand from plate-consuming industries remains stronger.

While all the other steel forms have had shorter lead times during the year, with increasing domestic capacity utilization, plate lead times continue to lengthen.

Chinese Steel Prices

The 800-pound gorilla, China, offers a window into what may happen to domestic prices.

Chinese steel prices have fallen since September 2018. Steel prices have been softer in China this year, driven by signals of weaker demand and a slower manufacturing index.

Source: MetalMiner data from MetalMiner IndX(™)

What This Means for Industrial Buyers

Current domestic steel prices appear to be in a downtrend.

Adapting the right buying strategy becomes crucial to reducing risks. Only the MetalMiner monthly outlooks provides a continually updated snapshot of the market from which buying organizations can determine when and how much of the underlying metal to buy.

MetalMiner’s Annual Outlook provides 2019 buying strategies for carbon steel

For more information on how to mitigate price risk year-round, request a free trial to our Monthly Metal Buying Outlook.

It is not just the stock market that is having a wobble — firms are asking if now is the right time to be investing in new capacity or raising production.

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2018 was a stellar year for the U.S. jobs market, but recent figures suggest part of that may have been the sugar rush of the president’s tax breaks.

That effect is beginning to wane now. Investors are looking at slowing growth in China and Europe, trade wars and a shaky U.S. housing market and asking: what does 2019 hold?

A New York Times article is robustly upbeat, reporting Labor Department data showing December was one of the strongest months of job gains in the last decade, with employers adding 312,000 to payrolls. After years of slow wage growth, the tightness of the labor market may finally be influencing wages, which the article states also showed impressive gains at 3.2% year over year. Unemployment is exceptionally low at 3.7%, yet inflation has remained benign.

Some would suggest the economy is in Goldilocks territory — growing not too fast and not too slow.

So why did the stock market crash in December, posting its worst monthly loss since the financial crisis and the worst December since 1931 and the Great Depression (as another article by The New York Times states)?

It would seem investors took fright at a number of converging factors. Those factors included the Fed’s raising of rates in the month (when many thought they had tightened enough already in 2018), the still unresolved trade war with China and weak housing market data.

All of that is leading many to ask if the bull run come to an end.

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For those on the other side of the pond, the debacle that is Brexit must feel rather like a distant joke, particularly the defeat this week of Prime Minister Theresa May’s Brexit plan by not just Parliament, but a large number of her own party.

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There may be many of a more nationalist or independent disposition outside the U.K., who have cheered on Britain’s original decision to leave the E.U.

And then there may be those who have supply chains embedded in the U.K. — or, indeed, in continental Europe — who worry about the disruption a “hard” exit from the E.U. would entail. (A hard Brexit is generally taken to mean an exit without a deal in place that safeguards the existing terms of trade between the U.K. and E.U.)

Readers will not be surprised to hear voters in the U.K. are similarly split.

Some want separation from the E.U. at any price — those are hard line “Brexiters,” many of whom come from more rural and northern parts of the country. A proportion of referendum voters were Remainers, who never wanted to leave the E.U. and willingly accepted both the financial cost and the imposition of European rules as an acceptable price for the economic and security benefits of being part of, if not a united Europe, at least an integrated single European market.

Ranged in between — and without a referendum, we will never know quite know how many this includes — are a variety of opinions from Leavers, who have since seen what leaving really means and changed their minds, to those who would be willing to try a partial separation of the sort May negotiated with Brussels (but has been soundly thrown out by Parliament this week).

The scale of the government’s defeat on her plan should not be understated.

Read more

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This morning in metals news, aluminum producer Alcoa Corporation reported its fourth-quarter and full-year 2018 results, India is considering a higher iron ore import duty and Shanghai steel futures moved up.

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Alcoa Reports 4Q Earnings

Pittsburgh-based aluminum producer Alcoa Corporation reported its fourth-quarter and full-year 2018 earnings this week, reporting adjusted net income of $125 million, excluding special items, for the final quarter of 2018.

The 4Q net income total was up from $119 million in the third quarter but down from $195 million in 4Q 2017.

For 2018 as a whole, the company reported adjusted net income excluding special items of $675 million, up from $563 million in 2017.

“Despite sequentially weaker commodity prices, we had a strong fourth quarter with higher profits in our Bauxite and Alumina segments,” President and CEO Roy Harvey said. “With the help of higher market prices earlier in the year, we increased annual profits, addressed liabilities, significantly strengthened our balance sheet, and began returning cash to stockholders. With markets likely to remain dynamic in 2019, we will focus on what we can control to continue improving our operations, addressing challenges with agility, and making the most of opportunities in the year ahead.”

In 2019, Alcoa projects a global aluminum deficit between 1.7 million and 2.1 million metric tons. In addition, Alcoa reported the global alumina market came in at a deficit of 0.6 million metric tons.

“In 2019, the Company expects the alumina market to move to a surplus that is projected to range between 0.2 million and 1 million metric tons, which assumes ongoing, third-party supply disruptions in the Atlantic region,” Alcoa states. “The projected alumina surplus is driven by China, where refining expansions are expected to outpace demand growth from smelting.”

India Considers Hiking Iron Ore Duty

According to a report from Creamer Media’s Mining Weekly, the Indian government is considering an increase to its iron ore import duty.

Per the report, domestic industry has lobbied the government to increase the current 2.5% duty on imported iron ore.

Shanghai Steel Picks Up

Global steel prices have lagged of late, but Thursday was a positive session for Shanghai steel futures, Reuters reported.

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Per the report, the most-traded rebar contract on the SHFE ticked up 0.8%, while hot rolled coil was also up 0.8%.

alexkich/Adobe Stock

A resolution that sought to reverse the Trump administration’s decision to ease sanctions on Russian companies — including aluminum heavyweight United Company Rusalfailed to pass this week, coming in at a 57-42 vote (just short of the 60 votes needed to pass).

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Sen. Chuck Schumer (D-NY) introduced the resolution Jan. 4, after which it was referred to the Committee on Banking, Housing, and Urban Affairs.

The resolution states that Congress “disapproves of the action relating to the application of sanctions imposed with respect to the Russian Federation proposed by the President in the report submitted to Congress under section 216(a)(1) of the Russia Sanctions Review Act of 2017 on December 19, 2018, relating to terminating sanctions imposed on En+ Group plc (“En+”), UC Rusal plc (“Rusal”), and JSC EuroSibEnergo (“ESE”).”

In April 2018, the U.S. Treasury Department announced sanctions against several Russian companies and their owners, including Russian oligarch Oleg Deripaska and Rusal (the second-largest aluminum producer in the world).

The April announcement sent aluminum prices skyrocketing on fears of Rusal aluminum being taken off the market.

2018 LME prices. Source: LME

As has been noted here previously, the Treasury proceeded to delay its deadline for U.S. companies to unwind business relations with the listed Russian firms, first from Oct. 23 to Nov. 12, to Dec.12, then Jan. 7, then Jan. 21.

However, on Dec. 19, 2019, the Treasury announced intentions to delist En+ Group (which has a controlling interest in Rusal), Rusal, and EuroSibEnergo.

“Treasury sanctioned these companies because of their ownership and control by sanctioned Russian oligarch Oleg Deripaska, not for the conduct of the companies themselves. These companies have committed to significantly diminish Deripaska’s ownership and sever his control.  The companies will be subject to ongoing compliance and will face severe consequences if they fail to comply,” Treasury Secretary Steven Mnuchin said in a release at the time. “OFAC maintains the ability under the terms of the agreement to have unprecedented levels of transparency into operations.”

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Notably, although the resolution ultimately did not receive the requisite votes to pass, 11 Senate Republicans voted in favor of the resolution to reverse the decision to ease sanctions — representing a now rare instance of bipartisanship.

Base metals traded higher at the beginning of January. However, momentum appears to be weaker once again.

The DBB index has shown weakness since June 2018, when it started this short-term downtrend. MetalMiner has recently revised its market outlook, advising buying organizations to closely follow how the index develops.

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DBB index. Source: MetalMiner analysis of Yahoo Finance

Since 2016, the DBB base metals complex has remained in a long-term trend (see the chart below). Base metal prices have skyrocketed since then but moved lower in 2018, when concerns about the Chinese economy started to appear.

DBB index long-term trend. Source: MetalMiner analysis of Yahoo Finance

A weaker Chinese economy will move demand lower. However, 2018 closed with the six base metals in global deficit. Supply and demand has not moved; therefore prices, mostly economic expectations and trading changes have driven base metal markets.

The Drivers

The DBB index comprises three base metals: aluminum, copper and zinc.

LME aluminum prices moved higher at the beginning of January, but prices did not breach the $1,970/mt level that acted as a support for most 2018. Prices being unable to breach that support level signals weakness for the base metal complex.

LME Aluminum prices. Source: MetalMiner analysis of FastMarkets

Both LME copper and LME zinc prices started to increase slightly at the beginning of January. Similar to aluminum, prices of both base metals fell. LME copper remains below the $6,000/mt level, which has served as the psychological ceiling for copper prices.

What This Means for Industrial Buyers

The base metals complex seems seems weaker. MetalMiner recently switched the long-term uptrend to a sideways trend.

Buying organizations may want to follow price dynamics closely, as well as each specific base metal price. Adapting the right buying strategy becomes crucial to reducing risks.

Only the MetalMiner Monthly Outlook reports provide a continually updated snapshot of the market from which buying organizations can determine when and how much of the underlying metal to buy.

MetalMiner’s Annual Outlook provides 2019 buying strategies for carbon steel

For more information on how to mitigate price risk year-round, request a free trial to our Monthly Metal Buying Outlook.

With the January 2019 Monthly Metals Index (MMI) report, we can close the book on 2018 and what was a wild year in the world of metals and metals price movements.

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It was a book that closed with a pessimistic chapter for metals (and commodities in general), with many posting price declines as markets feel the effect of simmering trade tensions between the U.S. and China.

In our latest MMI report, you can read about all of the latest news and trends in our 10 metals subindexes: Automotive, Construction, Rare Earths, Renewables, Aluminum, Copper, Stainless Steel, Raw Steels, GOES and Global Precious.

A few highlights from this month’s round of reports:

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Read about all of the above and much more by downloading the January 2019 MMI Report below: