CommentaryMarket Analysis

The Raw Steels Monthly Metals Index (MMI) traded sideways this month, driven by slower domestic steel price momentum. The current Raw Steels MMI fell to May 2018 levels.

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Domestic steel prices have started to fall slightly. Prices traded lower in August, showing some downward momentum. Buying organizations may want to remember that this year domestic steel prices have remained at more than seven-year highs.

Source: MetalMiner data from MetalMiner IndX(™)

All forms of steel decreased in August. HRC, CRC and HDG showed weaker momentum. Meanwhile, plate prices held stronger in August. Plate prices had the support of low metal availability. However, plate prices lost momentum at the end of August and prices decreased. So far in September, prices for all steel forms declined.

The recent slowdown in steel prices may comes down to historical steel price cyclicality. Domestic steel prices have remained in a sharp uptrend since January 2018. Prices have started to come off slightly but remain higher than last year’s average.

Chinese Steel Prices

So far in September, Chinese steel prices have increased. Chinese steel prices increased in August, recovering price momentum. Chinese steel prices appear to be in a recovery and have started an uptrend, after a slight downtrend since the beginning of the year. Higher Chinese domestic demand has supported prices.

Source: MetalMiner data from MetalMiner IndX(™)

Chinese steel prices tend to drive U.S. domestic steel prices. Therefore, buying organizations may want to keep a close eye on pricing.

The Spread

The hot-rolled coil and cold-rolled coil spread seems to be weaker than historical pricing.

The spread has been historically around the +/- $100/st level. However, the spread started a divergence back in November 2015, reaching around $200/st. 

The current spread now stands at $79/st. This means that CRC and HRC prices have become closer than anticipated. Market anomalies sometimes create divergences in prices. However, this may correct soon.

What This Means for Industrial Buyers

Since steel prices remain high, buying organizations may want to follow price movements closely to decide when to commit to mid- and long-term purchases. Adapting the right buying strategy becomes crucial to reducing risks.

Only the MetalMiner monthly outlooks provide a continually updated snapshot of the market from which buying organizations can determine when and how much to buy of the underlying metal. Click here for more information on how to mitigate price risk year-round and request your two-month free trial.

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Actual Raw Steel Prices and Trends

The U.S. Midwest HRC 3-month futures price fell this month by 3.68%, falling to $785/st.

Chinese steel billet prices increased sharply this month by 11.56%, while Chinese slab prices increased just by 1.17%, moving to $634/mt.

The U.S. shredded scrap price closed the month at $354/st, decreasing from last month.

As the Oct. 23 deadline approaches, the aluminum market is taking no risks on continued supply from Russia’s Rusal, Reuters reports.

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The industry traditionally gets together in Berlin this week to negotiate annual supply contracts for 2019 with billet makers, rolling mills and casting plants rubbing shoulders at a conference known, as Reuters notes, as the “mating season” … except one stag in the herd has been shut out.

European customers will avoid 2019 supply deals with Rusal. “We can’t agree a deal with Rusal on the basis that sanctions will be lifted by Oct. 23,” a Rusal customer in Europe is quoted by Reuters as saying, adding “Anyone that has a relationship with Rusal will be preparing for the sanctions to remain in place for now.”

The aluminum market has so far been relaxed about the fallout from Rusal being placed under sanctions at the beginning of April once a stay of execution was granted later in the month. The expectation has been the sanctions would be lifted in October.

But over the last week or two, doubts are being raised and the fear factor is dissuading buyers from taking the risk.

This is no small issue for the industry, although the market has since had time to adjust to the idea. The reality is the aluminum supply market is in deficit and Rusal still contributes some 6% of global supplies.

Even if sanctions are somehow avoided next month, Rusal will be without its normal quota of annual supply contracts, forcing it to sell on the spot market. Reuters suggests this will contribute to volatility next year, even if the market can access all the metal it needs.

But if Oleg Deripaska fails to sufficiently distance himself from Rusal and En+, such that sanctions are applied as currently expected, expect physical delivery premiums in Europe to rise again and for considerable disruption to the supply market next year. You cannot take nearly 4 million tons a year of metal out of an already tight market and not expect there to be casualties.

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The industry’s calm over the summer is going to be tested in coming weeks as the deadline approaches. Even if sanctions are avoided, the result of Rusal being left with only a spot market next year will in itself contribute to volatility buyers could do without.

The September Aluminum Monthly Metals Index (MMI) traded sideways this month. The Aluminum MMI index stands at 95 points.

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LME aluminum prices increased in August. However, so far in September, prices have fallen. Aluminum prices are in a sideways trend within the $1970-$2170/mt band.

Source: MetalMiner analysis of FastMarkets

Buying organizations may want to remember that the $1,970/mt level has served as a strong support level (or floor) since August 2017.

During 2017 and 2018, aluminum prices fell two times  toward that support level and rebounded from it. Aluminum prices decreased in December and April.

Therefore, buying organizations may want to follow closely how aluminum prices react to that level.

Global Aluminum

Mexico launched an anti-dumping probe against Chinese aluminum foil makers after reaching a new NAFTA deal with the U.S.  Mexico and the U.S. reached a new NAFTA agreement on Aug. 27. The U.S. and Mexico agreed to increase regional automotive content to 75% from the current 62.5% in NAFTA. The deal will be reviewed after six years. As stated by the USTR, duty-free access for agricultural products remains in place.

Meanwhile, Japanese aluminum premium offers have fallen by around 13-15% from last quarter. Current pricing indicates Japanese aluminum premiums of between $112-$115/mt. Premiums represent the regional logistical costs of moving metal from the producer to the regional exchange. (it is a cost borne by the consumer). Japan is Asia’s biggest aluminum importer.

SHFE Aluminum

Chinese SHFE aluminum prices increased in August, following the LME aluminum trend.

So far in September, prices have retraced slightly. As with LME prices, the SHFE long-term trend has become a mostly sideways trend.

Source: MetalMiner analysis of FastMarkets

U.S. Domestic Aluminum

As a result of the ongoing uncertainty in the aluminum market, U.S. Midwest aluminum premiums have skyrocketed this year.

However, the U.S. Midwest premium has fallen for the second consecutive month. The premium currently stands at $0.19/pound.

Source: MetalMiner data from MetalMiner IndX(™)

What This Means for Industrial Buyers

Despite the recent downtrend, the LME aluminum price trend suggests a continuation of the bull market that started last year.

Tariffs, sanctions and supply concerns will act as supports to aluminum prices, both for LME aluminum and the U.S. Midwest premium. Adapting the right buying strategy becomes crucial to reducing risks. Only the MetalMiner monthly outlooks provide a continually updated snapshot of the market from which buying organizations can determine when and how much to buy of the underlying metal.

Click here for more information from our Monthly Metal Buying Outlook on how to mitigate price risk year-round.

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Actual Aluminum Prices and Trends

LME aluminum prices increased this past month, with a closing price in August of $2,118/mt.

Meanwhile, Korean Commercial 1050 sheet fell by 3.6%, following last month’s downtrend.

Chinese aluminum primary cash prices increased by 1.12%, while Chinese aluminum bar increased by 5.03%. Chinese aluminum billet prices also decreased 5.26% this month, falling to $2,313/mt.

The Indian primary cash price fell by 0.48% to $2.06/kilogram.

European steel producers have rarely had it so good— that’s not a statement you would expect to hear describing what has been a horribly cyclical industry that has struggled with overcapacity, political interference and significant legacy costs (such as expensive pension funds).

At the same time, the European market has been flooded with cheap imports from Russia, Ukraine, and China, to name a few.

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This year however, despite howls of protest from European steel producers and politicians when the U.S. imposed a 25% import duty on steel products, European steel producers have actually been doing rather well.

The imposition of U.S. import tariffs drove U.S. hot-rolled coil steel futures to a decade high around $900/metric ton this year, up 35%. Rather than lock out European steelmakers, the resulting price rise has been a boon as European mills have found they can still sell into the U.S. despite the tariffs, as domestic mills rapidly followed the market up.

While steel prices in the U.S. held up well over the summer, they are showing signs of weakening now.

According to Reuters, hot-rolled coil prices could be down by $100 per metric ton by the year’s end, as local steel producers ramp up production and higher prices crimp demand.

But in Europe, robust global growth and capacity cuts in China have reduced competition from cheap Chinese imports.

At the same time, importers have been nervous about overordering material since the imposition of the E.U.’s safeguard measures, which were initiated in March but formerly adopted by the Commission only in July. The safeguard measures are intended to impose additional duties if imports exceed what is termed traditional levels. The measures are part of a three-pronged E.U. response to the US decision to impose tariffs on steel and aluminum and are intended to prevent the impact of material being dumped in the E.U. market as a result of it being locked out the U.S.

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As a result, European mills have found their order books have remained strong during the seasonally quiet summer months.

Long products in the North European market are booked out for the next eight weeks, according to SPGlobal. Prices are already up €10 per ton from the early summer and further rises are expected in the coming weeks for rebar, as the current measures reduce imports by some 5 million tons per annum, or 3%, according to Reuters.

buhanovskiy/AdobeStock

Global crude steel production was on the rise last month, jumping 5.8% compared with July 2017, according to a World Steel Association report this week. That rate is down from the 8.5% posted in July 2017 and the 6.4% in June 2018.

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According to the report, the 64 countries reporting to the World Steel Association produced 154.6 million tons (MT) in July.

Global capacity utilization, however, fell for the first time since December, dropping from 78.9% in June to 77.5% in July. However, July’s global capacity utilization is up from July 2017’s 73.8%.

China’s crude steel production in July jumped 7.2% compared with July 2017, having produced 81.2 MT last month. China posted a 12.9% production growth rate in July 2017 and 7.5% in June 2018.

Japan produced 8.4 MT, marking a 2.0% year-over-year drop. South Korea’s crude steel production hit 6.2 MT for an increase of 0.1%.

Elsewhere, U.S. production of 7.3 MT marked a 4.5% increase.

Meanwhile, Turkey’s production reached 3.3 MT, down 2.3%. As noted in this space before, rising political tensions between the U.S. and Turkey led to the U.S. doubling its Section 232 tariffs vis-a-vis Turkey, raising the steel tariff to 50%.

At 3.0 MT, Brazilian production was up 6.7%.

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Ukrainian production rose 11.4% to 1.8 MT.

Turkey may not be a big cheese in many ways, but its currency has taken a hammering following President Donald Trump’s threats of doubling tariffs and dire sanctions against a select few individuals close to authoritarian President Recep Tayyip Erdoğan.

But apart from the impact on one or two other emerging-market currencies, like South Africa’s, the rest of the world has barely noticed.

In one industry, however, Turkey is a sizable player: steel.

Read more

Alexander Chudaev/Adobe Stock

Like a sudden and overwhelming springtime rainstorm, aluminum prices, as many are no doubt aware, received a shock in April.

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On the news of U.S. sanctions targeting Russian companies and their owners — including Russian aluminum giant Rusal, the second-biggest aluminum producer in the world — prices spiked on fears of Rusal’s supply being pulled from the market.

LME aluminum shot up to $2,597.50 per ton on April 19, marking its highest point since late July 2011.

However, the U.S. Treasury announced an extension, allowing businesses until Oct. 23 to unwind their business activities with Rusal (among others).

As a result, the price has come steadily down since then.

Source: LME

Since that April peak, the price has dropped 22.2% as of Aug. 23.

Exemptions and Escalations

As we noted last week, Turkey has sought consultations with the U.S., via the WTO’s dispute settlement system, in response to the U.S.’s doubling of both the steel and aluminum tariffs against Turkey (bringing them to 50% and 20%, respectively).

Turkey has argued the escalation goes against provisions of the Agreement on Safeguards and the General Agreement on Tariffs and Trade (GATT) 1994.

Meanwhile, according to a Haaretz report, Israel has decided to drop its attempts to win an exemption from the U.S. aluminum tariff.

According to the report, countries that have so far won exemptions from the tariff were able to do so on the condition that they will limit their exports to the U.S., which goes against Israeli export policy.

Israeli aluminum exports are valued at $25 million annually, according to the report.

Companies on the Tariff Effect

Unsurprisingly, a number of U.S. companies have noted the effect of the tariff on their bottom lines.

According to USA Today, Coca-Cola cited the tariff as the basis for its decision to raise prices on its soft drinks.

“Clearly, it’s disruptive for us. It’s disruptive for our customers,” CEO James Quincey was quoted as saying during the company’s Q2 earnings call. “But I think the conversations have been about how is this going to work for each and every customer.”

Meanwhile, automakers have also cited the tariffs’ impact on their bottom line.

However, during its FY 2018 Q1 — the three-month period ending June 30 — earnings call in July, Nissan Corporate Vice President Joji Tagawa said the Section 232 tariffs had a limited impact during Q1; going forward, the impact will depend on how much the tariffs will continue, citing the uncertainty of the situation.

He added the company will be operating under the mindset of localization.

“Globally, we have been promoting localization,” said Tagawa, adding they would like to “pursue localization [and] increase local content.”

Commerce Secretary Visits Century Aluminum

Bolstering the domestic steel and aluminum industries, particularly in light of rising imports, has been a stated goal of the Trump administration even since launching a Section 232 investigation on the matter back in April 2017.

In this vein, U.S. Steel’s twin announcements this year regarding the restarting of blast furnaces at its steelworks in Granite City, Illinois, was touted as a victory for the administration.

On the aluminum side, Century Aluminum’s recent announcement that it would invest $150 million to double its output was also seized upon by the administration as a victory, an affirmation of its tariff strategy.

Secretary of Commerce Wilbur Ross visited the company’s plant in Hawesville, Kentucky, last Wednesday.

“And while U.S. production has steadily declined since 2000, China’s output of aluminum has increased by 1,390 percent, from 2.4 million metric tons in 2000 to a whopping 36.2 million metric tons in 2017,” Ross said during an event celebrating the restarting of a smelter. “China’s output last year was 49 times higher than U.S. production, and almost all of it was sub-standard, and subsidized — produced by state-owned enterprises.

“For the first time in decades, we are changing the trajectory of the industry. Many have painted our efforts to create a level playing field and ensure the continued viability of the aluminum industry as the starting of a trade war. But you have been engaged in this fight for a long time.”

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The company aims to return to 100% capacity by early next year and add 300 jobs in the process.

Whether by design or dint of investors’ view of a currency’s true worth in the wake of tariffs, emerging-market currencies are sliding — in some cases, fast.

The Turkish lira is by far the most dramatically impacted, as the escalating tariff standoff with the U.S. has hastened an already weakening currency toward a 40% decline, according The Economist reported.

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Source: Bloomberg (via The Economist)

Some suggest that global emerging-market currency weakness is a direct cause of the slide in the Turkish lira, but that is too simplistic.

Yes, the lira’s slide has set a very negative tone for emerging-market currencies, but the backdrop of rising dollar strength predates the spat between the Washington and Ankara.

According to The Week, India’s currency fell to an all-time low this week, reaching 70 rupees against the U.S. dollar. The South African rand and Argentinian peso have also seen big drops in recent days.

The devaluation of the rupee has led to fears the “Fragile Five” economies — composed of Brazil, India, Indonesia, South Africa and Turkey — which overly rely on growth fueled by foreign investment are all vulnerable to a debt default crisis.

Some analysts are warning the market could increasingly look at the five as a single asset class and apply the same negative attitude to all of them. That would be despite some, like India, having comparatively limited external foreign debt and good control of inflation and fiscal balances, compared to, say, Argentina, where the central bank unexpectedly lifted its main interest rate by another 5% points to an eye-watering 45% to support the currency.

The rise came after the Argentine peso had fallen for a sixth consecutive day to hit a record low against the dollar. Argentina not only has significant foreign currency denominated debt but poor fiscal control of the economy and weak banks make them very susceptible to a currency crisis.

Emerging-market stability is one thing; in itself it has the potential to create a crisis. Of more worry, however, is the potential for a global currency war, as America’s opponents either deliberately weaken their currencies to counter the impact of tariffs or tacitly allow the market to devalue the currency by not stepping in to support a slide.

The Chinese yuan has already slid 9% since April. This alone has more or less countered the 10% import tariff on aluminum and significantly mitigated the 25% tariff on steel goods into the U.S. for Chinese exporters.

According to aforementioned Economist article, there are fears that if the U.S. slaps tariffs on a further $200 billion of tariffs on Chinese exports, the yuan will slide by a further 5-6% over the coming months to a 15% devaluation. That would not only help Chinese exporters cope with the tariffs, it would put U.S. exporters at a severe disadvantage.

As the yuan (and other currencies) are sold, sellers move funds to safe havens – namely the dollar, further fueling the dollar’s rise. As the yuan falls, it drags down other Asian currencies, as its neighbors allow their currencies to weaken to maintain some degree of parity and continued access for their exporters to China.

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Weakening emerging-market currencies, particularly the yuan, would be seen by Washington as a hostile act, not an inevitable consequence of the tariffs, and in itself may spark further retaliatory action.

It has to be said, so far Beijing does not appear supportive of a weakening currency, but that may change if its trade war with the U.S. escalates.

Even if U.S. steelmakers have been slow to add capacity following President Trump’s tariff protection, it would seem foreign steel makers are willing to commit to domestic U.S. production.

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The Financial Times this week reported on the announcement by BlueScope Steel, Australia’s biggest steelmaker, to examine adding 600,000 to 900,000 metric tons per year of steelmaking capacity to its North Star business in Ohio. This would raise the Ohio plant’s existing production of 2.1 million metric tons per year to some 3 million tons at a cost of between U.S. $500 million and $700 million.

The project would involve the addition of a third electric arc furnace and a second slab caster, according to the Financial Times report. A decision is expected at the company’s February 2019 annual results pending the outcome of the feasibility study, by which time a clearer picture may emerge of what the tariff landscape is going to look like longer term.

Interestingly, Australian steelmakers are exempted from the tariffs; in theory, BlueScope could have invested at home. Australia, however, along with Argentina, are subject to quota limits, so ramping up domestic production to meet U.S. demand is not considered a viable option.

According to the Financial Times, domestic U.S. steel producers are, not surprisingly, doing rather well from the tariffs.

The resulting price rises have fueled a rally in U.S. domestic prices, helping firms like ArcelorMittal surpass forecasts previously set by analysts. Arcelor’s earnings came in at $5.59 billion before interest, taxes, depreciation and amortization for H1 2018. That represented an increase of 28.6% on the same period a year before, as half-year sales rose 17.6% year-on-year in value terms to $39.2 billion, primarily due to higher steel selling prices. Net income was up by almost one-third to $3.06 billion. It hasn’t yet resulted in Arcelor announcing any increased investment in domestic U.S. production capacity — the real aim of the tariffs — but, arguably, steelmakers are waiting to see how the whole tariff situation develops and whether they are truly here to stay (in which case, investment could result).

The U.S. Department of Commerce found foreign steel accounted for about one-third of the 107 million metric tons of steel the U.S. economy used in 2017, the Weekly Standard reported.

Although U.S. producers still have a commanding market share, the report concluded that inexpensive foreign imports were causing domestic steelmakers to lose money, lay off workers, and close plants last year.

U.S. steel plants in 2017 ran at just 72% of capacity, below the 80% level they are widely considered necessary to be profitable. The blame for poor capacity utilization fell firmly at the door of “excessive imports of steel.”

Well, that was last year; this year is something very different.

Following tariffs, steel prices are up sharply, profits are up at the domestic mills and so is capacity utilization. The domestic mills have the option to price balance towards full capacity, shielded as they are now behind a 25% import tariff. They may choose to take higher prices and forego full capacity or adjust pricing to achieve full capacity; we will see what policy has been adopted when Q3 and H2 figures are released.

It is unlikely significant new capacity will be added in the short term, though, despite talk of planned new capacity.

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According to Reuters, steel output in the United States rose 2.9% in the first half to 41.9 million metric tons and gained 0.8% in June to hit 6.9 million tons for the month. Data from the American Iron and Steel Institute (AISI) show capacity utilization at U.S. mills in the year to July was 76.4%, up from 74.4% in 2017, suggesting domestic mills generally are opting for better prices as a route to profitability rather than pricing out tariffed imports.

The spike in aluminum prices this quarter, caused by the initial announcement of sanctions on Oleg Deripaska and his investments, is an issue anyone in the aluminum sector will be only too well aware of.

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Prices spiked in days and were associated with a number of other supply constraint worries. Sharp rises in conversion premiums have not relaxed even though the primary aluminum price has since eased back to where it was just before the announcement.

The price increase and supply-chain panic was a result of the sanctions announced by the Office for Foreign Assets Control (OFAC). Prices fell back as OFAC granted a stay of application until late October 2018, allowing consumers to adjust supply agreements accordingly.

Source: Bloomberg

While the market is aware first-hand of the impact, what is only just becoming clear is the impact on the main supplier from Deripaska’s group: Rusal.

According to the Financial Times, drawing on the most recent Q2 company filing, inventories had risen to $2.88 billion at end the of June, from $2.41 billion in December as the company produced 939,000 metric tons of primary aluminum and alloys in the three months to June, but only sold 783,000 tons. Both first-half 2018 production and sales are down from a year earlier, largely due to the Q2 sanctions, even though the company continues to operate profitably.

Although Rusal is looking to boost output of value-added goods (VAGs), as they call processed products, they sharply cut back production of foil, powders and other VAG products in April for fear of not being able to shift production if sanctions were sustained.

As it happens, most global consumers restarted deliveries after a few weeks, but many in the U.S. are still reluctant to touch Rusal product – primary or VAGs – as the October crunch date looms.

Source: Bloomberg

2019 annual contracts are usually negotiated in September, ahead of the October LME week, and in preparation for supplies starting in January of the following year. Unless there is certainty that the OFAC sanctions will be lifted or some form of exemption will be granted to Rusal despite what happens to Deripaska, Rusal will again face restricted sales options going forward.

The case against Deripaska is already severely impacting any trade with entities in which he or his holding company En+ Group have a stake, as banks carry out exhaustive checks on every payment, causing delays of weeks on some transactions.

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Those consumers with other supply options will conclude it is just not worth the effort and switch to alternative sources, further crimping capacity availability in the market and pushing up conversion premiums even, if the primary metal price has yet to respond.