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Before we head into the weekend, let’s take a look back at the week that was.

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• Holidays in India mean an uptick in gold buying — our Sohrab Darabshaw covered India’s holiday gold surge.
• The fourth round of renegotiation talks focused on the North American Free Trade Agreement (NAFTA) concluded earlier this week. We covered the latest round of talks, which by all accounts have the three negotiating teams at an impasse.
• As the fallout continues from Kobe Steel’s quality data falsification scandal, our Stuart Burns wrote about what exactly might have gone wrong at Japan’s third-largest steelmaker.
• The World Steel Association’s Short Range Outlook came out this week, predicting solid, albeit moderated growth for the global steel market.
• Precious and base metals have been behaving similarly, our Irene Martinez Canorea wrote this week.
• The U.S. International Trade Commission launched a new Section 337 probe related to automation systems.
• The value of the U.S. dollar has a significant impact on the fortunes of a number of metals, our Stuart Burns explained.
• And how about palladium? Burns also touched on the rise of the platinum group metal and its leapfrogging of platinum (for the time being).
• It’s third-quarter earnings report time. Alcoa and Nucor were among the latest companies to announce their earnings for the latest quarter.

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Although we have entered the fourth quarter of 2017, it’s the time of year during which companies update shareholders and other interested entities on their third-quarter performance.

Alcoa and Nucor were among the latest metals companies to announce their third-quarter earnings (on Wednesday and Thursday, respectively).

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Alcoa, which specializes in bauxite, alumina and aluminum products, reported third-quarter net income of $132 million, or $0.72 per share.

The company also posted $2.96 billion in third-quarter revenue, up from $2.86 billion in the second quarter.

The company raised its 2017 outlook for adjusted EBITDA  — or earnings before interest, tax, depreciation and amortization — to $2.4 billion, up from a previous estimate of $2.1 billion to $2.2 billion.

“Alcoa continues to benefit from favorable commodity markets, and we’ve raised our projections for profitability in 2017 and global aluminum demand growth for the balance of the year,” said Roy Harvey, president and chief executive officer, in a company release announcing the third-quarter earnings. “We continued to execute on our three strategic priorities — our strong cash generation aligns with our priority to strengthen the balance sheet, while our recent Rockdale announcement advances our priorities to reduce complexity and drive returns.”

The company is approaching a milestone, having initiated its run as an independent, publicly traded firm on Nov. 1, 2016.

“As we approach our first anniversary as an independent, publicly-traded company, we’ll continue to be guided by our three strategic priorities to further strengthen our Company and Alcoa’s foundation for the future,” Harvey said.

The company’s EBITDA got a boost earlier this month when Alcoa announced the termination of a power contract tied to its Rockdale Operations — fully curtailed since 2008 — in Texas. According to the release, beginning in the fourth quarter the termination is expected to result in an additional $60 million to $70 million in annual net income and adjusted EBITDA.

Growth in the aluminum market has added wind to the firm’s sails. As for supply, Alcoa expects the global market to be balanced for 2017, departing from its second-quarter projection of a slight surplus surplus.

“The improvement is mostly due to planned and actual curtailments in Chinese smelting capacity as well as increased Chinese demand,” the Alcoa release states.

Nucor Earnings Drop From Previous Quarter, But YTD Earnings Highest Since 2008

Nucor, meanwhile, announced Thursday consolidated net earnings of $268.5 million, or $0.83 per diluted share, for the third quarter of 2017. In the second quarter of this year, Nucor reported earnings of $323.0 million, or $1.00 per diluted share. As for the third quarter of 2016, it reported earnings of $305.4 million, or $0.95 per diluted share.

However, earnings through the first nine months of this year exceed those of the same time frame of every year since 2008, according to Jim Frias, Nucor’s chief financial officer.

For the period of January-September, Nucor reported consolidated net earnings of $948.4 million, or $2.94 per diluted share, compared with consolidated net earnings of $636.6 million, or $1.99 per diluted share, for the first nine months of last year.

“Nucor’s disciplined strategy for profitable growth is working,” Frias said during Nucor’s third-quarter earnings call on Thursday. “During the steel industry’s protracted downturn, we have invested aggressively to increase our capabilities for delivering value to our customers and profitable growth for our shareholders.”

Frias added that the third-quarter earnings decline from the previous quarter is largely attributable to lower capacity utilization rates and metal margins in its steel segment, in addition to an unplanned outage at its Louisiana DRI plant, which began in late July before operations resumed earlier this month.

Looking ahead, Frias said they see stable or improving conditions in a number of markets for 2018, including non-residential construction, automotive, energy, heavy equipment and agriculture.

“Although illegally traded imports remain at unacceptable levels, we are encouraged by the cumulative benefits of the U.S. steel industry’s successful trade cases,” Frias added.

Similarly, Chairman and CEO John Ferriola touched on this year’s “renewed surge of illegally traded imports into the U.S.,” citing the 27% year-to-date market share for finished steel imports.

“Nucor continues to believe significant work remains to be done to achieve free and fair trade for U.S. manufacturers,” Ferriola said. “More specifically, it’s time for comprehensive and broad-based remedies that address the illegal foreign trade practices that have materially weakened our nation’s economic vitality.”

He also added that Nucor applauds the U.S. International Trade Commission’s affirmative ruling Oct. 5 regarding washing machine imports (stemming from a petition filed by Whirlpool). A public hearing on remedies with respect to the case was held yesterday, Oct. 19.

In other company developments, last month Nucor announced its board of directors had approved a new steel bar micro mill project. Nucor is considering the states of Nebraska, Kansas, Missouri, South Carolina and Florida for the project.

Free Download: The October 2017 MMI Report

Other metals companies also have earnings announcements on the horizon. AK Steel will announce its third-quarter earnings Oct. 31.  U.S. Steel‘s third-quarter earnings call is scheduled for 8:30 a.m. EDT on Nov. 1.

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This morning in metals news, Japanese carmakers tested the safety of Kobe Steel products, palladium outshines gold and the global nickel deficit widened in August.

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Kobe Steel Materials Pass Safety Checks

Toyota, Honda and Mazda gave Kobe Steel, Japan’s embattled third-largest steelmaker, a touch of good news Thursday by saying its products are safe, despite the recent data falsification scandal.

According to a report in The New York Times, the products fell short of advertised standards, but met with regulators’ standards (as well as those of the carmakers).

Palladium Continues Charmed Run

The palladium price recently eclipsed that of platinum for the first time since 2001 — and the metal’s rise has people taking notice.

The upward trend for palladium has even caught the eye of the gold industry, according to the Financial Times.

Our Stuart Burns covered palladium’s rise in his post earlier this morning.

Nickel Market Showed 6,700-Ton Deficit in August

The nickel market deficit deficit rose to 6,700 tons in August, according to data released by the International Nickel Study Institute.

Free Download: The October 2017 MMI Report

Global production was 176,800 tons, with demand at 183,500 tons.

There are a number of variables that drive commodity prices, and at any one time that mix of factors will vary depending on the global economy, specific country performance, and supply and demand fundamentals, to name but a few.

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But one variable that has had a consistent impact over time has been the strength of the U.S. dollar relative to other currencies.

A strong dollar is bearish for commodity prices, as the dollar-priced commodity costs more in other currencies when the dollar exchange rate is strong. Conversely, the reverse is often true — a weakening of the U.S. dollar will see a rise in commodity prices.

So while it is far from the only driver of price, keeping an eye on the exchange rate and holding a sense of trend direction for the currency can be a useful indicator of price direction.

As the Financial Times notes, the U.S. dollar has performed poorly so far this year, falling about 6% on a trade-weighted basis. Investors were wrong-footed, the Financial Times states, early in 2017 when they bet that U.S. tax reform would push the dollar beyond already lofty valuation levels and help the American economy continue to outperform the rest of the world.

In support of our argument, metal prices have performed well this year, as the dollar has weakened. Where the dollar goes from here could have a bearing on whether the market continues to rise or goes in reverse.

The Impact of Proposed Tax Reforms

The dollar has followed the fortunes of the market’s view on President Donald Trump’s proposed tax reforms.

From the time he won the election through to the end of last year — when tax reform was much in the news and markets first considered the benefits of tax cuts and repatriation of foreign-held profits — the dollar strengthened some 5%.

Since then, it has depreciated steadily, hitting a 33-month low last week, according to another Financial Times article.

Much of that decline has been due to the market’s perception that growth is slowing in the U.S., while at the same time the prospects of tax reforms have dwindled in the face of a divided Congress.

At the same time, growth and confidence have picked up in Europe. The Euro, the world’s second-most highly weighted currency, has done correspondingly better.

Growth in Asia has also remained more robust than observers may have expected 12 months ago. At the same time, the market’s expectation of a December Fed rate rise has fallen to less than 30% probability with next June the more likely date. Meanwhile, in Europe the talk is more about rolling back quantitative easing.

The dollar’s performance could be transformed if Congress could agree on tax reforms. Even if many economists disagree on the actual benefits of the income tax reforms, most agree the repatriation of foreign profits holiday would have a profound impact on the economy and the dollar.

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At present, agreement on anything seems a long way from probable.

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This afternoon in metals news, renegotiation efforts focused on the North American Free Trade Agreement (NAFTA) appear to be at a standstill, Chile’s state copper commission boosts its 2018 copper forecast and a European agency advises plane manufacturers to suspended their use of products from embattled Japanese steelmaker Kobe Steel.

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NAFTA Deadlock

The fourth round of renegotiation talks regarding the 23-year-old NAFTA concluded yesterday, but the U.S., Mexico and Canada appear to be no closer to a consensus.

According to Bloomberg, initial hopes for a quick resolution have fizzled, as talks will now be extended into 2018 (which was previously hoped to be avoided, given the scheduled elections in each country next year).

The next round of talks is scheduled for Nov. 17-21 in Mexico.

Cochilco Forecasts Copper at Nearly $3/Pound in 2018

Chile’s state copper commission, Cochilco, on Wednesday put out a forecast for 2018 including a prediction of the average global copper price hitting $2.95/pound.

The new forecast is up significantly from Cochilco’s mid-year estimate of $2.68/pound. Greater Chinese demand is cited as a supporter of the global price.

Kobe Steel Saga Continues

The fallout from the Kobe Steel data falsification scandal continues, as the European Aviation Safety Agency (EASA) advised plane manufacturers to suspend their use of products from the firm, the third-largest steelmaker in Japan, according to CNN Money.

According to the report, EASA advised those manufacturers to find alternative suppliers and conduct a “thorough review of their supply chain.”

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A number of global heavyweights use Kobe Steel products, including GM, Boeing, Ford and Toyota, according to the report.

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The United States International Trade Commission last week announced it is launching an investigation related to the importation of something that is often considered the wave of the future: automation systems.

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The USITC announced it launched a Section 337 investigation last Wednesday. Section 337 of the Tariff Act of 1930 determines whether there is unfair competition in the importation of products into, or their subsequent sale in, the United States, including the infringement of a U.S. patent, copyright, registered trademark or mask work.

The investigations stems from a complaint filed Sept. 6 by Rockwell Automation, Inc., of Milwaukee, Wisconsin.

“The products at issue in the investigation include components used in the complainant’s industrial automation systems that bear the complainant’s Allen-Bradley® trademarks and that use the complainant’s copyrighted software and firmware,” the USITC announcement reads.

According to the complaint, the respondents allegedly violated Section 337 with respect to the importation and sale of “certain industrial automation systems and components thereof including control systems, controllers, visualization hardware, motion and motor control systems, networking equipment, safety devices, and power supplies that infringe trademarks and copyrights asserted by the complainant.”

In addition, Rockwell is asking for a general exclusion order, and cease and desist orders.

The following firms were listed as respondents in the case:

• Can Electric Limited of Guangzhou, Guangdong, China
• Capnil (HK) Company Limited of Hong Kong
• Fractioni (Hongkong) Ltd. of Shanghai, China
• Fujian Dahong Trade Co., Ltd., of Fujian, China
• GreySolution Limited d/b/a Fibica of Hong Kong
• Huang Wei Feng d/b/a A-O-M Industry of Shenzhen, China
• KBS Electronics Suzhou Co., Ltd., of Shanghai, China
• PLC-VIP Shop d/b/a VIP Tech Limited of Hong Kong
• Radwell International, Inc., d/b/a PLC Center of Willingboro, NJ
• Shanghai EuoSource Electronic Co., Ltd., of Shanghai, China
• ShenZhen T-Tide Trading Co., Ltd., of Shenzhen, China
• SoBuy Commercial (HK) Co. Limited of Jiangsu, China
• Suzhou Yi Micro Optical Co., Ltd., d/b/a Suzhou Yiwei Guangxue Youxiangongsi d/b/a Easy Micro-optics Co. LTD. of Suzhou, Jiansu, China
• Wenzhou Sparker Group Co. Ltd., of Wenzhou, China
• Yaspro Electronics (Shanghai) Co., Ltd., of Shanghai, China

Free Download: The October 2017 MMI Report

USITC rules dictate that it will issue a target date for completion of the investigation within 45 days of launching one, meaning the Commission will set a target date by Nov. 25 in this case.

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This morning in metals news, U.S. raw steel production went up last week, aluminum is heating up as China prepares for winter cuts to excess capacity and Kobe Steel’s data falsification scandal could stretch back a decade.

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Raw Steel Production Up 5.4%

U.S. raw steel production for the week ending Oct. 14 was up 5.4% from the same week in 2016, according to weekly data from the American Iron and Steel Institute (AISI).

Production for the week amounted to 1,744,000 tons, up from 1,655,000 for the same time frame in 2016.

Aluminum Heating Up

It’s been a big year for aluminum — and with Chinese winter cuts to excess capacity on the way, the aluminum price could continue to rise.

According to a Reuters report, China is preparing to reduce its aluminum smelting capacity by one-tenth by the end of the year.

Kobe Steel Scandal Could Go Back More Than 10 Years

The data falsification scandal plaguing Japan’s third-largest steelmaker could go back more than a decade, according to a Bloomberg report.

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According to the report, Kobe Steel will cooperate with the U.S. Department of Justice. A company executive quoted in the report told Bloomberg that data falsification at the firm has likely been happening for over a decade — stretching further than Kobe’s admission of falsification dating back to 2007.

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The World Steel Association released its October 2017 Short Range Outlook (SRO) — its assessment of the global steel market — on Monday.

For the most part, the latest SRO relates good news for the global market.

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“In 2018, we expect global growth to moderate, mainly due to slower growth in China, while in the rest of the world, steel demand will continue to maintain its current momentum,” said T.V. Narendran, chairman of the World Steel Association’s Economics Committee, in the report.

According to the SRO, global steel demand will reach 1,622.1 million tons (Mt) in 2017 and 1,648.1 Mt in 2018. Excluding China, demand is expected to grow 2.6% this year and 3.0% next year.

Dr. Nae Hee Han, the World Steel Association’s director of economic studies and statistics, wrote on Monday that while the numbers in the SRO are mostly positive, there are a few caveats.

First, she wrote, the growth of emerging economies did not meet previous SRO estimates set in April.

“A number of emerging economies did not perform as well as expected in 2017 due to short term disruptions caused by ongoing reform initiatives or political factors,” Nee Han wrote.

On the other hand, developed economies — the European Union, Japan and the United States — performed better than expected. But Nee Han explains that emerging economies will experience greater growth in 2018, partially as a result of reform initiatives, including the Goods and Services Tax (GST) system in India, energy and tax reform in Mexico, exchange rate reforms in Argentina and Egypt, and fiscal reforms in GCC countries.

As for the sustainability of the current growth trend, Nee Han writes that it might not be a long-term thing.

“Secondly, the worldsteel Economics Committee at its most recent meeting in Amsterdam a month ago was in agreement that the current momentum is driven mostly by cyclical rather than structural factors,” she wrote. “We do not find the improved growth figures to be sustainable in the long term: China’s continued deceleration, megatrends such as aging populations, a shift to a circular economy and increasingly stringent environmental regulations continue to weigh against steel demand.”

Another optimism-mitigating factor listed by Nee Han is the statistical anomaly that is China’s 2017.

“In 2017 China closed most of its illegal induction furnace capacity, which up until now had not been included in official statistics,” Nee Han explains. “With this closure, the demand satisfied from these producers is now being met by the official sector. This shift of demand explains the forecasted jump in the Chinese growth rate in 2017 – the technical effect of the underestimated 2016 base.”

Around the World

Demand for finished steel is variable around the world, but, for the most part, is forecasted to increase this year and next in most regions.

In the North American Free Trade Agreement (NAFTA) bloc, there is an expected 4.9% year-over-year increase in demand (or 138.7 Mt) and 1.2% increase in 2018 (140.4 Mt).

Meanwhile, the report forecasts a 2.5% jump this year in the EU (162.1 Mt) and 1.4% increase next year (164.3 Mt).

In the Commonwealth of Independent States (CIS) bloc, which includes Russia, there is an expected 3.6% increase in 2017 (51.1 Mt) and 3.8% next year (53.0 Mt).

In the Asia and Oceania region, there is an expected 9.3% growth in 2017 (1,098.8 Mt) and 1.1% in 2018 (1,111.1 Mt).

In Africa, there is an expected 1.6% drop in demand this year (37.0 Mt) and a 3.3% jump next year (38.2 Mt).

In Central and South America, the report forecasts a 2.5% jump this year (40.4 Mt) and 4.7% jump next year (42.3 Mt).

Construction and Automotive Sectors

What about industry sectors, like construction and automotive?

According to the SRO, construction growth in developed countries, which has been relatively slow since the 2008 economic recession, is “now showing more positive signs both in the residential and commercial sectors due to rising incomes and improving investment sentiments.”

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As for the automotive sector, the report states that despite a strong 2017 overall, growth could moderate in the U.S. and China, a trend that is “likely to extend to other countries in 2018.”

Few topics, apart from metal prices of course, prompt more debate in the office of MetalMiner than supply chain issues.

So it should come as no surprise that hot on the heels of our article reporting last week’s news regarding Kobe Steel’s admission of falsifying quality data should be a more in depth analysis of what exactly went wrong — and, maybe more importantly, why it went wrong.

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The “what” is still difficult to pin down.

On the one hand, many sources, even highly respected sources like The Economist, say products were certified as having properties – such as a level of tensile strength – that they did not in fact possess.

Yet this does not square with the response of many of Kobe’s customers.

Aerospace firms like Boeing and Mitsubishi Heavy Industries who used affected products on the recent H-2A satellite launch vehicle, and automotive clients like Toyota, Honda, Nissan, Ford and GM, have variously said their preliminary findings are no material exhibiting properties outside of the standards has been used.

If that is the case (and it is still early days), what we could have is a case of incorrect procedures being employed, such as Nissan’s recall of 1.2 million cars after finding unqualified inspectors had been conducting safety checks.

Bloomberg explored the ongoing threat of substitution of steel with aluminum in automotive applications and the transport industry’s relentless pursuit of lower weight – and hence thinner materials – as somehow a reason for Kobe Steel falsifying data. But there is no evidence the quality issue has anything to do with weight reduction, or specifically new, thinner grades of steel.

The Money Argument

One angle in trying to understand why it happened is to follow the money.

There could be an argument that quality control can be the first casualty of a firm struggling for profitability. Kobe has not fared well in the face of a highly competitive international steel market, particularly in Asia.

As this chart courtesy of Morningstar shows, the share price has been in decline since the start of the decade.

Source: Morningstar

Without focusing on the 30% decline in the last week, the firm has been making rising losses in 2015 and 2016, although part of this has been down to provisions against bad debts according to the latest company accounts.

Could cost-cutting have been to blame? Possibly. Bloomberg quotes a spokesman for the company who said pressure to meet delivery deadlines was one reason behind the failure. But as the firm has said the falsification involves only 4% of its shipments, between September 2016 and August 2017.

The fact that there have been no specific reports of defective parts and no carmakers have yet to issue recalls or warnings to stay off the road could be just a case of luck that defective parts have gone to less critical applications or it could be that end users have run their own assessment and concluded chemical and mechanical properties met minimum standards. The period quoted does correspond to the loss-making period at Kobe, but does not square with admissions made by the firm.

A Reuters report article stated “Kobe had fabricated data to show its products met customer specifications” when in fact the material did not. It also quoted the company in saying “The misconduct involved dozens of staff and possibly stretched back 10 years.” That would not have passed multiple audits and inspections, not just by ISO but even more rigorous audits by automotive and aerospace end users. These statements, though, are general admissions and do not specifically state what was hidden or changed.

A Culture Issue?

Back to The Economist, who quote Toshiaki Oguchi of Governance for Owners Japan, a corporate-governance lobby group, who said “Japanese workers are ethical, but tend to hide wrongdoing rather than confront management. Kobe Steel ignored at least one whistle-blower who sounded the alarm over its substandard metal.” Maybe what we have here is a cultural issue, a minor non-conformance was covered up or divergence from the standard procedure was allowed to happen, no one was reprimanded, it happened again and over time so that gradually circumventing proceedures became common practice.

A report in the Japan Times just prior to the weekend supports this position, cataloguing both corporate wrongdoing and quality issues. For example, in 2006, Kobe was involved in a data fabrication scandal after an internal investigation found that data on soot and smoke released by one of its plants had been falsified frequently over a period of 30 years. In 2008, Kobe Steel subsidiary Nippon Koshuha Steel Co. was found to have cheated on steel inspection data. In 2016, shoddy legal compliance led to another quality-control issue at subsidiary Shinko Wire Stainless Co.

Both affiliates were listed among the data falsifiers in this year’s scandal.

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The Japan Times went on to say production units skipped inspections and engaged in unspecified data fabrication because they were under pressure to meet delivery dates and win more orders, leading to compromises on quality.

So much for kaizen and Japan’s much-lauded pioneering adoption of Deming’s principals of quality improvements.

This situation illustrates the clash of two cultures, the open culture of continual improvement which demands a no-blame admission of every failing in the interest of rectifying and improving, coming up against a corporate culture in which executives could not admit failure to meet internal deadlines.

In this clash, quality lost.

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This morning in metals news, Kobe Steel’s share price continues to plummet in the wake of its data falsification scandal, London copper hits a three-year high and palladium is having a strong 2017.

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Kobe Steel Shares Hit Lowest Price Since 2012

Kobe Steel, Japan’s third-largest steelmaker, continues to see its share price drop on the heels of its data falsification scandal.

The fallout from the scandal has already seen Kobe lose approximately $1.8 billion in market value, Reuters reported.

On Friday, Hiroya Kawasaki, Kobe’s chief executive, said about 500 companies received falsely certified products from Kobe, which was more than double a previously released number, according to the Reuters report.

LME Copper on the Rise

London copper is on the way up again, this time rising to hit a three-year high, Reuters reported.

The metal eclipsed the $7,000 mark, powered in part by good news on the Chinese economy, according to the report.

Palladium Powered by Automotive Demand

Recently, the palladium price recently eclipsed that of platinum for the first time in 16 years.

It’s been that kind of year for palladium.

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According to a CNNMoney report, 78% of palladium demand this year came from the automotive market.