Market Analysis

Aluminum buyers are understandably nervous about the future price direction following the near 9% fall in prices from a high in early January.

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Aluminum on the Shanghai Futures Exchange closed at the lowest level this week in 14 months, particularly unsettling as the industry had become comfortable with a bull narrative for aluminum over the last year predicated on tight global supplies outside of China.

President Trump’s 10% import tariff on aluminum added another dynamic to the domestic U.S. price and considerable uncertainty as to the possible impact on prices in the rest of the world.

Not surprisingly, while the LME price barely reacted to the new tariff, domestic U.S. Midwest delivery premiums nearly doubled from 9.5 cents per pound at the start of January to the current 18.5 cents per pound. Expressed in dollar terms, the jump in premiums by some $200 dollars a ton equates to nearly 10% of the cash LME aluminum price, Reuters reported this week.

Meanwhile, delivery premiums outside of the U.S. had already been on the rise, so there was little surprise when Japanese buyers settled this week at U.S. $129 per metric ton premium for shipments in the second quarter, the highest in three years.

Although last year saw tightness in physical metal availability, the return of the contango on the LME, with cash aluminum falling below the three-month price, suggests there is now greater availability of nearby metal (at least in the rest of the world outside the U.S.).

There is certainly no shortage of metal available in the Chinese market, where Shanghai inventory has been rising for 12 months. Indeed, much of the current weakness is blamed on fears that smelter restarts following the end of the Chinese winter heating season will cause the surplus to balloon further.

Prices in China, though, are below those of the LME and industry sources are suggesting there will only be limited restarts as current prices are not enough to help some smelters break even, according to a Reuters report. Oliver Nugent is quoted by the news source as predicting prices will remain below $2,100 in the first half of the year because of Chinese surpluses, but persistent shortages outside of China would likely see the price rise again in the second half of the year.

Smelter restarts in the U.S. are unlikely to be significant enough to materially impact global supplies ,with Reuters suggesting Century Aluminum’s restart of 150,000 tons at Hawksbill, Kentucky, Magnitude 7 Metals’ restart of two out of the three pot-lines at the 263,000-ton Marstons smelter in Missouri and Alcoa’s already initiated restart of some of its idle capacity at the Warwick smelter Indiana will almost be enough to achieve the administration’s capacity 80% target mentioned in the Section 232 determination.

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The broad consensus appears to be that aluminum remains in a long-term bull trend, but in the short term will operate as a sideways market. Buyers are unlikely to see significant upside to $2,100 in the first half, but should keep the market under close review as, subject to developments, the second quarter may prove a low point for the year; therefore, that time period may represent a buying opportunity.

It’s that time — our latest Monthly Metals Index (MMI) report is in, covering the second month of 2018. 

Momentum from the start of the year slowed considerably in this round of readings.

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Four MMIs held at the same reading as the previous month (Automotive, Rare Earths, Renewables, Stainless) while four dropped (Aluminum, Copper, Global Precious, Construction).

The GOES and Raw Steels MMIs were the only ones to move up, with the latter rising 7% month over month for a March reading of 92.

On March 1, President Trump announced his administration’s intention to implement tariffs on steel and aluminum of 25% and 10%, respectively. That announcement became reality last week, when the tariffs were signed into policy (albeit with temporary exemptions for North America Free Trade Agreement partners Canada and Mexico).

Unsurprisingly, the tariffs have drawn criticism from trading partners around the world, including the European Union, Japan and South Korea, among others. The tariffs are officially set to go into effect March 23, but many countries are still lobbying for exemptions from the tariffs. In addition, the announcement drew criticism from downstream producers in the U.S. who rely on foreign sources of metal for their products.

A few other high points:

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You can read about all of the aforementioned — and much more — by downloading the March MMI report below.

This month, zinc prices started to trade lower, returning to the $3,200 level. This activity represents the first short-term price pullback we’ve seen in zinc prices since June 2017, when prices started their latest rally.

Source: MetalMiner analysis of FastMarkets

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But going back even further, the zinc price bullish rally started in 2016. Since then, zinc prices have increased around 120%, from $1,471/mt to current levels.

During this bullish rally, zinc prices reached a more than 10-year high, which signaled strength in the rally.

Source: MetalMiner analysis of FastMarkets

Some analysts believe this recent short-term downtrend serves as a possible peak for zinc prices. In other words, zinc prices may have already peaked and have started a new downtrend.

The alarms sounded on the London Metal Exchange when 78,950 tons of metal were delivered into LME stocks.

Before we speculate as to where zinc prices are going, let’s examine some of the indicators.

LME Stocks vs. Trading Volume

Traders commonly react to stocks changes, which is reflected directly in zinc prices. When a big delivery of any metal — in this case, zinc — reaches the LME stock, traders interpret this signal as a lack of tightness in the metal supply and demand equation.

In other words, traders think that the deficit is lower and sell their positions for the metal.

However, LME stock levels typically serve as a very short-term price driver (for days or weeks, not months). Rather, MetalMiner believes trading volumes better reflect the metal price trend. Zinc trading volume still supports the long-term uptrend, even if prices have so far trended lower this month.

Global Zinc Market

According to the International Lead and Zinc Study Group (ILZSG), 2017 left behind a deficit of 495 kt for refined zinc metal. Zinc mine output increased by 33.7% in India, while the increase in Peru was driven by higher output in the Antamina mine.

World output refined zinc production remained flat when compared to 2016, with increases in India around 30.4% versus a decrease in Canada, China, Peru and the Republic of Korea.

Despite the increases in zinc production, zinc demand increased by 2.6%, driven by zinc appetite in Australia, Brazil, China and Japan.

U.S. demand increased by just 0.6%, while European demand fell 0.5%.

Chinese Zinc Market

As for other industrial metals, Chinese numbers are commonly used as an indicator for the global metal industry. During the November 2017 to January 2018 period, China’s official zinc trade figures show 291,000 tons of refined zinc entering the country. This figure is the largest since 2009, when metallic trade flows were massive.

Shanghai Futures Exchange (ShFE) zinc stocks have recovered from a 2017 drop of 84,000 tons. Since the beginning of 2018, zinc stocks have rebounded by 46,000 tons, reaching the highest level since May 2017 (114,887 tons).

Brazilian Zinc

Brazilian mine Nexa Resources forecasts a deficit for zinc in 2018, with demand outpacing supply.

The deficit may continue due to the inability of Chinese small mines to renew permits under current environmental policies. Therefore, Chinese production may not be able to meet the annual demand growth of around 2-2.5% (based on previous growth).

What This Means for Industrial Buyers

MetalMiner sees the current pullback in zinc prices as short-term in nature as opposed to a price trend correction.

Therefore, while base metals and zinc remain in a current bull market, buying organizations may want to take advantage of lower prices and learn the exact time to commit to some zinc volume.

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Zerophoto/Adobe Stock

India’s trying to do an OPEC in solar energy, screamed some headlines in Indian newspapers after the founding ceremony of the International Solar Alliance (ISA) was held here recently, witnessed by Indian Prime Minister Narendra Modi and French President Emmanuel Macron.

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It was during former French President Francois Hollande’s visit to India in January 2016 that Hollande and Modi laid the foundation stone for the ISA headquarters in Gurugram district in northern India, adjacent to the National Institute of Solar Energy (NISE).

For the uninitiated, the ISA is a treaty-based alliance of over 120 countries, most of them being “sunshine countries,” which lie either completely or partly between the Tropic of Cancer and the Tropic of Capricorn. Its primary objective is to work for efficient exploitation of solar energy to reduce dependence on fossil fuels.

In addition to land, India has also contributed U.S. $27 million to build the ISA campus and has committed to meeting the operational expenditure of this body for the first five years.

Now comes the news that the French government will be committing €700 million in investment to this alliance.

Read more

Cobalt may be a minor constituent of lithium ion batteries, but it is a crucial one.

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Lithium has been the metal in the news this year. Bolstered by rising demand for hybrid and electric cars, however, the supply market has been struggling to keep up with demand.

Not that the world is short of lithium, as we wrote recently — it is widely distributed and relatively abundant. But projects time to ramp up, and while many are on the planning board, not all reach production maturity.

Cobalt, on the other hand, is a much more constrained market — not just constrained, but the vast majority is from politically unstable sources.

According to Reuters, two-thirds of global cobalt comes from just one politically very unstable country – the inappropriately named Democratic Republic of Congo, with some 80,790 tons of the metal sourced from there last year out of a total market of about 119,710 tons.

Worse, the DRC is sliding back into yet another potentially bloody civil war.

Joseph Kabila was elected for a final five-year term in 2011 on a mandate that ran out in 2016, but he clings on even though no more than 10% of Congolese support him, according to the Economist. Ten of 26 provinces are suffering armed conflict, the Economist reports, with dozens of militias once again on the warpath.

Some 2 million Congolese fled their homes last year, bringing the total still displaced to around 4.3 million out of a total population of nearly 80 million. The state is tottering and the president is illegitimate, the Economist says. Ethnic militias are proliferating and one of the world’s richest supplies of minerals is available to loot.

Source: London Metal Exchange

So the rise in the price of cobalt — while it mirrors that of lithium and has so far been driven largely by battery and super alloy demand — is fragile to political unrest in a way that lithium is not.

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Of the two, cobalt represents a bigger supply risk and may yet prove the cause of considerable volatility if the DRC’s neighbors cannot get their act together and seek a solution in the most resource-blessed but politically cursed of African nations.

gui yong nian/Adobe Stock

Li Lizhang, the chairman of state-owned mill Fujian Sangang Group Co Ltd, is quoted in Reuters as saying exports of steel products may continue to fall this year, having plunged by over 30% last year to 75.43 million tons.

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China produced 831.73 million tons of crude steel last year. The country has been trying to eliminate excess capacity, in part to assuage global concerns about excess capacity flooding global markets. But, in reality, it’s more because it realizes overcapacity in its steel industry leaves all domestic producers in a precarious position and sees logic in driving the cleanup in favor of its state-owned producers rather than leaving the market to possibly favor the private sector – not what an increasingly state-centered Beijing wants at all.

Whether Li is promoting the reduction in exports as a counter to allegations abroad that China is harming global steel markets with its exports or whether we should take his ongoing linkage to the fight against pollution at face value is up to the reader. It may be that it is a case of two birds with one stone, but one suspects the timing, straight after President Trump’s 25% tariff on steel imports, is no coincidence.

Li’s comments regarding further production curbs is interesting, though, saying the steelmaking hub of Tangshan in Hebei province will extend production restrictions for another eight months after current curbs expire next week, according to the Reuters report. Production curbs would not be limited to the smog-prone region of Beijing-Tianjin-Hebei, according to Li, who added “other regions will also see restrictions if pollution levels exceed the limits.”

Beijing’s drive to shutter production capacity across a range of environmentally harmful industries has been broadly successful.

But what is clear is that smog reduction was not the only objective.

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State-owned enterprises have benefited at the expense of the private sector with new steel and aluminum capacity coming onstream to partially replace the older shuttered plants. Permits for new plants seem to have favored the state-sector producers over the private sector; contrary to the position 18-24 months ago, the state sector is doing very well at present.

The Stainless Steel MMI (Monthly Metals Index) traded flat in March after a big jump in February. The current reading is 75 points.

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The index remained flat as LME nickel prices decreased slightly, while other elements of the  stainless steel basket increased. Stainless steel surcharges jumped again this month, largely following the previous month’s LME nickel price movements.

LME Nickel

Nickel momentum appears to have slowed since the beginning of March. Prices retraced slightly. However, nickel prices remain in a strong, long-term uptrend.

Source: MetalMiner analysis of FastMarkets

Like copper prices, nickel prices remain above the blue dotted line above. In December, nickel prices rallied and started to trade with a sharper slope, following the purple dotted line.

However, these movements are often not sustainable in the long-term trend, and commonly correct. Therefore, nickel prices retraced to their long-term trendline, while trading volume remains supportive of the uptrend.

Domestic Stainless Steel Market

Following the recovery in stainless steel momentum, domestic stainless steel surcharges increased further this month.

The 316/316L-coil NAS surcharge breached its previous $0.8/pound ceiling. Stainless steel surcharges increased again rapidly. Therefore, buying organizations will want to look at surcharges to identify opportunities to reduce price risk either via forward buys or hedging.

Source: MetalMiner data from MetalMiner IndX(™)

Tariffs Do Not End in the U.S.

The European Commision prolonged the already existing anti-dumping measures on Chinese imports of stainless steel seamless pipes and tubes for another five years. The duties imposed initially in 2011 ranged from 48.3% to 71.9%. These duties gave European stainless steel producers — like France, Spain and Sweden — some breathing room.

The review of these measures started again in December 2016 and showed the removal of duties on Chinese products would harm European producers.

Therefore, the European Commission agreed to maintain the current duties on pipes and tubes used in the chemical and petrochemical industries for another five years.

Although the Europeans have not enacted broad tariffs like the U.S. has done via Section 232 of the Trade Expansion Act of 1962, the issue of global overcapacity remains paramount as the E.U. continues to implement heavy duties on stainless steel products to limit imports.

What This Means for Industrial Buyers

Stainless steel momentum appears stronger this month, recovering from its previous weakness.

As both steel and nickel remain in a bull market, buying organizations may want to follow the market closely for opportunities to buy on the dips.

To understand how to adapt buying strategies to your specific needs on a monthly basis, take a free trial of our Monthly Outlook now.

Buying organizations who have concerns about the Section 232 impact on the steel industry may want to read our comprehensive Section 232 Report, which includes new data.

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Actual Stainless Steel Prices and Trends

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The impact of the president’s Section 232 proclamation applying a 25% import duty on all steel articles with HTS codes 7206.10 through 7216.50, will have a somewhat predictable impact on steel prices (they will increase, at least in the short term).

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The impact on grain-oriented electrical steel (GOES) buying organizations, MetalMiner believes, will not exactly mirror the broader impact of the tariffs on commonly purchased steel forms, alloys and grades.

But first, the reaction to the announcement of the steel tariffs from Roger Newport, the CEO of AK Steel, and the last remaining GOES producer in the U.S.: “We support President Trump for taking the bold action of imposing a 25% global tariff on steel to defend America’s steel industry and its workers from imports that threaten our national and economic security,” he said. “Nowhere is this threat more evident than in electrical steel where AK Steel is now the only domestic producer of electrical steel for electrical transformers. Years of surging imports and the subsequent market volatility caused the only other U.S. producer to exit the market in 2016. This action by the President could not come soon enough as the surge of electrical steel imports continued throughout last year, with imports nearly doubling in 2017 when compared to 2016.”  

GOES Markets Are More Nuanced Than Other Flat Rolled Products Markets

GOES markets serve as an example of where and how certain sub-segments of the steel industry will attempt to carve out exceptions and/or exemptions from the tariff proclamation — specifically, under point 11 of Trump’s proclamation.

MetalMiner believes that Japanese producers, along with their importing partners and customers, will petition the Department of Commerce for an exception by proving that certain highly engineered grades of electrical steel are not in fact produced in the United States.

The president’s proclamation identifies the procedure by which exceptions can be made:

The Secretary, in consultation with the Secretary of State, the Secretary of the Treasury, the Secretary of Defense, the United States Trade Representative (USTR), the Assistant to the President for National Security Affairs, the Assistant to the President for Economic Policy, and such other senior Executive Branch officials as the Secretary deems appropriate, is hereby authorized to provide relief from the additional duties set forth in clause 2 of this proclamation for any steel article determined not to be produced in the United States in a sufficient and reasonably available amount or of a satisfactory quality and is also authorized to provide such relief based upon specific national security considerations.  Such relief shall be provided for a steel article only after a request for exclusion is made by a directly affected party located in the United States.

Clearly, the impact of imports on the domestic GOES market has come on the back of rising and significant Japanese imports. China and South Korea are non-players for GOES into the U.S.

Source: International Trade Administration and MetalMiner Analysis

The real question involves whether or not customers of Japanese products will be able to prove that the materials they are buying from Japan, are indeed not produced in the U.S.

The president has mandated that the secretary of commerce issue procedures for requests for tariff exclusions within 10 days of the proclamation date (which was March 8).

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Exact GOES Coil Price This Month

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Is it just me or is there a contradiction developing at the heart of President Trump’s linkage of movement on the North American Free Trade Agreement (NAFTA) negotiations to the application of steel and aluminum tariffs on imports from Canada and Mexico?

I have been pondering this since earlier this week when the topic was raised in the MetalMiner office, but it became crystallized after reading an article by Phil Levy in Forbes this week.

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President Trump has made no secret of his dislike of the NAFTA trade agreement. He has repeatedly pointed to large trade deficits with Mexico and Canada, noting the world’s largest free-trade deal has been bad for the U.S., causing the relocation of companies and jobs. Yet at no time has there been a suggestion that close allies Canada and Mexico constitute any kind of security risk to the U.S.

However, Levy makes the very appropriate point that the new steel and aluminum tariffs are being pursued under Section 232 of the Trade Expansion Act of 1962, in which the provision deals with instances where imports threaten the national security of the U.S. It would seem that the Commerce Department has come to the conclusion that steel and aluminum imports do pose a threat to the viability of the U.S.’s steel and aluminum industries.

Fine — whether you personally agree with it or not is not the issue. That is the Commerce Department’s position and, it would seem, President Trump’s too, and therefore justifies some form of action in order to protect U.S. national security.

But this week during the seventh round of the NAFTA renegotiation talks in Mexico City, U.S. Trade Representative Robert Lighthizer presented a tweet from President Trump saying that tariffs on steel and aluminum will only come off if a new and fair NAFTA trade agreement is signed. It would seem as an incentive to strike an early deal.

But where does that leave the rationale of national security, Levy quite rightly asks?

Either sourcing steel and aluminum from Canada and Mexico poses a threat to U.S. national security or it does not. It’s hard to see how the conclusion of a new NAFTA deal would alter the security situation, suggesting the president’s linkage between an exception for Canada and Mexico and the conclusion of a renegotiated NAFTA agreement has little to do with national security and more to do with leverage and protectionism.

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This opens the floodgates for challenges, both domestically and internationally, as the legitimacy of the U.S. position depends heavily on whether the U.S. national security claim is plausible, Levy argues. Whether the pursuit of measures to stem imports of steel and aluminum were originally seen as part and parcel of the NAFTA renegotiations or whether this is an opportunistic melding of otherwise completely separate issues is hard to tell.

Without doubt, however, those opposed to the import duties and inclined to use legal action will see this as an opportunity to undermine the U.S. argument.

The Raw Steels MMI (Monthly Metals Index) increased 7% this month, reaching 92 points. This reading is the highest since June 2012. The skyrocketing MMI came as a result of sharp increases in steel prices, the Section 232 release and President Trump’s comments regarding imposition of a 25% steel tariff.

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Steel price momentum strengthened in February, moving sharply up for all forms of steel. Steel prices have reached more than three-year highs. However, some forms of steel are now even higher. Domestic HRC prices, currently at $762/st, haven’t seen these levels since June 2011.

Source: MetalMiner data from MetalMiner IndX(™)

Based on the long-term analysis, steel prices will likely continue to rise this year. Even if the seasonality for steel prices returns in Q2, steel price momentum appears strong.

Let’s Talk Spreads

Section 232 — and the price uncertainty it has unleashed — requires metal-buying organizations to pay more attention to what is called the spread. The spread refers to the price delta between domestic HRC and CRC prices and the spread of each with Chinese prices. Analyzing and understanding these spreads helps to determine by how much mills could increase steel prices (as well as how high they can go).

So, let’s take a look at some examples.

The Domestic HRC-CRC Spread

As with all the other forms of steel, CRC prices also increased again this month. The upward movement remains strong, even if the amount of the increases — and therefore the slope of the upward trend — appears softer (less sharp).

This does not come as a surprise, as the spread between CRC and HRC prices was extremely high. Now, the spread between CRC and HRC prices has returned closer to historical levels.

Source: MetalMiner data from MetalMiner IndX(™)

It is important to understand where the spread comes from. CRC (cold rolled coil) is HRC (hot rolled coil) plus one additional rolling process. As per the chart above, from 2011 to 2016 the price spread between the two has been around $100/st (plus or minus).

At the end of 2016, buying organizations could see a $201/st spread between HRC and CRC prices. The spread started to decline at the beginning of 2017, and has increased further in 2018. The domestic spread is currently at $124/st, much closer to its historical levels. (MetalMiner covered domestic spreads in our free Annual Outlook Report published in October 2017.)

A higher spread creates better margins for domestic mills. From a buying perspective, the previous anomaly only helps a buying organization that has not contracted for all of its CRC purchases (and can play a price arbitrage game by purchasing HRC and paying to roll it to CRC).

Chinese Spread

Chinese demand has always been positioned as one of the main drivers of global steel prices. Check out the correlation in the graph below between the domestic HRC and Chinese HRC prices. When Chinese prices increase, U.S. domestic prices tend to increase, too. The same is usually true when prices fall.

Source: MetalMiner data from MetalMiner IndX(™)

Even if short-term events (such as the release of the Section 232 report or President Trump’s comments) add support to steel prices in one country, the general trends tend to correlate.

This is exactly what happened with U.S. HRC prices.

The latest increase in HRC prices here in the U.S. came as a result of the Section 232 uncertainty and the announcement of the tariff. Not surprisingly, so far this month, HRC prices in China increased after trading sideways last month. Therefore, watching price reactions in China makes sense in order to better forecast price trends in the U.S.

An  analysis of the spread between Chinese and U.S. prices allows buying organizations to better understand the price impacts the tariffs could have on domestic steel prices. In other words, the spread tells us how much domestic prices could rise before it is better to import steel from China.

What This Means for Industrial Buyers

The strong upward momentum for steel, together with the Section 232 outcome and President Trump’s comments regarding steel tariffs, drove steel prices to more than three-year highs. Buying organizations who have concerns about the Section 232 impact on the steel industry may want to read our Section 232 Report.

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Actual Raw Steel Prices and Trends

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