CommentaryMarket Analysis

Steelmakers’ fortunes are up, and for that we should all rejoice; an industry fighting bankruptcy or suffering long-running losses is not an industry that invests in its products or services.

But questions remain about how long the current run of good fortune will continue for Western steelmakers.

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Source: Financial Times

Posting Profits

On the plus side ArcelorMittal has just posted its best quarter since 2011 with EBITDA quarterly core profits rising 17% year on year to $2.5 billion for the January-March period.

Analysts quoted in the Financial Times put the recovery down to rounds of cost-cutting and efficiency instigated after the downturn of 2015-16. Rising global GDP and, hence, demand has built on these improvements to raise prices for steelmakers and, in particular, the delta between raw material costs and finished steel prices, lifting profitability to the highest in a decade.

Source: Financial Times

ThyssenKrupp of Germany posted a tripling of half-year earnings on the back of better sales prices and reduced losses, having offloaded its South American slab mill to Siderúrgica do Atlântico (CSA) and its Calvert, Alabama carbon and stainless mills to ArcelorMittal/Nippon Steel and Outokumpo, respectively.

Some would argue it got out at the bottom of the market and would have lost less if it had held on for a better price when the market turned, but both plants were making losses and ThyssenKrupp was under pressure from shareholders to turn the group around.

ThyssenKrupp is not alone — many steel mills have demerged, shuttered, divested or otherwise re-structured in order to focus on their more profitable opportunities in recent years and are reaping the benefits.

Eyes on Chinese Exports

However, the extent to which this happy state of affairs can continue lies, at least in part, in China.

As the Financial Times points out, a combination of industrial reform in China and positive profit margins has lifted steelmakers’ focus on the domestic market and reduced exports. From a peak of 110 million tons in 2015, China’s steel exports have shrunk by one-third to 73.3 million tons in 2017. The Financial Times credits this restriction of supply as helping restore a sense of balance to the steel market, which is reflected in regional price rises in Europe and North America.

There remains dispute about the depth and speed of the steel market restructuring program in China, but even if it is not as radical as the authorities claim it has contributed to sentiment and supported prices. The questions the Financial Times poses is thus: how long will this new balance last and, with prices falling in China, will exports rise later this year?

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Making Moves

An indication of European concern is a new registration program started just this month that requires importers to register all incoming shipments by origin, value and tariff code.

At present, there is no requirement for a license or any cases of approval not being given, but many see it as a first step to Brussels more closely monitoring steel (and aluminum) imports from China, Russia, etc., with a view to introducing quotas or tariffs if volumes rise.

For once, Brussels can be said to be ahead of the game.

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It was a report in the Hong-Kong-based newspaper, the South China Morning Post that sparked it all off.

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The report claimed that India’s neighbor, China, had started large-scale mining operations in Lhunze county on its side of the “disputed border” with India in the Himalayas.

It said the area was literally a “treasure trove,” having gold, silver and other precious minerals, valued at about U.S. $60 billion according to Chinese state geologists.

On the face of it, at least, the report and the development seems to have caught Indian authorities by surprise.

On its part, China tried to downplay the report, to a degree rubbishing the claims made in the Post report. A report in The Economic Times quoted an editorial in the Global Times tabloid that questioned the news report’s motive, at the same time hoping that India would not be “provoked” by it.

“It is to be hoped that India will not be provoked by this report, lose focus on the big picture of the relationship between Beijing and New Delhi and get off the track of Sino-Indian cooperation,” said the editorial titled “Dodgy report disturbs Sino-Indian ties.”

In fact, the editorial also said to many Chinese people, their first impression was that the report is not credible, given the vague facts in the story.

It’s hardly a secret that the Himalaya region, from India, Tibet and all the way to Afghanistan, has massive reserves of mineral oil, gold and many precious materials. Arunachal Pradesh is said to have vast reserve of mineral oils and even coal reserves. Coal is explored from Namchik-Namphuk mines in Tirap district. In addition, there are huge reserve of dolomite, limestone, graphite, marble, lead, zinc, etc.

Indian newspapers were full of reports talking of a new flashpoint between the two neighboring countries following the South China Morning Post report. India has not yet reacted officially to the news report.

Last year, there was a major standoff between the armies of both countries at the border area of Doklam, which is a triangle area disputed by three countries: India, China and Bhutan. The standoff emerged after China’s People’s Liberation Army (PLA) construction party attempted to build a road near the Doklam area. Bhutan claims Doklam is its area while China claims it as part of its Donglang region.

A few decades ago, India claimed China had illegally occupied Aksai Chin — an area of 38,000 square kilometers, part of India’s Jammu and Kashmir province — and had its eyes on Ladakh because the area was rich in minerals and natural resources.

For over a year now, China has been setting up infrastructure in this mountainous region, including Doklam, leading to India registering its protests over the move to remove the status quo of the disputed border maintained all these years.

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What seems to have gotten China’s goat was the fact that the Post report also claimed that China was rapidly building infrastructure to turn the area into another South China Sea scenario, which the Global Times editorial dubbed an absurd observation. In fact, the editorial also said Lhunze county was not a disputed region at all, as it “fell entirely within China’s sovereignty.”

You would think that U.S. Treasury Secretary Steven Mnuchin’s announcement last week of a “framework” deal that would see Beijing increase its purchase of U.S. goods and services and commit to reducing the U.S.’s $337 billion annual trade deficit with China would have been met with universal acclaim.

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Certainly, the stock markets surged on the news on what appeared to be vindication of the Trump administration’s hard-line approach to realign the stars of the US-China trade relationship.

Yet, as the Financial Times points out, the news has been met by howls of protest in some quarters of the U.S.

The Financial Times reports U.S.-China hawks fear that the Trump administration may be giving up the leverage it created by threatening tariffs on up to $150 billion in Chinese imports earlier this year and sacrificing a broader push for change in China.

Even accepting the idea that you cannot please all of the people all of the time, what chance does Mnuchin’s team have of negotiating either an increase in U.S. exports or a reduction in Chinese imports — or a mixture of both — to bridge this $337 billion gap?

None, is the immediate answer.

To be fair, the U.S. has set a $200 billion deficit reduction as its target, but even that is going to be extremely challenging. This is particularly true if the U.S. rightly sticks to its guns on respect for intellectual property rights and associated design theft in China, as this will limit U.S. firms from selling or sharing technologically sensitive products with China. For example, China is desperate to lift the seven-year ban on Chinese telecommunications company ZTE sourcing US parts, a ban which it says jeopardizes the future of the company and its 70,000 employees.

Mnuchin is said to be following a strategy of setting targets industry by industry, an easy first win being to ramp up exports of energy by some $50-60 billion. Bloomberg ran a report that identified considerable opportunities in ethanol, liquefied natural gas (LNG) and crude oil exports. China is already the U.S.’s second-largest buyer of crude oil, but demand is growing across all energy types and China could certainly switch supplies to the U.S.

Source: U.S. Energy Information Administration via Bloomberg

The U.S. is also a major supplier to China of agricultural products, particularly soybeans and cotton. The U.S. is not without its rivals, particularly Brazil, but while China has diversified purchasing there is scope within a central-command economy to switch more to U.S. sources.

Is that what the U.S. really wants, though, to become a raw material and agricultural products exporter like Russia or Brazil?

Surely, the U.S. should be promoting higher value-add goods and services as its priority? That’s where the jobs and future lie, but they also run counter to China’s avowed aim of becoming a world leader in advanced technologies itself, per its Made in China 2025 policy.

Forbes explains the program aims to increase the domestic content of core materials to 40% by 2020 and 70% by 2025. At present, domestic content is relatively low for high-tech goods, with the foreign content comprising more than 50% in these products on average. In some categories, such high-level digital control systems and high-level hydraulic components, China is almost entirely dependent on foreign production. ZTE’s reliance on U.S. components falls exactly into this situation. The short and simple route to achieving the strategy’s objectives is to pinch foreign designs and technologies until you can develop your own.

This story has a long way to run, but China hawks should not be alone in worrying that in order to claim the headline “deal” of a possibly temporary reduction in the trade deficit, the administration does not sell the farm down the road.

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There is much that is wrong with the global trading system. As the two largest players, the balance between the U.S. and China is the most stark. However, it is equally a very complex situation and, as such, is not well suited to a quick-fix deal.

The U.S. Section 232 and 301 probes have made significant waves in global markets this year.

In March, the U.S. imposed tariffs on steel and aluminum of 25% and 10%, respectively, as part of the Section 232 probe.

Last year, the U.S. launched a Section 301 probe investigating Chinese trade practices, with particular focus on intellectual property. In recent months, trade tensions have ramped up — the recent announced “truce” in the trade war notwithstanding — between the two countries, which have exchanged sizable tariff threats.

As such, it’s been a tumultuous time for the world of metals, and you’re probably looking for more information with respect to these developments and what they mean for your business.

On June 6, MetalMiner Executive Editor Lisa Reisman will host a webinar delving into the aforementioned and much more, including short-term price outlooks for stainless steel, aluminum and carbon steel. She will also touch on techniques for managing risk in what can be volatile metals markets.

To register for the webinar — which will take place at 10:00 a.m. CDT, June 6 — visit this link to sign up.

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It is a question we often see on the financial pages of newspapers or news sites, but rarely take time to seriously consider the consequences – why is the West apparently in a period of stagnant productivity growth?

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A recent article in The Telegraph explores the position for the U.K., but many of the trends observed — and, likely, reasons behind — Britain’s poor productivity growth are very similar to those in the U.S. and the rest of Europe.

For the sake of good order, we should define productivity growth. Simply put, it is a measure of the efficiency of production, usually measured as the ratio of inputs to outputs, or output per unit of input. Clearly, for workers to be paid more without a firm going bankrupt, just as for a country to raise living standards without living beyond its means, productivity per unit of labour has to increase over time. And so it has broadly over time, but not in a straight linear fashion, and therein lies a clue to our current malaise, the authors of the article suggest.

The article draws substantially on comments made and work done by Ben Broadbent, the Bank of England’s deputy governor. Broadbent fears Britain is past its peak and destined for a sustained period of poor growth in living standards due to stagnant productivity growth. Measuring productivity growth is far from easy, not least because “work” changes. In the days when most outputs were delivered by the manufacturing industry, it was easier to measure inputs and outputs; in today’s digital world, many services, like the internet, are largely free at the point of use.

Yet even so, the trend is clear: over the past decade, productivity has grown by just 2.1%, according to the Office for National Statistics as quoted by the news source. That is compared to before the financial crisis, when it typically grew by more than 2% every year. As a result, for much of the 2008-2014 period, real wages were in negative territory, a situation that was variously blamed on the financial crash, low interest rates perpetuating companies that would otherwise go bust, and lack of finance to allow firms to invest.

But Broadbent believes it is more deep-seated than those reasons, saying the wave of benefits seen from digitization we accrued in the 1990s and early 2000s has now passed. In addition, he argues, our position now is more akin to the industrial world’s lull between the age of steam and the onset of electricity – the big gains arising from steam had all been made yet and the benefits of electrification had not been felt, such that firms did not have a technological advantage encouraging investment, growth and expansion or face the threat of being left behind.

So far, there is limited evidence of new technologies like the mobile internet, artificial intelligence and mass automation transforming productivity. Broadbent believes it is simply too soon, but that given time and further technological progress, we could see these technologies having a transformational impact.

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Let’s hope so. Combined with the impact on traditional manufacturing jobs that globalization has had in mature markets and the growing disparity in incomes during this century, populist politics could have a destabilizing effect on Western societies, which will only be encouraged by a prolonged period of flat, or worse, negative growth in standards of living.

Does your company strategy call for a European manufacturing base but you worry you have missed the boat in terms of accessing lower-cost opportunities created when eastern European countries like Poland and the Czech Republic came into the E.U.?

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Lower land and labour costs, aligned with ample financial support from the E.U. to the poorer parts of Europe created a fertile investment environment for new business growth in these eastern European states. With a good standard of education, generally good rule of law and a high work ethic, it is not surprising eastern Europe has gone through something of an industrial revolution over the last 20 years.

But for firms looking to set up in those markets now, they are the Johnny-come-latelies to a maturing investment environment.

But fear not — a new wave of entrants may be on the horizon.

Read more

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Even as news came in late last week that some of India’s biggest steelmakers were set to expand production after reporting solid quarterly earnings amid strong steel prices, well-known research agency CRISIL has said in a report that resolution of stressed steel assets – those that are bankrupt – will “alter” the Indian steel sector irrevocably.

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Steel companies with about 22 million tons (MT) of crude steel capacity have been referred to the National Company Law Tribunal (NCLT) in the first round of the stressed assets resolution process by India’s apex bank, the Reserve Bank of India (RBI).

The CRISIL research report said the resolution of these cases would alter India’s steel sector landscape in three ways:

  • Over half of steel sector’s outstanding debt would stand resolved
  • About a fifth of India’s crude steel capacity held by these companies will move to stronger hands, resulting in better working capital and liquidity management (which, in turn, would lead to improving utilization levels)
  • The flat steel segment would consolidate further and be controlled by fewer players – both domestic and global

“For acquirers of these assets, apart from attractive product portfolios & locational advantages, these assets also offer easy scalability,” said Prasad Koparkar, senior director of CRISIL Research. “The 22 MT of capacities under resolution have brownfield expansion potential of another 20-21 MT – based on their environment clearance and regulatory filings.”

India’s flat steel market is dominated by six players that account for 85% of the capacity, with the rest being distributed between smaller players and re-rollers. Of the six, three are currently part of the NCLT I resolution process.

Many, as reported by MetalMiner earlier, were being eyed by large domestic and international steelmakers for expansion or entry strategies.

The CRISIL report further claimed that based on various acquisition scenarios, the flat steel market in India was expected to consolidate further from the current scenario — of 85% being controlled by six players — to three or four players.

Already, India’s biggest steelmakers, such as JSW Steel Ltd., posted record net income last Wednesday and outlined a $6 billion plan to raise output. Tata Steel Ltd., which aims to double domestic capacity, swung to profit, helped by a one-time gain. Both are ramping up to meet an anticipated surge in domestic consumption, with the government set to spend trillions of dollars on expanding infrastructure.

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The Bloomberg report said JSW has forecast Indian steel consumption to rise by about 7.5% in the 2019 financial year.

Domestic steel momentum seems appears to have finally started to slow down.

So far this month, hot-rolled coil, cold-rolled coil, hot-dip galvanized and plate prices have begun to  trade sideways.

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Source: MetalMiner data from MetalMiner IndX(™)

The slower pace of the increases should come as no surprise, as domestic steel prices have skyrocketed for the past five months. Also, the trade tensions around steel tariffs weakened a bit as a result of the one-month extension for the exempted countries (Canada, Mexico and the E.U.).

Raw Steel Production

According to the American Iron and Steel Institute (AISI), domestic year-to-date raw steel production increased by 1.7% from the same period last year.

Current capability utilization stands at 75.5%, while capacity utilization in 2017 ran at 74.3%.

The Spread

Tracking the spread between domestic HRC and CRC prices closely gives a sense of how prices could move in one direction or another.

HRC and CRC prices trade in the same direction, despite the price differential ($100-$200/st). The spread has returned to historical levels, and currently stands at $116/st. The spread fell from 2016 highs over $200/st.

Source: MetalMiner data from MetalMiner IndX(™)

Chinese Steel

Chinese steel prices have shown a slight recovery this month.

Historically speaking, April and May sees higher demand in China. Therefore, steel prices tend to increase, driven by this stronger demand.

Source: MetalMiner data from MetalMiner IndX(™)

Meanwhile, investigations around Chinese steel continue in the U.S. The U.S. International Trade Commission recently made a preliminary finding that U.S. producers were harmed by imports of steel automotive wheels from China. The investigation will determine if certain Chinese steel wheels were dumped in the U.S.

What This Means for Industrial Buyers

Since steel prices remain high, buying organizations may want to closely follow price movements to decide when to commit to mid- and long-term purchases. The latest upward movements in Chinese steel prices may also add some support to domestic steel prices.

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Buying organizations looking for more clarity on when to buy and how much to buy may want to take a free trial now to our Monthly Metal Buying Outlook.

(Editor’s Note: This is the second of two parts delving into the complexity of the modern global trading system. In case you missed it, read Part 1 here.)

The results of trade agreements with South Korea and other nations have been similarly lopsided; America’s trade-in-goods deficit with the world is now approximately 4% of GDP.

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In tandem with this, the system seems to have legitimized and empowered dictatorships in China and Russia. Rather than spreading liberal values with rising prosperity, the system has actually entrenched autocracy and cronyism in many emerging economies.

Even those arguing in The Economist debate for the principles of free trade and the global trading order acknowledge there are deep-seated problems that need to be resolved. The debate is now about not if but how to fix them.

President Trump’s approach appears to be the rather simplistic one of the dealmaker, of threatening and even imposing the harshest of conditions and then leaving the door open for a deal or renegotiation to find a solution acceptable to America. Only time will tell if this tactic works. It is crude — it may be effective, or it may cause lasting damage.

Supporters of the World Trade Organization (WTO) would see the fight taken up within the WTO courts, feeling that America has plenty of ammunition to force change.

They point out the WTO has ruled against China more often than for China, and that China has subsequently complied to WTO rulings. But it is possible politicians are being driven by a sweeping populist domestic tide that is railing against the ever more evident income disparity with the top 5% and the loss of well-paid shop floor jobs this globalization has caused.

Part of this trend was inevitable, anyway, with automation taking the place of manual labour. However, the pace and extent has been accelerated by the outsourcing of jobs and investment to low-cost labor markets, lured not just by low-cost labor but lax environmental standards and a host of other attractions, extended to local joint venture partners with state approval.

Liberalizing global trade has bought immense benefits to many, including lifting hundreds of millions out of poverty and raising the living standards of hundreds of millions more middle-class Westerners.

Those benefits, however, have come at a price, and the cost is rising.

The system can be fixed, but the strength of the system is in its near universal set of agreed rules and means for arbitration. Rather than ripping through decades of careful evolution, America should lead a revolution within the WTO and force through fundamental change. It is not as easy as laying down an ultimatum and handing over a bilateral negotiation to a team of officials.

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Rewriting the WTO’s rules of engagement will take time and immense patience. but maybe the shockwaves of President Trump’s tariff announcements have created a more dynamic atmosphere in which to push through such changes. The world knows he is not to be messed with — never has there been a better time to rewrite the rules of a flawed system that, nevertheless, remains the best of all flawed systems.

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(Editor’s Note: This is the first of two posts addressing the global trading system. Check back tomorrow for Part 2.)

The Economist asked the question in a debate that has been running over the last few weeks, stimulated in part by President Trump’s unprecedented actions on tariffs and quotas aimed at perceived cheaters of the global trading system.

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The article summarizing the debaters’ arguments (with contributions by guest contributors) makes fascinating and very appropriate contemporary reading for anyone interested in the topic. Few would argue that in its earliest guise the multilateral, rules-based system managed by the World Trade Organization (WTO), to lift the article’s words, has built up and delivered unprecedented prosperity across the world.

But even ardent supporters would also concede it has contributed to the decimation of the industrial base in many rich countries. Other factors have played a role, like automation and environmental policies, but the global trading system has played its part in this transfer for manufacturing capability and accompanying jobs.

The article questions whether the global trading system is broken, whether we should do away with it altogether, and whether a return to national tariffs and bilateral trade agreements is the solution to the perceived problems it has caused.

But the reality is that while the WTO and its rules-based system has significant faults, it is not bust in the way the world order of the 1930s, which was complete chaos and, as one of the arguments points out, fraught with government-imposed tariffs, quantitative limits on trade, discriminatory deals and foreign-exchange controls. It got so bad at times that some international commercial relationships even devolved into barter. This writer can remember his firm dealing with the Soviets in the 1980s, bartering ship loads of hot rolled coil steel from Russia and shipping back cold rolled steel coil from British Steel in the U.K.

But if the system is not busted it is certainly flawed, and those flaws have resulted in multiple problems.

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