Market Analysis

After dipping two weeks ago, the U.S. steel sector’s capacity utilization rate for the week ending Sept. 5 bounced back.

Steel mills produced at a rate of 63.7% during the week ending Sept. 5, 2020, according to the American Iron and Steel Institute (AISI). The rate marked an increase from the 61.7% recorded the prior week (when it had fallen from 63.0% the week before that).

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Production hits 1.43M tons

Steel output for the week ending Sept. 5 totaled 1.43 million net tons.

The weekly production total marked a 21.2% decline compared to the week ending Sept. 5, 2019, when capacity utilization reached 78.0%.

Meanwhile, production last week marked a 3.3% increase from the week ending Aug. 29.

Year-to-date output down by one-fifth

Buoyed in part by a recovery in automotive demand, the steel capacity utilization rate has made gains in recent months.

However, for the year to date, the capacity rate and overall output remain down compared to 2019 levels.

Year-to-date steel output totaled 53.27 million net tons, down from 66.73 million net tons for the same period in 2019. The capacity utilization rate for the same period last year reached 80.6%.

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India aluminum

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The Indian aluminum sector, which once stood firmly on the path of growth, today finds itself buffeted by the winds of uncertainty because of the COVID-19 pandemic.

Industry leaders have suggested many measures to the India government to put the sector back on track.

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Indian aluminum sector calls for removal of export cap

Uppermost on the list is a request to allow an export scheme for aluminum without any cap on the total exports.

The Engineering Export Promotion Council (EEPC) of India recently wrote to the Commerce Minister to continue with the Merchandise Export from India Scheme (MEIS Scheme) without any limit on the aluminum exports. The change would help the sector survive the current crisis situation, the Council argues.

Floated last year, the government trimmed the MEIS in the fiscal relief package recently extended to exporters. The government found it “unsustainable.”

The view is that, in general, the MEIS had failed to boost exports and capture new markets.

Critics argue MEIS cut hurts Indian aluminum sector

But experts, like Economics Affairs Secretary R. Gopalan, beg to differ.

Writing in the Financial Express, Gopalan said shrinking the MEIS had hurt the Indian aluminum industry, as the industry had to continue to rely on exports because of weak domestic demand. As such, so, the government had to support aluminum exports.

The only option left for the industry to sustain itself in these times of the pandemic is to export aluminum products, Gopalan said. As such, the decision to suddenly stop the MEIS, he felt, could have “a debilitating impact” on exporters’ ability to survive under current difficult conditions. Gopalan felt it would hurt exporters that work on long-term contracts.

Indian aluminum is one of the high-growth areas which could propel the nation’s GDP. However, the COVID-19 pandemic has already affected India’s aluminum exports. Export values declined 11% from U.S. $5.7 billion in fiscal year 2019 to U.S. $5 billion in fiscal year 2020. The new directive with regard to MEIS would render aluminum exports vulnerable and uncompetitive.

Mining group calls for import curbs

In parallel, the Federation of Indian Mineral Industries (FIMI) has urged the government to curb aluminum imports. Furthermore, the federation asked the government to facilitate the “tapping of rich and almost inexhaustible” domestic resources by local players.

Despite robust domestic demand and sufficient domestic aluminum capacity, India imported 60% of the aluminum it consumed. The result of this forex outgo, according to Vice-president R.L. Mohanty.

Domestic primary aluminum producers — such as Hindalco Industries and the Anil Agarwal-led Vedanta Ltd — are already working with the government at three levels: primary aluminum, scrap and downstream products. They have been asking the government to implement remedial measures, such as anti-dumping and anti-subsidy duties, the Business Standard reported.

Hindalco, the world’s largest aluminum rolled products manufacturer (especially in beverage cans and auto body), recently acquired Aleris. With this move, the company can now produce aerospace-grade aluminum sheets. It is also focusing on building capability in India to be part of the India growth story.

Meeting future aluminum demand

Domestic consumption of aluminum is expected to reach 10 million tons by fiscal year 2031-2032. To meet this future demand, India needs to increase bauxite production from 23 million tons in fiscal year 2019 to approximately 70 million tons by that time. Alumina production would have to rise from 7.4 million tons to 20 million tons.

India is No. 2 in the world in aluminum capacity. The country has primary aluminum capacity of 4.1 million tons per year and downstream processing capacity of 3.9 million tons.

Recently, the aluminum industry had made huge investments to increase domestic production capacity from 2 million tons per year to 4.1 million tons per year.

But experts fear that the COVID-19 crisis, coupled with the new government policies, could derail this growth story.

See why technical analysis is a superior forecasting methodology over fundamental analysis and why it matters for your aluminum buy.

In this month’s Rare Earths Monthly Metals Index (MMI) news: Texas Congressmen introduced the RARE Act; the European Commission unveiled its own raw materials action plan; and Chinese rare earths to the U.S. could plunge this year.

The Rare Earths MMI gained 8.3% for this month’s MMI reading.

September 2020 Rare Earths MMI chart

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Texas Congressmen introduce bill aimed at curbing U.S. dependence on China for rare earths

Congressmen Lance Gooden (R-TX) and Vicente Gonzalez (D-TX) recently introduced the House’s version of a bill that seeks to decrease the U.S.’s dependence on China for rare earths.

The bill, dubbed the Reclaiming American Rare Earths (RARE) Act, aims to establish tax incentives for domestic production of rare earths.

“The United States is more dependent than ever on the importation of the resources that drive our economy, enable us to build advanced technology, and ensure our national security,” Gooden’s office said in a release. “Thirty-five of these rare earth minerals are designated by the Department of Interior as ‘critical’, and we source fourteen of them entirely from foreign suppliers. China is a leading supplier for twenty-two of the thirty-five. The RARE Act is specifically designed to change that.”

Earlier this year, Sen. Ted Cruz introduced similar legislation, dubbed the Onshoring Rare Earths Act of 2020, or ORE Act.

In late July, Australian rare earths firm Lynas Corporation announced it had signed a contract with the U.S. Department of Defense for Phase 1 work on a heavy rare earths separation facility in the U.S.

Like U.S. RARE Act, Europe presents critical minerals action plan

In a similar vein, the European Commission also recently announced its own action plan related to its raw materials supply security.

The plan also includes an updated list of those materials deemed critical.

The 2020 list includes heavy and light rare earths elements, in addition to raw materials like coking coal. New materials added to the 2020 list that were not on the 2017 list were titanium, lithium, bauxite and strontium.

The list contains 30 materials, up from the 11 materials included on the 2011 list.

“The supply of many critical raw materials is highly concentrated,” the European Commission said in a release. “For example, China provides 98 % of the EU’s supply of rare earth elements (REE), Turkey provides 98% of the EU’s supply of borate, and South Africa provides 71% of the EU’s needs for platinum and an even higher share of the platinum group metals iridium, rhodium, and ruthenium. The EU relies on single EU companies for its supply of hafnium and strontium.”

Chinese rare earths exports to the U.S. could be on the decline

The South China Morning Post reported China’s rare earths exports to the U.S. could fall by anywhere between one-fourth and one-third this year.

For instance, Adamas Intelligence forecast global consumption of NdFeB alloys could fall by as much as 9.3% this year. The figure comes on the heels of growth at a CAGR of 6.4% from 2015-2019.

However, Adamas did offer a silver lining.

“However, with the ongoing re-opening of key demand markets through the end of 2020 and into 2021, we expect demand for most end-uses and applications to rebound strongly in 2021 and 2022 and thereafter rise steadily through the end of the decade and beyond,” the research firm said.

Actual metals prices and trends

The Chinese yttrium price rose 1.8% month over month to $32.83 per kilogram as of Sept. 1. Terbium oxide 9.0% to $722.31 per kilogram.

Neodymium oxide surged 16.1% to $52,896.23 per metric ton.

Europium oxide fell 2.7% to $31.37 per kilogram. Dysprosium oxide fell 2.3% to $259.74 per kilogram.

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September 2020 Construction MMI chartThe Construction Monthly Metals Index (MMI) gained 2.6% for this month’s MMI reading.

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U.S. construction spending

U.S. construction spending in July checked in at a seasonally adjusted annual rate of $1,364.6 billion, the Census Bureau reported.

The July rate was up 0.1% from the previous month, when it reached $1,362.8 billion. However, the July figure marked a 0.1% decrease from the July 2019 estimate of $1,366.0 billion.

During the first seven months of 2020, construction spending totaled $792.6 billion, or up 4.0% year over year.

As for private construction, spending reached a seasonally adjusted annual rate of $1,013.5 billion, or up 0.6% from the previous month.

Within private construction, residential construction reached $546.6 billion in July, or up 2.1%. Nonresidential construction reached a seasonally adjusted annual rate of $466.9 billion in July, or down 1.0%.

Meanwhile, public construction spending reached an estimated seasonally adjusted annual rate of $351.1 billion, which marked a 1.3% decline. Educational construction fell 3.0% to $82.2 billion. Highway construction reached a seasonally adjusted annual rate of $99.0 billion, or down 3.1%.

ABI holds at 40.0

For another month, the Architecture Billings Index (ABI) held flat for a reading of 40.0.

The index, put out monthly by the American Institute of Architects, measures billings growth (any reading less than 50 indicates billings contraction).

“Inquiries into new projects continued to show just a modest decline, but more seriously, the value of new signed design contracts slipped from its June level,” the latest ABI report notes. “Unfortunately, with the continued resurgence in COVID-19 cases in many areas of the country, clients may be interested in starting new projects, but remain reluctant to sign on the dotted line.”

By region, the West posted the strongest reading, checking in at 40.9. Trailing the West were the South (40.7), the Midwest (40.1) and the Northeast 36.8).

This month’s ABI survey asked architecture firms about their experience with the federal Payroll Protection Program (PPP).

“Overall, 85% of responding firms reported that they applied for, and received, a PPP loan,” the report states. “Just 1% applied for a loan but did not receive one, while the remaining 14% did not apply for a loan at all. Firms with an institutional specialization were most likely to report receiving a PPP loan (89%), followed by firms with a commercial/industrial specialization (81%), and firms with a multifamily residential specialization (75%).”

Housing starts surge

In positive economic indicators, last month we noted U.S. housing starts in July jumped back up to pre-pandemic levels.

July starts reached a seasonally adjusted annual rate of 1.496 million units, according to data from the Census Bureau and the Department of Housing and Urban Development.

The July start rate marked a 22.6% increase from the previous month and a 23.4% increase year over year.

Actual metals prices and trends

The Chinese rebar price increased 3.5% month over month to $536.99 per metric ton as of Sept. 1. Chinese H-beam steel rose 0.7% to $535.53 per metric ton.

The U.S. shredded scrap steel price rose 4.2% to $248 per short ton.

The European commercial 1050 aluminum sheet price rose 5.4% to $2,582.27 per metric ton.

Stop obsessing about the actual forecasted steel price. It’s more important to spot the trend. See why.

Europe

Andrey Kuzmin/Adobe Stack

Despite the economic and political challenges related to the coronavirus pandemic, the European metals industry is becoming increasingly vocal in trying to form the arguments around its own survival.

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Making the case

A recent article in the Financial Times — penned, it must be said by the president of Eurometaux, the European Association of non-ferrous metals producers — should not be dismissed as just a PR attempt to lobby Brussels.

The arguments made are repeated across the European metals sector. The arguments nod to social trends supported across the region to tackle climate change issues while trying to protect jobs and local economies.

Europe may not be able to set the world’s agenda. Collectively, however, the E.U. can set Europe’s agenda. In so doing, it can set an example other countries are already showing some interest in adopting.

Lost market share

As the post points out, since the 2008 financial crisis, Europe has lost a third of its primary aluminum production. Meanwhile, China has grown to produce some 60% of the world’s market.

Europe has lost market share for other base metals, too, missing the early boat for the cobalt, lithium and rare earths (used in electric cars).

Like the U.S., Europe has come to realize its dependency on foreign countries for strategic resources comes at its peril.

“The era of a conciliatory or naive Europe that relies on others to look after its interests is over,” Thierry Breton, the E.U. industry commissioner, is quoted by the Financial Times as saying.

Mining and refining in Europe has slashed its collective carbon footprint by more than 60% in the past two decades due to far higher and better-enforced standards in the region. Yet, not surprisingly, Europe’s metals sector cannot compete with subsidized imports from China and other regions.

A level playing field

But drawing on parallel commitments to achieve carbon neutrality by 2050, the region’s industry is making the case for creating a level playing field. That level playing would come not simply by imposing quotas but by applying a financial cost to imports that come with significantly higher carbon and environmental costs.

The wider industry is buying into the idea of products having a lower carbon footprint as a brand strength.

The LME is launching a low-carbon aluminum spot contract to promote and facilitate growing demand for metal with a definable carbon footprint.

Some producers are already onboard.

Rusal is at the forefront of promoting its primary metal as coming wholly from renewable (hydroelectric) sources. European metals producers may not have such a clear advantage in terms of power supply. However, a combination of technologies, practices and power sources means each ton of metal Europe produces emits on average eight times less carbon than its equivalent from China.

The industry wants the E.U. establish a coherent framework to assess, regulate and penalize imports that do not meet the same level of environmental responsibility. That could include a carbon tax on imports that would help level the playing field.

Ultimately, consumers always pay for taxes. However, at least this approach may have the benefit of helping to ensure a sustainable regional metals industry. It could encourage producers elsewhere to lower their environmental impact. Furthermore, it could reduce the supply chain risk of a growing dependence on countries like China that play by a different set of rules.

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The Automotive Monthly Metals Index (MMI) rose 4.7% for this month’s reading.

September 2020 Automotive MMI chart

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U.S. automotive sales

Among automakers still reporting sales on a monthly basis, Honda reported its August sales fell 21.9% year over year. Its car sales fell 29.6%, while truck sales fell 16%.

Hyundai reported total sales fell 8% year over year in August, while retail sales dipped 2%.

However, when accounting for extra selling days in August 2019, August 2020 retail sales increased 7% year over year. SUVs represented just over two-thirds of Hyundai’s U.S. retail sales in August.

“Despite a down market, our SUVs continue to drive sales and deliver results for us and our dealers,” said Randy Parker, vice president of national sales for Hyundai Motor America. “Our entire line up performed well, but Palisade led the pack and is one of the fastest selling vehicles in the industry. Sonata sales were up, because customers still want great, high-quality, safe sedans.”

Subaru’s U.S. sales, meanwhile, fell 17% year over year to 57,885 units in August.

“Thanks to the dedicated efforts of our retailer network, we are able to count August as the best sales month of 2020,” said Thomas J. Doll, president and CEO of Subaru of America, Inc. “Our retailers are continuing to sell at very high levels of sales efficiency given their on-ground inventory levels while at the same time providing a Love Promise customer experience. We are grateful for their outstanding efforts.”

August 2020 sales forecast to decline

While automotive sales have recovered somewhat over the summer months, August 2020 sales remained down year over year.

According to a forecast released jointly by J.D. Power and LMC Automotive, retails sales were expected to fall 3.7% compared to J.D. Power’s pre-virus forecast to 1.17 million units.

Total sales were expected to reach a seasonally adjusted annualized rate of 15.1 million vehicles, or down 2 million units from a year ago.

“Given the ongoing disruption that COVID-19 has on the industry, the fact that retail sales of new vehicles are only 4% below the pre-virus forecast is evidence of strong consumer demand for vehicles,” said Thomas King, president of the data and analytics division at J.D. Power. “The modest decline also is a result of significant inventory constraints.”

Toyota, Mazda JV announces $830M additional U.S. investment

A joint venture of Toyota and Mazda, Mazda Toyota Manufacturing, last month announced an additional investment of $830 million in its U.S. facility in Huntsville, Alabama.

The investment will contribute to “cutting-edge manufacturing technologies to its production lines and provide enhanced training to its workforce of up to 4,000 employees,” Toyota said in a release.

The additional $830 million comes on top of the $1.6 billion investment originally announced in 2018.

“The new facility will have the capacity to produce up to 150,000 units of a future Mazda crossover vehicle and up to 150,000 units of the Toyota SUV each year,” Toyota said. “MTM continues to target up to 4,000 new jobs and has hired approximately 600 employees to date, with plans to resume accepting applications for production positions later in 2020.”

Chinese sales gain again

Meanwhile, automotive sales in China gained in July for a fourth consecutive month.

According to the China Association of Automobile manufacturers, sales rose 16.4% year over year in July.

The rise comes on the heels of year-over-year increases in April, May and June.

Actual metals prices and trends

The U.S. HDG price rose 5.6% month over month to $736 per short on as of Aug. 1.

LME primary three-month copper fell 4.1% to $6,702 per metric ton.

U.S. shredded scrap steel rose 4.2% to $248 per short ton.

The Korean 5052 aluminum coil premium rose 2.4% to $3.03 per kilogram.

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scrap steel

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Pandemic-related lockdowns constrained the global scrap market earlier this year. Consequently, operations were restricted or closed down.

But even as containments have eased, the market has been slow to come back — resulting in rising prices for steel and base metal scrap over the summer.

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New EAF capacity coming onstream

Steel, in particular, is facing not one but two constraints.

On the one hand, as new electric arc furnace (EAF) steelmaking capacity has come onstream — with more planned to come onstream in the years ahead — steel scrap demand in the U.S. is likely to remain robust, even if the wider finished steel market remains under pressure from imports and only slowly recovering demand.

Meanwhile, China has not historically been a large producer of steel via the EAF route. However, the flexibility that the process affords and its lower environmental impact is attracting significant investment, spurring the country’s demand for more scrap.

As a result, steelmakers in China and their trade associations have been taking measures to make imported ferrous scrap shipments more welcome. They are trying to have scrap reclassified as a “resource,” according to Recycling Today.

Differing perspectives on nonferrous vs. steel scrap

Traditionally, China has treated metal scrap imports rather like general waste imports.

China in the past has even branded imported non-ferrous scrap as “foreign garbage,” according to the aforementioned article. The country has limited volumes with strict quota rules, which will decline to zero for base non-ferrous metals by 2021.

On the other hand, China is reviewing its steel scrap quotas, with a view toward relaxing them. Most expect import volumes to surge from early next year. As a result, that could potentially putting pressure on prices in an already constrained global market.

Scrap prices rose last month in Europe when Turkish buyers came back into the market. Those buyers had to bid for packages, even as their traditional U.S. sources were also facing limited availability.

All this is not to suggest we are facing runaway inflation in steel scrap prices.

Steel production generally is muted in most markets. Furthermore, finished steel prices are under pressure. However, there is a growing case, both economically and environmentally, for EAF production over the traditional iron ore-based blast furnace route.

That means there will be more buyers bidding for the finite supplies in the year ahead.

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India

Zerophoto/Adobe Stock

India’s steel production contracted since the arrival of COVID-19. However, exports surprisingly notched a new high in the April-July 2020 period.

Steels exports more than doubled in these months to hit their highest level in six years, reported news agency Reuters.

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Chinese demand soaks up India’s exports

Much of the Indian steel exports headed to China, despite ongoing tensions between the two nations.

China’s emergence as a new leading buyer of Indian steel has caught producers and analysts unaware. China replaces traditional importers like Vietnam, Italy and Belgium.

According to a China Iron and Steel Association official, it was paying particular attention to the imports of hot-rolled coils. The latter is used mostly to make pipes, automobile parts, and engineering and military equipment.

Indian production set to continue contraction

On the production side, a new report by Fitch Ratings has predicted further contraction in fiscal year 2021.

The ratings agency said higher prices supported by the price rebound in China will drive margins in the second quarter of the fiscal year and beyond. Hot-rolled steel sheet prices in China have improved by around $100 per metric ton since April 2020. Indian prices had started to tick up since late July, with a lag.

But the silver lining, according to Fitch, is that steel volumes could further improve over the next few quarters. Rural consumption and government spending on infrastructure would lead the improvement, and lead to better margins due to operating leverage.

On the exports front, Indian steel companies, like Tata Steel Ltd and JSW Steel Ltd, sold a total of 4.64 million tons of finished and semi-finished steel products in the world market between April and July. That total compares to 1.93 million tons shipped in the same period a year earlier.

Of the 4.64 million tons, Vietnam and China purchased 1.37 million tons and 1.3 million tons of steel, respectively.

Steel analysts here feel the exports jumped because of reduced prices as Indian sellers tried to get rid of a surplus generated by the impact of COVID-19 on domestic demand.

Analysts are also optimistic that with the Unlock 4.0 plan now announced, activities such as construction would increase. As a result, the plan would lead to an increase in local consumption, too. Overall, in the short term, exports would continue to grow over domestic consumption in India.

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aluminum price

Grispb/Adobe Stock

Several metals prices have been on the rise this year, powered in part by China’s demand recovery (among other factors, including a weakening dollar). Copper, in particular, has been a fast riser this year.

Aluminum, however, has not been as strong.

Over the last month, the LME three-month aluminum price has gained 4.62%, according to MetalMiner data.

However, since the start of the year, the price is actually down 2.8%.

Rising production levels won’t necessarily help support the aluminum price.

Stop obsessing about the actual forecasted aluminum price. It’s more important to spot the trend. See why.

Global output rises in July

According to the International Aluminum Institute, global aluminum production in July totaled 5.45 million metric tons.

The July total marked a 2.8% increase from the 5.30 million metric tons produced in June. Production totaled 5.41 million metric tons in July 2019.

Estimated Chinese production reached 3.13 million metric tons, up 3.3% from the 3.03 million metric tons produced in June. Production in July 2019 totaled 3.06 million metric tons.

Meanwhile, production in the Gulf Cooperation Council (GCC) countries reached 488,000 metric tons in July. The July total marked a 3.0% increase from the previous month.

Production in east and central Europe totaled 349,000 metric tons, up 2.6% from the previous month.

North American production reached 333,000 metric tons in July, up slightly from the 330,000 tons the previous month.

Asian production ex-China reached 343,000 metric tons in July, up from 337,000 tons the previous month.

Aluminum tariff goes into effect

Earlier this month, President Donald Trump announced the reimposition of the 10% Section 232 aluminum tariff on some Canadian aluminum.

Citing a rise in imports from Canada, the Section 232 tariff targeted Canadian non-alloyed, unwrought aluminum.

The reimposed tariff went into effect Aug. 16, despite criticism from domestic industry groups, including the Aluminum Association.

Trump initially levied the Section 232 tariffs on steel and aluminum in March 2018. After an initial exemption, the tariffs were eventually applied to imports of the metals from Canada.

However, in May 2019, the tariffs on Canadian steel and aluminum were rescinded as part of ongoing talks over the successor to NAFTA (the United States-Mexico-Canada Agreement, which went into effect July 1, 2020).

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China

Zerophoto/Adobe Stock

China became a net importer of steel for the second consecutive month in July.

This happened despite its crude steel production rising 9% year on year and demand from infrastructure and construction remaining subdued.

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Demand drivers

Several factors have driven demand.

On the one hand, global steel demand was depressed in the spring, impacted by lockdowns and restrictions as a result of the COVID-19 pandemic. Steel producers looked to dump excess capacity.

As a result, China was able to access low-cost metal from overseas markets keen to find a home for unwanted metal. Ironically, China has briefly become the home for unwanted global overproduction.

On the other hand, finished steel demand, particularly hot-rolled coil (HRC), is robust. Traders turned to temporarily low-priced overseas suppliers to fill the gap and China bounced back from its own lockdowns in May.

Those orders will likely carry on into August but then peter out from September onward. The two largest supply markets for semi-finished steel have been India (660,851 tons in July, accounting for 27% of China’s total purchases), while shipments from Russia were at 479,044 tons (equating to 20% of the total).

Much of the increased metal supply has been in the form of billets and slabs as high-cost iron ore. High-cost iron ore, now back to price levels last seen in 2014, constrains integrated mills’ ability to compete.

Net exporter to net importer

According to Platts, semis such as slab and billet when added to finished steel imports took China’s total steel imports in July to 5.06 million metric tons. That total greatly surpassed July’s steel exports of 4.18 million metric tons, making China a net importer.

The switch, however, is likely to be temporary.

Since July, China’s steel import orders have slowed, while export orders have improved.

Construction is said to have been hampered by heavy rains and even flooding in some regions and typhoons in others.

China’s steel inventory levels have remained relatively steady. Prices have reflected relative sector demand, with construction steel rebar rising only modestly by about RMB 60/ton over the last two months but HRC rising by a much stronger RMB 310/ton, according to MetalMiner data over the last two months.

Regional steel markets have reacted to the change in China’s supply-demand pattern with modest increases in supply of finished products. However, they are also cautious about strong ramp-ups in the expectation their largest neighbor’s increased appetite for metal is going to be short-lived.

Stop obsessing about the actual forecasted steel price. It’s more important to spot the trend. See why.