Market Analysis

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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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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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The Renewables MMI (Monthly Metals Index), after a significant surge last month, sat at 100 for the second consecutive month.

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Within this basket of metals, the Japanese steel plate price rose, as did the price of Chinese and American steel plate. U.S. steel plate, in fact, rose 5.5% month over month.

U.S. grain-oriented electrical steel (GOES) coil also jumped in price.

As for the trio of rare and minor metals in this MMI, cobalt cathodes fell 1.1%, while silicon dropped slightly and neodymium made a small gain.

Cobalt Costs

According to a report by the Financial Times, changes to the mining code in the Democratic Republic of Congo will lead to higher costs for consumers of the metal.

According to the report, President Joseph Kabila on Wednesday said he would sign a new order after meeting with representatives from some of the big miners with business in the country, including Glencore, Molybdenum and Ivanhoe Mines. 

Cobalt is used in batteries for electric vehicles (EVs), among other things, making it an especially prized material as EVs gain popularity. As such, with a majority of the world’s cobalt being mined in the DRC, political machinations in the country have a significant impact on the metal’s price.

According to the Financial Times, the code could see royalties on cobalt — plus other metals, like copper and gold — rise from 2% to 10%.

Senators Lobby for Electrical Steel Protection in 232

The Journal-News reported on a trio of U.S. senators who lobbied Trump to prioritize electrical steel in the Section 232 trade remedy process.

The only remaining maker of electrical steel in the country, AK Steel, was unlikely to benefit from the Section 232 trade remedy proposal, according to Sen. Rob Portman (R-OH).

“We write you today to share our concerns that your proposed section 232 remedy is incomplete when it comes to electrical steel,” Portman and two other senators said in their letter to Trump, according to the Journal-News. “We write on behalf of a constituent company, AK Steel, which is the last domestic producer of grain-oriented electrical steel (GOES). Since the remedy, as currently constructed, does not include electrical cores and core parts, the remedy will not be effective for the domestic electrical steel market.”

In the senators’ letter, they requested the president add a trio of HTS codes to the duty order.

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The Rare Earths MMI (Monthly Metals Index) held steady, notching a reading of 20 for our March MMI.

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Within the basket of metals, Chinese yttrium dropped slightly, while terbium metal picked up in price.

Europium oxide also dropped slightly, while dysprosium oxide picked up an extra dollar per kilogram.

New Toyota Magnet Not Dependent on Some Rare-Earth Minerals

According to a report by Ars Technica, a new magnet developed by automaker Toyota will not be dependent on some key rare-earth minerals.

Toyota announced it had invented a magnet — for application in electric vehicles — that uses much less of the rare-earth mineral neodymium. According to Toyota, it had developed “the world’s first neodymium-reduced, heat-resistant magnet.”

Of course, cost is a major restraining factor when it comes to electric vehicle (EV) growth. Materials needed for EV batteries, like neodymium, are costly, and many battery makers have sought to reconfigure the percentages of metals used in their batteries to phase out more cost-prohibitive materials (like cobalt, for example).

In addition to reducing the use of neodymium, the new magnet also completely phases out two other rare earth minerals.

“The newly developed magnet uses no terbium (Tb) or dysprosium (Dy), which are rare earths that are also categorized as critical materials necessary for highly heat-resistant neodymium magnets,” according to the Toyota statement. “A portion of the neodymium has been replaced with lanthanum (La) and cerium (Ce), which are low-cost rare earths, reducing the amount of neodymium used in the magnet.”

According to the announcement, the new magnet reduces the amount of neodymium used by as much as 50%.

Europium Market to Hit $308.9M by 2025

The global europium market is set to hit a value of $308.9 million by 2025, according to a recent report by Reportbuyer.

According to the report, consumer electronics, automotive, semiconductors, and energy and mining  are the sectors leading the charge in the growth of europium.

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The Indian metal industry seems divided for now over the implications of U.S. President Donald Trump’s announcement of the intention to impose tariffs on steel and aluminum imports.

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News reports and statements by industry leaders, along with reports by research agencies, show no unanimity on how the decision by the U.S. government, if implemented, would affect trade in India aand other neighboring Asian countries.

A report by news agency Press Trust of India (PTI), quoting industry leaders, said India will not be impacted much.

President Trump said last week he had decided to impose a steep 25% import tariff on steel.

Quoting H Shivram Krishnan, Essar Steel commercial director, the PTI report said the U.S. decision was not compliant with World Trade Organization (WTO) regulations. Former Steel Authority of India Ltd (SAIL) chairman Sushil Kumar Roongta said that the move may impact some of India’s steel exports to the U.S.

On the other hand, Sanak Mishra, former managing director of SAIL’s Rourkela Steel Plant, told PTI the decision may not have a significant impact on India as of its total steel imports, U.S. imports only 2% from India.

Some experts in India believe if the U.S. President went ahead with his decision, it would spark off a retaliatory war between exporting nations and the US, disrupting the just-about-recovering global steel industry.

On the official front, the Indian government, without naming the U.S., has let it be known that it may not exactly be a wise move. In a nuanced statement, Indian trade envoy J S Deepak said the government shared the concerns that some members had expressed on recent developments that could lead to new tariff barriers and even a trade war.

The envoy added that application of tariffs must respect the ceiling of bound rates agreed to at the WTO.

Several countries, including the European Union, China and Japan, to name a few, have criticized President Trump’s announcement.

India has also cautioned about the threats posed by the U.S. to the WTO’s dispute settlement functions because of the continued delay in selection and appointment of members to fill vacancies in the Appellate Body, the highest limb for adjudicating global trade disputes.

The U.S. is India’s largest export destination with U.S. $42.21 billion worth of shipments sent in 2016-17. But India’s steel and aluminum exports to the U.S. remain low. While steel exports to the U.S. stood at only U.S. $330 million, export of finished steel products were U.S. $1.23 billion in 2016-17. Total exports of aluminum and aluminum products stood at $350 million.

But a report in the Business Standard said India may have to brace itself for more imports from China into India as a result of the U.S. action.

On the other hand, ratings agency Moody’s said in a report that Asia, which produced more than two-thirds of the world’s steel, would “be minimally affected” when compared to the rest of America’s trading partners. Asian exports of aluminum and steel to the U.S. typically amount to less than 1% of GDP or exports, Moody’s reported.

Moody’s said the direct impact on steel companies would be manageable for the steel sector and rated steelmakers in Asia, because steel is predominantly traded within the region.

The CEO of Japanese giant Nippon Steel, the world’s second-largest steel producer by volume, has already dubbed Trump’s decision “regrettable.”

The one area likely to be affected if Trump goes ahead is metallic scrap imports. The U.S.’s imposition of import tariff on primary metals, including steel and aluminum, was likely to hit India’s 10 million tons (MT) of metallic scrap import annually, according to this news report. The U.S. makes up 20% of this import.

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More use of scrap as raw material for metal producers in the Unites States will result into its lower availability for importers across the world. This means scrap price would move up outside the U.S., which would impact secondary metal producers into India, according to Sanjay Mehta of Material Recycling Association of India.

The Construction MMI (Monthly Metals Index) dropped one point this month, falling to 93 for our March reading.

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Within the basket of metals for the Construction MMI, Chinese rebar and H-beam steel prices dropped on the month. Meanwhile, U.S. shredded scrap steel rose 8.4% on the month, while European commercial 1050 sheet fell 3.0%.

Chinese aluminum bar also fell, dropping 1.0% month over month.

U.S. Construction Spending

According to U.S. Census Bureau data for January, total spending stood pat from December, but was up year over year.

Construction spending during January 2018 was estimated at a seasonally adjusted annual rate of $1,262.8 billion, up minimally from the revised December estimate of $1,262.7 billion, according to the Census Bureau.

The January figure, however, was up 3.2% from January 2017’s $1,223.5 billion.

Meanwhile, spending on private construction was at a seasonally adjusted annual rate of $962.7 billion, 0.5% above the revised December estimate of $967.9 billion.

Under the umbrella of private construction, residential construction was at a seasonally adjusted annual rate of $523.2 billion in January, 0.3% above the revised December estimate of $521.8 billion. Nonresidential construction was at a seasonally adjusted annual rate of $439.6 billion in January, 1.5% below the revised December estimate of $446.2 billion.

As for public construction, the estimated seasonally adjusted annual rate of public construction spending was $300.1 billion, 1.8% above the revised December estimate of $294.8 billion.

Within that, educational construction was at a seasonally adjusted annual rate of $76.7 billion, 2.1% above the revised December estimate of $75.2 billion. Highway construction was at a seasonally adjusted annual rate of $92.6 billion, 4.4% above the revised December estimate of $88.8 billion.

Construction and Tariffs

Just like other metal-using sectors, the construction industry would also be impacted by President Trump’s announced steel and aluminum tariffs (especially steel).

Trump’s announcement came just over a month after Trump proposed $1.4 trillion in infrastructure investment over 10 years.

For a construction industry that saw spending flatten in January, a rise in materials costs would not be great news, should the tariffs become the law of the land.

According to Philip Gibbs, an analyst at KeyBanc Capital, the tariffs might give steel stocks a short-term “sugar high,” he told Reuters, but that unsustainable pricing could eat into demand from manufacturers.

The National Association of Homebuilders (NAHB) came out against the tariffs proposal, with the association’s chairman saying the tariffs would hurt consumers and make housing less affordable.

“It is unfortunate that President Trump has decided to impose tariffs of 25 percent on steel imports and 10 percent on aluminum imports,” said Randy Noel, chairman of the NAHB. “These tariffs will translate into higher costs for consumers and U.S. businesses that use these products, including home builders.

“Given that home builders are already grappling with 20 percent tariffs on Canadian softwood lumber and that the price of lumber and other key building materials are near record highs, this announcement by the president could not have come at a worse time.”

Of course, the metals world is still in wait-and-see mode regarding the tariffs, which have yet to become actual law.

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In an effort to curb horrendous atmospheric pollution, particularly during the winter heating season, Beijing’s crackdown on energy-intensive and polluting industries resulted in widespread closures across the Chinese aluminum smelting industry.

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But even as expectations rise that those smelters from Shandong to Shanxi may soon restart, Reuters reports record stockpiles on the SHFE and prices that are down some 10% since last December will weigh heavily on smelters’ decision-making.

Many are already barely profitable and, contrary to expectations six months ago, national Chinese aluminum production has continued running at a high level. December’s output rose to the same level as June when countrywide smelters had been running at capacity to stockpile before the expected clampdown.

The irony is that while Beijing has clamped down on production in some regions closer to major urban areas, producers — many of them state-owned — have been free to build new, lower-cost capacity out in the provinces. Reuters quotes Paul Adkins, managing director of the consultancy AZ China, who estimates that 4.4 million metric tons of new capacity would be completed this year, mostly from state-run companies.

Despite new capacity being based on lower-cost coal and/or alumina supplies, there are question marks whether all this 4.4 million tons will make it to full capacity.

Adkins believes the actual increase may only be some 3 million tons. Even so, incremental increases will be at a cost base lower than older plants and will allow them to operate a break-even price below established plants. If prices remain weak, and the overcapacity issue suggests there is little prospect of a significant rise, then there will be a further shift of production to the state sector, as these new, largely state-owned plants thrive while older, more costly plants struggle.

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Primary metal is restrained from directly impacting the global market by 15% export taxes, but limitations on extrusions, rolled products and forgings are less constrained (in some cases supported with rebates). A lower-priced, amply supplied domestic primary market will enable semi producers to export excess capacity abroad, adding to an already fractious trade situation following the U.S. announcement of its intention to levy a 10% import tariff on semi-finished aluminum products.