Market Analysis

Prime Minister Narendra Modi’s vision for India to become a $5 trillion economy by 2024 is in danger.

The current downturn — the third since the financial crisis — looks likely to undo that objective and extend further into the future as the world’s second-most populous country strives to bring large swathes of its population out of poverty.

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In a recent Stratfor report, India’s rollercoaster economy is said to be experiencing growth of just 6.1% in this financial year. Falling tax receipts are likely to mean the government will breach its 3.3% deficit target.

The report paints a picture of an economy unable to sustain strong growth for more than a few years at a time, saying this is the third downturn following periods in 2009 and 2014 which brought previous annual averages of 9.5% growth (2005-2008) to an abrupt end.

Both investment as a share of GDP (crucial for a developing country) and manufacturing growth (crucial for a young and rapidly rising labor force to find employment) have again fallen below target.

All of this comes despite the government’s much-heralded “Make in India” policy, which is designed to force firms to develop a domestic supply chain (thus creating investment, employment and technical knowhow).

The only measure that has remained down compared to previous periods is inflation, following two bumper harvests that depressed food costs. The flip side of that is farmers, who make up some two-thirds of the population, are experiencing depressed incomes, adding to weak GDP growth.

Bank lending is also suffering. The Reserve Bank of India is enforcing stricter rules on banks to realize their non-performing loans and close down firms, as opposed to the historical practice of indefinitely kicking the can down the road, which consumed valuable funds and perpetuated zombie companies.

The new policy makes sound economic sense, but in the short term is reducing banks’ ability to lend and is shining a light on the country’s increasingly shaky shadow banking sector.

A return to strong growth is unlikely in the short term; double-digit growth may be a thing of the past in a weaker global environment. Efforts to boost investment by reducing corporate tax rates from 30% to 22%, while admirable, have deprived the treasury of revenue but failed to stimulate the desired investment.

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For India’s technocrats, it must feel like they are the also-rans to China’s stellar growth engine.

However, maybe they should console themselves with the thought that while a centralized autocratic regime can achieve amazing rates of growth and market control, it has proved inconsistent with freedoms as Indians understand them; it is hard to see the Chinese model being popular among India’s pluralist democracy of 1.3 billion people.

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Amid a weakening demand picture for a number of metals, global lead and zinc demand is forecast to decline this year, according to the International Lead and Zinc Study Group (ILZSG).

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Zinc Demand Forecast to Fall in 2019, Bounce Back in 2020

According to the latest ILZSG report, global zinc demand is forecast to fall 0.1% this year to 13.67 million tons and rise by 0.9% in 2020 to 13.80 million tons.

Chinese demand is expected to bounce back after sliding for the past two years. China’s zinc demand is forecast to rise 0.6% in 2019.

“Despite a steep fall in automobile production, output in the galvanising sector increased during first seven months of 2019 compared to the same period of 2018, propelled by rises in property construction and investment in public infrastructure,” the ILZSG report stated.

Chinese demand is forecast to rise 1.2% in 2020.

Meanwhile, European demand is expected to fall 3.7% this year, on the back of declines in Germany and the U.K. The latter’s decline comes as a result of the liquidation of British Steel earlier this year; currently, the U.K.’s Official Receiver is seeking a buyer to take over the ailing firm. Talks with Ataer Holding, an arm of the Turkish military pension fund OYAK, failed to materialize a deal during a 10-week exclusivity period.

In 2020, however, European zinc usage is forecast to rise by 0.5%.

Elsewhere, demand is forecast to fall in India and Japan, with a 2020 recovery forecast for the former and a further decline for the latter.

In terms of supply, zinc mine production is forecast to rise 2% this year and by 4.7% in 2020.

“A significant rise in Australian output this year will mainly be a consequence of the commissioning of the Woodlawn tailings project in May and increased contributions from MMG’s Dugald River mine, Glencore’s Lady Loretta mine, and the tailings projects operated by New Century Resources and Hellyer that were commissioned in 2018,” the ILZSG report states.

Lead Demand Forecast to Fall 0.5%

As for lead, global demand is forecast to fall by 0.5% this year and rise by 0.8% in 2020. Lead usage is forecast to fall 1.1% in China this year; a usage decline is also forecast for both Europe and the U.S.

Lead mine supply, meanwhile, is forecast to increase 1.7% and 3.9% in 2019 and 2020, respectively.

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“The completion of expansions at Hindustan Zinc’s mines in India, combined with substantially higher Australian production, will be major influences on the forecast increase in 2019 output,” the report stated. “Rises are also expected in Mexico, Poland and South Africa. In Bolivia, Kazakhstan and the United States, production is forecast to be lower compared to 2018.”

Lead, Zinc Prices on the Rise

The LME three-month lead price is up 6.28% over the last month, rising to $2,207/mt early this week, according to MetalMiner IndX data.

Meanwhile, LME three-month zinc has surged 10.4% over the last month, up to $2,537/mt.

Global steel production contracted in September, according to the most recent monthly data from the World Steel Association.

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In September, steel production from the 64 countries reporting data to the World Steel Association totaled 151.5 million tons, down 0.3% on a year-over-year basis.

For the first nine months of the year, production reached 1,391.2 million tons, up 3.9% compared with the first nine months of 2018.

Asian production reached 1,000.1 million tons through the first nine months of the year, up 6.3% from the first nine months of 2019.

Production in the E.U. reached 122.5 million tons, down 2.8% compared with the first nine months of 2018.

North American crude steel production in the first nine months of 2019 increased 0.3% to 90.6 million tons, while the Commonwealth of Independent States produced 76.0 million tons, down by 0.1% year over year.

Meanwhile, China’s September 2019 production reached 82.8 million tons, up 2.2% compared to September 2018. September production marked a decline in terms of relative year-over-year growth, as August 2019 year-over-year growth registered at 9.3%.

India’s production reached 9.0 million tons, marking a 1.6% increase. Japan produced 8.0 million tons, decreasing 4.5% year over year. South Korea’s crude steel production hit 5.7 million tons in September, marking a 2.7% year-over-year decline.

In the E.U., Germany churned out 3.4 million tons of crude steel, which marked a 4.0% year-over-year decrease. Italy’s production increased 1.1% to 2.2 million tons. France’s production fell 10.2% to 1.2 million tons, while Spain’s production also hit 1.2 million tons (marking a 1.0% decline).

U.S. production totaled 7.1 million tons, down 2.5% year over year (although year-to-date production remains higher than for the same period in 2018).

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Elsewhere, September production totals in Brazil, Turkey and Ukraine were down by 22.0%. 6.9% and 2.3%, respectively, on a year-over-year basis.

Norsk Hydro’s Alunorte refinery. Source: Norsk Hydro

Norwegian aluminum, alumina and bauxite producer Norsk Hydro scored a key victory in September when Brazil’s federal court lifted the final embargo on the firm’s Alunorte alumina refinery, allowing it to ramp back up to 100% capacity.

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The refinery had been subject to embargoes, particularly with respect to its DRS2 bauxite residue deposit area, after flooding in the region in early 2018. Alunorte declared force majeure in March 2019 after the Brazilian authorities ordered a 50% production cut.

With the embargoes in the rear-view mirror, the firm is now looking to ramp up production. The Alunorte refinery, boasting a capacity of 6.3 million metric tons per year, reached 83% capacity capacity utilization during the third quarter.

Hydro reported third-quarter underlying EBIT of NOK 1,366 million (U.S. $148.5 million), marking a 49% year-over-year decline, citing “a decrease in realized aluminium and alumina prices.”

However, the declines were partially offset by lower raw material costs and higher production in Brazil, the company said. Compared with the second quarter, underlying EBIT increased 56%.

“It is encouraging to see costs coming down in our upstream business, combined with forceful restructuring and optimization measures downstream. Amid challenging markets, it is more important than ever to focus our efforts on what we control ourselves. I am therefore pleased to report progress on our new and ambitious improvement programs, which is an important enabler for our profitability and sustainability agenda,” President and CEO Hilde Merete Aasheim said in a release.

By segment, underlying EBIT for Hydro’s bauxite and alumina segment fell 30% on a year-over-year basis, but increased 16% compared with the second quarter of 2019.

Underlying EBIT in extruded solutions increased 12% on a year-over-year basis, but declined 28% compared with Q2 2019. The extruded solution segment was hit hardest by a cyber attack that struck Hydro’s operations in March.

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“The cyberattack on Hydro on March 19, affected the entire global organization, with Extruded Solutions having suffered the most significant operational challenges and financial losses,” the company said. “The financial impact of the cyberattack is estimated to around NOK 550-650 million in the first half year with limited financial effects for the third quarter.”

A recent Platts report offers a worrying picture of overcapacity in the Chinese steel market, which could have ramifications for steel prices worldwide.

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When Europe or the U.S. has an overcapacity issue, domestic producers suffer and domestic prices are depressed, but the effects rarely ripple much beyond the region’s borders.

But in part because of China’s dominance in the steel sector — producing over half the world’s steel — and in part because Chinese producers use exports to dump excess production when the country produces more than it consumes, the rest of the world feels the impact through increased exports of low-cost steel products.

China has been engaged in a multiyear program to shutter outdated, more polluting steel capacity. New additions have been authorized only on a replacement basis, but Platts’ analysis suggests plants that have been closed for some years but not pulled down have been allowed to count towards the construction of new, far more efficient steel plants.

Specifically, the report states China’s net crude steel capacity expansion will total 37.65 million mt per year over 2019-23, of which 34.88 million mt per year is due to come online in 2019. This will take China’s total crude steel capacity to around 1.2 billion mt per year by the end of this year.

In the September-October period of this year alone, China approved eight steel capacity replacement projects, Platts reports, which will see 17.18 million mt per year of pig iron and 13.56 million mt per year of crude steel capacity commissioned in the next 3-4 years.

The new projects are predicated on closures of 19.52 million mt per year of pig iron and 15.21 million mt per year of crude steel capacity (5.18 million mt per year of pig iron and 2.16 million mt per year of crude steel capacity were already closed before the end of 2018).

This means there will be just 14.39 million mt per year of pig iron and 13.04 million mt per year of crude steel capacity closed during 2020-23, resulting in a net increase of 2.79 million mt per year of pig iron and 0.51 million mt per year of crude steel capacity over the period.

The problem is further exacerbated by actual output from new facilities being even higher than headline capacity, Platts reports. The new facilities can produce up to 20% more than the stated installed capacity, possible through improved production technologies — by adding more scrap into the iron and steelmaking process — and by using higher-grade iron ore, the article states.

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Steel demand in China, at least from the construction sector, has been robust this year.

But worrying signs are appearing that supply is exceeding demand.

Rebar margins have fallen to just $29/mt during July-September from $159/mt in the same period last year.

Manufacturing is depressed, particularly in the automotive sector. The property sector is expected to weaken next year as new plants come onstream looking to run at 100% capacity to recoup investment; increased exports may be the inevitable result.

This morning in metals news, a planned takeover of British Steel by a Turkish military pension fund is in doubt, Caterpillar reported down third-quarter earnings and Chinese iron ore futures made gains again.

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OYAK Bid for British Steel Takeover on Shaky Ground

Plans for a Turkish military pension fund that has emerged as the favorite to take over the U.K.’s second-largest steelmaker, British Steel, are in doubt.

According to Reuters, Ataer Holding, a subsidiary of the OYAK pension fund, received a 10-week exclusivity period earlier this year to hash out a takeover deal of the liquidated British Steel.

However, with the deadline on that exclusivity period falling today, the U.K.’s Official Receiver said other options will be explored, according to Reuters.

Caterpillar Posts Down 3Q

Caterpillar reported third-quarter sales and revenues of $12.8 billion, down 6% from the $13.5 billion recorded in 3Q 2018.

“The primary driver of the decline in sales and revenues was a $1.2 billion movement in dealers’ inventories,” the company said. “Dealers decreased their inventories about $400 million during the third quarter of 2019, after increasing their inventories about $800 million during the third quarter of 2018.”

The company also lowered its full-year profit-per-share guidance down to a range of $10.90 to $11.40 (from $12.06 to $13.06).

Chinese Iron Ore Futures Keep Rising

Chinese iron ore futures made gains for a fourth straight session, Reuters reported.

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The most-active contract on the Dalian Commodity Exchange closed up 1%, according to the report, at 628 yuan ($88.90) per ton.

It has come as a surprise to some in the coal sector that for the third consecutive month, India’s coal imports are set to drop in October.

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News agency Reuters reported India’s seaborne imports of both thermal and coking coal were on track to be about 13.3 million tons this month, according to vessel tracking and port data compiled by Refinitiv.

The development has caught some experts off guard given the fact that India’s largest producer, Coal India, has seen industrial action in some of its operations and the flooding of a major mine.

By the end of October, analysts believe India’s import figure is likely to go up. Even if October imports do exceed the current estimate, it’s likely they will still fall short of the 15.3 million tons of September, which was down from 15.9 million tons in August.

Like their global counterparts, Indian steelmakers are dependent on coal for making steel. India is dependent on imports of coking coal, as there is not enough indigenous coal to meet domestic demand (India’s total coal reserves are about 260 billion tons).

India imports coal from countries like Australia, Canada and the U.S. The import figures through July this year were 8% higher as compared with the same seven-month period in 2018.

Because of strikes, Coal India said its output was down by 13 million tons, or 2.1%, of its annual output this financial year.

To add to the coal producer’s woes, an unusually high and largely devastating monsoon season has stopped production at a major coal mine in the Chhattisgarh province, exacerbating the overall coal production shortfall.

In the last days of September, a river here suddenly changed its course, flooding the Dipka coal mine in Korba district, Quartz India reported. Incidentally, Chhattisgarh produced the highest quantity of coal in the country in financial year 2018-19.

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Recently, India became the second-largest destination for seaborne coking coal after China, which was about 13% of global demand in the spot market.

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The U.S.’s rise as an oil producer is well-documented, but the U.S. Energy Information Administration’s (EIA) latest report marks another milestone for the domestic sector.

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According to the EIA, the U.S. now exports crude oil to more nations than it imports from.

In 2009, the U.S. imported oil from as many as 37 sources in a given month, according to the EIA. Meanwhile, through the first seven months of 2019, the largest number of import sources in a given month was 27.

In terms of exports, the U.S. exported oil to as many as 31 destinations per month through the first seven months of 2019.

“This rise in U.S. export destinations coincides with the late 2015 lifting of restrictions on exporting domestic crude oil,” the EIA said. “Before the restrictions were lifted, U.S. crude oil exports almost exclusively went to Canada. Between January 2016 (the first full month of unrestricted U.S. crude oil exports) and July 2019, U.S. crude oil production increased by 2.6 million b/d, and export volumes increased by 2.2 million b/d.”

Demand abroad for light-sweet crude oil has fueled the U.S.’s rise as an oil exporter.

“Several infrastructure changes have allowed the United States to export this crude oil,” the EIA said. “New, expanded, or reversed pipelines have been delivering crude oil from production centers to export terminals. Export terminals have been expanded to accommodate greater crude oil tanker traffic, larger crude oil tankers, and larger cargo sizes.”

As noted in MetalMiner’s Annual Outlook, in addition to the strength of the U.S. dollar and China’s economy, oil prices constitute a key price driver for metals.

OPEC’s daily basket price reached $59.50 per barrel on Monday.

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According to a Reuters report, OPEC and its allies are considering whether to extend previously agreed upon supply curbs in an effort to support flagging oil prices.

Two features of Chinese political and industrial policy have been consistent over the years: the willingness to plan long term and deep pockets to finance those plans.

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A major state-owned steelmaker and mining company, Sinosteel, has epitomized this in western Australia.

The steelmaker has bought into the region’s lower-grade iron ore resources back in the last decade, in what was seen at the time as a potential rival to the country’s largest iron ore producing region further north at Pilbara.

A collapse in iron ore prices largely brought a halt to not just Sinosteel’s ambitions but those of joint venture partners and competitors Mitsubishi. During the five-year life of Mitsubishi’s Stage 1 operations at nearby Jack Hills, it produced and shipped around 1.8 million tons of lump and fines DSO each year.

Jack Hills, owned by Mitsubishi via its Crosslands subsidiary, was closed in 2015. Sinosteel’s Weld Range also closed, set to be a $2 billion iron ore project in the region when the Oakajee deepwater Port and 570-kilometer rail project was also shelved following cost blowouts that forced up proposed port fees, Reuters reported.

It was hoped Mitsubishi would come to the rescue when it paid A$325 million for the balance 50% stake in Oakerjee that it did not own.

But as iron ore prices continued to slide, the project was shelved — until now.

Following a year in which iron prices have been at their highest since 2014, Sinosteel has acquired Oakerjee and Crosslands (pretty much for free, by all accounts). Reuters reported Sinosteel will control both the port tariffs and the Weld Range mine, not to mention other iron ore assets in the region, assuming Oakajee’s port and rail assets are ever built.

Officially, there are no current plans to construct the deep-water port at Oakajee, nor the network of railways that were going to connect it to the iron ore mines at Jack Hills, Weld Range and related assets.

But documents filed with the Australian Securities and Investments Commission last week show two Sinosteel subsidiaries are the buyers, the article reports. The documents suggest the two subsidiaries paid the just $3 each for their respective 50% stakes in Oakajee Port and Rail, the company that owns the studies and intellectual property for the Oakajee railway network and deep-water port.

One of the Sinosteel subsidiaries was also said to have been transferred all shares in Crosslands Resources, the company that holds the nearby Jack Hills iron ore project. Crosslands is reliant on Oakajee Port and Rail building the port and rail infrastructure to get its product economically to market; so, without the port, the assets is essentially a dead duck.

Maybe not surprisingly, ASIC documents say Crosslands was sold for nothing.

On the face of it, it’s a huge loss for Mitsubishi, which had spent hundreds of millions buying into the related projects and investing in Jack Hills. Meanwhile, it’s a zero cost gain for Sinosteel, but it now leaves the Chinese with the need to invest the best part of A$10 billion to develop the port, rail infrastructure and mines.

With much of the local resources in the form of low-grade magnetite ore, investment will be needed to process the ore from 30-50% purity to 65-70% concentrate, an energy-intensive process that has historically made magnetite deposits largely uneconomical in western Australia.

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Sinosteel may therefore decide to sit on its asset until iron ore prices rise and/or the technology to reduce energy requirements in the concentration process makes the region’s magnetite more economical.

Fortescue appears to be making progress in that direction, Reuters reported, at its Iron Bridge property, halving the energy inputs by improved efficiencies. Even so deep pockets and a willingness to play the long game will be needed by Sinosteel if the region is ever to see its potential realized.

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U.S. raw steel production for the week ending Oct. 19 slowed, with the sector’s capacity utilization rate checking in just below the important 80% mark, all coming as steel prices continue to fall — in some cases, to late 2016 levels.

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Capacity utilization for the U.S. steel sector during the week ending Oct. 19 checked in at 79.6%, according to the American Iron and Steel Institute (AISI).

Production for the week reached 1.84 million tons, down from the 1.88 million tons produced during the equivalent week in 2018 (at a capacity utilization rate of 80.1%).

Meanwhile, production during the week ending Oct. 19 picked up 1.1% from the previous week, when production reached 1.82 million net tons at a capacity utilization rate of 78.7%.

Production for the year through Oct. 19 checked in at 77.9 million net tons, at a capacity utilization rate of 80.3%. The year-to-date production marks a 2.8% increase compared with the same period in 2018, when the rate was 77.5%.

The steel capacity utilization rate remains above the 80% mark for the year, but it has been sliding in recent weeks.

U.S. steel price have showed no signs their slide is nearing an end.

The U.S. HRC price is down 12.63% over the last month, reaching $498/st — dropping below the $500/st mark for the first time since late 2016.

The U.S. CRC price is down 8.99% over the last month, down to $688/st, also its lowest since late 2016.

U.S. HDG is down 9.26% to $745/st.

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Meanwhile, plate, which recently lagged behind the other forms of steel, has showed a more moderate decline over the past month. The U.S. plate price is down 1.49% to $727/st, bringing it down to January 2018 levels.

The World Steel Association is set to report September steel production figures later this week.

In its recently released October Short Range Outlook, the World Steel Association forecast global steel demand would rise 3.9% this year, but just 1.0% next year amid slowing overall growth, trade uncertainty and weakness in the automotive sector.