CommentaryMarket Analysis

Oil prices are on track for their largest monthly decline in six months, the online trade journal oilprice.com writes.

The Trump administration exacerbated the selloff with another threat of tariffs, this time against its southern neighbor Mexico if it does not stem the flow of immigrants across the border. President Donald Trump threatened to apply a gradually rising tariff, starting at 5%, on goods imported from Mexico beginning June 10.

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The threat was seen by investors as a negative move for both U.S. and wider region growth. The move was also seen as evidence, as if any were needed, that the president will continue to use his weapon of choice, tariffs, as a means to achieve his political ends — with negative consequences for growth.

Meanwhile, OPEC as a group and Saudi Arabia as its spokesman has reacted with assurance that the cartel will continue to limit output to further deplete inventories and keep the market in balance.

OPEC is desperate for oil prices to maintain the gains it has made this year and, if possible, reverse the decline seen during the last 30-40 days.

Source: Oilprice.com

OPEC sees itself in a fight with the U.S. shale industry, worried that it is losing share with limited power to substantially support the market as it was once able.

Some consumers are hoping rising U.S. shale output will permanently consign OPEC to history — at least in terms of engineering higher pricing.

The expectation is rising U.S. output has more than made up for the loss of Libyan, Iranian, and Venezuelan output. However, according to JP Morgan Chase, the market is finely balanced with robust demand, up 5-7% in China and Europe this first quarter, with increasingly constrained supply.

Maybe in recognition of that, Trump has so far exempted Iran from sanctions on its petrochemicals industry. OPEC’s output is currently running at 30.17 million barrels per day (bpd), its lowest level in four years. This comes despite Saudi Arabia increasing output by 200,000 bpd to partially compensate for the loss of some 400,000 bpd from Iran.

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Anyone holding off filling up their tanks in the hope prices will fall further may be disappointed.

Negative sentiment around trade is the order of the day, but supply is becoming tighter and demand has so far not reflected the wider slowing of global GDP.

The oil price is down, yes, but not out.

MetalMiner’s June 2019 Monthly Metal Buying Outlook is in the books.

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The Monthly Metal Buying Outlook, released at the beginning of every month, offers analysis and buying strategies for 10 metals:

  • Aluminum
  • Copper
  • Nickel
  • Lead
  • Zinc
  • Tin
  • Hot-Rolled Coil  (HRC)
  • Cold-Rolled Coil (CRC)
  • Hot-Dipped Galvanized (HDG)
  • Steel Plate

The monthly report supplies buyers with valuable data and analysis to mitigate price risk and buy at the most opportune times in the price cycle. In addition to buying strategies, the outlook includes analysis of the last month in news and trends for each metal category, drivers affecting price movements, and resistance and support levels (and much more).

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Request your free trial to the Monthly Metal Buying Outlook here.

The planned merger of Chinese behemoth Baowu Steel Group with a smaller rival is painted in rather dramatic terms, as if it is to be something that is feared.

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In practice, we should see this as a positive move.

The Financial Times reported this week that Baowu Steel Group is to buy a majority stake in smaller domestic rival Magang Steel as part of the state’s wider drive to close outdated capacity and merge the country’s fragmented steel sector — all part of the move to improve efficiencies and control.

The two companies had combined crude steel output last year of 87 million metric tons, the Financial Times reports, surpassing total U.S. steel output of 86.6 million tons. The combined group is only slightly behind the world’s No. 1 steelmaker, ArcelorMittal, which produced 92.5 million tons of crude steel in 2018.

Capacity of the merged group would be in the region of 90 million tons, making it likely that further acquisitions will see Baowu exceed ArcelorMittal at some stage in the not-too-distant future.

Beijing is actively encouraging state champions to absorb smaller rivals, as its plan is for the top 10 producers to account for some 60% of steel production (up from 35% now). In the process, Beijing can exert better control over the industry than it has managed in the past.

Baowu itself is the product of an earlier merger between Baosteel Iron & Steel and Wuhan Iron & Steel Corporation in 2016.

Baowu has a production target of 100 million tons by 2021. With standing capacity in the Chinese market said to be some 928 million tons while output was only 828 million tons last year, there is room for Baowu to achieve its target through acquisition of underperforming rivals.

The Chinese steel market is facing slowing demand and margins are weak – down 46% at Baosteel Iron & Steel, the Financial Times states – and widely reported to have already surpassed peak steel output.

The path from here on out will be based on consolidation, rationalization and better environmental controls  — all of which would be good for the wider global community.

A fragmented steel industry is less disciplined and more likely to seek local state support to maintain employment (while simultaneously dumping excess production on the world market).

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Consolidation improves the chances of a managed rationalization of facilities and output. It’s not guaranteed, of course, but it’s more accountable, with politically appointed and controlled management in place — prospects are improved where policy directives have failed in the past.

One of India’s largest miners, Hindustan Copper Ltd., is looking to grow in ore production by 25% to 5.15 million tons in fiscal year 2019-2020. The company has set a revenue from operations target of approximately U.S. $286 million, with a capital expenditures of about U.S. $86 million, mostly for mine expansions.

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Besides mining of copper, Hindustan Copper’s other principal activities include concentration of copper ore into copper concentrate through a beneficiation process, in addition to smelting, refining and extruding of the copper concentrate into refined copper.

The state-owned company announced it had signed a memorandum of understanding with the Indian Ministry of Mines to raise copper ore production from 4.12 million tons in 2018-19 to 5.15 million tons, moneycontrol.com reported.

Like steel and iron ore, India’s copper consumption has been steadily going up.

A recent report by the International Copper Study Group for February said while the global mine production had declined by about 1.8% in the first two months of the year, refined usage remained more or less unchanged in the same period. In China and India, demand grew by 4%, but declined in Japan and the United States.

Like in steel, copper in India is under stress from imports.

The latter now account for 38% of the country’s consumption. India has a capacity of 1 million tons in copper, according to the Business Standard, and major players like Vedanta Ltd are about to set up new smelting units.

Likely Fallout of RCEP

India is on the verge of formally signing what’s called the Regional Comprehensive Economic Partnership (RCEP).

Domestic copper producers have raised concerns to the Indian government regarding the potential fallout from signing this agreement.

RCEP is an economic gathering of 16 nations, which includes China. India’s trade with RCEP countries is amounts to approximately $100 billion, according to the Business Standard.

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When RCEP is signed, the Indian government is likely to keep 10% of the items under exempt list while opening up the rest of the goods. The Indian Primary Copper Producers Association has asked the government to keep key metals like copper and aluminum on RCEP’s exempt list.

In spite of their status as precious metals, the automotive industry accounts for a high percentage of platinum and palladium demand annually, making the pair essentially industrial metals.

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Given that a high percentage of demand generated from the automotive industry relates to the use of the metals within the catalytic converter, as the automotive market moves more fully toward electric powered vehicles, demand will likely decline for both metals.

Meanwhile, according to Reuters, even though palladium- and platinum-heavy fuel cell technology in the electric car market is on the rise, the growth in this area is unlikely to offset falling autocatalyst demand.

Given that prices for palladium soared of late, let’s take another look at palladium price trends, along with its close substitute platinum.

Palladium, Platinum Price Trends Compared with the Dollar Index (DXY)

Given that metals and the dollar index (DXY) tend to move in opposite directions, we can see that palladium prices gained quite a bit more value than expected when looking at the DXY trend line against the palladium trend line in light blue below.

Source: MetalMiner data from MetalMiner IndX(™) and Yahoo.com

On the other hand, platinum’s price movement in the U.S. looks much more in line with what we might expect when compared with the relative performance of the U.S. dollar. Therefore, although platinum prices historically exceeded palladium prices, platinum prices still trend fairly close to the expected (recent) value, while palladium prices started to look inflated. Platinum prices peaked in 2008 at more than $2,000 per ounce.

Source: MetalMiner data from MetalMiner IndX(™)

Looking at the price difference in the U.S. between the two metals, or spread, as shown by the purple line in the chart above, we see that the spread between the two flip-flopped in late 2017 to early 2018. The spread surged since last year, hitting a peak around March 1, 2019. More recently, the spread has moved sideways at around $500 per ounce.

Do Chinese Palladium and Platinum Prices Drive U.S. Prices?

Given that China consumes a high percentage of palladium, we could expect that Chinese prices lead U.S. prices.

Source: MetalMiner data from MetalMiner IndX(™)

A look at the price trend lines between the two countries does in fact show a high correlation in prices between the two countries, especially long term.

More recently, U.S. and Chinese platinum prices continued to move in a tight band together.

Chinese palladium prices, on the other hand, trend above U.S. prices, with the gap growing in 2019 – not surprising given that China leads demand for the metal globally.

Source: MetalMiner data from MetalMiner IndX(™)

The zero line in the chart above indicates where the two countries’ prices are equal. At points above zero, the Chinese price is higher. The price difference tended to amount to U.S. $25-$50 per ounce, but increased into 2018. During the past few months, the difference decreased again slightly, but still looks somewhat high historically.

Source: MetalMiner data from MetalMiner IndX(™)

The chart above shows the spread between Chinese and U.S. prices. When the spread value is under zero, U.S. prices are higher.

The spread between U.S. and Chinese platinum prices tends to lean toward the U.S. having the higher price. However, since 2016, the prices trended very close together. U.S. prices started to look relatively more expensive again in 2019.

What This Means for Industrial Metal Buyers

For industrial metal buyers looking to track palladium prices, the Chinese price offers a solid proxy of what we might expect with regard to the future behavior of palladium prices.

While the price indicates slightly weaker Chinese demand of late, prices for palladium remain at historically high levels.

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Platinum prices, however, remain somewhat low historically. The recent performance against the DXY does not necessarily suggest the metal is undervalued. However, given that platinum can serve as a substitute, it’s doubtful the price will stay suppressed long term, as high palladium prices will drive a push toward substitution.

According to the Financial Times, Norsk Hydro’s giant Alunorte refinery in Brazil has been given approval to restart production by the Brazilian authorities.

The announcement caught the market by surprise, coming some months earlier than had been expected.

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The restart is a boost for Hydro, whose Brazilian operations, which form bauxite for primary aluminum, have had a slow go of things for the last year. The firm has been forced to run its 6.3 million ton refinery at half its normal capacity following a 2018 dam tailings spillage.

The Financial Times reports production at Alunorte would hit 75-85% of its 6.3 million ton capacity within two months, adding some 2 million tons per annum to the market.

“Production at Hydro’s Paragominas bauxite mine will be increased in line with the ramp-up speed at Alunorte,” the company is quoted as saying. “A decision to increase production at Hydro’s part-owned Albras primary aluminium plant is also expected shortly.”

Alumina prices had been supported by Alunorte’s slowdown and further buoyed by environmental pressure on refineries in China. However, this month authorities ordered the closure of a major refinery in Shanxi province following spillage of red mud waste tailings.

But overall, China’s exports have been at a record high and new alumina refineries are coming on stream.

AluminiumInsider reports Emirates Global Aluminium’s Al Taweelah refinery will, at full capacity, produce 2 million tons per year, with output for 2019 expected to be around 0.7 million tons.

Other projects expected to restart or increase production in 2019 include: the Alpart Alumina refinery in Jamaica, India Vedanta’s Lanjigarh refinery and Friguia refinery in Guinea, the article notes.

Global alumina production (excluding China) is expected to increase by nearly 4 million tons this year compared to 2018, with further capacity coming on stream in 2020. All this new supply will undermine price support for spot alumina and, in turn, the primary aluminum price.

Many aluminum smelters caught between relatively high spot alumina prices and an already weak aluminum price have had their margins squeezed.

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To the extent that alumina prices ease this year, that pressure could ease — but so will support for the primary ingot price as smelters are allowed to adjust prices to the market.

The tariff war between the United States and China is being watched with trepidation in India.

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There’s no unanimous view yet on the fallout of the tariffs with respect India. Most in India are in a wait-and-see mode as things unfold.

Overall, some analysts have said the situation could be good for India, as the U.S. would now start sourcing more and more goods from other Asian countries, including India. That belief is underlined by a recent report by the Coalition for GSP, a group of U.S. companies and trade associations.

Based on official trade figures, the Generalized System of Preference (GSP) had saved U.S. companies U.S. $105 million this March, marking an increase of 36% from March 2018 and the second-highest level on record, The Asian Age reported.

But U.S. President Donald Trump’s March warning regarding removing India from the GSP list has not gone down well in Indian trade circles; the 60-day notice period ended May 3.

The report noted that Chinese imports, subject to new tariffs, were down significantly, and had risen significantly from countries like India.

For India, 97% of increased 2019 GSP imports are on the China Section 301 lists, so it is only logical that what is China’s loss is India’s gain.

But with Trump’s announcement, nobody knows what’s going to happen on this front yet.

That is specifically true on the metals front. Indian steel companies are already apprehensive that it will lead to an increase in the dumping of cheap steel into the Indian market.

The Indian steel industry has already appealed to the Indian government to impose safeguard duties of 25% to protect it from growing imports.

News agency Reuters quoted an unnamed source as saying that China’s excess steel capacity was “a concern” for India, as the former could reroute it through other countries like Vietnam and Cambodia.

The new agreement signed a few days ago between the U.S. and Canada to prevent cheap imports of both products from entering North America will only compound the problem for India.

The world’s second-largest steel producer, India turned net importer this year on March 31, 2019, according to official statistics. Along with China, other countries that export steel to India are Japan and Korea, who, incidentally, are also major exporters of steel to the U.S. and Europe.

Fearing the dumping of additional steel, a group of Indian steel companies recently met with Indian government officials asking for more safeguards. For now, with the national election just having been completed, there may not be much movement as everyone awaits the next government to get into the saddle.

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According to a World Steel Association report, India is expected to finish as the second-largest user of steel in 2020. The usage of finished steel products in India is forecast at 102.8 million tons in 2019, rising to 110.2 million tons (mt) in 2020. The country’s steel use in 2018 reached 96 million tons.

Pavel Ignatov/Adobe Stock

U.S. steel mills have operated at a capacity utilization rate of 81.8% for the year through May 18, according to the American Iron and Steel Institute’s (AISI) weekly steel production report.

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According to the report, adjusted year-to-date production through May 18 reached 37.5 million net tons at a capability utilization rate of 81.8%, which marked a 6.5% increase from the 35.2 million net tons produced during the same period last year. During that period in 2018, the capacity utilization rate reached 76.6%.

In the week ending on May 18, 2019, domestic raw steel production reached 1.9 million net tons at a capacity utilization rate was 81.6%, up 5.1% from 1.8 million net tons produced during the week ending May 18, 2018 (when the capacity utilization rate was 77.1%). 

Production for the week ending May 18, 2019, was down 1.4% from the previous week ending May 11, 2019, according to AISI. Production for the week ending May 11, 2019, reached 1.9 million net tons at a capacity utilization rate of 82.8%.

Production by region for the week ending May 18, 2019, broke down as follows:

  • North East: 197,000 net tons
  • Great Lakes: 738,000 net tons
  • Midwest: 201,000 net tons
  • Southern: 698,000 net tons
  • Western: 66,000 net tons

In policy news, last week President Donald Trump announced the U.S. would remove its Section 232 tariffs with respect to steel and aluminum imports from Canada and Mexico. The tariffs had been in place for the U.S.’s NAFTA partners since June 1, 2018, when initial temporary exemptions for those countries were allowed to expire (the E.U.’s temporary exemption also expired at that point).

The imposition of the Section 232 tariffs saw to a gradual decline in U.S. steel import market share. U.S. imports of steel fell 12% in 2018 compared with 2017, with import market share reaching 23% in 2018.

While much attention is given to China and its steel overcapacity, it is a minor source of steel for the U.S. According to the International Trade Administration, Canada, Mexico and Brazil were the top three sources of steel for the U.S. last year.

Despite the tariffs, Canada was the largest single-country source of steel imports, accounting for 19% of U.S. steel imports last year, followed by Brazil (14%) and Mexico (11%). However, by volume, U.S. imports from Canada fell 1% in 2018 compared with the previous year and increased 9% from Mexico.

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“On the other hand, given that the 25% tariff on steel effectively deterred imports of that metal to the U.S., MetalMiner does expect to see an impact on steel prices as imports of steel increase,” MetalMiner analysts explained Friday on the heels of the news the tariffs would be remove for Canada and Mexico.

“Canada serves as the largest exporter of flat rolled steel products, as well as long products, with Mexico taking the No. 3 position. For tubular products, Canada and Mexico take the No. 2 and 3 positions. For stainless steel, Mexico serves as the fourth-largest exporter to the U.S. and Canada does not export stainless to the U.S. in a major way.”

Canada accounted for 32% of U.S. imports of flat products and 21% of long products last year, in both cases constituting the largest piece of the pie in each steel product category. In addition, 15% of the U.S.’s pipe and tube imports came from Canada last year — behind only South Korea (16%) — while Mexico accounted for 13%.

alfexe/Adobe Stock

In recent weeks, the Chinese yuan (CNY) has weakened against the U.S. dollar (USD). A weaker yuan makes imports cheaper, all other things holding equal.

As we can see in this chart, during the past couple of weeks the yuan weakened back to roughly December levels.

Will this currency change result in surging steel imports due to the increased attractiveness of Chinese steel prices?

Source: MetalMiner analysis of Yahoo.com data

The Price Spread Still Remains Fairly High, Apples to Apples

The chart below shows the spread between U.S. and Chinese CRC prices since January 2018.

Source: MetalMiner data from MetalMiner IndX(™)

Around the time the U.S. tariffs took effect, U.S. prices increased, while Chinese prices started to move lower.

Fast forward to mid-May 2019 and the differential still remains higher than during the pre-tariff period. The differential is down to just over $200/st — from around $400/st, the 2018 peak — as shown by the spread line in purple, which measures the straight arithmetic difference between the two prices.

Why should we look at Chinese prices? It’s certainly not because China serves a major trading partner for steel. Looking at the statistics, in fact, only around 1% of China’s steel exports come to the U.S.

The reason to study Chinese steel prices owes to the fact that China drives global production, with over 50% of global steel produced in China. In pure price trend analysis, we know it remains a key to future pricing for the U.S., as it will be for all country-level analyses.

As such, examining the Chinese CRC price offers value, regardless of whether or not an organization plans to actually import from China.

A Tactical Examination of the CRC Price Differential

In terms of a more hands-on assessment for buyers looking at importing steel from China, a second look at the spread below takes into account the 25% tariff and $90 per ton in estimated import charges (e.g., freight, trader margin, etc.).

Source: MetalMiner data from MetalMiner IndX(™)

The chart above depicts $90 in importing costs added to the Chinese CRC price only, plus the 25% tariff rate, with the extra 25% added on top only after March 23, 2018.

Adding the import tariff decreases the spread, as shown by the purple line. Subsequently, the tariff triggered a drop in the spread.

At the arrows, we see the differential shift after March 23, 2018, when Chinese prices effectively rose to around $900/st. At that point, the spread dropped significantly, as expected, as shown by the sudden drop in the purple line.

While a spread in China’s favor still remained throughout 2018, into 2019 one could say tariffs leveled the relative price difference. Additionally, U.S. steel prices dropped in line with Chinese prices (plus the tariff and import costs).

With the spread essentially flat, tariffs look to essentially “level the playing field,” as prescribed by their use.

What Does This Mean for Industrial Buyers?

With the Chinese currency weakening once more against the U.S. dollar, MetalMiner expects Chinese imports will start to look increasingly attractive to would-be U.S.-based importers.

However, once we account for the tariffs and import costs, the spread between U.S. and Chinese prices looks effectively negligible.

The fact that U.S. prices for CRC dropped very recently also offset some of the would-be increase in the spread following the weakening of the yuan against the dollar.

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Given that Chinese imports only account for a small percentage of U.S. steel imports at this time, and given the flattening of the spread, the Chinese yuan must depreciate more significantly or U.S. prices must begin to rise once more before we can expect to see a major uptick in imports of Chinese CRC steel.

According to the BBC last week, British Steel, the U.K.’s second-largest steel producer, is knocking on the door of the British government for the second time in as many months looking for support.

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In April, the firm borrowed £120 million from the government to pay an E.U. carbon bill so it could avoid a steep fine, arising when the E.U. arbitrarily withdrew the carbon credits the firm would previously have used to offset such fines. However, the E.U. decided to suspend U.K. firms’ access to such free carbon permits until a Brexit withdrawal deal is ratified.

Having survived that, the firm is apparently now back on the brink of administration and asking for £75 million to help it cope with Brexit-related issues, the news channel says. The firm cites uncertainty over the U.K.’s future trading relationship with the E.U. as a deterrent to European clients to place business with the British steel company.

That may be so, but all European steel producers have been hit with a weak market.

Prices have fallen 16% this year, according to Platts, due to rising competition from eastern Europe and China, in addition to rising costs due to iron ore, electricity and environmental compliance costs.

So far, British Steel looks like a victim of bad fortune.

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