China

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If we were worried about China’s dominance of global steel output over the last decade, the next decade is looking like it may be even worse.

Having bounced back robustly this year from severe coronavirus lockdowns in Q1, China is on track to top 1 billion tons of steel production by the end of 2020, beating 2019’s 996.3 million tons despite steel-consuming industries suffering a lockdown.

Indeed China is the only major producing country to have increased output this year, up 5.6% at the end of October. Europe, North America, Japan, South Korea, and India are all down over the year cumulatively, leading to a global 1.9% reduction.

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Despite a small decrease from record levels in August and September, China’s October output was still up on last year.

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China and India find themselves in some sort of a mini-race in the crude refining business.

(As readers of our Annual Outlook know, the oil sector is one of three key macroeconomic pillars we consider in our analysis of commodities markets, in addition to the Chinese economy and the strength of the U.S. dollar).

China races ahead in crude refining

China, though, is paces ahead of its neighbor. If all goes to plan, China could soon dethrone the present No. 1 refiner, the United States.

Bloomberg quoted the International Energy Agency (IEA), which said that perhaps by next year, China would dethrone the U.S. as the top refining country in the world.

This will be no small feat.

China may become No. 1 following the closure of some refineries in the U.S.

Steve Sawyer, director of refining at energy industry consultancy Facts Global Energy, told Bloomberg in an interview that, in the coming years, China would be putting out an additional million barrels a day, helping it overtake the U.S.

India aims to build crude refining capacity

While China goes about the crude refining business, its neighbor India has also thrown its hat in the ring.

For the last couple of years, India has made no bones of building its domestic refining capacity. The country has added some well-known international petroleum companies to its client list.

India planned to double its current capacity in the next 10 years. However, Prime Minister Narendra Modi wants things done faster.

At present, India’s refining capacity stands at 250 million tons, or a little more than 5 million barrels per day, based on a conversion factor of 7.33 barrels per metric ton of oil. Under an earlier plan, India sought to hike this to 450 million to 500 million tons over the next 10 years.

Now, Modi wants to do it even faster, accomplishing it within five years.

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We wrote last month how China’s rapid recovery from the COVID-19 pandemic resulted in the country importing semi-finished products for which it previously had been self-reliant or even a net exporter for the last decade.

Some steel products and primary aluminum swung into becoming significant net inflows for the economy during the summer months.

But as we cautioned at the time, this was only expected to be a temporary phenomenon.

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China’s steel flows recalibrate

Sure enough, although volumes are still down on this time last year, exports have picked up and imports have fallen.

In a recent post, Argus Media reported China’s steel exports in October rose by 5.2% from September to 4.04 million tons. Chinese mills shifted supplies to overseas markets, enabled — or forced, depending on your point of view — by falling domestic prices.

Summertime exports rose as domestic prices fell

Falling domestic prices in the summer aided Chinese steel mills’ ability to export so aggressively.

Domestic inventory levels rose and domestic crude steel production hit record levels of 3.09 million tons a day in September, in large part to meet domestic demand. Weakness in domestic steel prices suggests overoptimism by the steel mills, inevitably resulting in excess production leaking into export markets looking for a home.

Domestic Chinese steel prices have recovered since the summer as global steel prices have risen and imports have fallen.

As the global recovery has lifted demand and prices, mills in India and elsewhere have not felt the need to distress sell metal into China. In addition, the arbitrage window has narrowed.

Imports have therefore appeared less attractive to Chinese buyers and exports more attractive to mills. That is a trend we expect to continue through Q4.

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The Department of Commerce made a preliminary determination in its anti-dumping investigation covering non-refillable steel cylinders imported from China.

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DOC rules steel cylinders dumped from China

The DOC determined China dumped the steel products into the U.S. at margins between 57.83% and 114.58%.

The domestic petitioner in the case is Worthington Industries of Columbus, Ohio.

“As a result of today’s decisions, Commerce will instruct U.S. Customs and Border Protection (CBP) to collect cash deposits from importers of non-refillable steel cylinders from China based on the preliminary rates noted above,” the DOC said in a release last week.

Imports of non-refillable steel cylinders reached a value of $21.5 million in 2019, per the DOC.

The U.S. International Trade Commission will make its final determination in the case by Feb. 22, 2021.

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According to the Financial Times, China’s President Xi Jinping surprised the global community by announcing last month a hugely ambitious plan to improve China’s environment and make the country carbon-neutral by 2060.

In addition, he said the country’s emissions would peak before 2030.

But does this really mean anything? If it does, what impact will it have on the country’s massive steel industry? The steel industry, of course, is the source of a significant proportion of the country’s carbon emissions?

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China’s environment and emissions figures

Firstly, let’s look at the scale of the proposition.

China is the world’s largest emitter of greenhouse gases (such as carbon dioxide and methane).

Last year, China’s emissions accounted for roughly 27% of the global total. The country’s total accounted for more than the U.S., Europe and Japan combined, the Financial Times reported.

Furthermore, the country consumes more coal than the rest of the world put together. In addition, China continues to commission new coal power plants.

On the one hand, China also leads the world in the deployment of solar power, wind power and electric vehicles. Its energy-efficiency policies are ambitious and successful. Significantly, there are no known climate change deniers in the Chinese leadership.

But is the pledge meaningful?

It contrasts poorly with that made by almost 70 countries and the E.U. Those countries have already pledged to make their economies “net-zero” greenhouse gas emitters by mid-century, or 10 years earlier than China’s pledge.

And the 2030 peak emissions date is a rehash of a commitment made back in 2014, suggesting peak emissions could be reached well before 2030 and the authorities are simply back-sliding.

Difficult changes

The scale of the challenge vis-a-vis China’s environment and emissions is considerable.

More than 85% of China’s primary energy last year came from coal, oil, and natural gas, all of which produce carbon dioxide. This came despite massive investment in solar and wind.

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A relatively swift exit from pandemic lockdowns and the impact of stimulus-led infrastructure investment have powered China’s metals rebound. Furthermore, the Shanghai Futures Exchange has continued its summer disconnect from the London Metal Exchange aluminum price, which started in April of this year.

The resulting arbitrage window has sucked in imports of aluminum primary and remelt alloy casting ingot. As a result, China’s imports are at levels not seen since the aftermath of the financial crisis in 2009.

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China leads the metals rebound as aluminum imports surge

Combined imports of primary metal and unwrought alloy totaled 393,000 tonnes, just shy of the previous record of 394,000 tonnes in April 2009, according to Reuters. Furthermore, cumulative net imports reached 653,000 tonnes so far.

Alloy imports should be seen as in part as a replacement for lower scrap imports. However, even so, the disconnect has continued through the third quarter. Although that disconnect is expected to narrow in the run-up to year’s end, it underlines the current two-speed nature of the global manufacturing economy.

Meaning, there’s China and then there’s the rest of the world.

China tightened up on scrap grade import controls last year and precipitated a switch to imports of refined remelt alloy over scrap, even before the pandemic took hold.

Southeast Asian regional remelters have taken in the displaced scrap and exported alloy ingot to China. A similar trend is taking place with copper scrap and alloy ingot, possibly suggesting a structural shift that is here to stay.

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India turned a net exporter of steel to China (and other countries) during April-August 2020 for the first time in several years, credit rating agency CRISIL reported.

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India becomes net exporter amid domestic demand slump

Local consumption in India has slumped. As such, during the aforementioned period, Indian companies exported 60-80% of their steel output.

China accounted for 45% of the total steel exports, according to The Week.

“India turned net exporter of steel to China for the first time in several years, with 69% of semi-finished steel & 28% of finished steel heading there between April & August,” CRISIL said in a statement.

The rise coincided with border tensions rising between India and China, which led to clashes in India’s Ladakh region.

Chinese steel production, iron ore imports rise

China has been the largest producer of steel globally, followed closely by India.

In the January-June 2020 period, China’s steel production rose 1.4% to 499 million tons. Meanwhile, India’s production slumped 24.2% to 43.13 million tons.

The increase in exports, however, has eased the pressure on India’s steel sector. The sector has been buffeted by lockdowns and a major slump in economic activity because of the pandemic.

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This morning in metals news: copper prices gained momentum Wednesday; the rival of German steelmaker Thyssenkrupp rejected the idea of an alliance; and a Pakistani steelmaker is looking to ramp up its output amid a construction spike in the country.

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Copper price momentum

The LME copper price bounced back Wednesday after falling Tuesday, Reuters reported.

The copper price gained 0.2% Wednesday, as stocks fell to a 15-year low, per the report.

As with other materials, recovering Chinese demand continues to support metals prices (including copper).

Salzgitter CEO says company not interested in Thyssenkrupp alliance

The rival of German firm Thyssenkrupp told Reuters it is not interested in an alliance.

Salzgitter CEO Heinz Joerg Fuhrmann said a merger of the two would not improve the company’s standing.

Last year, Stuart Burns delved into Thyssenkrupp’s struggles, including its departure from Germany’s blue-chip DAX index.

In August, Thyssenkrupp reported on the impact of the coronavirus pandemic on its finances (citing the automotive technology fallout, in particular).

Pakistani steel firm aims to augment steel capacity

Per Bloomberg, China-backed steel projects in Pakistan are looking to raise a lot of money and significantly augment their steel capacity.

Agha Steel Industries Ltd. aims to triple its capacity for gray steel bars, Bloomberg reported.

Furthermore, the company plans to raise between 3.6 billion and 5 billion rupees, according to the report.

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China’s automotive market has bounced back over the last quarter, with automotive sales up for the last three months.

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Marking a third straight month of year-over-year increases, China’s June automotive sales were up 11.6%, according to data recently released by the China Association of Automobile Manufacturers (CAAM).

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True to form, if not to scale, Beijing resorted to infrastructure spending this quarter to support the economy as it sought to pull the country out of government-imposed lockdowns in the first quarter.

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