China

This morning in metals, here are a couple news items that piqued our interest:

  • China giving the U.S. a break in trade “war” by lifting the tariff on cars… According to a story originally reported by Bloomberg today, China will lift the 25% retaliatory duty on cars for three months (thanks, China!) in an effort to defuse trade tensions with the U.S. The tariff “will be scrapped starting Jan. 1, China’s finance ministry said Friday, ” according to the article. “The temporary tax reduction for U.S. car imports comes as China heads for its very first annual vehicle sales decline in 28 years amid the trade war and an economic slowdown that’s undermining consumption momentum.” Full article here.

 

  • …And here’s why: China’s economy is sputtering across the board. According to the WSJ, many economic and industrial indicators in China are causing worry. “Weakness was seen across the industrial sector,” the paper reports (paywall). “Automobile production shrank 3.2% last month from a year earlier, extending a 0.7% contraction in October. Chemical materials and products rose 1.9%, decelerating from 4.4% growth. Retail sales rose 8.1% in November from a year earlier, slowing from an 8.6% year-over-year gain in October.” Full article here.

 

  • Cuba’s nickel production expected to top 50,000 tons in 2018. Nickel mining is a primary source of export revenue for the Communist country, according to a Reuters article, which has foundered in recent years. However, earnings from nickel are up over last year for Cuba, the 10th largest nickel producer globally (who knew!), so things are looking up for the island nation…at least in regards to nickel production. Full article here.

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The Week That Was

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To review what MetalMiner covered over the past week, check out my colleague JP Morris’ excellent rundown here over at our sister site Spend Matters — we couldn’t have written it better ourselves!

A hint of the highlights:

Here’s to a happy and relaxing weekend.

With all this talk of trade wars and weakness, both on the Shanghai stock market and in the Chinese currency, you would expect that steel production in China would be heading south fast.

In actual fact, steel mills continue to churn out product at near-record levels and imports of iron ore remain robust.

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Platts reported this week that Brazil’s iron ore exports to China were up 2% in November to just under 20 million tons for the month and that China remains the destination for nearly 60% of Brazil’s total ore exports.

The futures market, however, is taking a dim view of the fortunes for steel products with Chinese steel futures dropping for three days in a row this week. Both Baoshan Iron & Steel Co Ltd and Wuhan Iron and Steel Co lowered their prices for January, despite forced output cuts as part of China’s winter-heating-season struggle to fight air pollution. Reuters reported that Tangshan ordered steel mills and other industrial plants to make further output cuts in December as part of a growing crackdown on air pollution.

The trade war does, however, appear at least to be having an impact on China’s steel exports.

China’s steel shipments dropped nearly 9% to 63.78 million tons in the January to November period, according to Reuters. All the more significant because during that period the currency has been steadily depreciating, a trend that would normally boost exports by making domestic producers more competitive in dollar terms.

The futures market probably has it right: weakening car sales and lackluster infrastructure investment combined with weak exports will gradually create a position of oversupply if, as expected, the crackdown on steel mill output during the winter season is not as robust as last year.

Source: Business Insider.

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In the last few days, iron ore prices have dropped sharply, with the biggest fall being in lower purity 58% fines down over 2% to $42.45 per metric ton, compared to a slide of just 0.8% in high purity 65% Brazilian fines, which are down to $82.70.

The wide disparity between less-polluting high purity material and more-polluting low purity material shows no signs of narrowing.

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Price forecasters are always looking out for apparently unrelated factors that correlate to the price movement they are tracking.

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Sometimes the relationship seems bizarre.

At first sight, a link between oil prices and aluminum prices appears tenuous until you consider that the oil price is taken as a proxy for energy prices in general, particularly as fuels like liquefied natural gas (LNG) can be linked to the crude oil price.

So, here is one for you. If you would like a leading indicator to price movements for coal, steel and energy-intensive base metals, the South China Morning Post suggests, or at least links, pollution levels in major Chinese cities to production levels of steel and aluminum.

According to the argument, if pollution levels are high it is because production is high, and if production is high then the market is going to be oversupplied and prices will fall.

The South China Morning Post compares pollution levels this year to last around Beijing and other major eastern seaboard cities. Last winter, local government officials in Beijing restricted — or simply banned — the burning of coal across much of northern China, the article reports. Consequently, in early December average pollution levels in Beijing were less than half the concentrations seen in the previous two years.

Beijing’s citizens no doubt welcomed the blue skies. Unfortunately, coal is not just used as an energy source for electricity generation — it is also burned as fuel by millions to heat their homes, workplaces and schools, the South China Morning Post reports.

With industry slowing and reports of school children facing hardship, Beijing relented, and by late December to early January, the smoke had returned.

Read more

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It’s good to talk — or so the oft-quoted phrase used in the mobile phone ads would have us believe.

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And so it would seem from the market’s reaction to two meetings over the weekend.

The first was a temporary truce in the U.S.-China trade dispute called by President Donald Trump and President Xi Jinping following their meeting at the Group of 20 (G20) summit in Buenos Aires on Saturday.

The second, possibly brokered at the same venue, was between Vladimir Putin and Saudi Arabia’s Mohammed bin Salman, in which Russia agreed it would continue to cooperate with Saudi Arabia on managing oil production, according to the Financial Times.

Global stocks rallied on the news, bond prices fell, the Chinese renminbi rose and the dollar eased as markets reacted to the news that the U.S. had agreed not to increase tariffs on more than $200 billion of Chinese goods slated to take effect in January.

The tariff increase, from 10% to 25%, has been widely attributed to causing market uncertainty and a fall in stock and commodity prices for the last month. European and Asian stock markets bounced up this morning, up over 1% in Europe and nearly 3% in mainland China.

The onshore Chinese renminbi exchange rate was up 0.6% against the dollar this morning in a sharp correction as the following graph, courtesy of the Financial Times, shows.

Imposition of the increased tariffs has been postponed until March, but it has to be said that little progress seems to have taken place on the issues which gave rise to the tariffs in the first place.

Both sides remain implacably opposed to issues of market access, intellectual property rights, cyber attacks and forced technology transfer concerns, according to the FT.

Metal prices reacted positively to the news, however, with three-month LME copper up nearly 2.5% as a return to more stable growth prospects looked more likely.

The devil remains, as they say, in the details.

Responsibility will now fall to an army of working-level officials on both sides to find solutions to these issues. The fact no progress has been made so far may be more down to political posturing than a complete lack of common ground. Nevertheless, China will be reluctant to admit it even practices any of the policies listed in the U.S. complaints being leveled against it, let alone publicly agree to change.

Is the market getting ahead of itself? Yes, probably. But while the bounce in sentiment is seen as positive, it is little more than a reversal of a previously negative trend.

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For a sustained rally in markets – metals or energy – much more progress needs to occur than a postponement of deadlines.

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This morning in metals news, President Donald Trump and President Xi Jinping reached an agreement that at least temporarily puts a cap on the escalation of trade tensions, Chinese steel and iron ore prices rose on the news, and Chinese copper premiums hit an 18-month low.

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Trump, Xi Reach Trade Deal

The Group of 20 (G20) meeting between Trump and Xi had been much-anticipated, particularly as the U.S.’s $200 billion tariff package impacting Chinese imports was set to go from a 10% tariff to 25% at the start of the new year.

That is, at least, it was. 

After talks Saturday, Trump and Xi agreed to a 90-day trade truce of sorts. As a result of the agreement, the U.S. will not escalate the tariff rate as previously scheduled.

Of course, it remains to be seen what can be accomplished within the upcoming 90-day window.

Chinese Iron Ore, Steel Prices Up

On the heels of the G20 summit that concluded over the weekend, Chinese iron ore and steel prices picked up a bit of momentum.

According to a Reuters report, SHFE rebar futures jumped 7%, while the most-active iron ore futures contract on the DCE jumped 5.9%.

Chinese Copper Premiums Hit 14-Month Low

Meanwhile, despite the backdrop of relatively positive news of the G20 trade truce, Chinese copper premiums dropped to an 18-month low, Reuters reported, reflecting weaker demand.

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According to the report, premiums fell 10.7% from Friday.

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This morning in metals news, Norsk Hydro sees global aluminum demand picking up 2-3% next year, the Office of the United States Trade Representative (USTR) released a statement on China’s automotive tariffs and Steel Dynamics shares bounced back from a 14-month low.

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Aluminum Demand in 2019

Norwegian aluminum firm Norsk Hydro says aluminum demand is expected to tick up 2-3% in 2019, featuring a continued deficit in the market.

In addition, President and CEO Svein Richard Brandtzæg commented on the situation at Hydro’s Alunorte alumina smelter in Brazil, as it aims to return to full capacity there after running at 50% for nine months.

“We are aiming to establish a common platform with authorities and the court system to have an aligned way forward towards full production, utilizing the best available technology,” Brandtzæg said. “We have what it takes: the right people, the right technology and the right spirit.”

MetalMiner’s Take: Norsk Hydro’s announcement that aluminum demand is expected to rise by 2-3% in 2019 is conservative.

Demand has been rising at 5-6% since the financial crisis and Norsk Hydro’s lower numbers reflect a slowing global economy, which might be hard for those in the more buoyant U.S. to grasp. However, the rest of the world, though growing, is doing so at a slower pace than in recent years.

The issue for the aluminum price has not been lack of demand but surplus of supply. Irrespective of reports the world outside China is in deficit, exports of semi-finished products from China have more than made up for the Western world’s shortfall in primary metal. This is despite the LME forward curve providing sufficient incentive for the stock and finance trade to roll forward maturing contracts — Chinese exports are keeping the market amply supplied.

Lighthizer: China’s Automotive Tariffs Are ‘Egregious’

The USTR released a statement Wednesday commenting on China’s tariffs on U.S. automobiles, a couple of days before the G20 summit is scheduled to begin in Buenos Aires.

“As the President has repeatedly noted, China’s aggressive, State-directed industrial policies are causing severe harm to U.S. workers and manufacturers,” USTR Robert Lighthizer said in a release. “We are continuing to raise these issues with China. As of yet, China has not come to the table with proposals for meaningful reform.

“China’s policies are especially egregious with respect to automobile tariffs. Currently, China imposes a tariff of 40 percent on U.S. automobiles. This is more than double the rate of 15 percent that China imposes on its other trading partners, and approximately one and a half times higher than the 27.5 percent tariff that the United States currently applies to Chinese-produced automobiles. At the President’s direction, I will examine all available tools to equalize the tariffs applied to automobiles.”

MetalMiner’s Take: Lighthizer’s comments come at an interesting time — just before the G20 summit in Argentina.

Most trade agreements between countries do not include equal duties across categories of goods. The U.S. exports about 250,000 automobiles annually to China, while the U.S. imports only about 50,000 vehicles from China.

More likely, this announcement creates additional negotiating power for the Trump administration as it seeks to extract concessions from China, in general, over Section 301 tariffs, Section 232 and the trade deficit with China.

Steel Dynamics Bounces Back

Earlier this week, Steel Dynamics announced plans to build a new electric arc furnace (EAF) flat roll steel mill, expected to be located in the southwestern U.S.

According to a company release, the mill is expected to have an annual capacity of 3.0 million tons.

“The current estimated investment is $1.7 billion to $1.8 billion, with anticipated direct job creation of approximately 600 well-paying positions, and numerous opportunities for indirect job growth from other support service providers,” the release stated.

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Even so, the company’s share price plunged 9% Tuesday. However, Wednesday afternoon it jumped 3.2%, off of a 14-month low, following a congratulatory tweet by President Donald Trump, per a MarketWatch report.

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This morning in metals news, Chinese iron ore has hit a 4 1/2-month low, the zinc price fell for a fourth straight session and tariff waiver requests have been granted for a great number of metals from China.

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Chinese Iron Ore Continues Fall

Prices of Chinese iron ore fell to a 4 1/2 month low, according to the Hellenic Shipping News.

Trade tensions have weighed on the Chinese economy this year, with steel prices taking a tumble, even while Chinese steel production has not let up (in fact, China’s crude steel production jumped 9.7% year over year in October, according to a recent World Steel Association report).

U.S. President Donald Trump and Chinese President Xi Jinping are scheduled to attend this week’s G20 Summit in Buenos Aires, where they are expected to talk trade. The tariff rate on the U.S.’s $200 billion tariff package is set to jump from 10% to 25% at the start of the new year, barring an agreement that would preclude the hike.

Zinc Price Falls Again

The price of London zinc dropped for a fourth straight sessions Tuesday, according to a Reuters report.

LME zinc dropped 0.3% Tuesday, according to the report, down to $2,428.50 per ton.

Tariff Waivers and Chinese Metals

According to a report by The New York Times that cites a congressional analysis, the Trump administration has granted more than 3,000 tariff waivers that could exempt Chinese-made metals.

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In fact, according to the report, the U.S. has granted waivers with respect to a higher share of requests from China than from Japan and Canada.

MetalMiner’s Take: Clearly, the process for obtaining tariff exemptions remains opaque and, in some cases, irrational.

We have seen specific instances, such as with grain-oriented electrical steel (GOES) requests, that disputes often occur within some very gray areas that require a deep subject matter expert to vet and ascertain.

The simple “if nobody opposed the exclusion request” rule of thumb is faulty, particularly in the case of Mandel Metals, where the amount of the request far exceeds the total volumes necessary to run Mandel’s operations. Perhaps the “return of market fundamentals” will help guide the process, as well.

In the case of aluminum, a real common alloy shortage exists. The exclusion request process ought to consider where the U.S. runs market deficits and shortages versus only who, in theory, can produce the particular metal.

The same can not be said for many of the common forms of steel, where ample domestic supply exists to meet demand.

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Not before time, China’s steel industry is making some progress towards consolidation.

Although both sides deny talks are taking place, a Reuters article details information received from various sources that suggests state-owned China Baowu Steel Group is in talks to take over rival local Anhui province government-controlled Magang Group.

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The two mills are geographically close to each other, with Magang headquartered in Maanshan city in China’s eastern Anhui province, about a four-hour drive from Shanghai, where Baowu Group is based, the article states.

From a product perspective, the two companies are broadly complementary.

Baowu mainly churns out flat steel products, while Magang’s output is split between flat and long steel products used in construction. There may be some consolidation as a result of the merger, but Baowu’s corporate strategy is to reach 100 million tons of capacity by 2021 from its current 70 million tons, so closing capacity is probably not the primary driver.

Reuters reports that in 2017 Baowu produced 65.39 million tons of steel, while Magang produced 19.71 million tons. Their combined output of 85.1 million tons would be just 11.9 million tons below ArcelorMittal’s production last year and ahead of the U.S. total of 81.6 million tons.

Source: Reuters

The combined group, though, would be a potential rival to ArcelorMittal only in tonnage terms. Globally, the firms are poorly represented, with most of Magang’s production consumed domestically and Baowu exporting just 3.8 million tons from its Baoshan Iron and Steel division last year.

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The merger fits with Beijing’s strategic objective of putting 60% of its national steel capacity in the hands of its top 10 (mostly state) producers by 2020, up from a third presently.

Expect a lot more mergers over the next couple of years as Beijing seeks to curtail capacity form the current 1.1 billion tons to some 980 million tons by 2020.

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This morning in metals news, U.S. senators are asking for an independent review of the Trump administration’s Section 232 tariff waiver process, LME copper is down for the third straight day and Chinese steel mills are preparing for difficult times ahead.

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Another Look

The review of Section 232 tariff exemption requests from domestic companies has been going on since June, and the process has come in for much criticism.

According to a Bloomberg report, a bipartisan group of senators have asked for an independent review of the tariff waiver process, noting that as of last month only about one-third of the approximately 50,000 requests had been addressed.

LME Copper Down Again

London copper has been on the slide of late, dropping Tuesday for the third straight day, Reuters reported.

According to the report, the drop comes after comments by President Donald Trump to the Wall Street Journal related to China. The president said it was unlikely the U.S. would agree to China’s request to delay the scheduled Jan. 1 tariff rate increase — up to 25% from 10% — on the previously announced $200 billion tariff package.

Chinese Steel Mills Hit a Rough Patch

According to another Reuters report, Chinese steel producers posted losses for the first time in three years.

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Per the report, as a result of falling prices, some mills are looking to utilize more low-grade iron ore in the steelmaking process in an effort to tamp down costs.

MetalMiner’s Take: In markets in which profit margins erode, simple supply and demand fundamentals ought to take hold — producers ought to limit supply to boost profits.

In the U.S., producers did exactly that for years and years, operating at below 80% utilization rates (U.S. producers have only recently hit those production rates as a result of the tariffs, the bullish commodity market and a booming economy).

When Chinese producers start to run losses, those producers ought to take a lesson from their American peers — and limit production to shore up profits.

But Chinese steel producers won’t do that. In fact, they will do the opposite — continue to produce, even at a loss, to keep people employed.

And once again, that excess steel will flow to the rest of the world.

Too much steel always has and always will put a lid on prices. Therefore, steel-buying organizations will want to watch very closely how much steel China produces, as well as the price per ton, as Chinese steel production and steel prices lead the U.S. market.

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The Office of the United States Trade Representative (USTR) released an update on its Section 301 investigation into China last week, an update — titled “Update Concerning China’s Acts, Policies and Practices Related to Technology Transfer, Intellectual Property, And Innovation” — which followed the same theme as previous reports.

That theme? China has made some small changes to the U.S.’s liking, but not nearly enough to address U.S. concerns regarding intellectual property theft and investment restrictions, the USTR report explains.

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“We completed this update as part of this Administration’s strengthened monitoring and enforcement effort,” USTR Robert Lighthizer said in a prepared statement. “This update shows that China has not fundamentally altered its unfair, unreasonable, and market-distorting practices that were the subject of the March 2018 report on our Section 301 investigation.”

The USTR launched the Section 301 probe in August 2017 “to determine whether acts, policies, and practices of the Government of China related to technology transfer, intellectual property, and innovation are unreasonable or discriminatory and burden or restrict U.S. commerce.” In March, the USTR released an update titled “Findings of the Investigation into China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation under Section 301 of the Trade Act of 1974.”

Using Section 301, the U.S. has already slapped a total of $250 billion in tariffs on U.S. goods, with President Donald Trump also having threatened to impose an addition $257 billion.

The USTR update cites a rise in China’s cyber-enabled theft of U.S. intellectual property, unfair technology transfer rules and discriminatory licensing restrictions, among other points, as evidence that China has not changed its practices. In meetings with Chinese trade officials throughout the year, the Chinese side has failed to adequately address U.S. concerns vis-a-vis the aforementioned issues, the USTR report claims.

“Despite repeated U.S. engagement efforts and international admonishments of its trade technology transfer policies, China did not respond constructively and failed to take any substantive actions to address U.S. concerns,” the report states. “As a result of China’s ongoing failure to respond constructively to U.S. concerns, USTR imposed tariffs on July 6, 2018 and August 23, 2018 on approximately $50 billion of Chinese imports as part of the U.S. response to China’s unfair trade practices related to the forced transfer of American technology and intellectual property.

“The United States also requested dispute settlement consultations with China in the World Trade Organization (WTO) on March 23, 2018 concerning certain measures pertaining to the licensing of intellectual property rights, and the United States is now pursuing dispute settlement before the WTO on those issues.”

The USTR update went on to add that a 71-page white paper published by the Information Office of China’s State Council in September, which referred to the Section 301 probe as an example of “trade bullyism,” as further evidence of China’s unwillingness to address U.S. concerns (while also noting China’s counter-tariffs in response to the U.S.’s Section 301 tariffs.

“These actions demonstrated that USTR’s initial tariff action was no longer appropriate to obtain the elimination of China’s unfair trade acts, policies, and practices. In addition, the burden or restriction on United States commerce of these acts, policies, and practices continues to increase, including following the one-year investigation period,” the report states. “Accordingly, under direction of the President, USTR imposed additional tariffs on approximately $200 billion of imports from China on September 24, 2018.”

In terms of foreign investment restrictions, the USTR report claims China has made only “incremental” improvements.

“Using foreign ownership restrictions, including in connection with its administrative review and licensing processes, China continues to pressure technology transfer from foreign companies in numerous ways,” the report states. “For example, a September 2018 report by the Wall Street Journal provides case-specific examples of Chinese actions to obtain technology from five major U.S. companies: DuPont, General Electric, Advanced Micro Devices, Huntsman Corp, and Micron Technologies. Several of these companies faced coercive pressure from Chinese officials.”

In terms of outbound investment, the report notes China’s venture capital (VC) investment in the U.S. has served as a mechanism for technology transfer. Per the report, China’s VC investment in the U.S. from January-May 2018 hit $2.4 billion, matching the full-year high set in 2015.

“As this data makes clear, Chinese VC investors are increasingly active in the U.S. VC ecosystem,” the report states. “Analysts estimate that Chinese investors participated in 10-16% of all venture deals in the United States between 2015 and 2017.265 According to Bloomberg data, Chinese VC investors have participated in 151 deals through November 15, 2018, which roughly matches the pace set in 2017 when Chinese investors participated in an all-time high of 167 deals.”

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The full Section 301 report update can be found here.