China

This morning in metals news, a Turkish military pension fund has reportedly reached a tentative deal to buy the ailing British Steel, copper prices held flat Friday and the latest round of tariffs could impact China’s ability to prop up its economy.

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Turkish Military Pension Fund to Buy British Steel

The British Steel saga could be moving toward a positive resolution.

The steelmaker, the U.K.’s second-largest, went into liquidation in May after it was unable to secure a government loan. Afterward, a bidding process began for the firm.

In recent weeks, a Turkish military pension fund emerged as the favorite to buy the troubled steelmaker. On Friday, the BBC reported the Turkish fund has reached a tentative deal to buy British Steel.

According to the report, the Turkish Armed Forces Assistance Fund said it plans to take over British Steel by the end of the year.

Copper Flat

Copper prices traded flat to close the week, Reuters reported.

LME three-month copper held at around $5,750 per ton, while the most-traded SHFE copper contract held at around $6,591 per ton, according to Reuters.

Tariffs and China

Earlier this month, President Donald Trump announced a new round of tariffs on Chinese products, aiming a 10% tariff on an additional $300 billion in Chinese goods (although the U.S. later announced the tariff would be delayed for some items in the product list).

With the new tariffs, nearly all of the U.S.’s imports of China would be subjected to tariffs.

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According to a J.P. Morgan analyst in an interview with CNBC, the tariffs could impact Beijing’s ability to mitigate the damages via government measures. Bruce Kosman, chief economist and head of global economic research for J.P. Morgan, said China has deployed policies to mitigate the damages of the tariffs over the last year, but it is unclear how much more China will be able to do on that front.

The Rare Earths Monthly Metals Index (MMI) dropped one point this month for an August reading of 22.

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Tariffs, China and Rare Earths

Once again, the ongoing trade talks between the U.S. and China took a turn toward further tensions recently when President Donald Trump announced the U.S. would impose a 10% tariff on an additional $300 billion in Chinese goods (effective Sept. 1).

The move would subject nearly all of the U.S.’s imports from China to duties. The proposed $300 billion tariff list includes a wide range of consumer goods, including cellphones, cheeses, jackets, shirts, jewelry and toys.

In addition, the proposed tariff list included: various forms of iron/nonalloy steel; copper and copper alloy table, kitchen, household articles and parts; and aluminum kitchen or household articles.

Notably missing on any of United States Trade Representative’s tariff lists to date?

Rare earths.

The omission is not surprising given the U.S.’s reliance on China for rare earths, the latter which boasts an overwhelming dominance of the global market.

As the U.S.-China trade war has unfolded, speculation has increased regarding the potential for China to use that rare earths dominance as a weapon in trade talks with the U.S.

The Association of China Rare Earth Industry this week accused the U.S. of “bullying,” Reuters reported, adding it would support counter-measures by China to combat the U.S. tariffs.

“The cost of tariffs imposed by the United States should be borne by the U.S. market and consumers,” the association was quoted as saying.

Reuters: Lynas to Receive Malaysia License Extension

Given the specter cast over the rare earths market by China (and possible trade-related restrictions on its rare earths exports), the ongoing saga of Australia’s Lynas Corp. in Malaysia is of particular importance.

Lynas is the largest rare earths miner outside of China. The miner has been entrenched in a battle with the Malaysian government regarding disposal of radioactive waste at its facilities in the country; the miner’s license is set to expire as of Sept. 2, 2019.

According to Reuters, however, Malaysia plans to renew Lynas’ license to operate in the country, which would preserve a key source of rare earths production outside of China. Lynas announced Wednesday that it will receive an update from the Malaysian government on the license renewal in mid-August, Reuters reported.

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Actual Metal Prices and Trends

The Chinese yttrium price fell 0.3% month over month to $32.68/kg as of Aug 1. Terbium oxide fell 5.0% to $567.83/kg.

Neodymium oxide plunged 14.8% to $43,059.20/mt.

Europium oxide fell 2.5% to $31.95/kg. Dysprosium oxide fell 4.6% to $270.12/kg.

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This morning in metals news, iron ore prices this week have plunged, the Energy Information Administration (EIA) released its short-term energy outlook and China could weaken its currency further.

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Iron Ore Prices Plunge

After reaching five-year highs earlier this year, aided by supply-side disruptions in Brazil and Australia, the iron ore price has plunged this week.

The iron ore price reached around $120 per ton earlier this year, but has fallen to the $80s this week. According to Bloomberg, iron ore on the Singapore Exchange for September fell as much as 7% to $86.68 per ton, while Dalian Commodity Exchange futures fell as much as 5.1%.

EIA Releases Short-Term Energy Outlook

The EIA released its short-term energy outlook this week, predicting average monthly gasoline prices in the U.S. peaked in May at $2.86 per gallon.

The EIA estimated U.S. crude oil production in July reached 11.7 million b/d, down 0.3 million b/d from June.

Meanwhile, Brent crude spot prices averaged $64 per barrel in July, flat compared with June but down $10 per barrel from July 2019.

China Could Devalue Currency Further

Recently, the U.S. Treasury Department officially designated China a currency manipulator after China devalued its currency to levels not seen since the financial crisis.

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According to The New York Times, China could devalue its currency further. Per the report, on Thursday China’s central bank set the midpoint of the renminbi’s daily trading range above 7 to the U.S. dollar for the first time in over a decade.

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This morning in metals news, the American Iron and Steel Institute (AISI) applauded the U.S. Treasury’s designation of China as a currency manipulator, U.S. companies are hoping the Trump administration does not impose tariffs on copper from the E.U. and Novelis announced its quarterly financial results.

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U.S. Treasury Labels China a Currency Manipulator

On the heels of the devaluation of the yuan to levels not seen since the 2008 financial crisis, the U.S. Treasury officially designated China as a currency manipulator.

“This pattern of actions is also a violation of China’s G20 commitments to refrain from competitive devaluation,” the Treasury said in a statement. “As highlighted in the FX Report, Treasury places significant importance on China adhering to its G-20 commitments to refrain from engaging in competitive devaluation and to not target China’s exchange rate for competitive purposes. Treasury continues to urge China to enhance the transparency of China’s exchange rate and reserve management operations and goals.”

The American Iron and Steel Institute (AISI) applauded the move.

“Today’s action by the Treasury Department is welcome news for the steel industry and American manufacturing,” AISI President and CEO Thomas J. Gibson said in a prepared statement. “China was, and remains, a currency manipulator. The Chinese government’s actions today are just one more instance of its active role in manipulating the value of its currency to promote Chinese exports. We applaud the decisive action today by President Trump and the U.S. government to address the damage, and unfair competitive advantage, that China’s undervalued currency has caused to our nation’s manufacturing sector – especially the steel industry.”

U.S. Companies Concerned About Copper Tariff

As the U.S. has proposed tariffs on a number of items — including copper alloys — from the E.U. as part of the ongoing battle over Airbus subsidies, several U.S. companies have expressed concern.

During a United States Trade Representative (USTR) hearing Monday, many testified to ask the USTR to remove the copper tariffs from the proposed list, Reuters reported.

Novelis Reports 1Q 2020 Earnings

Novelis announced its first-quarter earnings for fiscal year 2020, posting net income of $127 million (down from $137 million for the same quarter in 2018).

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Excluding special items, however, the firm reported net income of $145 million, up from $115 million the previous year.

It should come as no surprise that President Trump last week announced the imposition of a 10% tariff on an additional U.S. $300 billion worth of Chinese goods from Sept. 1.

The new tariff would come on top of the 25% levy that Trump already imposed on $250 billion worth of Chinese imports — resulting in the U.S. taxing nearly everything China sends to it, The New York Times reported.

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The move appears to be in frustration with the slow pace of negotiations since the president and President Xi Jinping met at the G20 summit in Japan in June and agreed to restart negotiations.However, talks have broken down due, the U.S. side says, to a failure by China to implement earlier promises to buy large volumes of U.S. agricultural products, a promise Trump said at the time was to be immediately implemented but was never agreed to by the Chinese side.

In what has become a media circus of twitter announcements and accusations, it is impossible to tell who is telling the truth, whole truth and nothing but the truth.

The reality is both sides use the media to pressure the other by making statements of the other’s intent, only to then accuse them of backtracking when it doesn’t happen.

More importantly, both sides seem further apart than ever and neither side seems willing or able to engage in the meaningful compromises that a negotiated settlement would require. It is therefore a near certainty the tariffs will remain in place, at least until after the 2020 presidential elections and should, if Trump is re-elected, quite possibly continue for many months thereafter.

The Chinese side, much like the Europeans in dispute with the U.S. over Airbus and Boeing subsidies, appear to have decided the current administration is not willing to negotiate or compromise and, as such, only a one-sided agreement is possible. So, if they wait it out until after the elections, there is a chance they may have a different administration with which to deal.

In the meantime, China is likely to impose some reciprocal tariffs against a further range of U.S. goods, but they are fast running out of products to which they have not already applied some form of tariff (as they import less from the U.S. than they export).

China could increase existing tariffs, but are more likely to make life increasingly difficult for American corporations doing business with and exporting to China as a form of retaliation. The New York Times lists surprise inspections, rejections for licenses, and moves to roll out a list of “unreliable entities” that Beijing has threatened to take action against as examples of potential measures China may use other than tariffs.

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Either way, the stock market and currency market’s reaction to the news of additional tariffs says it all — both fell as investors acknowledged the damage the tariffs would cause to global growth and investment.

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Copper has been buffeted by macroeconomic and political news, suffering from trade tensions and fear of slowing growth in top consumer China. Conversely, iron ore has been trading at recent five-year highs this month, topping U.S. $130/ton amid reports of tight supply and robust demand. (We wrote last week about the apparent disparity between copper and iron ore price direction in China.)

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But a report in the Financial Times suggests what we may be seeing is simply a mismatch of timing.

The relatively well-supplied copper market has shown weakness in the absence of any supply-side dynamic to support higher prices. This comes despite, as we observed, falling treatment charges suggesting ore supply is getting tighter. Iron ore, on the other hand, has suffered supply outages from Brazil and constraints in Australia that, coming on top of historically low Chinese port inventories, has driven short-term demand this year and forced prices up.

That may be about to change, the Financial Times suggests.

The article focuses on miner Anglo American’s surprise decision to return $1 billion to investors via a buyback alongside $800 million as an interim six-month dividend this month.

The move is not in and of itself surprising, as Anglo has made record profits on the back of strong iron ore prices and a stellar rise in palladium prices. The miner reported a 19% increase in underlying earnings to $5.5 billion in the six months to June.

What is noteworthy is, despite the apparently strong position for both metals, Anglo has made no commitments — not even hints — that it will continue with buybacks in the year ahead.

The firm justifies its position by saying, “In terms of capital allocation, is it sustainable? Well, no. It’s a one-off . . . until such time as we accumulate more cash,” Anglo’s finance director Stephen Pearce is quoted as saying by the Financial Times. “It’s very much an ‘earn it before we think about it’ policy.”

What does that tell us about the miner’s expectations for iron ore prices in the year ahead?

The report observes the price of iron ore has fallen back to $118 per ton since its high, as the pace of stock declines at Chinese ports has started to slow in recent weeks — a signal that supply is starting to recover from problems earlier this year, according to analysts.

On top of that, there has been an increase in Chinese steel inventories, indicating output could slow in the second half of the year.

Steel prices had been supported by environmentally promoted steel mill closures, restricting supply as government-supported housing construction drove demand. However, although anti-pollution measures are expected to continue, it will require further stimulus to keep the housing market running at the current pace.

Anglo may be right to set cautious expectations about its ability to earn big rewards from iron ore in the near term.

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For the time being, at least, peak iron ore may already have been breached.

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This morning in metals news, copper dipped on Tuesday, Asian countries are dealing with a glut of steel from China and Heineken is feeling the impact of higher aluminum costs.

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Copper Slides

The LME copper price dipped Tuesday amid U.S.-China trade talks and a U.S. Federal Reserve meeting this week, Reuters reported.

LME copper dipped 0.2% to $6,008.50 per ton, according to the report.

Chinese Steel in Asia

Asian countries are feeling the weight of China’s steel oversupply on the heels of last year’s Section 232 tariffs.

China’s steel output jumped 9.9% year over year during the first half of this year, the Nikkei Asian Review reported. The tariffs, paired with China’s ever-rising output, have shunted China’s steel supplies elsewhere, including to other countries in Asia.

For example, Japan’s imports of Chinese carbon steel rose 73% year over year through the first five months of the year, according to the report.

Beer Blues

Despite higher sales, Heineken failed to reach estimates for first-half profits, Reuters reported, partially on account of aluminum packaging costs.

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Through the first half of the year, Heineken’s input costs surged 8.5%, an increase reflected primarily by higher aluminum packaging costs, according to Reuters.

Automotive executives running carmaking joint ventures in China must be asking themselves regarding the current performance situation: is it a downturn in the lower end of the car market or backlash against trade war?

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The Financial Times reported Ford’s plants in China operated at only 11% of capacity during the first six months of this year, as the firm’s car sales plunged to 27% of the same period last year.

Meanwhile, Peugeot owners PSA’s plant in Chang’an produced just 102 cars — yes, you read that right, 102 cars — in the first half of the year, meaning its capacity utilization was below 1%. The firm’s other joint venture with Dongfeng Auto ran at just 22% of capacity, the article reported, as sales were just 62% of the same H1 period last year.

Source: Financial Times

The collapse in sales comes particularly hard as foreign firms have been making such stellar returns from the China market.

Volkswagen and General Motors’ Chinese sales accounted for 38% and 23% of the companies’ respective pre-tax profits last year, so losses will be particularly painful.

Both firms have fared better than Ford and OSA, though. Volkswagen reported a 6% year-on-year sales decline in the first quarter of the year, while sales for GM fell 10%. Capacity utilization has so far held up well, staying above the critical 80% (the generally accepted break-even line). The Financial Times reported the Shanghai GM joint venture is running at 88% capacity, but Volkswagen’s venture with FAW Group achieved only 77% in the first half of this year.

Source: Financial Times

The connection to trade wars comes not just from the probable cause for the collapse in sales, but the disparity among producers.

Japanese carmakers, for example, remain strong. Honda and Toyota are both running extra shifts to maintain better than 100% capacity. Premium European brands are doing well, with Daimler’s Beijing Benz joint venture running close to 90% capacity while BMW Brilliance is running at 96%. If it were just the sale of low-end cars that were suffering, you would expect the Japanese carmakers and Volkswagen to also see a similarly sharp downturn, but they are not.

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None of the major carmakers is ready to call time on the massive Chinese car market just yet. At some 23 million cars a year, it remains by far the largest single market, but it is an increasingly challenging market in which to make money.

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This morning in metals news, U.S. and Chinese trade negotiators resumed talks this week, Goldman Sachs is pessimistic about copper supply and smaller Chinese steel mills are shaking off anti-pollution laws in an effort to compete against larger steel firms in the country.

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Trade Talks

After trade talks fell apart in May despite significant optimism, China and the U.S. are back at the negotiating table this week.

Negotiators are meeting in Shanghai for the latest round of trade talks aimed at ending the escalation of tensions that have boiled over throughout the last year.

White House economic adviser Larry Kudlow downplayed the resumption, telling CNBC that he did not expect any “grand deal” coming out of this week’s Shanghai talks.

Copper Supply Troubles

Goldman Sachs is bearish on the copper supply market ahead, Bloomberg reported.

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According to the report, copper treatment charges in China have fallen to their lowest level in seven years, which could engender production cuts.

China’s Small Steel Mills

Smaller steel mills in China are bypassing environmental regulations aimed at stemming pollution in the country, Reuters reported.

According to the China Iron and Steel Association (CISA), smaller steel firms raised production by approximately a quarter through the first five months of the year, compared with 6.2% among CISA’s larger members.

That the aluminum market is in a deficit is a widely accepted fact — but it still remains hard to see in practice.

Usually when markets are in deficit, prices rise. Primary aluminum as quoted by the LME, however, has been at best sideways for the last year or more. Prices have gradually softened within the $1,700-$1,900 per ton range, although a recent run-up has seen prices north of $1,800 per ton this month.

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The problem is the shortfall between production and consumption has been made up from two notable sources.

The first is a gradual leakage of metal stored in off-market stock and finance deals by the financial community. The second is a rising tide of semi-finished metal from China that has depressed prices and caused uncomfortable competition for producers in the rest of the world (outside the U.S., at least).

Chinese semi-finished exports are seen as the release valve for excess domestic Chinese production in a market that produces half the world’s aluminum. The approximately 5 million tons per annum of Chinese exports is significant for the rest of the world, but still a fraction of China’s total output.

By comparison, western Europe consumed just over 5 million tons of flat-rolled and 3 million tons of extrusions in 2016-2017, according to European Aluminium, a trade body, underlining what a significant impact China’s exports can have when they flood mature markets like Europe.

This ready supply of semi-finished metal but more restricted supply of primary metal is one reason why delivery premiums, like the U.S. Midwest Premium, have remained elevated at over $400/ton.

The U.S. has to import much of its primary aluminum in the process, incurring Section 232 duty costs, delivery costs and opening the rather closed market to a speculative environment that has seen futures trades outnumber physical trades. The net result is an elevated Midwest Premium cost to consumers compared to western Europe or Japan (the other two main ROW markets).

But there is a change happening to the global aluminum market.

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