China

What a difference a few days in politics makes.

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Just last week many analysts, including this publication, were optimistically speculating that President Trump’s aggressive application of tariffs to force a major realignment of U.S.-China trade terms was actually paying off. Although the tone and nature of the president’s position shocked politicians and business leaders around the world, raising the specter of a trade war, the howls of protest from Chinese politicians were also matched by indications that inward investment could be relaxed and import tariffs on U.S. products could be reduced in an effort to reach some kind of settlement.

The New York Times, however, reports that as the president’s position on North Korea falls apart, so, too, is progress with China — and the two may not be unrelated.

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Steelmakers’ fortunes are up, and for that we should all rejoice; an industry fighting bankruptcy or suffering long-running losses is not an industry that invests in its products or services.

But questions remain about how long the current run of good fortune will continue for Western steelmakers.

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Source: Financial Times

Posting Profits

On the plus side ArcelorMittal has just posted its best quarter since 2011 with EBITDA quarterly core profits rising 17% year on year to $2.5 billion for the January-March period.

Analysts quoted in the Financial Times put the recovery down to rounds of cost-cutting and efficiency instigated after the downturn of 2015-16. Rising global GDP and, hence, demand has built on these improvements to raise prices for steelmakers and, in particular, the delta between raw material costs and finished steel prices, lifting profitability to the highest in a decade.

Source: Financial Times

ThyssenKrupp of Germany posted a tripling of half-year earnings on the back of better sales prices and reduced losses, having offloaded its South American slab mill to Siderúrgica do Atlântico (CSA) and its Calvert, Alabama carbon and stainless mills to ArcelorMittal/Nippon Steel and Outokumpo, respectively.

Some would argue it got out at the bottom of the market and would have lost less if it had held on for a better price when the market turned, but both plants were making losses and ThyssenKrupp was under pressure from shareholders to turn the group around.

ThyssenKrupp is not alone — many steel mills have demerged, shuttered, divested or otherwise re-structured in order to focus on their more profitable opportunities in recent years and are reaping the benefits.

Eyes on Chinese Exports

However, the extent to which this happy state of affairs can continue lies, at least in part, in China.

As the Financial Times points out, a combination of industrial reform in China and positive profit margins has lifted steelmakers’ focus on the domestic market and reduced exports. From a peak of 110 million tons in 2015, China’s steel exports have shrunk by one-third to 73.3 million tons in 2017. The Financial Times credits this restriction of supply as helping restore a sense of balance to the steel market, which is reflected in regional price rises in Europe and North America.

There remains dispute about the depth and speed of the steel market restructuring program in China, but even if it is not as radical as the authorities claim it has contributed to sentiment and supported prices. The questions the Financial Times poses is thus: how long will this new balance last and, with prices falling in China, will exports rise later this year?

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Making Moves

An indication of European concern is a new registration program started just this month that requires importers to register all incoming shipments by origin, value and tariff code.

At present, there is no requirement for a license or any cases of approval not being given, but many see it as a first step to Brussels more closely monitoring steel (and aluminum) imports from China, Russia, etc., with a view to introducing quotas or tariffs if volumes rise.

For once, Brussels can be said to be ahead of the game.

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This morning in metals news, the E.U. opened a new steel investigation, turnover at Russian aluminum giant Rusal and Novelis announces a major investment.

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E.U. Investigates Chinese Steel

According to Reuters, the E.U. has launched a new investigation of Chinese hot-rolled steel sheet piles coming into Europe.

The E.U. already has 17 anti-dumping or anti-subsidy measures in place on various forms of steel, according to the report.

Rusal CEO, Directors Quit

The Russian aluminum firm, recently in the news for being one of the Russian companies hit with U.S. sanctions, announced Thursday that its CEO and seven of its directors have stepped down, according to a CNN report.

According to the report, Rusal’s stock was up 7% after the announcement, but is still down significantly from its level before the U.S. sanctions were announced.

Novelis Plans New Investment in China

American aluminum firm Novelis announced it plans to invest $180 million to augment its Chinese automotive body sheet capacity, Reuters reported.

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Per the report, the investment would lead to an additional 100,000 tons of capacity at the firm’s Changzhou plant.

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It was a report in the Hong-Kong-based newspaper, the South China Morning Post that sparked it all off.

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The report claimed that India’s neighbor, China, had started large-scale mining operations in Lhunze county on its side of the “disputed border” with India in the Himalayas.

It said the area was literally a “treasure trove,” having gold, silver and other precious minerals, valued at about U.S. $60 billion according to Chinese state geologists.

On the face of it, at least, the report and the development seems to have caught Indian authorities by surprise.

On its part, China tried to downplay the report, to a degree rubbishing the claims made in the Post report. A report in The Economic Times quoted an editorial in the Global Times tabloid that questioned the news report’s motive, at the same time hoping that India would not be “provoked” by it.

“It is to be hoped that India will not be provoked by this report, lose focus on the big picture of the relationship between Beijing and New Delhi and get off the track of Sino-Indian cooperation,” said the editorial titled “Dodgy report disturbs Sino-Indian ties.”

In fact, the editorial also said to many Chinese people, their first impression was that the report is not credible, given the vague facts in the story.

It’s hardly a secret that the Himalaya region, from India, Tibet and all the way to Afghanistan, has massive reserves of mineral oil, gold and many precious materials. Arunachal Pradesh is said to have vast reserve of mineral oils and even coal reserves. Coal is explored from Namchik-Namphuk mines in Tirap district. In addition, there are huge reserve of dolomite, limestone, graphite, marble, lead, zinc, etc.

Indian newspapers were full of reports talking of a new flashpoint between the two neighboring countries following the South China Morning Post report. India has not yet reacted officially to the news report.

Last year, there was a major standoff between the armies of both countries at the border area of Doklam, which is a triangle area disputed by three countries: India, China and Bhutan. The standoff emerged after China’s People’s Liberation Army (PLA) construction party attempted to build a road near the Doklam area. Bhutan claims Doklam is its area while China claims it as part of its Donglang region.

A few decades ago, India claimed China had illegally occupied Aksai Chin — an area of 38,000 square kilometers, part of India’s Jammu and Kashmir province — and had its eyes on Ladakh because the area was rich in minerals and natural resources.

For over a year now, China has been setting up infrastructure in this mountainous region, including Doklam, leading to India registering its protests over the move to remove the status quo of the disputed border maintained all these years.

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What seems to have gotten China’s goat was the fact that the Post report also claimed that China was rapidly building infrastructure to turn the area into another South China Sea scenario, which the Global Times editorial dubbed an absurd observation. In fact, the editorial also said Lhunze county was not a disputed region at all, as it “fell entirely within China’s sovereignty.”

You would think that U.S. Treasury Secretary Steven Mnuchin’s announcement last week of a “framework” deal that would see Beijing increase its purchase of U.S. goods and services and commit to reducing the U.S.’s $337 billion annual trade deficit with China would have been met with universal acclaim.

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Certainly, the stock markets surged on the news on what appeared to be vindication of the Trump administration’s hard-line approach to realign the stars of the US-China trade relationship.

Yet, as the Financial Times points out, the news has been met by howls of protest in some quarters of the U.S.

The Financial Times reports U.S.-China hawks fear that the Trump administration may be giving up the leverage it created by threatening tariffs on up to $150 billion in Chinese imports earlier this year and sacrificing a broader push for change in China.

Even accepting the idea that you cannot please all of the people all of the time, what chance does Mnuchin’s team have of negotiating either an increase in U.S. exports or a reduction in Chinese imports — or a mixture of both — to bridge this $337 billion gap?

None, is the immediate answer.

To be fair, the U.S. has set a $200 billion deficit reduction as its target, but even that is going to be extremely challenging. This is particularly true if the U.S. rightly sticks to its guns on respect for intellectual property rights and associated design theft in China, as this will limit U.S. firms from selling or sharing technologically sensitive products with China. For example, China is desperate to lift the seven-year ban on Chinese telecommunications company ZTE sourcing US parts, a ban which it says jeopardizes the future of the company and its 70,000 employees.

Mnuchin is said to be following a strategy of setting targets industry by industry, an easy first win being to ramp up exports of energy by some $50-60 billion. Bloomberg ran a report that identified considerable opportunities in ethanol, liquefied natural gas (LNG) and crude oil exports. China is already the U.S.’s second-largest buyer of crude oil, but demand is growing across all energy types and China could certainly switch supplies to the U.S.

Source: U.S. Energy Information Administration via Bloomberg

The U.S. is also a major supplier to China of agricultural products, particularly soybeans and cotton. The U.S. is not without its rivals, particularly Brazil, but while China has diversified purchasing there is scope within a central-command economy to switch more to U.S. sources.

Is that what the U.S. really wants, though, to become a raw material and agricultural products exporter like Russia or Brazil?

Surely, the U.S. should be promoting higher value-add goods and services as its priority? That’s where the jobs and future lie, but they also run counter to China’s avowed aim of becoming a world leader in advanced technologies itself, per its Made in China 2025 policy.

Forbes explains the program aims to increase the domestic content of core materials to 40% by 2020 and 70% by 2025. At present, domestic content is relatively low for high-tech goods, with the foreign content comprising more than 50% in these products on average. In some categories, such high-level digital control systems and high-level hydraulic components, China is almost entirely dependent on foreign production. ZTE’s reliance on U.S. components falls exactly into this situation. The short and simple route to achieving the strategy’s objectives is to pinch foreign designs and technologies until you can develop your own.

This story has a long way to run, but China hawks should not be alone in worrying that in order to claim the headline “deal” of a possibly temporary reduction in the trade deficit, the administration does not sell the farm down the road.

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There is much that is wrong with the global trading system. As the two largest players, the balance between the U.S. and China is the most stark. However, it is equally a very complex situation and, as such, is not well suited to a quick-fix deal.

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This morning in metals news, U.S.-China trade talks have led to a tenuous truce, Nippon Steel says strong demand is easing the blow of the U.S.’s steel tariff, and shares of US Steel and AK Steel dropped on the heels of the latest developments in the U.S.-China trade talks.

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Trade Truce

On the heels of a visit from Chinese trade officials to Washington late last week, Treasury Secretary Steven Mnuchin over the weekend announced the two countries had reached somewhat of a truce, for now.

Of course, the longevity of that truce remains in question. According to the Washington Post, Mnuchin said on Monday that the president could still impose tariffs on Chinese goods if a deal can’t be reached to scale back the U.S. trade deficit with China.

Nippon Says Demand Working to Lessen Blow of U.S. Tariffs

Japan’s Nippon Steel & Sumitomo Metal Corp said strong demand for steel has cut the impact of the U.S.’s import tariff on the metal, according to a Reuters report.

“There has been no major impact from the U.S. tariffs thanks to solid global demand,” Katsuhiro Miyamoto, Nippon Steel executive vice president, told Reuters.

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US Steel, AK Steel Shares Down After China Truce Announcement

Shares of US Steel and AK Steel fell 1.1% and 2.6%, respectively, in premarket trade Monday, according to MarketWatch. The drop came on the heels of the weekend’s announcement regarding a truce between the U.S. and China on trade.

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This morning in metals news, Tata Steel completed its buy of the bankrupt Bhushan Steel, Chinese steel mills are turning to scrap and Turkey is preparing to respond over the U.S. tariffs on aluminum and steel.

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Tata Steel Buys Bhushan Steel

Indian firm Tata Steel completed its purchase of the bankrupt Bhushan Steel for $5.2 billion, Reuters reported.

Bhushan has an annual steelmaking capacity of 5.6 million tons, according to the report.

Scrapping Plans

Amid environmental rules, Chinese steel mills are looking to use more scrap, according to a report by the South China Morning Post.

The recycling of material comes as the government continues to crack down on “smoke-stack industries,” according to the report.

Turkey Plans Response on Section 232 Tariffs

Turkey is among the many countries not to have won an exemption from the U.S.’s Section 232 tariffs on steel and aluminum; unsurprisingly, Turkey is planning a response, according to one report.

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Turkey plans to impose tariffs worth about $266.5 million on U.S. products, including coal, paper, walnuts, almonds, tobacco and unprocessed rice, among other items, according to a report by the Hurriyet Daily News.

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This morning in metals news, copper was up again Thursday, the impact of the Trump administration’s steel tariffs on the can business and hearings on the Trump administration’s proposed tariffs on Chinese goods will be extended.

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Copper Price Gains Momentum

The LME copper price rose again on Thursday as low inventories and strong Chinese economic data supported the price, Reuters reported.

Three-month LME copper jumped 0.5% and the most-traded July contract on the Shanghai Futures Exchange rose 0.7%, according to the report.

Tariffs and Cans

The can business is one industry sector that is feeling a negative impact from the Section 232 metals tariffs, as materials costs have risen.

According to a Reuters report, canning industry executives say the tariffs will add $0.04 to the cost of the typical 15-ounce can, which usually comes in at a cost of $0.17.

The tariffs have a ripple effect, one that trickles down to those in lower income brackets, according to the report.

Hearing Them Out

A hearing scheduled for May 15 on the subject of proposed tariffs on Chinese goods has been extended to include sessions on May 16 and May 17, according to a Bloomberg report.

A number of companies and lobbying groups have filed requests to testify during the hearing, according to the report.

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Trade tensions between the U.S. and China escalated in recent weeks when President Trump proposed $50 billion in tariffs on China goods. That led to a reciprocal Chinese threat of $50 billion in tariffs. The situation escalated further when Trump proposed a potential additional $100 billion in tariffs.

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This morning in metals news, Chinese exports of steel and aluminum were up in April, copper prices fell and negotiators are working to reach a deal on the North American Free Trade Agreement (NAFTA) this month.

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Chinese Steel, Aluminum Exports Jump in May Despite Section 232 Tariffs

China saw an increase in its steel and aluminum exports in April as U.S. sanctions on Russia canceled out the impact of the Section 232 tariffs, Reuters reported.

China’s steel exports rose to their highest level since August, according to customs data cited by Reuters.

Copper Price Falls

Copper prices dropped as the inversely correlated U.S. dollar gained strength, Reuters reported.

LME three-month copper dropped to $6,758 per ton, according to the report.

NAFTA Talks

Renegotiation efforts around NAFTA began last fall, but last week U.S. Trade Representative Robert Lighthizer said he hopes to reach a deal this month.

However, according to a Bloomberg report, Lighthizer hasn’t given any ground on some proposals with which Mexico and Canada are unlikely to agree.

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Lighthizer met with Mexican Economy Minister Ildefonso Guajardo on Monday and was scheduled to meet Canadian Foreign Affairs Minister Chrystia Freeland this morning.

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This morning in metals news, China iron ore futures were up Monday, the chief executive of Japan’s LIXIL Group expressed concern about aluminum price volatility, and a new study measures the economic effect of a potential U.S. withdrawal from the North American Free Trade Agreement (NAFTA).

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Chinese Iron Ore Futures Rise

Chinese iron ore futures were up Monday, Reuters reported, on the second day that contracts have been open to foreign investors.

According to Reuters, the most-traded September iron ore contract rose 0.2% to $73.86 per ton.

Japan’s LIXIL Group Concerned About Aluminum Prices

The U.S. has made waves in the metals markets in recent months with the Section 232 tariff measures, and Japan’s LIXIL Group is among the firms concerned about the trade moves’ impact on prices (particularly aluminum). In addition, U.S. sanctions against Russian individuals and companies had seen aluminum prices rise sharply last month.

According to Reuters, LIXIL CEO Kinya Seto said the company isn’t concerned about the impact of sanctions on Russian aluminum giant Rusal, but that LIXIL is still worried about volatility in aluminum prices.

Impact of NAFTA

According to a study by A.T. Kearney, the near-term cost to American retailers of a withdrawal from NAFTA is estimated at $15.8 billion.

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NAFTA, the trilateral trade deal in place since 1994, has been the subject of renegotiation talks dating back to last fall. Last week, U.S. Trade Representative Robert Lighthizer indicated he hoped to reach a deal with Canada and Mexico this month.