China

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(Editor’s note: This is the first of a two-part series examining Chinese flat-rolled steel prices. The first part examines historical steel price trends. The second part, which will be published Tuesday, will cover the economic outlook for China.)

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Chinese steel prices started to weaken in late May and continued to decline into the second week of June (after generally increasing this year).

A seasonal steel price change typically happens at the start of the summer due to the change in weather, which impacts construction and, therefore, steel demand.

Source: MetalMiner data from MetalMiner IndX(™)

Looking at the longer-term pattern since 2016, prices have dipped around the June time frame and tend to correct or show a clear change of the longer-term direction in July.

Theoretically, demand starts to pick up again as fall seasonal restocking picks up, supporting prices. However, in some years, demand may fail to pick, vis-a-vis available supply (as in 2015, when prices kept falling).

In 2018, the seasonal pickup did not last long. Prices turned down again by October, although they stayed relatively flat overall.

Source: MetalMiner data from MetalMiner IndX(™)

From a longer-term perspective, prices continued to increase overall when considering the period since mid-2015, as shown in the chart above. Considering January 2017 forward only, prices have moved sideways overall.

HRC, CRC and plate prices mildly increased in the first quarter, but the rate of increase looked weaker during 2019 than in previous years. More recently, all three prices have grown weaker; CRC for example, only increased into March and grew weaker by April.

Chinese HRC prices dropped slightly in early June after generally rising since the start of the year and into late May. Government stimulus measures have not provided price support lately, although additional support measures, especially continued fiscal stimulus measures and tax cuts aimed at providing support to the economy during the second half of 2019 and into 2020, could provide support.

CRC prices dropped again between May and early June, by 3%, to CNY 4,111/mt, down by around 5% from the short-term April high of CNY 4,331/mt. With CRC prices dropping more steeply of late, the China HRC-CRC spread narrowed to CNY 191/mt.

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As pointed out in MetalMiner’s June Monthly Metal Buying Outlook, CRC prices suffered from a supply glut due to blast furnace restrictions that led producers to invest in downstream production, like CRC and HDG, instead of HRC.

The Rare Earths Monthly Metals Index (MMI) picked up three points, rising to a June MMI value of 22.

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China’s Rare Earths

In light of last month’s developments in the long-running U.S.-China trade talks, MetalMiner’s Stuart Burns delved into what could be a big play for China.

Last year, the U.S. left rare earths off a wide-ranging list of Chinese imports to be targeted by tariffs (as part of the U.S.’s Section 301 probe), as the U.S. — and the rest of the world — depends on China for rare earths.

Last month, the U.S. raised tariffs on $200 billion in imports from China and China responded with retaliatory tariffs. On the heels of the tit-for-tat and President Xi Jinping’s recent visit to a rare earth magnet facility, some commentators are wondering if China could put the squeeze on the rare earths market.

“China is rattling the saber ever so softly to say that it may be more exposed to general trade on a balance of payments position – China exports more to the U.S. than the U.S. exports to China — but the U.S. (and the rest of the Western world, as it happens) is uniquely exposed to China’s control of not just rare earth elements, but the whole supply chain,” Burns wrote. “That supply chain includes everything from mining through refining to manufacturing of myriad components used in high-tech applications including from electric vehicles, cellphones, laptops, missiles and fighter jets.”

According to CNBC, China’s exports of rare earths dropped in May to 3,639.5 metric tons, down from 4,329 metric tons in April.

The rare earths market is notorious for its volatility; as such, it remains to be seen if the drop in exports is a calculated move or a one-off blip. As trade talks between the U.S. and China continue to take shape, market watchers will want to keep an eye on China’s export levels.

Malaysia PM: ‘We’ll Have to Renew’ Lynas License

On May 30, Malaysian Prime Minister Mahathir Mohamad told reporters, with respect to the ongoing discussions regarding Australian rare earths miner Lynas Corp’s license to operate in the country, “We think we’ll have to renew the license,” according to a report in the Straits Times.

Lynas, the largest rare earths miner outside of China, has battled regulatory challenges in Malaysia related to waste disposal. Disposal of two forms of waste at the miner’s Malaysian facility has been the focus of the ongoing saga, as the miner’s license to operate in the country expires in September.

The miner has previously said it would not be able to comply with the government’s conditions vis-a-vis waste disposal in the required time frame.

“We welcome the Prime Minister’s comments acknowledging the importance of the continuation of the Lynas operations in Malaysia,” Lynas said in a prepared statement May 31. “We will update the market as we receive further clarification from the Malaysian government.”

Actual Metal Prices and Trends

Chinese yttrium fell 2.4% month over month to $32.58/kilogram as of June 1. Terbium oxide rose 1.3% to $529.26/kilogram. Neodymium oxide skyrocketed this past month, jumping 27.7% to $50,681.30/mt.

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Europium oxide fell 13.7% to $33.30/kilogram. Dysprosium oxide rose 29.8% to $285.99/kilogram.

Lithium batteries. konok1a/Adobe Stock.

This morning in metals, the London Metal Exchange announced a new partnership that aims to promote “market uptake of a transparent and representative global lithium price,” President Donald Trump backs off imposing a 5% tariff on all imports from Mexico and China’s May copper imports dropped. 

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LME Announces New Partnership

The LME announced its latest steps toward creation of an LME lithium contract.

“Over the past 18 months the London Metal Exchange (LME) has been working closely with the global lithium industry to meet the need for transparent and robust reference prices,” an LME release stated. “Following extensive market engagement, the LME is announcing today that it is partnering with price reporting agency Fastmarkets to promote market uptake of a transparent and representative global lithium price. Continued adoption of reference pricing across the industry will pave the way for launch of a LME lithium futures contract.”

Among other uses, lithium is coveted for its use in electric vehicle batteries.

“In recent years there has been unprecedented price volatility in the lithium market, driven particularly by explosive electric vehicle (EV) battery demand,” said Robin Martin, LME head of market development.The LME has been approached by a number of industry players, including producers, end users and several leading automotive firms, to develop effective lithium price-risk management tools. We are delighted to be announcing the next step in that process today.”

No Mexico Tariffs … For Now

Late Friday, the Trump administration announced it had reached a deal with the Mexican government and, as such, the U.S. would not impose a previously mentioned 5% tariff on all imports from Mexico.

Trump said last month that the U.S. would impose an escalating tariff, beginning at 5%, as of June 10 if the two countries could not reach a deal that addressed the flow of migrants to the U.S.

However, the threat of tariffs still looms.

In a tweet Monday morning, Trump said if the immigration deal does not receive approval by Mexico’s legislature, “tariffs will be reinstated.”

China Copper Imports Down

China’s imports of unwrought copper dropped 10.9% in May from the previous month, Reuters reported.

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Among other metals, China is the world’s top consumer of copper. The country’s imports of copper reached 361,000 tons in May, according to Reuters.

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This morning in metals news, the LME copper price continued its tumble this week, U.S. imports from countries like Vietnam have increased and the June 10 Mexico tariff deadline draws near.

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Copper Down for Eighth Straight Week

The copper price is set to fall for the eighth consecutive week this week, Reuters reported.

LME copper fell 1% Friday and was down 1.4% for the week, according to Reuters.

Rising Imports

Amid ongoing trade tensions with China, the U.S. has seen import levels from other countries rise.

Citing Census Bureau data, CNN reported the U.S.’s imports from Vietnam increased 38% over the first four months of this year. Imports during that period from Taiwan (22%), South Korea (17%) and Bangladesh (13%) were also up.

Tariffs on the Horizon

Vice President Mike Pence said the U.S. is still planning to slap tariffs on imports from Mexico next week, Bloomberg reported.

President Donald Trump has threatened to impose an escalating tariff, beginning at 5%, on all imports from Mexico if the two countries can’t reach a deal to stem the flow of migrants into the U.S.

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According to Mexican Foreign Minister Marcelo Ebrard, talks to reach a deal and avoid tariffs continued Friday.

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.

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This morning in metals news, Australian Prime Minister Scott Morrison said the country’s aluminum exports to the U.S. are fair, China’s Baowu Steel is acquiring a majority stake in rival Magang and the USTR announced an extension related to duties imposed on Chinese goods.

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Australia Abiding by Export Deal

Australian Prime Minister Scott Morrison said his country is sticking to its deal with the U.S. over aluminum exports, Reuters reported. The assurance comes on the heels of a report by The New York Times stating President Donald Trump considered imposing new tariffs on Australia.

Australia received exemptions from the U.S.’s Section 232 steel and aluminum tariffs imposed last year.

Baowu to Buy Majority Stake in Rival

Chinese steel giant Baowu Steel Group is buying a majority stake in rival steelmaker Magang Group Holding Co Ltd, Reuters reported.

Baowu ranked as the world’s second-largest steelmaker in 2017, according to World Steel Association data cited in the report.

Section 301 Notice

The United States Trade Representative released a notice Friday that it would release a notice on the Federal Register related to an extension for the time Chinese goods have to enter the U.S. before they are subject to a tariff rate increase (from 10% to 25%).

“Covered products that were exported from China to the United States prior to May 10, 2019 will remain subject to an additional 10 percent tariff if they enter into the U.S. before June 15, 2019, the USTR said in the release. “Originally, the deadline to enter the U.S. before the goods would be subject to an additional 25 percent tariff was June 1, 2019.

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“This limited extension will further account for customs enforcement factors and the transit time between China and the United States by sea.”

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Cast your mind back nearly 10 years — for those of you in the metal business at that time, the market was briefly all about rare earths. For the first time in decades, all anyone could talk about was the West’s vulnerability to the supply of this misnamed group of highly important strategic metals and their salts.

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In fact, so excited did the manufacturing sector become that it spurred a whole raft of startup specialists as consultants, analysts and research bodies as metal prices peaked in the summer of 2011 and then gradually fell back.

Not wanting to sound like the harbinger of bad news, but we could be in for a repeat performance if the significance of President Xi Jinping’s visit last week to a Chinese rare earth magnet factory in the province of Jiangxi is looked at with the seriousness Beijing intends.

China is rattling the saber ever so softly to say that it may be more exposed to general trade on a balance of payments position – China exports more to the U.S. than the U.S. exports to China — but the U.S. (and the rest of the Western world, as it happens) is uniquely exposed to China’s control of not just rare earth elements, but the whole supply chain. That supply chain includes everything from mining through refining to manufacturing of myriad components used in high-tech applications including from electric vehicles, cellphones, laptops, missiles and fighter jets.

Source: The Telegraph

An intriguing article in the subscription-only section of The Telegraph newspaper detailed the long-term risk the West has been running for years on rare earths elements (REE) and how REE could be the next flashpoint in an escalating trade war between China and the U.S.

The U.S. is nowhere near self-sufficient in REE, with even ores mined at California’s Mountain Pass shipped to China for processing and Lynas Corp’s proposed U.S.-based processing plant in Texas still years away from shipping a kilogram of refined metal. The post suggests China does not even have to announce an embargo of exports — it could close down selected parts of the U.S. supply chain by restricting supply to any number of component suppliers in China or shutting down a supplier on “environmental grounds.”

With the U.S. reliant on Chinese REE for whole components of U.S. manufacturing (examples cited range from simple car starters to chunks of aircraft), which are pre-finished in China using rare earths before shipping to the U.S.

Arguably, the military-industrial complex is even more exposed than the private sector.

F-35 Joint Strike Fighters need the thermal protection of rare earth coatings. Hellfire missiles, the Aegis Spy-1 radar and the sights of Abrams M1 tank all rely on rare earths. So do precision-guided weapons, the post’s list goes on, yet the White House and, indeed, successive U.S. administrations have been strangely sanguine about this vulnerability that covers not just the processing of ore to refined metals, but the infrastructure to use those refined metals and salts in a wide range of applications in the early stages of multiple supply chains.

Many, if not all, of those roads lead to China.

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Maybe President Donald Trump should have used some of his brief time in Japan devising solutions to this shared problem with Prime Minister Shinzō Abe rather than watching Sumo wrestling and playing golf.

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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.

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This morning in metals news, the May 18 deadline for the president’s decision on potential new automotive tariffs is being pushed back up to six months, Chinese iron ore futures rose to a record high and the Trump administration reversed an Obama-era pause on mining in a northeastern Minnesota wilderness area.

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Pumping the Brakes

May 18 marked the statutory deadline for President Donald Trump to make a decision regarding whether or not to impose new tariffs on imported automobiles and automotive parts. The decision is prompted by a Section 232 investigation — launched in May 2018 — into whether those imports negatively impact U.S. national security.

However, the decision is being delayed by up to six months, CNBC reported.

China’s Iron Ore Futures Soar

China’s iron ore futures rose to a record high Thursday, Reuters reported, on the back of rising demand and tight supply.

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According to Reuters, the most-trade September iron ore contract on the Dalian Commodity Exchange rose by as much as 4.5% Thursday to reach 678.5 yuan ($98.62) per ton.

Trump Administration Opens Door to Potential Minnesota Copper Mining

The U.S. Interior Department this week renewed two mining leases near the Boundary Waters Wilderness area in northeastern Minnesota, leases which had been suspended under President Barack Obama, Reuters reported.

According to the report, the Bureau of Land Management granted the leases to Twin Metals Minnesota LLC, which is a subsidiary of Chilean copper giant Antofagasta.

Chinese HRC prices increased again this month, while other forms of steel stayed flat overall.

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Source: MetalMiner data from MetalMiner IndX(™)

Looking more closely at HRC — along with CRC, HDG and plate — prices generally remain lower than a year ago on a year-on-year basis, with the exception of HRC due to the recent price increases. However, they all are generally hovering at similar prices levels, with HDG showing the biggest change.

Source: MetalMiner data from MetalMiner IndX(™)

The spread between U.S. HRC and China HRC rests at $122/st, the lowest level since February 2018. However, recently the yuan weakened against the dollar, which will effectively increase the spread once more. A weaker yuan means Chinese prices will be cheaper.

China’s Economic Indicators Flattened in April

China’s Caixin Manufacturing PMI reading decreased unexpectedly for April, dropping to 50.2 from March’s eight-month high of 50.8. With the forecast value at 51.0, the drop surprised the market. Weakness came from decreased output and orders. Additionally, export sales dropped for a second straight month due to weaker overseas demand.

The FXI, an index of China’s large-cap companies, also showed flat growth recently after increasing since the start of the year.

Source: MetalMiner analysis of Yahoo.com data

Crude Steel Production Increases Continued in March

According to the World Steel Association, China produced around 80.3 million metric tons of crude steel during March, an increase of 10% compared to March 2018. For the sake of comparison, the U.S. produced 7.8 million metric tons of crude steel in March, an increase of 5.7% compared with March 2018.

In late April, China’s Iron and Steel Association once again issued a statement indicating the industry faces risks due to ongoing excess capacity, sluggish demand and increased raw material costs.

According to the association, fixed asset investment in the sector increased by 30.6% during Q1 2019. Some of the capacity increase harks back to less environmentally friendly induction furnace production, as companies looking to boost output turned to cheaper production methods. The industry organization came out in a public statement advocating that companies refrain from illicit capacity increases.

According to a recent Reuters report, the organization warned against structural issues in the industry as demand weakens. In addition, profitability suffered due to rising iron ore prices.

China’s Baoshan Iron and Steel Co Ltd (Baosteel) recently announced that profits fell during Q1, the first such drop since 2015. The company cited higher raw material costs and weaker automotive demand as the key causal factors, while demand for steel for infrastructure remained strong.

The company expects to produce 45.46 million metric tons of iron and 48.18 million metric tons of steel in 2019, with an expectation of strong infrastructure demand. Baosteel also expects sales of steel for automotive production to remain a challenge due to the EV transition and due to the impact of tariff-related policy changes.

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China’s automotive sales declined by 11.3% during the first quarter compared with the same period of 2018, according to the China Association of Automobile Manufacturers (CAAM).