China

President Trump lobbed another salvo in the administration’s trade strategy, moving to sign an order that paves the way for tariffs on China potentially amounting to as much as $60 billion, he said Thursday, covering approximately 1,300 products, according to administration officials cited in media reports (the list has yet to be released).

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“This has been long in the making,” said Trump, who also went on to say he considers China a “friend” and expressed respect for President Xi Jinping.

Trump added that in speaking with President Xi, he’s asked China to reduce the trade deficit by $100 billion. In 2017, the U.S. ran a goods trade deficit of over $375 billion with China.

“The world I want to use is ‘reciprocal,'” Trump continued. “When they charge 25% for a car to go in, and we charge 2% for their car to come in to the United States, that’s not good. That’s how China rebuilt itself.”

The president signed a memorandum authorizing United States Trade Representative (USTR) Robert Lighthizer to move forward with a series of actions, including the potential imposition of approximately $60 billion in tariffs on imports of Chinese goods. The announcement comes as a part of the Section 301 probe launched in August 2017 — under the authority of the Trade Act of 1974 — which sought to assess unfair Chinese trade practices with respect to technology transfer and intellectual property. (The USTR’s complete Section 301 findings are available online.)

“President Trump has made it clear we must insist on fair and reciprocal trade with China and strictly enforce our laws against unfair trade. This requires taking effective action to confront China over its state-led efforts to force, strong-arm, and even steal U.S. technology and intellectual property,” Lighthizer said in a USTR release. “Years of talking about these problems with China has not worked.  The United States is committed to using all available tools to respond to China’s unfair, market-distorting behavior. China’s unprecedented and unfair trade practices are a serious challenge not just to the United States, but to our allies and partners around the world.”

In the order signed by Trump, the president directs Lighthizer to:

  1. Publish, within the next 15 days, a list of proposed products to be subjected to tariffs (then, after a period of notice and comment, the USTR will publish a final list of products and tariff increases)
  2. Pursue action within the World Trade Organization (WTO) dispute framework to address unfair Chinese trade practices (with a report required from Treasury Secretary Steven Mnuchin within 60 days)
  3. Address concerns about investment in the United States “directed or facilitated by China in industries or technologies deemed important to the United States” (with a report required from Treasury Secretary Steven Mnuchin within 60 days)

“We have a tremendous intellectual property theft situation going on,” Trump said. “Which likewise, is hundreds of billions of dollars, and that’s on a yearly basis.”

Trump added he’s spoken with President Xi and Chinese trade officials, in addition to acknowledging the ongoing North American Free Trade Agreement (NAFTA) and U.S.-Korea Free Trade Agreement (KORUS) talks, plus talks with countries regarding potential steel and aluminum tariff exemptions. A number of countries have gained temporary exemptions from the tariffs, Lighthizer told the Senate Finance Committee Thursday, CNBC reported. The list includes the European Union, Australia, Argentina, Brazil and South Korea.

The announcements immediately impacted markets. The Dow Jones plunged more than 400 points at one point on the heels of the announcement Thursday morning. After a brief bounceback Thursday afternoon, the Dow continued to drop, falling by more than 700 points approaching closing time (a 2.89% fall).

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In his comments Thursday, Trump also criticized the WTO, saying it has been a “disaster” for the U.S.

“It’s been very unfair to us,” he said. “The arbitrations are very unfair, the judging’s been very unfair.”

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In a letter from 45 U.S. trade associations sent to President Trump Sunday, the associations urged the president to avoid imposing tariffs on China because they would negatively impact the U.S. economy and consumers, according to a Reuters report.

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According to a Bloomberg report, the president could announce new tariffs on China this week amounting to $60 billion in value, in response to what the U.S. perceives as intellectual property theft by China.

“We urge the administration not to impose tariffs and to work with the business community to find an effective, but measured, solution to Chinas protectionist trade policies and practices that protects American jobs and competitiveness,” the groups wrote in the letter, as quoted by Reuters.

The groups also stated the tariffs would be “particularly harmful.”

According to the report, the sweeping tariffs could take aim at a wide range of products, including consumer electronics, clothing and shoes from China.

Among the groups making the plea were the U.S. Chamber of Commerce, the National Retail Federation and the Information Technology Industry Council, according to the report.

Thomas J. Donohue, president and CEO of the Chamber of Commerce, issued a statement last week that was strongly against the imposition of tariffs.

“The administration is right to focus on the negative economic impact of China’s industrial policies and unfair trade practices, but the U.S. Chamber would strongly disagree with a decision to impose sweeping tariffs,” he said. “Simply put, tariffs are damaging taxes on American consumers. Tariffs of $30 billion a year would wipe out over a third of the savings American families received from the doubling of the standard deduction in tax reform. If the tariffs reach $60 billion, which has been rumored, the impact would be even more devastating.”

Last August, the Office of the U.S. Trade Representative (USTR) announced the launch of a Section 301 investigation of China.

“The investigation will seek 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,” a USTR announcement said in August.

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The president earlier this year hinted at levying penalties of some form against China vis-a-vis ongoing intellectual property theft complaints. Trump told Reuters in January that he was considering a big “fine” for China.

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This morning in metals news, a report indicates the U.S. plans to impose new tariffs on China this week, the E.U. looks to pin the blame for global steel oversupply on China and the U.A.E. wants to gain an exemption from the U.S. tariffs on steel and aluminum.

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New Tariffs on China?

The Trump administration plans to announce new tariffs on China as early as this week, according to a Bloomberg report.

According to the report, the tariffs would amount to as much as $60 billion in response to what the U.S. says is intellectual property theft by China.

According to the report, the sweeping tariffs could take aim at a wide range of products, including consumer electronics, clothing and shoes from China.

E.U. Hopes to Join Forces with U.S. to Tackle Global Steel Oversupply

E.U. Trade Commissioner Cecilia Malmstrom is in Washington today to argue that the E.U. should be exempted from the recently announced tariffs on steel and aluminum, the Financial Times reported.

On Monday, she said she wants to work with the U.S. and other partners to address the “root cause” of the issue, according to the report.

The tariffs are set to go into effect on Friday.

U.A.E. Looks for Tariffs Exemption

Included among the long list of countries and business entities lobbying for exemptions from the U.S.’s steel and aluminum tariffs is the U.A.E., Reuters reported.

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The country is the third-largest exporter of aluminum to the U.S., after China and Russia, according to the report.

Not surprisingly, any discussion of iron ore prices in top consumer China inevitably involves some reference to import stock inventory.

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So when Reuters reports that the Dalian commodity exchange May iron ore contract price touched a low of 475.50 yuan per ton this week and China’s Qingdao port price dropped below $70 per ton — the lowest since Dec. 11 — analysts readily refer to record port stocks as being the cause.

Port inventory stood at 158.6 million tons at the end of last week, closer to the previous week’s record of 159.1 million times, according to a separate Reuters article. The article goes on to explain why headline port stocks are far from the whole story. China’s environmental crackdown on polluting industries this winter has driven steel mills to favor high-purity minimum 62% iron ore grades, supplied by firms like Australia’s Rio Tinto and BHP Billiton, Brazil’s Vale, and South Africa’s Kumba, over lower 58% Fe grades, such as Australia’s Fortescue Metals group and some Indian suppliers.

Much of the rise in import stocks has been a buildup of low-grade iron ore shunned by steel mills keen to avoid the pre-blast furnace upgrading needed for lower grades or the increased consumption of polluting coking coal that the protracted smelting of lower grades requires.

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This month, zinc prices started to trade lower, returning to the $3,200 level. This activity represents the first short-term price pullback we’ve seen in zinc prices since June 2017, when prices started their latest rally.

Source: MetalMiner analysis of FastMarkets

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But going back even further, the zinc price bullish rally started in 2016. Since then, zinc prices have increased around 120%, from $1,471/mt to current levels.

During this bullish rally, zinc prices reached a more than 10-year high, which signaled strength in the rally.

Source: MetalMiner analysis of FastMarkets

Some analysts believe this recent short-term downtrend serves as a possible peak for zinc prices. In other words, zinc prices may have already peaked and have started a new downtrend.

The alarms sounded on the London Metal Exchange when 78,950 tons of metal were delivered into LME stocks.

Before we speculate as to where zinc prices are going, let’s examine some of the indicators.

LME Stocks vs. Trading Volume

Traders commonly react to stocks changes, which is reflected directly in zinc prices. When a big delivery of any metal — in this case, zinc — reaches the LME stock, traders interpret this signal as a lack of tightness in the metal supply and demand equation.

In other words, traders think that the deficit is lower and sell their positions for the metal.

However, LME stock levels typically serve as a very short-term price driver (for days or weeks, not months). Rather, MetalMiner believes trading volumes better reflect the metal price trend. Zinc trading volume still supports the long-term uptrend, even if prices have so far trended lower this month.

Global Zinc Market

According to the International Lead and Zinc Study Group (ILZSG), 2017 left behind a deficit of 495 kt for refined zinc metal. Zinc mine output increased by 33.7% in India, while the increase in Peru was driven by higher output in the Antamina mine.

World output refined zinc production remained flat when compared to 2016, with increases in India around 30.4% versus a decrease in Canada, China, Peru and the Republic of Korea.

Despite the increases in zinc production, zinc demand increased by 2.6%, driven by zinc appetite in Australia, Brazil, China and Japan.

U.S. demand increased by just 0.6%, while European demand fell 0.5%.

Chinese Zinc Market

As for other industrial metals, Chinese numbers are commonly used as an indicator for the global metal industry. During the November 2017 to January 2018 period, China’s official zinc trade figures show 291,000 tons of refined zinc entering the country. This figure is the largest since 2009, when metallic trade flows were massive.

Shanghai Futures Exchange (ShFE) zinc stocks have recovered from a 2017 drop of 84,000 tons. Since the beginning of 2018, zinc stocks have rebounded by 46,000 tons, reaching the highest level since May 2017 (114,887 tons).

Brazilian Zinc

Brazilian mine Nexa Resources forecasts a deficit for zinc in 2018, with demand outpacing supply.

The deficit may continue due to the inability of Chinese small mines to renew permits under current environmental policies. Therefore, Chinese production may not be able to meet the annual demand growth of around 2-2.5% (based on previous growth).

What This Means for Industrial Buyers

MetalMiner sees the current pullback in zinc prices as short-term in nature as opposed to a price trend correction.

Therefore, while base metals and zinc remain in a current bull market, buying organizations may want to take advantage of lower prices and learn the exact time to commit to some zinc volume.

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Li Lizhang, the chairman of state-owned mill Fujian Sangang Group Co Ltd, is quoted in Reuters as saying exports of steel products may continue to fall this year, having plunged by over 30% last year to 75.43 million tons.

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China produced 831.73 million tons of crude steel last year. The country has been trying to eliminate excess capacity, in part to assuage global concerns about excess capacity flooding global markets. But, in reality, it’s more because it realizes overcapacity in its steel industry leaves all domestic producers in a precarious position and sees logic in driving the cleanup in favor of its state-owned producers rather than leaving the market to possibly favor the private sector – not what an increasingly state-centered Beijing wants at all.

Whether Li is promoting the reduction in exports as a counter to allegations abroad that China is harming global steel markets with its exports or whether we should take his ongoing linkage to the fight against pollution at face value is up to the reader. It may be that it is a case of two birds with one stone, but one suspects the timing, straight after President Trump’s 25% tariff on steel imports, is no coincidence.

Li’s comments regarding further production curbs is interesting, though, saying the steelmaking hub of Tangshan in Hebei province will extend production restrictions for another eight months after current curbs expire next week, according to the Reuters report. Production curbs would not be limited to the smog-prone region of Beijing-Tianjin-Hebei, according to Li, who added “other regions will also see restrictions if pollution levels exceed the limits.”

Beijing’s drive to shutter production capacity across a range of environmentally harmful industries has been broadly successful.

But what is clear is that smog reduction was not the only objective.

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State-owned enterprises have benefited at the expense of the private sector with new steel and aluminum capacity coming onstream to partially replace the older shuttered plants. Permits for new plants seem to have favored the state-sector producers over the private sector; contrary to the position 18-24 months ago, the state sector is doing very well at present.

The U.S. Department of Commerce. qingwa/Adobe Stock

Amid the hubbub caused by President Trump’s recent Section 232 proclamation on steel and aluminum tariffs, the Department of Commerce issued an affirmative preliminary determination on Thursday in the countervailing subsidy case of forged steel fittings from China.

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The Department of Commerce ruled that the fittings from China have benefited from countervailable subsidies of 13.79%.

“We will continue to review all information related to this preliminary determination while standing up for American workers and companies,” Secretary of Commerce Wilbur Ross said in a release.

The petitioners in the case are the Bonney Forge Corporation (of Mount Union, Pa.), and the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union (of Pittsburgh, Pa.). According to the Department of Commerce, imports of forged steel fittings in 2016 amounted to a value of approximately $78.4 million.

The Department of Commerce calculated the 13.79% countervailable subsidy rate for mandatory respondent Both-Well (Taizhou) Steel Fittings Co., Ltd.

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The Department of Commerce is scheduled to make a final determination in the case July 23. After that, the U.S. International Trade Commission is scheduled to make its final determination Sept. 6, after which an order would be issued should both bodies reach affirmative final determinations.

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In an effort to curb horrendous atmospheric pollution, particularly during the winter heating season, Beijing’s crackdown on energy-intensive and polluting industries resulted in widespread closures across the Chinese aluminum smelting industry.

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But even as expectations rise that those smelters from Shandong to Shanxi may soon restart, Reuters reports record stockpiles on the SHFE and prices that are down some 10% since last December will weigh heavily on smelters’ decision-making.

Many are already barely profitable and, contrary to expectations six months ago, national Chinese aluminum production has continued running at a high level. December’s output rose to the same level as June when countrywide smelters had been running at capacity to stockpile before the expected clampdown.

The irony is that while Beijing has clamped down on production in some regions closer to major urban areas, producers — many of them state-owned — have been free to build new, lower-cost capacity out in the provinces. Reuters quotes Paul Adkins, managing director of the consultancy AZ China, who estimates that 4.4 million metric tons of new capacity would be completed this year, mostly from state-run companies.

Despite new capacity being based on lower-cost coal and/or alumina supplies, there are question marks whether all this 4.4 million tons will make it to full capacity.

Adkins believes the actual increase may only be some 3 million tons. Even so, incremental increases will be at a cost base lower than older plants and will allow them to operate a break-even price below established plants. If prices remain weak, and the overcapacity issue suggests there is little prospect of a significant rise, then there will be a further shift of production to the state sector, as these new, largely state-owned plants thrive while older, more costly plants struggle.

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Primary metal is restrained from directly impacting the global market by 15% export taxes, but limitations on extrusions, rolled products and forgings are less constrained (in some cases supported with rebates). A lower-priced, amply supplied domestic primary market will enable semi producers to export excess capacity abroad, adding to an already fractious trade situation following the U.S. announcement of its intention to levy a 10% import tariff on semi-finished aluminum products.

The U.S. Department of Commerce. qingwa/Adobe Stock

This morning in metals news, China’s Ministry of Commerce expressed displeasure with the U.S. Department of Commerce’s ruling Tuesday on aluminum foil, the European Union will retaliate if the U.S. imposes steel tariffs and the copper price takes a dip.

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China Expresses Dissatisfaction with Aluminum Foil Ruling

The U.S. Department of Commerce announced a final affirmative determination in the anti-dumping and countervailing duty investigations of aluminum foil imports from China.

Unsurprisingly, the Chinese government is not pleased about the decision.

In a statement from China’s Ministry of Commerce, Wang Hejun, the head of the ministry’s Trade Remedy and Investigation Bureau, was quoted by CNBC as saying, “The U.S. has disregarded the WTO rules and seriously damaged the interests of China’s aluminium foil exporters. China is strongly dissatisfied with this.”

German Deputy Economy Minister Warns of E.U. Response to Possible U.S. Steel, Aluminum Tariffs

As nations around the world prepare for the U.S. decision on steel and aluminum tariffs (stemming from the Department of Commerce’s Section 232 investigations, launched in April 2017), some are warning the U.S. of retaliation.

Germany’s deputy economy minister, Matthias Machnig, said E.U. trade ministers agreed Tuesday to respond to U.S. steel or aluminum tariffs, according to a Reuters report.

Copper Takes a Dip

The copper price fell to a two-week low Wednesday on account of a strengthening dollar and disappointing Chinese data, according to a Reuters report.

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The price fell to $6,988 per ton, according to the report.

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This morning in metals news, the extension of pollution-curbing efforts in China is offering a boost to iron ore and steel futures, an Australian steel company is nervous about the possibility of Section 232-related steel tariffs from the U.S., and Mexico fined a steel company for stock manipulation.

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Future is Bright for Iron Ore, Steel Futures

According to a report by the Financial Times, iron ore and steel prices rose to a year-to-date high after the announcement that winter capacity cuts in China’s top steelmaking region would continue.

Per the report, the local government of Tangshan, the biggest steelmaking city in China, announced Friday that cuts set to expire at the end of March will continue.

Australia’s BlueScope Awaits Section 232 Verdict as Turnbull Angles for Exemption

Despite assurances given last year by the U.S. that Australia would be exempted from Section 232-related tariffs, Prime Minister Malcolm Turnbull and some Australian companies might be getting concerned that those assurances won’t come to fruition.

Australian steelmaker BlueScope, for example, is one firm looking to secure assurances that it would be spared from possible hard-hitting tariffs, according to a report in The Sydney Morning Herald.

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Mexico Fined Steel Firm for Stock Manipulation

Mexican company Industrias CH was fined $159,764 in late November for stock manipulation, according to a Reuters report citing government data.