China

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Global crude steel production in November jumped 5.8% year over year, the World Steel Association reported today.

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Production from the 64 countries reporting to the World Steel Association hit 148.6 million tons (MT) in November, continuing an upward production growth trend that began in August. Steel production growth of 5.8% in November jumped from 5.1% in October.

Broken down by key producers, China’s crude steel production reached 77.6 MT, up 10.8% compared to November 2017. The production growth marked an increase from October, when year-over-year growth hit 9.1%.

The increase comes even with the winter heating season underway, with it production cuts aimed at tackling pollution in the country. Unlike last year, however, Beijing opted not to impose blanket cuts, instead delegating the scope of the cuts to local authorities.

Chinese steel rebar prices hit a five-week high this week, but the more relaxed program of winter cuts could see prices continue softening in the coming months. Chinese steel prices have lagged on account of weaker demand and the continued increases in production. However, a comprehensive trade detente between the U.S. and China would likely give a boost to China’s economy and augment steel demand.

The most-traded rebar contract on the SHFE closed at 3,481 yuan per ton ($506) on Thursday, up from an opening price of 3,433 yuan per ton ($496).

U.S. production continues to boast strong growth after the Trump administration’s Section 232 tariff on imported steel went into effect earlier this year. U.S. production in November hit 7.4 MT, marking an increase of 11.8% year over year.

Japanese production hit 8.7 MT, marking a year-over-year decrease of 0.5%. South Korea produced 5.9 MT in November, up 1.1% on a year-over-year basis.

In Europe, France produced 1.4 MT of crude steel in November, marking an increase of 12.8% compared to November 2017. Italy’s crude steel production hit 2.2 MT, down by 1.0%. Spain produced 1.3 MT, down 0.7%.

The European Commission launched a steel safeguard investigation in March in response to the U.S.’s Section 232 tariff and the subsequent concerns about diverted steel flooding the European market. The investigation, which covers 28 product categories, was to last nine months; however, the European Commission this week announced an extension of the duration of the probe, pushing its conclusion to Feb. 1, 2019.

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Elsewhere, Brazil’s production reached 2.8 MT, down 6.1% year over year. Turkey’s crude steel production hit 3.1 MT, a decrease of 2.1% year over year. Crude steel production in Ukraine reached 1.7 MT, marking an 11.2% year-over-year decline.

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This morning in metals news, the U.S. Treasury Wednesday announced it will lift its sanctions against companies owned by Russian oligarch Oleg Deripaska (which includes aluminum giant United Company Rusal), Chinese steel prices hit a five-week high and Alcoa cuts aluminum production amid a labor dispute at its Becancour smelter in Quebec.

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U.S. to Lift Sanctions on Russian Firms

On Wednesday, the U.S. Treasury Department announced it would delist several Deripaska-controlled companies, not long after previously announcing a sanctions deadline pushback to Jan. 7.

“Treasury sanctioned these companies because of their ownership and control by sanctioned Russian oligarch Oleg Deripaska, not for the conduct of the companies themselves,” Treasury Secretary Steven T. Mnuchin said. “These companies have committed to significantly diminish Deripaska’s ownership and sever his control. The companies will be subject to ongoing compliance and will face severe consequences if they fail to comply. OFAC maintains the ability under the terms of the agreement to have unprecedented levels of transparency into operations.”

According to the Treasury Department’s announcement, it will terminate the sanctions imposed on En+ Group plc, UC Rusal plc and JSC EuroSibEnergo in 30 days.”

MetalMiner’s Take: LME aluminum prices have increased slightly today on the news knowing that the Trump administration will lift sanctions on Russian companies owned by oligarch Oleg Deripaska.

However, the increase does not appear sharp. Prices increased following the previous pattern, and aluminum prices are still lower than they were at the beginning of the month. This decision will not have a large impact on the aluminum market.

In April, when the sanctions were announced, the aluminum market felt constraint regarding supply; prices subsequently spiked.

However, current market conditions are far different from April 2018.

Crude oil prices are lower, commodities are decreasing and the U.S. dollar is rising. Also, Section 232 and all the other tariffs still remain in effect.

Therefore, buying organizations won’t see dramatic changes in LME aluminum prices, in both the short and long terms.

Alcoa to Cut Production at Quebec Smelter

Alcoa announced Wednesday that it will cut production by half at its Aluminerie de Bécancour Inc. smelter in Quebec.

“The Bécancour aluminum smelter, owned by Alcoa (74.95%) and Rio Tinto Alcan Inc. (25.05%), has nameplate capacity of 413,000 metric tons per year, across its three potlines,” Alcoa said in a release. “Two of the facility’s potlines were curtailed on January 11, 2018, after union members rejected a proposed labor agreement for hourly employees.”

Alcoa said curtailment of the one operating potline, which has a nameplate capacity of 138,000 metric tons per year, was “necessary to ensure continued safety and maintenance in light of recent retirements and departures.”

Alcoa and the union representing its workers still remain without a labor agreement almost a year after the other two potlines were curtailed.

“After extensive negotiations this year, ABI and the union have yet to reach an agreement on key terms to improve productivity and profitability,” Alcoa said in its release. “ABI’s management remains committed to reaching a negotiated agreement.”

According to Alcoa, curtailment of the one operating potline will begin Friday, Dec. 21.

Chinese Steel Prices Hit Five-Week High

Chinese steel prices, which have lagged of late, rose to their highest level in five weeks, Reuters reported.

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Shanghai rebar steel prices rose as much as 1.8% Thursday before settling up 1.5%, according to the report.

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This morning in metals news, the European Commission has extended its probe of steel imports, steel production in the Great Lakes region of the U.S. ticked up last week and Chinese aluminum companies will reportedly come together to discuss falling aluminum prices.

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E.U. Pushes Investigation End Back to Feb. 1

The European Commission has extended its investigation into potential remedies needed to address a surge of steel imports on the heels of the U.S. 25% tariff, Reuters reported.

The Commission launched a steel safeguard investigation in March and was to conclude in nine months (prior to the announced extension).

Great Lakes Steel Production Rises

Steel production in the Great Lakes region of the U.S. hit 726,000 tons last week, according to a report by the Times of Northwest Indiana.

The production total last week marked a 4.6% increase from the previous week.

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Chinese Aluminum Producers Will Gather Over Dropping Prices

According to a Reuters report, representatives from China’s biggest aluminum producers will gather to discuss falling demand and aluminum prices.

MetalMiner’s Take: A pow-wow amongst China’s top aluminum brass won’t impact the macro trends impacting metals markets.

The facts remain, oil prices have sunk, critically falling below $50/barrel, which has moved commodities markets lower.

Astute buying organizations know that commodities and industrial metals as asset classes show tight correlation (but not always).

Industrial metals as of Dec. 1 remained in a long-term bull trend and a short-term sideways trend. Cutting aluminum production makes sense in markets with weak demand. Demand from China appears sluggish, yet it remains unclear if Chinese aluminum producers will show the strength and unity in reducing production.

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The issue of automotive tariffs has often been cited by President Donald Trump and others in his administration when framing the the U.S.’s trade relationship with other countries.

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Earlier this month, on the heels of the Group of 20 (G20) summit meeting in Argentina — during which Trump and Chinese President Xi Jinping met for a working dinner on trade — Trump said China would “reduce and remove” its 40% tariff on imported U.S.-made automobiles.

Following the G20 summit, the Alliance of Automobile Manufacturers expressed optimism about a then-potential decrease in China’s tariff rate on U.S. automobiles entering the world’s largest automotive market.

“Tariffs are a direct hit to the wallets of consumers, so taking more time to achieve a U.S.-China agreement is good news and shows movement in the right direction,” the industry group said in a release. “We appreciate the Administration’s efforts to de-escalate trade tensions with China, and we look forward to reviewing the details. Ultimately, consumers, auto workers and the auto sector win when trade barriers are lowered.”

Fast forward to late last week: China’s Ministry of Finance announced it would temporarily reduce its tariff on U.S. automobiles from 40% to 15%, according to Reuters, beginning Jan. 1, 2019.

Just before the G20 summit, United States Trade Representative Robert Lighthizer released a statement on China’s automotive tariffs.

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

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

U.S. automaker Ford Motor Co. applauded China’s announcement of a reduction in the tariff on imported U.S. automobiles, which, at least for now, marks a de-escalation of trade tensions that have intensified between the two countries this year.

“As a leading exporter of vehicles from the U.S., we are very encouraged by China’s announcement today to reduce tariffs on U.S. produced vehicles to 15 percent,” said Joe Hinrichs, Ford’s executive vice president and president of Global Operations. “We applaud both governments for working together constructively to reduce trade barriers and open markets. Last year, Ford exported nearly 50,000 U.S. built vehicles to support the growing auto market in China.”

China’s 2017 imports increased 16.8% from the previous year, reaching 1.21 million automobiles. Meanwhile, total automotive sales in China hit 28,879,000 units in 2017, according to the China Association of Automobile Manufacturers, making imports less than 5% of the market.

In its recent November sales report, Ford touted the importance of the Chinese market.

“China is absolutely essential to Ford globally,” said Anning Chen, president and CEO of Ford Greater China. “The management team of Ford China is focusing on our China Turnaround Plan. We are building a robust management team and efficient organizational structure to drive the business forward.

“To win against the competition in China, we must better understand the Chinese customer, respond to market changes quickly, introduce more products that customers like and want, streamline the organization, improve the capability of our team, speed up decision-making, and strengthen our relationships with dealers.”

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Ford’s Lincoln brand has made gains in 2018, with sales up 3% year over year through the first 11 months of the year. However, Ford’s overall sales in China in the year to date are down 34% compared with the January-November 2017 period.

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

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

 

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

 

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

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The Week That Was

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

A hint of the highlights:

Here’s to a happy and relaxing weekend.

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

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

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

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

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

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

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

Source: Business Insider.

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

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

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

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Sometimes the relationship seems bizarre.

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

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

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

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

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

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

Read more

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Trump, Xi Reach Trade Deal

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

That is, at least, it was. 

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

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

Chinese Iron Ore, Steel Prices Up

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

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

Chinese Copper Premiums Hit 14-Month Low

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

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

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

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Aluminum Demand in 2019

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

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

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

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

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

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

Lighthizer: China’s Automotive Tariffs Are ‘Egregious’

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

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

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

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

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

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

Steel Dynamics Bounces Back

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

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

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

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