China

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This morning in metals news, the Office of the United States Trade Representative announced it will move forward with $16 billion in tariffs on Chinese imports (out of an initially announced total of $50 billion in tariffs), Chile posted solid copper exports in July and U.S. raw steel production data is in for the week ending Aug. 4.

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Trump Administration Enacts $16B in Tariffs

The Office of the United States Trade Representative (USTR) announced Tuesday afternoon that it will move forward with $16 billion in tariffs on Chinese imports (in addition to the $34 billion that went into effect July 6).

The USTR finalized the previously announced list of products. From the original list, which included 284 tariff lines, 279 made it into the final list.

Duties will be collected on the list of 279 products beginning Aug. 23.

Chile Posts Strong July in Exports, Particularly Copper

Chile boasted a trade surplus of $375 million in July, according to a Reuters report, powered in part by strong copper exports.

July copper exports were up 9.47% year over year, according to the report.

Steel Production Up 4.3% Year Over Year Last Week

According to American Iron and Steel Institute (AISI) data released this week, U.S. steel production for the week ending Aug. 4 was up 4.3% compared with the same period in 2017.

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Production for the week, however, was down 0.4% compared with the previous week.

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The Rare Earths Monthly Metals Index (MMI) fell one point for an August reading of 18.

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Rare Earths and Trade Tensions

Much has been said about the rise of trade tensions around the world, particularly between the U.S. and China.

Those tensions began to manifest in the form of the Trump administration’s steel and aluminum tariffs this past spring, which, in addition to China, have affected U.S. allies.

But what about the impact of trade conflict on rare-earth metals, a market overwhelmingly dominated by China (at approximately 90%, according to most industry estimates)?

The U.S. is threatening a potential additional $200 billion in tariffs on Chinese imports (on top of the previously announced $50 billion, of which $34 billion has already gone into effect), while China has indicated it is prepared to respond in kind.

But, as The New York Times reported last month, China could strike back in other ways, too, including disruption of supply chains that depend on rare earth metals for an end product (e.g. smartphones).

As the report notes, some rare-earths metals appeared on the Section 301 product list drawn up by U.S. Trade Representative Robert Lighthizer at President Trump’s direction.

Those metals and related compounds included:

  • scandium and yttrium, whether or not intermixed or interalloyed
  • mixtures of rare-earth oxides or of rare-earth chlorides
  • yttrium materials and compounds containing by wt. >19% but < 85% yttrium oxide equivalent
  • compounds, inorganic or organic, of rare-earth metals, of yttrium or of scandium, or of mixtures of these metals, nesoi
  • cerium compounds

With very little in the way of alternative supplies — that is, supplies of rare earths outside of China — the end result could simply be that U.S. companies will have no choice but to pay more for the metals, as an editorial in the South China Morning Post explains.

China’s dominance in the market and concerns over that fact are nothing new, nor is the situation likely to change anytime soon.

As the U.S. Geological Survey (USGS) noted earlier this year, rare earths were not mined in the U.S. at all in 2017. According to USGS, the estimated value of rare-earth compounds and metals imported by the U.S. in 2017 was $150 million, up from $118 million in 2016. According to USGS, the distribution of rare-earths imports by end use was as follows: catalysts, 55%; ceramics and glass, 15%; metallurgical applications and alloys, 10%; polishing, 5%; and other, 15%.

Outside of China

Despite China’s dominance in the rare-earths sector, that hasn’t stopped business interests from probing for new sources around the world.

Within the U.S., Alaska is one such place considered potentially viable for rare-earth mining.

Alaska Sen. Lisa Murkowski, who chairs the Energy and Natural Resources Committee, expressed concerns during a July hearing on the issue of China’s dominance of the market and the impact of potential tariffs.

“My concern, among many concerns, is if China ultimately responds to tariffs by restricting our supply of rare earths, or any number of other minerals, the U.S. could be in serious trouble. We’ve heard testimony in the past about the dangers of the concentration of supply from a handful of countries that control the supply chain,” she said, as quoted by the Anchorage Daily News. “I’m hopeful that we aren’t about to experience those dangers firsthand and will continue to urge action to reduce this significant vulnerability.”

As the report notes, at the current stage, much work remains to be done before assessing the viability of rare-earth mining in the state, including the Bokan Mountain prospect, considered to be the most promising of Alaskan sites, per the report. But availability and viability are two different things; particularly in light of the specter of potential tariffs, it is certainly worth keeping an eye on developments in rare-earth mining efforts in The Last Frontier.

Actual Metal Prices and Trends

It was a down month for many of the metals in the Rare Earths MMI basket.

The price of yttrium fell 2.8% month over month, down to $33.03/kg. Terbium oxide dropped 2.8% to $3,009.10/kg.

Neodymium oxide dropped 4.3% to $46,971.30/mt.

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Europium oxide plunged 21.5% to $46.24/kg, while dysprosium oxide fell 3.4% to $168.80/kg.

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This morning in metals news, U.S. Steel reported its Q2 earnings, Century Aluminum also posted its Q2 earnings and China is preparing $60 billion in retaliatory tariffs against the U.S.

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U.S. Steel Posts Strong Q2, But Stock Drops

U.S. Steel reported better-than-expected Q2 net earnings of $214 million, albeit down from $262 million in Q2 2017.

The firm increased its 2018 full-year EBITDA guidance to $1.85-$1.90 billion.

Meanwhile, the company’s stock price dropped more than 8% Thursday on the New York Stock Exchange.

Century Aluminum’s Adjusted EBITDA Up to $54.5M

Century Aluminum reported net income of $19.4 million in Q2 2018, up from a net loss of $0.3 million in Q1 2018.

EBITDA hit $54.5 million, up from $32.7 million in Q1.

China Prepares to Strike Back With Retaliatory Tariffs

In response to the U.S. announcement regarding an increase of the tariff rate on $200 billion worth of Chinese imports (from a previously announced 10% to 25%), China has announced it has prepared tariffs on approximately $60 billion worth of U.S. goods, according to a statement from China’s Ministry of Commerce.

“China decided to impose additional tariffs of four different rates on about 60 billion U.S. dollars worth of products imported from the United States, a spokesperson of the Ministry of Commerce said Friday,” the release states. “The decision was made in response to U.S. plan to raise tariffs to be imposed on 200 billion dollars of Chinese goods from 10 percent to 25 percent.”

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According to a report by the state-run Xinhua News Agency, the tariff rates with be 5%, 10%, 20% and 25%, and will cover 5,207 items imported from the U.S.

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This morning in metals, United States Trade Representative Robert Lighthizer released a statement regarding the news of a potential increase in the tariff rate on the previously proposed list of $200 billion worth in Chinese goods, China responds and Secretary of Commerce downplays the potential impact of the tariffs.

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USTR to Mull Increasing Tariff Rate from 10% to 25%

Per a statement from the Office of the United States Representative (USTR), President Donald Trump has directed USTR Robert Lighthizer to consider increasing the tariff rate on a previously announced list of Chinese imports worth $200 billion that have been targeted for duties.

According to the announcement, the president directed Lighthizer to consider increasing the rate from the initially announced 10% to 25%.

“The Trump Administration continues to urge China to stop its unfair practices, open its market, and engage in true market competition,” Lighthizer said in the release. “We have been very clear about the specific changes China should undertake.  Regrettably, instead of changing its harmful behavior, China has illegally retaliated against U.S. workers, farmers, ranchers and businesses.

“The increase in the possible rate of the additional duty is intended to provide the Administration with additional options to encourage China to change its harmful policies and behavior and adopt policies that will lead to fairer markets and prosperity for all of our citizens.

“The United States has joined forces with like-minded partners around the world to address unfair trade practices such as forced technology transfer and intellectual property theft, and we remain ready to engage with China in negotiations that could resolve these and other problems detailed in our Section 301 report.”

China Responds

According to a spokesperson for China’s Ministry of Commerce, the U.S.’s actions on trade are “futile, “according to a report on the state-run Xinhua News Agency.

The “two-faced” approach referred to in the report points to the U.S. announcement regarding the potential increase in the tariff rate combined with the U.S.’s recent announcement that it wants to restart negotiations with China.

The spokesperson added the U.S. is acting against the interests of its farmers, business owners and consumers.

“Facing such an escalating trade war threat, China has made full preparations and will be forced to take countermeasures in order to defend national dignity, the interests of its people, free trade, and the multilateral system, as well as the common interests of all countries,” the spokesperson said.

Ross Says Tariffs Not ‘Cataclysmic’

In a television interview, Secretary of Commerce Wilbur Ross said a move to a 25% tariff on $200 billion in Chinese imports would not be “cataclysmic,” saying it would have a relatively small impact on the Chinese economy, Reuters reported.

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According to the report, Ross added that Trump thinks it is potentially time to apply more pressure on China in order to “modify” the country’s “behavior.”

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This morning in metals news, media reports indicate President Donald Trump could up the ante regarding a previously announced $200 billion tariff proposal, ArcelorMittal announced strong second-quarter financial numbers and Mexican officials are optimistic about reaching a deal on a renegotiated North American Free Trade Agreement (NAFTA).

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Raising the Stakes

According to media reports, President Trump plans to bump up the tariff rate on a previously proposed list of $200 billion in Chinese imports targeted by the administration from 10% to 25%.

The change has yet to be formally announced, but would further fan the flames of a burgeoning trade conflict between the U.S. and China.

The news comes as $34 billion in tariffs on Chinese imports already went into effect last month, while an additional $16 billion in tariffs remain under review.

ArcelorMittal Has Strong Q2

ArcelorMittal posted strong financial numbers for the second quarter, boasting net income of $1.9 billion, up 56.4% from 1Q 2018. The steelmaker’s 1H 2018 net income hit $3.1 billion, up 31.5% year-over-year.

Earnings before depreciation, interest, taxes, depreciation and amortization (EBITDA) hit $3.1 billion in Q2, a 22.3% increase from Q1. First-half EBITDA hit $5.6 billion, marking a 28.6% increase year-over-year.

“This is an encouraging set of results reflecting the structural improvements in both the global steel industry due to supply reform dynamics and within ArcelorMittal as a result of Action 2020,” said Lakshmi N. Mittal, ArcelorMittal chairman and CEO, in a press release. “The significant improvement in our balance sheet and earnings outlook has been recognised by the main credit agencies and the Company has achieved its stated aim of regaining its investment grade credit rating.”

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Optimism on NAFTA

According to a Reuters report, there is optimism vis-a-vis NAFTA, the trilateral trade agreement that has undergone several rounds and approximately a year of talks.

Juan Carlos Baker, Mexico’s deputy economy minister, commented that there is optimism regarding the talks and said that there will “hopefully” be “news coming out of Washington in the next few days.”

China Zhongwang Holdings failed to close a deal to buy Aleris last year after concerns were raised about the national security and corporate responsibility track record of the Chinese group.

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Not that we think of Novelis as Indian, but they are. Since 2007, the ex-Alcan flat-rolled manufacturer has been owned by Hindalco, part of India’s Aditya Birla Group. Novelis was already the world’s largest flat-rolled aluminum product producer before the Aleris deal.

Now, with the addition of Aleris, Novelis will acquire some very sophisticated aerospace technology — particularly in the plate market — and further secure the combined group’s position in high-technology products for the aerospace, automotive and defense sectors, not just in the U.S. but globally. Aleris is particularly strong in Europe and has just opened a new rolling mill in China.

Hindaloc will acquire Aleris in a $2.6 billion deal, which will include $775 million of equity and $1.8 billion of debt, funded by Novelis rather than the parent, Reuters reported.

The market reacted positively to the news.

The combined entity, comprising Novelis and Aleris, will have annual revenues of $15 billion when Aleris’ $3 billion has been added.

Revenue aside, the group’s combined sheet-rolling position will become even more significant at 4.4 million metric tons, raising concerns in some quarters about its market-dominating position.

Although Novelis has invested heavily in facilities to meet rising automotive demand, it is traditionally one of the largest suppliers of aluminum for beverage cans, which is more at the commodity end of the market. Novelis’ ability to competitively serve these markets could be of immense value if the culture can be migrated to Aleris, whose focus has been more in the high-value aerospace and automotive industries and has struggled with profitability.

Market dominance fears aside, Western producers need to invest and create critical mass to counter growing exports from China’s giant semi-finished product manufacturers, which are continuing to add capacity despite having much more than the domestic market can consume.

China is exporting in excess of 4 million tons per annum of semi-finished products, so far aimed more at the commodity end of the market. But Chinese producers have the ability, certifications and domestic experience to service aerospace and automotive markets, too.

Current trade tariffs notwithstanding, Chinese producers are going to be increasingly targeting these markets, if not penetrating the U.S. then displacing Aleris and Hindalco in Europe, South America and Asia.

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In the short term, the merger of Novelis and Aleris could generate cost savings, technology transfers and adoption of beneficial best management practices. In the longer term, it should be seen as positioning a more robust Western market leader against a growing threat from China, eager to compete in higher-value markets and willing to play the long game to get there.

We had a little mythbusting discussion the other day here at MetalMiner®, including, among other examples, that tracking raw material inputs is no predictor of finished product prices.

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Take, for example, iron ore.

Prices fell this spring and have been bouncing around either side of $65/ton. However, in China, the world’s biggest consumer, finished steel prices and production have been ripping along.

According to Reuters, China produced 80.2 million tons of crude steel last month, setting a new daily average production record for a third month in a row at 2.67 million tons.

Despite strong domestic steel prices, China’s steel exports last month rose to 6.94 million tons, their highest level since July 2017. Older, more polluting mills continue to be shuttered as part of Beijing’s program to curb pollution via increased inspections.

Reuters sees this as evidence that newer mills have ramped up operations to cash in on fat margins. China’s steel output in the first half of the year rose 6% to 451.2 million tons.

Richard Lu, analyst at CRU in Beijing, is quoted as saying that mills were earning a profit margin of about 800 yuan ($119.50) per metric ton of steel, while analysts at Huatai Futures put profit margins for mills in northern China at over 1,000 yuan per ton — one of the highest on record, the news source says.

Mill utilization still has further to go though; despite record output, mills are not running flat out. Monthly utilization rates reached 71.6% in June — the highest since October — but suggestive output levels could continue into the winter heating season, even as mills around major cities are made to close to reduce pollution.

However, that would presuppose demand remains robust; signs are beginning to emerge that demand is softening.

RBC Capital Markets mining analyst Paul Hissey is quoted as saying the bank expects steel demand to fall in H2 due to a slowdown in infrastructure and property demand and continued volatility around tariffs.

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Ultimately, a softening in steel demand will lead to a fall in steel prices; it is the anticipation of such that is a factor in falling iron ore prices.

As we noted, the correlation in raw material and finished product prices is stronger in falling markets than rising, despite the raw material price falls leading the finished product.

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Miner Freeport-McMoRan Inc., the world’s largest publicly traded copper producer, announced its second-quarter earnings Wednesday.

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The miner reported Q2 net income attributable to common stock of $869 million and $1.6 billion for the first six months of the calendar year. The figures compare with $268 million in Q2 2017 and $496 million for the first six months of 2017.

The miner reported copper sales of 989 million pounds in Q2 (1.982 billion pounds through the first half of the year). The miner, also a producer of gold, reported gold sales of 746,000 ounces in Q2 (1.345 million ounces through the first six months). In addition, Freeport reported sales of 24 million pounds of molybdenum (48 million pounds through the first six months).

“Our second quarter results reflect strong performance from our global operations and a continued focus on productivity, cost management and capital discipline,” President and CEO Richard C. Adkerson said. “During the first half of 2018, we generated $2.7 billion in cash flow from operations and capital expenditures totaled $0.9 billion, enabling further strengthening of our balance sheet and advancement of initiatives to build value for FCX shareholders.

“We achieved important progress during the quarter to reach a new long-term partnership structure with the Indonesian government, and we remain focused on completing negotiation and documentation of definitive agreements to restore long-term stability for our Grasberg operations.”

The miner’s share price dipped Wednesday, Bloomberg reported, as a result of operational issues at its Grasberg mine in Indonesia. After hitting $16.43 in the early part of the day, the price dropped 6.4% to $15.06 around noon. It rallied the rest of the day, closing at $15.86 (down 1.37% for the day).

In addition, the miner reported paying off $454 million in debt in April.

Copper Price Slumps

As a major copper producer, Freeport-McMoRan is eyeing the copper market’s recent slide.

The LME copper price has been falling fast since early June. After hitting $7,271.50 on June 8, the copper price proceeded to drop 17.6% and even dipping below $6,000/mt on July 17.

The price then bounced back slightly, moving to $6,166.50 as of July 24.

Source: LME

Adkerson referred to the slide in the copper price in tandem with the trade measures currently being undertaken by the U.S., in particular vis-a-vis China (the world’s top copper consumer).

As we sit here today, there is an anomaly between market sentiment and fundamentals in the marketplace,” Adkerson said. “We’re continuing to see real demand being very positive for our global business, including our business in China.”

Adkerson added that copper demand in the future will benefit from renewable-energy projects and electric vehicles.

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“Absent having some sort of global recession or a major setback in China, market deficits in copper appear to be inevitable,” Adkerson added.

Stock markets in the West react to peaks and troughs on the Shanghai stock market as if the market were a true indicator of the health of the Chinese economy. Shanghai has been down since talk of sanctions has spooked markets in China, Europe and the U.S.

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But in some parts of the world, where dependence on China is more than a simple +/- 0.1% of GDP, whole economies are reacting to the fear of a slowdown in China.

A recent Financial Times report details how the Aussie dollar has slumped 4.5% in just two weeks. Trade tensions have risen over investors’ fear for the prospects of the country’s largest trading partner, an indicator of how dependent has Australia become on China’s health and prosperity.

Likewise, copper, which for decades has been dubbed “Dr. Copper” for its supposed sensitivity to the health prospects for global growth, should maybe be renamed “Sino Copper” for the way in which it increasingly has become tied to the fortunes of one country (China) rather than the global economy.

After touching a four-year high of $7,348 a ton on June 7, copper has plunged 14%, or more than $1,000 to $6,303 a ton, the Financial Times reported, as investors fear a slowing China will be detrimental for copper demand later this year and next.

China is the world’s largest importer of copper, and Australia — the fifth-largest copper producer — is intimately tied to the world’s second-largest economy. China is its biggest customer, not just for copper but also for iron ore, coal, aluminum, bauxite and a range of other materials.

A follow-up article will analyze a wider range of metrics to better understand the state of the Chinese economy and to what extent the country’s growth trend for 2018 is a direct result of tariffs (compared to factors in play before April).

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What that will show is that China had much to contend with prior to tariffs and a trade war broke out. While massive foreign exchange reserves and a well-funded banking system means the economy is essentially sound, the current trade issues have come at a bad time for policymakers in Beijing and may partly explain the relatively restrained response from the authorities.

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This morning in metals news, a Chinese company that makes aluminum foil is suing the U.S. over anti-dumping and countervailing duties imposed on the product, Japan is concerned about a rise in Chinese steel exports and President Trump throws another supporting tweet behind his tariffs.

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Chinese Company Strikes Back at Anti-Dumping, Countervailing Duties

The subsidiary of Chinese company Shantou Wanshun Package Material Stock Co is suing the U.S. over anti-dumping and countervailing subsidy duties imposed on aluminum foil, Reuters reported.

The subsidiary, Jiangsu Zhongji Lamination Materials, was subjected to a countervailing duty of 17.14% and an anti-dumping duty of 37.99% earlier this year, according to the report.

Eyes on Chinese Steel Exports

Japan’s Iron and Steel Federation is keeping tabs on Chinese steel exports levels, particularly as U.S.-China trade relations deteriorate and, thus, could have a significant impact on the Chinese economy and steel demand within China.

“Our biggest worry is a scenario that the U.S.-China trade wars would dent China’s local demand, leading to a surge in China’s steel export,” said Koji Kakigi, the federation’s chairman, as quoted by Reuters.

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Trump Praises Tariff Tool

As the Office of the United States Trade Representative kicked off public hearings on proposed Section 301 tariffs worth $16 billion, President Trump again affirmed his stance on the trade tool, tweeting “Tariffs are the greatest!” on Tuesday morning.