grain oriented electrical steel

Grain-oriented electrical steel (GOES) prices fell for the second month in a row, with multiple large power equipment manufacturers requesting exclusions from the Section 232 tariffs.

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What makes these requests noteworthy involves the arguments made by each of the firms. One of the most interesting arguments pits two different firms on opposite ends of the national security argument – Eaton Corp (parent company of Cooper Power Systems) and AK Steel.

The Section 232 exemption request form asks a specific question with regard to whether the steel is used to support national security requirements. Cooper Power responded by stating the materials in the exemption are used to make transformers for the electrical grid, of which infrastructure is considered essential to national security: “This product allows Cooper Power Systems, LLC to meet federally maintained efficiency requirements in Liquid Filled Transformers as published by the D.O.E.”

The Cooper Power request involved, “chemically etched or mechanically scribed Domain Refined Grain Oriented Electrical Steels, capable of retaining domain refined properties post anneal, used in the manufacture of Distribution Transformers,” according to its exemption request. Cooper Power argued “the only domestic producer of electrical steels in the U.S., does not manufacture a Domain Refined Electrical Steel capable of being annealed after Transformer core production, while still retaining the Domain Refined properties.”

Ironically, Metglas, and not AK Steel, offered a rebuttal to the Cooper Power exclusion request that specifically addressed alternative products, notably amorphous ribbon, that could meet DOE requirements. Metglas also challenged the volumes Cooper Power had indicated – specifically that the volumes requested in the exclusion far exceed Cooper Power’s actual volume requirements.

Meanwhile, ABB’s exclusion request cited insufficient U.S. availability of 27M-0H, which it claims is not manufactured in the U.S. (This grade is high-permeability GOES.)

AK Steel — the only mill that challenged the ABB exclusion — made several arguments in its rebuttal, including:

ABB has moved away from several suppliers in the US and globally over the past few years. Changing suppliers and materials seems to be less of a concern to ABB when it achieves a financial return by purchasing foreign GOES. AK Steel is, and has been for many years, the largest supplier of GOES to the U.S. market. ABB knows AK Steel’s product very well and both ABB and its customers can plan to incorporate AK Steel GOES with little effort or hardship, just as they have in the past.

The company goes on to say, “As the largest domestic producer of GOES, a large percentage of transformers utilize AK Steel GOES products and it is a very well-known and broadly utilized product, both by ABB and their customers.” However, neither the buyer or supplier has explained fully why the GOES market appears more opaque than many other steel markets.

The Takeaway

In reality, power equipment manufacturers deploy a more multifaceted approach to the GOES sourcing decision. In fact, multiple GOES grades can meet various requirements as established by the DOE but the ultimate award decision made by a buyer considers many variables, such as: core loss, regulatory requirements, and the price arbitrage among alternative GOES products at any one given time. Together, these variables impact the buying decision.

From a sourcing perspective, manufacturers want and need the ability to maintain flexible sourcing options, not only to mitigate risk but to minimize the pricing power of a monopoly supplier. Moreover, the transformer market is dominated by global players who can easily shift production of transformer cores elsewhere (as they did after the unsuccessful 2014 anti-dumping case brought by AK Steel).

Buying organizations will continue to shift production away from the U.S. if the sourcing equation does not make economic sense. Regardless, should Big River Steel indeed move into this market —  as many hope that they will — AK Steel will need more than Section 232 to defend its market position.

In a subsequent post, MetalMiner will address the exemption request from Posco and the Section 301 tariffs.

Exact GOES Coil Price This Month

The U.S. grain-oriented electrical steel (GOES) coil price fell for the second month in a row from $2,857/mt to $2,763/mt. The MMI fell seven points from 207 to 200.

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The GOES MMI® collects and weights 1 global grain-oriented electrical steel price point to provide a unique view into price trends over a 30-day period. For more information on the GOES MMI®, how it’s calculated or how your company can use the index, please drop us a note at: info (at) agmetalminer (dot) com.

The GOES Monthly Metals Index (MMI) jumped by 14 points, marking the second consecutive monthly increase. The increase came as a result of tightness globally for thin gauge material, Section 232 import tariffs and healthy global demand.

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Japan excels at the production of thin gauge material used to improve transformer efficiency. Last month, MetalMiner reported Japanese mills sought to raise prices for the second half of this year by $100+/ton. A recent TEX report suggests European mills will seek similar increases for the second half of this year for middle-grade materials.

That leaves the sole domestic producer, AK Steel, in a strong position to ask for price increases for 2019 as buying organizations come back into the market for contract pricing. Meanwhile, Big River Steel earlier this year announced plans to produce grain-oriented steels, including H1B. The company, according to its website, wanted to first produce all of the nine grades of motor lamination steels and will now turn its focus toward grain-oriented electrical steel (GOES) and non-oriented electrical steel (NOES) – a welcome development to buying organizations.

Meanwhile, in early July, Nachi American Incorporated filed five additional exclusion requests for M2 materials. All of the materials within those exclusion requests appear within the standard product range for AK Steel. Nachi American a cited lack of sufficient availability as the reason for requesting the exclusion. The company currently imports its material from Japan.

South Korea, by way of negotiated agreement, remains exempt from the tariffs, though subject to quotas. However, according to International Trade Administration import data and MetalMiner analysis, South Korean imports make up only a paltry 26.3 tons. In other words, more imports from South Korea could come into the U.S. without the tariff.

GOES imports dropped dramatically since the Section 232 proclamation but Japan still represents the lion’s share: 

Source: ITA

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Exact GOES Coil Price This Month

The U.S. grain-oriented electrical steel (GOES) coil jumped for the second straight month from $2,712/mt to $2,914/mt. The GOES MMI increased 14 points from 197 to 211.

The GOES MMI® collects and weights 1 global grain-oriented electrical steel price point to provide a unique view into price trends over a 30-day period. For more information on the GOES MMI®, how it’s calculated or how your company can use the index, please drop us a note at: info (at) agmetalminer (dot) com.

Global steel prices tend to find a floor based on the price of Chinese steel. If Chinese prices fall, domestic U.S. prices also tend to fall. However, grain-oriented electrical steel continues to beat to its own drum, often not aligned with underlying steel prices.

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March is no exception.

Although U.S. domestic steel prices continued to rise in March, the GOES M3 price fell and fell rather significantly dropping by nearly 7%.

GOES MMI

Meanwhile, according to a couple of recent TEX Reports, GOES prices from Baosteel increased by $38/metric ton in April after increases of $168/mt from January through March. Baosteel acts as the price leader and according to a recent report, and will likely stand pat until or unless others also increase their prices. Those “others” may have a near-term opportunity to do so as a large tender from Bharat Heavy Electricals for 20,000 mt will bring in the global GOES producer community. As China tends to set the “market floor” for global steel prices, the TEX Report suggests that this tender will serve as the global price floor for GOES for the balance of 2017.

Supporting the rising price theory, TEX Report also suggests that prices have risen by $200-300 per mt in the Middle East and India.

Ironically, prices for steel rebar on the Shanghai Futures Exchange have declined by 5% according to a recent MetalMiner story on the back of declining coking coal (4%) and declining coke prices (5%), as well as falling iron ore futures. Some, including MetalMiner, believe the price declines are due to speculators unwinding bullish bets.

Chinese HRC

Source: MetalMiner Forecasting

Regardless, Chinese prices for hot-rolled coil are falling and though GOES prices often diverge from underlying steel market trends, upward price movements may be elusive.

 

U.S. M3 grain-oriented electrical steel prices dropped slightly with the M3 index moving from 200 to 197.

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Though U.S. prices dipped slightly, China’s Baosteel announced a price hike for GOES close to $40 per metric ton, according to a recent TEX Report. Although the Chinese have led recent GOES and other steel product price hikes, others have not necessarily followed. Nevertheless, Chinese steel prices set the floor for global steel prices.

GOES MMI

Now that the Trump administration has begun to settle in, market observers have paid close attention to trade actions within the metals industry, particularly the cold-rolled coil circumvention case and most recently a case filed by the Aluminum Association against China involving aluminum foil. Both the domestic steel and aluminum industries have pursued trade cases to address overcapacity concerns.

GOES Prices and NAFTA

GOES markets follow some of these same patterns. Back in 2013, GOES from China accounted for about 10% of total U.S. GOES imports (by tonnage). Clearly, the trade cases filed by the domestic producers at the time limited Chinese imports, but that trade case sought to stop other countries’ imports as much as China’s.

Herein lies a big difference between the GOES case and the aluminum case as well as the prior flat-rolled product steel cases. The GOES trade case did not result in any finding of injury, so no anti-dumping and countervailing duties were assessed. Instead, domestic power equipment manufacturers shifted their global supply chains to source GOES globally and purchase transformer parts and wound cores from NAFTA countries.

Some have speculated that two years ago, the addition of two new harmonized tariff codes for both transformer parts (8504.90.9546) and wound cores (8504.90.9542) would set the stage for future trade cases brought by the lone domestic GOES producer. We think this looks like a “stretch” and, legally, we’re not even sure there is a case to be had as AK Steel currently does not manufacture transformer parts or wound cores.

Import volumes for wound cores have modestly increased, but imports for transformer parts have actually declined:

GOES imports from 2015 to today

GOES imports from 2015 to today. Source: Lisa Reisman/MetalMiner.

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The GOES M3 MMI took another jump this past month moving from 192 to 200 for a 4+% increase. Last month the index made a 5% gain.

Last month, MetalMiner examined the Trump administration’s stance on trade policy and likely impact on GOES markets (and concluded that GOES prices would not see too much of an impact since most of the imported GOES material comes from Japan, Russia and the U.K.) In other words, even in a trade war with China, we don’t expect that to drive GOES price momentum.

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However, and as one of our readers pointed out, our story failed to address “Buy America” requirements which, indeed, could impact GOES markets.

We know President Trump implemented Buy America requirements for the Keystone XL and Dakota Access pipelines including all new pipelines and retrofits (even slab imports are disqualified for domestic producers with only rolling operations here in the U.S.) Could Trump implement Buy America requirements for transformers? The answer to that question: absolutely! It’s clear that Trump will act aggressively to promote Buy America requirements. These requirements will serve as a bullish indicator for GOES prices.

In the aftermath of the GOES domestic anti-dumping case, many large equipment manufacturers moved production of stacked and wound cores as well as laminations to suppliers in Mexico and Canada in anticipation of significant duties being placed on GOES imports here in the U.S. Those duties did not materialize. Nevertheless, production moved to NAFTA countries anyway.

Which brings us to NAFTA. President Trump has promised to renegotiate NAFTA. But in truth, NAFTA has not been bad for the domestic steel industry. It remains unclear what specific changes the President will attempt to renegotiate. Furthermore, AK Steel could find itself in a bit of a pickle. On the one hand, from an overall perspective, AK Steel has probably benefited from NAFTA as the agreement currently stands, though its GOES business, in particular, may have suffered as AK customers moved operations to Canada and Mexico. As the sole remaining domestic GOES producer, AK Steel may need to walk a fine line between what it lobbies for in terms of Buy America and what it has gained with NAFTA.

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Meanwhile, the industry should pay close attention to Big River Steel which reported record first-month production for a flat-rolled mini mill. BRS has publicly stated that they will add GOES capacity at a later stage. Aperam South America has started a GOES line out of Brazil. Imports from South America could increase just as BRS is starting its GOES line.

Meanwhile, what’s driving GOES price momentum right now?

According to a recent TEX report, orders that are typically placed during the summer months did not get placed which created a surplus. Since January, buying organizations have come back into the market including: Chinese, Korean and U.S. customers. In addition, a large tender for the Middle East will soak up some extra capacity which has caused market entrants to secure material before that tender is released. This has likely caused some price momentum as Baosteel raised prices for February shipments.

U.S. import levels have also increased during January supporting the notion that demand has increased.

 

Average grain-oriented electrical steel surcharges fell for the third year in a row. 2016 average surcharges took the biggest hit because Allegheny Technologies stopped production of GOES. AK Steel did not implement a surcharge until July 2016.

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Our own GOES M3 MMI showed only small price movements from month to month. The index hit a low of 181 back in July and today shows a modest recovery to 192, a 5% gain.

GOES follows its own fundamentals (e.g. supply and demand) and does not always follow the price arc of other more common forms of steel such as cold-rolled coil or hot-rolled coil. In fact, some of the wider trade dynamics for those forms of steel had little to no impact on GOES.

Which brings us to a larger issue. Will President-elect Trump, who is arguably pro-steel and who has gone on record against China’s trade practices, implement any policies that will likely impact GOES markets?

To begin, the nature of trade between the two countries, the U.S. and China, appears more complicated than what can be seen by the naked eye. Raw material/commodity-like supply chains lack the complexities of supply chains found in industries such as electronics. Blanket tariffs are easy to issue and calculate for commodities that move from point A to point B. But electronics industry supply chains involve components, parts, sub-assemblies, final assembly, etc. across multiple countries and locations. A blanket tariff on electronics will harm China much more than other countries as the tariff would apply to the “final point of assembly.” This could create all sorts of electronics shortages and problems here in the U.S.

Why Are We Discussing Electronics Supply Chains?

Because it would be easier to get tougher on China for commodities such as steel. And though China has curbed excess capacity in recent years, we could see a scenario in which tough trade policies such as a tariffs could significantly limit Chinese imports, which currently make up about 10% of domestic steel demand according to a recent analysis by Stratfor.

China will retaliate but a scenario exists that China could account for far less steel imports into the U.S. than it currently does (China has cut excess capacity already). In terms of grain oriented electrical steel, however, China does not represent the bulk of GOES imports into the U.S., in fact, Japan, Russia and the U.K. are far bigger GOES exporters to the U.S.

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Therefore, any President Trump trade policy that goes into effect (no pun intended) will likely have a bigger impact on the broader steel markets and a far less significant impact on the U.S. GOES market.

Next month, we will examine the potential impact of NAFTA changes on GOES markets.

Grain-Oriented Electrical Steel M3 retook last month’s loss rising by more than 3%.

 

China took action yesterday and filed a complaint with the World Trade Organization against the U.S. and Europe for not automatically granting China Market Economy Status.

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In fact, Commerce Secretary Penny Pritzker went on record specifically stating that the U.S. would not be granting China such status.

The granting of market economy status, of course, would make it harder for domestic companies to prove dumping against China. It all comes down to how price comparison data is calculated.

GOES_Chart_December_2016_FNL

According to Tim Brightbill, an attorney at Wiley Rein LLP, “essentially the only thing that would force the Commerce Department to formally confront the China/MES question is a trade lawsuit filed by China, or implicating China, in which the latter would be explicitly able to make that type of request.”

Alhough Europe appeared to be teetering with its decision not to provide MES, Japan also sided with the U.S. and denied China MES.

Why This Matters to GOES Markets

GOES has been the subject of international trade dumping cases for the past several years. The real challenge to MES will be the first trade case filed by any domestic industry against China. GOES will unlikely serve as that test case.

For readers interested in how China sees this issue (and uses the word protectionism to make its case), this post provides a good example.

We remind readers that MetalMiner is a banned publication within China because of all of our subversive anti-China rhetoric.

On that note, GOES industry observers should take note of a steel mega-merger within China. China’s Baoshan Iron & Steel (Baosteel) and Wuhan Iron and Steel Corp. (WISCO) have formed China Baowu Steel Group with a whopping 60 million metric tons of capacity (that is more than half of the entire U.S. steel-making capacity).

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The combined firm has publicly stated it would cut 16.6 million mt of capacity by 2018 to address the country’s over capacity concerns.

Baosteel is also major producer of GOES within China.

Grain-Oriented Electrical Steel M3 prices lost nearly all of last month’s gains dropping by nearly 3%.

 

Grain-oriented electrical steel M3 prices rose by about 3% this past month.

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Coincidentally, Allegheny Technologies, Inc. announced that it would now permanently idle its Midland, Pa. and Bagdad in Gilpin, Pa. facilities, thus exiting some commodity stainless steel markets as well as the GOES market entirely.

The closures — combined with new labor agreements, rightsizing plans and defined benefit retirement plans closed off to new employees — will help ATI improve its cost structure. ATI’s flat-rolled products division is expected to return to profitability in 2017 according to the most recent earnings announcement.

GOES_Chart_November_2016_FNL

And though these ATI plants have been idled since the Spring of this year, it now appears certain that the U.S. will have only one remaining GOES producer: AK Steel.

Similar cost reduction themes played out at the most recent AK Steel earnings call on October 25, “The improved product mix, higher average selling price per ton, improved carbon steel market prices, focus on cost reductions and lower raw material costs contributed to the 31% increase in adjusted EBITDA.”

In terms of the improved carbon steel market, we noted that non-ferrous metal prices continued to rise throughout October, confirming a bull market. Steel price declines have started to slow and, in fact, cold-rolled coil prices notched up $1/st this week. Though this appears insignificant, it demonstrates that steel prices may have found a price floor. In addition, the gap between domestic and international CRC prices has narrowed.

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Although GOES prices tend to move somewhat independently from other non-ferrous and ferrous metals, the fact that non-ferrous metals have moved in a bullish direction and steel prices also appear to be finding a floor means that, in the near term, we would not expect to see any dramatic GOES M3 price declines.

 

Many grain-oriented electrical steel market participants know that macroeconomic drivers and general steel price trends often diverge from GOES trends.

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Comments from the most recent Steel Market Update summit at the end of August suggest it may be hard to “buck the trend.”

Macro Trends

What are these macro trends?

  • Steel demand looks weak overall and overcapacity will continue unabated. According to Tony Taccone, Partner at First River Consulting, “global steel demand has stalled and there will be no growth going forward.” In addition, Taccone indicated the world has 700 million metric tons of overcapacity and the problem is set to become worse.
  • Trade cases will put the kabash on Chinese export growth. China has produced too much steel at unsustainable prices and has exported materials at the marginal cost of production, according to Taccone.
  • Automotive demand may have peaked and aluminum demand may weaken steel demand.

Despite weak demand in some sectors, others paint a more positive picture. According to Alan Beaulieu, Principal of the Institute for Trends Research, many factors look more positive for demand including light vehicle production, U.S. industrial machinery production (recently turned positive), a booming office building construction market, a stabilized oil and gas extraction market and healthy global demand for crude oil.

GOES_Chart_September_2016_FNL

In addition, Beaulieu pointed to rising mining, electricity generation and manufacturing sectors, that certainly bodes well for power equipment production and demand.

Micro Trends

With the loss of Allegheny Technologies, Inc. capacity for GOES, the uptick in electricity generation and construction, and the more bullish outlook for other commodities and non-ferrous metals, we might expect GOES prices to creep up accordingly.

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Though the macro trends paint a slightly more negative picture for steel prices in general (negative for producers, positive for buying organizations) for the near term, GOES markets don’t cleanly align with steel markets. September marks the second month of a rising price trend.

 

However, it appears unclear as to who will reap the benefits.

Compare Prices With The July 2016 MMI Report

The story begins with the U.S. GOES trade case that resulted in no duties applied to imported products to the U.S. However, U.S. power equipment manufacturers moved to alternative sources all the same, importing wound and stacked cores instead of purchasing GOES from domestic sources. Despite the unfavorable ruling for the U.S. domestic producers, other countries soon began filing anti-dumping cases.

GOES_Chart_August_2016_FNL

Chinese producers Wuhan Iron & Steel Co. and Baoshan Iron and Steel persuaded the Chinese government to rule against Japanese, Korean and European producers of GOES. The Republic of Korea received final duties of 37.3%. The preliminary duties on Korea, however, had been 14.5%-29.5%. The final duty rate, coming in significantly higher will likely shut down all Korean exports to China. With Japan receiving duties over 45%, both countries will no longer sell GOES into China.

According to a recent Reuters report, China imported over 120,000 metric tons of GOES of which over 95,000 mt came from Japan and Korea combined. Much of that material likely included the higher performing GOES grades. Japan had already started to withdraw from the Chinese market. Now China will need to find equivalent supply domestically which could limit GOES exports from China.

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In the meantime, here in the U.S., a word of clarity on the cold-rolled coil dumping case – grain-oriented electrical steel was “specifically excluded from the scope of this investigation”.

U.S. GOES prices inched up slightly.