The Chinese government frequently mandates steel production cuts, especially for environmental reasons. But the cuts have also aimed to cut production volume in support of maintaining higher steel prices and, therefore, a healthier domestic industry.
A recent goal of cutting 150 million metric tons of steel production capacity by 2020 was achieved by the end of 2018, according to the Chinese government. (By the way, no such purely production-focused reduction goal exists for 2019).
According to a recent Reuters article, on the other hand, in June 2018, China’s State Council banned new capacity development for steel, among so2me other primary commodity products, in some key geographic areas, such as Beijing-Tianjin-Hebei and the Yantze River Delta Regions.
The Chinese government mandated that blast furnace steel operations in Tangshan and Handan, China’s largest steelmaking cities, continue production cuts, but at a reduced rate of 20% of total capacity for April-June (compared to the 30% capacity reduction ordered for the November-March period).
These cuts target improvement in air quality by reducing the concentration of PM2.5 particulate matter by a minimum of 5% this year, when compared to 2018. Some production facilities must even leave the region as the government seeks to improve the quality of life in pollution-affected areas, such as Beijing, which is surrounded by Hebei province (the location of multiple steelmaking cities, including Tangshan and Handan).
When prices rise, however, these mandates become more difficult to enforce.
The World Steel Association released its Short Range Outlook (SRO) this week, which forecasts a 1.3% increase in global steel demand this year and a 1.0% increase in 2020.
“In 2019 and 2020, global steel demand is expected to continue to grow, but growth rates will moderate in tandem with a slowing global economy,” said Al Remeithi, chairman of the World Steel Association’s Economics Committee. “Uncertainty over the trade environment and volatility in the financial markets have not yet subsided and could pose downside risks to this forecast.”
While the 2019 forecast is still in positive territory, it would mark a decline from 2.1% demand growth in 2018.
China, of course, is undergoing trade talks with the U.S., which last year slapped a total of $250 billion worth of tariffs on imports from China. As with other industry sectors, China’s growth levels are closely monitored in the context of global growth trends.
According to the SRO, China’s steel demand is getting a boost this year from government stimulus measures.
“Chinese steel demand continues to decelerate as the combined effect of economic rebalancing and trade tension is leading to slowing investment and sluggish manufacturing performance,” the SRO states. “Mild government stimulus cushioned the economic slowdown in 2018. In 2019, the government is likely to heighten the level of stimulus, which is expected to boost steel demand.”
However, the SRO forecasts a “minor contraction” in Chinese steel demand in 2020 as government stimulus measures subside.
Steel demand is expected to continue to decelerate in developing countries. Demand growth in developing countries hit 3.1% in 2017, fell to 1.8% in 2018 and is forecast to drop to 0.3% in 2019.
The overall trend in declining demand is also expected to impact the automotive and construction sectors.
“As pent-up demand and government stimulus measures subsided, the automotive industry saw a sharp slowdown in growth in 2018 in many countries, in particular in the EU, Turkey and China,” the SRO states. “The largest decline was observed in Turkey (-9.0%) and in the UK (-5.5%). As a result, global auto production growth decelerated to 2.2% in 2018 from 4.9% in 2017.”
More recently, however, the company turned to more positive news, announcing plans to upgrade technology at its Husnes plant to produce more aluminum for the automotive market.
Aluminum use in automobiles has increased in recent years as automakers try to churn out lighter, more fuel-efficient vehicles.
Of course, the steel industry hasn’t allowed aluminum to rise uncontested, as new, lighter forms of steel are developed. In fact, Crain’s Cleveland Business reported last year that AK Steel plans to roll out a new advanced, high-strength steel to automakers by 2021.
The ongoing steel-versus-aluminum war aside, Hydro said it will invest NOK 150 million (U.S. $17.6 million) on the new technology for the Husnes plant.
According to a company release, the plant will feature upgraded in-house casting technology dubbed “low pressure casting” (LPC) will “enable Hydro to provide materials with enhanced properties for various extrusion segments.”
“Forge stock for products like suspension arms and knuckles is an attractive market for aluminium within the automotive industry, which needs ever more aluminium to fill its need to lightweight cars and reduce emissions,” said Ola Sæter, head of Hydro’s fully-owned primary aluminum plants.
The new LPC will debut in 2020. According to Johan Berg, plant manager at Husnes, the new process affords Hydro the “flexibility to be able to cast both extrusion ingots and forging materials according to customer demand in a flexible and efficient way.”
“This investment is timed well with the ongoing upgrade of Hydro Husnes’ second electrolysis line that is due to start operations in 2020, with an annual planned output of 210,000 mt of aluminium semi-products,” Berg added. “Making use also of this new technology will significantly strengthen our position as a preferred partner delivering of aluminium to the automotive industry.”
Hydro Delays Earnings Release
In other news, the firm announced a delay in the release of its Q1 financial results, from April 30 to June 5, on account of last month’s cyber attack.
“The delayed Q1 2019 reporting date is a result of the previously communicated cyber attack, impacting the availability of certain systems and data to produce the quarterly report,” Norsk Hydro said in a prepared statement.
“The revised date is conditional upon the planned timeline for restoring operational and reporting systems.”
Most of Hydro’s operations are “back to normal or near normal levels.” The firm’s energy segment is marked as “running as normal,” as is the bauxite and alumina segment, while its primary metal segment is running as normal “with higher degree of manual operation.”
According to Reuters, spot 62% grade iron ore for delivery to China recently rose 1.6% to $93 per metric ton and the most-traded May 2019 iron ore contract on the Dalian Commodity Exchange soared as much as 4.1% to 710.5 yuan ($106) per ton — the highest for the Asian benchmark since 2013.
Such robust price performance was not a one-day spike, but was reflected across the week as the contract gained nearly 10% during the first week of April on a combination of strong steel mill buying and concerns over constrained supply from both Australia and Brazil.
Nor was the bullish sentiment confined to iron ore, as Reuters reported coking coal on Monday rose 1% to 1,258.5 yuan ($187.29) a ton, and coke rose 1.4% to 2,048.5 yuan ($304.86).
Demand is at its seasonal peak as the weather warms in China and construction work begins in earnest, pushing up steel futures by more than 3% in early April. According to Reuters, the most-active construction steel rebar contract on the Shanghai Futures Exchange recently rose as much as 3.6% to 3,710 yuan ($552) a ton, its highest since Aug. 22, while hot-rolled coil jumped as much as 3.4% to 3,955 yuan a ton ($588).
Such performance suggests the steel market is roaring in China, fueled by another infrastructure spending spree, but the reality is something different.
The Trump administration announced this week it was considering the imposition of tariffs on $11 billion worth of European Union imports, said by the Financial Times to include such diverse products as passenger helicopters, Roquefort cheese, olive oil and wines.
The move is said to be in response to harm the administration claims is being caused to Boeing by E.U. subsidies for Airbus. U.S. Trade Representative Robert Lighthizer is said to have a list of E.U. products on which he intends to levy tariffs as retaliation for long-running U.S. complaints about European aircraft development cost subsidies to the Airbus Group.
Airbus, it must be said, counters that Boeing has received, in one form or another, similar subsidies and support, an argument that has brought temporary truces over this issue in the past. This time, however, the argument appears to be swept aside by the current administration, maybe because Boeing is under intense pressure over the 787 Max grounding and new build cancelations.
Although no friend of the World Trade Organization (WTO), the Trump administration has pointed out the organization has ruled Airbus’ past payments illegal under a May 2018 ruling regarding Airbus subsidies, but Airbus claims it has since cleaned up its act and no longer follows the practices ruled against in the report.
The move by the Trump administration comes on the heels of a separate WTO ruling establishing that the U.S. had itself illegally subsidized production of Boeing aircraft — a decision that incensed U.S. officials, according to the Financial Times.
The subindex tracking a basket of gold, silver, platinum and palladium prices from four different geographies dropped three points to 95 for the April reading — a 3.1% decrease — driven by a drop in palladium and platinum prices.
Even though the U.S. palladium price has cooled off a bit to begin the month of April, this marks the third month in a row it has traded higher than the gold price (even though the spread is a bit tighter).
As tracked by the MetalMiner IndX, the U.S. palladium bar price stood at $1,401 per ounce on April 1, an 8% drop from March 1.
In fact, every single constituent metal price comprising the Global Precious MMI basket — 14 in all — fell this month.
The Latest Palladium Price Outlook
According to a recent Kitco News report, BMO Capital Markets has “hiked their forecast for palladium sharply, looking for it to remain underpinned by a tight supply-demand picture and maintain a large price premium over sister metal platinum for the foreseeable future.”
The report states BMO “upped its average price forecast for palladium by 45% to $1,612.50 an ounce this year and upped its 2020 outlook by 11.3% to $1,112.50.
“As the premium over platinum continues to hit new records, there can be no doubt palladium is in a heavy market deficit at present amid stagnant supply and higher catalyst loadings for gasoline vehicles,” said BMO, as quoted by Allen Sykora of Kitco News. “And with substitution being a slow burn rather than an immediate fix, there remains decent potential for further upside. Qualifying a new catalyst is an expensive and time-consuming process, and we would expect this to occur only when the next range of vehicle models emerges.”
Sykora goes on to report “the bank figures that substitution to platinum will eventually occur, thus 2019 will be the peak for palladium prices.”
How tight is the supply market for palladium? Still as tight as we reported last month.
“‘The market is still fundamentally tight,” said Philip Newman, of the Metals Focus consultancy, as quoted by Reuters. In addition, the consultancy forecasts a 789,000-ounce shortfall this year in the 10 million ounce-a-year palladium market — and deficits of a similar size for several years after that, Reuters reported.
“Once the dust settles [on this latest downward blip for palladium], prices will start to recover,” he is quoted as saying.
LME copper prices moved sideways during the month and oscillated around $6,424/mt, struggling to hold on to the $6,500 level (despite hitting that price at multiple points throughout the month).
On the other hand, the price generally stayed above the longer-term resistance point of $6,380/mt. The price briefly dropped back later in the month before surging again, then sliding once again into early April.
Source: MetalMiner analysis of FastMarkets
LME copper prices trended upward rapidly at the start of 2019 on concerns over supply.
While the correlation between actual warehouse stocks and pricing generally falls outside of the factors driving actual LME copper prices, as pointed out in the most recent Monthly Metal Buying Outlook Report, recently traders traded on this information as warehouse stocks dwindled to historical lows.
Another key factor driving the perception of a potential shortage of the metal could be that supply and demand factors do not presently balance, with a multiyear production deficit of refined copper, as reported by the International Copper Study Group (ICSG).
What This Means for Industrial Buyers
While the bullish copper run ran out of steam by March when the price traded sideways, some of the increase in price from earlier in the year held, with prices now oscillating around a higher short-term level.
One reason for the increased interest comes from the metal’s uses in advanced applications, such as in aerospace and biotech. Interest also surged due to cobalt’s use in electric vehicle (EV) automotive battery production.
In addition to strong demand, the supply portion of the cobalt story has also spurred price volatility. Cobalt comes from the Democratic Republic of the Congo (DRC), where a majority of the world’s cobalt is mined.
The London Metal Exchange (LME) cobalt contract launched in February 2010 and the exchange recently launched a new cobalt contract tied to Fastmarkets’ standard-grade cobalt price (the go-to benchmark on cobalt pricing for industrial buyers).
In this analysis, we take a look at the dynamics of the established LME cobalt contract to see if it offers a suitable hedge for industrial cobalt buyers. The LME Cobalt FM contract does not yet have a long enough track history to warrant analysis, as the price has stayed flat since the contract’s launch.
LME Cobalt Contract May Offer a Hedge Against Pricing Volatility
Based on the long-term price trend for the contract, prices fluctuated in keeping with press reports on general market conditions for cobalt pricing:
LME Cobalt daily price trend since February 2010. Source: Fastmarkets
Price fluctuations may indicate enough volume and interest behind the scenes are creating pricing dynamism.
Let’s take a closer look at the underlying trade dynamics. The vertical lines early in the timeline suggest a lack of trading activity on some days and, therefore, no reported closing price.
LME Cobalt Contract Volumes Increased Annually (Especially Since 2016)
After some occasional volume spiking in the contract’s early years, trading increased again, especially around November 2016:
Chart 2: LME Cobalt daily contract volumes since February 2010. Source: Fastmarkets
To see the long-term trend more clearly, this chart shows annual volumes, including 2019 year-to-date numbers:
Chart 3: LME Cobalt annual contract volumes since February 2010. Source: Fastmarkets
Should trading in the contract continue at the same volume as this past Q1 quarter, the contract could see a record year.
This chart shows both volume and price together on a monthly basis:
Chart 4: LME Cobalt annual contract volumes since February 2010. Source: Fastmarkets
As contract volume began to surge, pricing became more dynamic, especially into 2016.
Even though prices fell since their peak last year, contract trading volumes remain relatively high (although not quite as high as at other points).
Open Interest in the LME Cobalt Futures Contract Waned Recently
Open interest in the contract recently flattened out, which appears as a contrary indicator compared with the increased dynamism of pricing and volumes:
LME cobalt contract open interest since April 2018. Source: Fastmarkets
Still, the open interest numbers remain higher than last year.
LME Cobalt FM Contract Launched March 11, 2019
Interest in cobalt price discovery continues to grow due to new uses for the metal combined with recent wide price fluctuations.
The older LME Cobalt contract requires physical settlement by approved LME brand providers. On March 11, a new non-physically settled cash contract launched based on FastMarkets’ standard-grade cobalt price: the LME Cobalt FM contract.
So far, it’s early days for the contract and prices appear flat. The price for this new contract, however, uses the arithmetic average of Fastmarkets’ twice-weekly price for the currently expiring contract month.
What Does This Mean for Industrial Buyers?
Given the increasing volatility of cobalt prices during the past year, industrial buyers may want to consider adding the existing metal-based LME cobalt futures contracts to the mix of buying strategies.
Buyers of cobalt looking for a price hedge mechanism could consider tracking the LME Cobalt FM contract as well. However, like most newly introduced futures contracts, it may take some time until the efficacy of the measure becomes validated through active trading and dynamic pricing.
According to the U.S. Census Bureau’s monthly construction spending report, U.S. spending in February reached $1,320.3 billion, up 1.1% from the revised January spending estimate of $1,307.3 billion.
The February spending total was also 1.1% above the February 2018 total of $1,305.5 billion.
Drilling down by category, spending on private construction hit a seasonally adjusted annual rate of $994.5 billion, up 0.2% from January’s estimate of $993.0 billion. Residential construction spending was $540.9 billion in February, up 0.7% from January’s $536.9 billion. Nonresidential construction was $453.6 billion in February, down 0.5% from January’s estimate of $456.0 billion.
Meanwhile, public construction spending was $325.8 billion, an increase of 3.6% from January’s estimate of $314.4 billion. Educational construction was at a seasonally adjusted annual rate of $76.3 billion, up 0.8% from January’s estimate of $75.7 billion. Highway construction was $111.1 billion, up 9.5% from January’s $101.5 billion.
The February ABI came in at a value of 50.3, down from 55.3 in January (the strongest value in over two years). An ABI value above 50 indicates billings growth.
“Overall business conditions at architecture firms across the country have remained generally healthy,” AIA Chief Economist Kermit Baker said in an AIA release. “Firms in the south recorded continued strong design activity, likely reflecting a healthy regional economy and ongoing rebuilding from the catastrophic 2018 hurricane season.”
By region, the South led the way with an ABI of 58.3, followed by the West (51.6), Northeast (51.5), Midwest (51.3).
Despite relatively minimal growth in February, the report indicates stronger billings growth may be on the horizon, if project inquiry levels are any indication.
“However, scores for both inquiries coming into architecture firms and new design contracts continued to reflect healthy growth rates,” the report states. “With sustained improvement in inquiries for future projects as well as new project activity, billings are expected to improve in the coming months.”
While billings growth remains on the positive end — despite it being less robust in February — concerns are mounting about the prospect of an economic downturn, not just in the U.S. but in major economies around the world.
Auto sales dipped in the first quarter of 2019, while U.S. housing starts were down 8.7%
This month’s ABI survey polled industry members about the economic indicators they most frequently look to for guidance on the general direction of the business climate. According to the report, 25% of respondents said interest rates, while 24% said stock market trends and 23% said business confidence scores.
Housing Starts Plunge 8.7%
As previously noted, U.S. housing starts fell 8.7% in February compared with January data, according to a recent joint report by the U.S. Census Bureau and the Department of Housing and Urban Development (HUD).
On a year-over-year basis, February’s 1.16 million starts marked a 9.9% decline from February 2018.
The next housing starts report is scheduled to be released April 19.
Actual Metal Prices and Trends
The Chinese rebar price rose 1.2% month over month to $573.53/mt as of April 1. Chinese H-beam steel dipped 0.3% to $563.10/mt.
You won’t have heard those calls for the dollar’s demise of late: why? Because despite the current administration’s weaponization of the currency – the imposition of geopolitically inspired controls on dollar transactions, such as sanctions on Russian oligarchs, Iran, North Korea, and so on — the dollar is being used more now than it was five years ago.
True, those most impacted, like Russia, have significantly reduced their reserve holdings of dollars and diversified into gold and other currencies. According to the Financial Times, Russia has reduced its holdings of dollars from 46% of the total foreign currency reserves to 22% and increased its holdings in gold.
Russia one can understand, but the surprise has been China.
Today, the renminbi is less international by three key measures than just before that 2015 meltdown, the Financial Times explains. At its peak more than four years ago, the Chinese currency had become the fourth-most widely used currency for cross-border payments, according to SWIFT, the global financial messaging service.
But for most of the past few years, it has been in fifth place, having fallen in larger monthly volumes, year on year, than other global currencies. Similarly, the Financial Times says, yuan-denominated trade accounted for 30% of total Chinese trade in 2014, but has since slipped to about half that level.
Moreover, offshore bond issuance denominated in renminbi is about half the roughly $900 billion level of 2014, according to JPMorgan.
The only parties to kick the trend are central banks, which, as of the third quarter, carried 1.8% of the world’s reserves in renminbi, according to IMF data. But that was up only slightly from 1.1% when the Chinese currency was first included in the data at the end of 2016 and still pales to banks’ appetite for gold, holdings of which are now at their highest level since 1971.
Fortunes for the renminbi could be about to change, though.
Recently, Chinese government bonds have become accepted into a widely used global index, a move that could ultimately spur some $2 trillion of fund inflows into China’s onshore debt market, according to the Financial Times. That signifies the country’s debt market, the world’s third-largest, could in itself spur demand for renminbi.