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March 29 is currently supposed to be the date by which Britain’s future relationship with the European Union is finally settled.

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There are several possible outcomes of varying likelihood. Britain could remain part of the E.U., which is looking comparatively unlikely.

Or, it will leave based on the agreement Prime Minister Theresa May has reached with Brussels, but including some last-minute tweaks around the longevity of the Irish border question (the most likely option).

Or, Britain will plunge out with no formal agreement — and to judge by the opinions of much of the business community and many commentators, it would plunge into an extremely uncertain and volatile future.

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The Automotive Monthly Metals Index (MMI) picked up one point this month, rising for an MMI value of 93.

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U.S. Auto Sales

As noted in previous reports, General Motors last year announced a switch from monthly sales reports to quarterly reports. Fellow Big Three automaker Ford Motor Co. has followed suit, recently announcing it would also move to a quarterly reporting schedule.

“We knew that a lot of our competitors would watch to see what our experience would be and if we’d stick to our guns,” GM spokesman Jim Cain told the Detroit Free Press. “We always expected they’d follow.”

Meanwhile, most automakers continue to report on a monthly basis. Fiat Chrysler reported February sales fell 2% year over year, breaking an 11-month streak of year-over-year gains.

“The overall industry is starting off slower due in part to weather, the U.S. government shutdown and concern over tax refunds,” U.S. Head of Sales Reid Bigland said. “We still see a strong, stable economy and anticipate any lost winter sales will be made up in the spring. For us, the Ram brand was the standout in February, and Jeep Cherokee set a February record as well.”

Honda saw its total sales dip 0.4% year over year in February. However, Honda’s Acura brand posted a strong February, with Acura sales increasing 11.3% year over year.  Sales of Acura trucks increased 23.9% year over year.

Nissan’s U.S. sales dropped 12% year over year. Nissan’s ousted former CEO Carlos Ghosn was granted bail by a Tokyo court, NPR reported, as he awaits trial on corruption charges.

Subaru reported a 3.9% year-over-year sales increase, with its Forester performing well in the year to date (up 17.6% compared with January-February 2018 sales). However, earlier this month Subaru recalled 1.3 million vehicles due to brake light issues, impacting certain Forester, Impreza and Crosstrek vehicles.

Section 232 Auto Report Moves to Trump

Last month, Secretary of Commerce Wilbur Ross submitted a report to President Donald Trump related to the Trump administration’s Section 232 investigation on imports of automobiles and automotive parts.

Pursuant to Section 232 of the Trade Expansion Act of 1962, once an investigation begins the commerce secretary has 270 days by which to provide the president with a report including recommendations. This particular investigation began May 23, 2018, setting the deadline on Feb. 17.

However, some industry groups have complained because the report was not made available to the public.

“It is critical that our industry have the opportunity to review the recommendations and advise the White House on how proposed tariffs, if they are recommended, will put jobs at risk, impact consumers, and trigger a reduction in U.S. investments that could set us back decades,” the Motor and Equipment Manufacturers Association said in a prepared statement. “Secrecy around the report only increases the uncertainty and concern across the industry created by the threat of tariffs. MEMA calls for the immediate and full release of the report.”

Meanwhile, the European Automobile Manufacturers’ Association (ACEA) issued a statement, arguing European automobiles do not pose a national security threat to the United States.

“Imports of cars and auto parts from the EU clearly do not pose a national security risk to the United States,” ACEA Secretary General Erik Jonnaert said. “Any trade restrictive measures in our sector will have a serious negative impact, not only on EU manufacturers but also on US manufacturers.”

Investments and Relocation

General Motors made waves late last year when it announced plans to close several of its North American plants and cut 15% of its workforce.

GM is far from the only automaker cutting costs and shuffling production, as MetalMiner’s Stuart Burns explained last month. Ford, Jaguar Land Rover, Nissan and Honda, among others, have either cut jobs or moved production.

“The U.S. market could be due for a severe shakeup if President Donald Trump’s threat to slap import tariffs on foreign cars comes into effect,” Burns explained.

“UBS Bank reckons that the worst case — tariffs of 25% — would see the American market shrink by 12% next year.”

As for investment, while GM previously announced the shuttering of five North American plants in 2019, it recently announced new investment in other plants. The automaker plans to invest a total of $56 million in two Michigan plants, located in Romulus and Lansing.

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Actual Metal Prices and Trends

U.S. HDG steel rose 1.8% month over month to $896/st as of March 1. U.S. platinum bars rose 6.0% to $869/ounce. U.S. palladium bars rose 14.9% to $1,522/ounce.

U.S. shredded scrap steel rose 5.7% to $332/st.

Chinese primary lead rose 0.8% to $2,615.72/mt. LME copper rose 5.3% to $6,494/mt.

Korean aluminum coil fell 3.5% to $3.31/kilogram.

Trade, trade, trade — that is the order of the day as the Trump administration pursues a trade accord with China and attempts to convince Congress to approve the United States-Mexico-Canada Agreement (USMCA).

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United States Trade Representative (USTR) Robert Lighthizer addressed Congress on Friday on the heels of the submission of the 2019 Trade Policy Agenda and 2018 Annual Report (which must be submitted by March 1 of every year, pursuant to the Trade Act of 1974).

In a statement, Lighthizer touted the administration’s trade actions as “more favorable to American workers.”

“In just two years, we have significantly re-written major trade deals with Korea, Mexico, and Canada,” he said. “We have undertaken dramatic new enforcement efforts to stop unfair trading practices by China and other countries. We are aggressively enforcing U.S. trade laws, including by bringing cases under trade agreements, relevant U.S. laws, and at the WTO. We are ensuring that countries receiving benefits under the GSP program live up to eligibility standards set by Congress. These actions and many others are contributing to a stronger U.S. economy, which has generated more jobs and higher wages for American workers.”

The USTR release also states that the Trump administration is “urging” Congress to approve the USMCA. The agreement, signed during the G20 Summit in Argentina late last year by the leaders of Mexico, Canada and the U.S., still needs to be ratified by the three countries’ legislatures before it can go into effect.

However, the outstanding hangup vis-a-vis ratification remains the U.S.’s Section 232 tariffs on steel and aluminum, which are still in place on U.S. imports of the metals from Canada and Mexico.

As reported previously, U.S. Agriculture Secretary Sonny Perdue has indicated he is attempting to convince President Donald Trump to remove the tariffs to ease passage of the USMCA, meant as the successor to the North American Free Trade Agreement (NAFTA) passed in 1994. Canada and Mexico have also indicated their legislatures may not approve the agreement unless the tariffs are removed.

That dialogue is perhaps complicated by the fact that the U.S. Department of Commerce last week launched anti-dumping and countervailing duty investigations of imports of fabricated structural steel from Canada, Mexico and China. The total value of the imports of the fabricated structural steel from Canada and Mexico in 2017 reached $1.1 billion, according to the Department of Commerce.

Meanwhile, the U.S. and China have continued trade talks this month, with media reports indicating a deal could be reached by the end of this month.

The two countries have traded a total of $360 billion in tariffs on each other’s goods, with the U.S. imposing a total of $250 billion as part of its Section 301 probe of China’s trade practices (including allegations of intellectual property theft, forced technology transfer and more).

The U.S. imposed a tariff package worth $200 billion on a wide range of goods from China in September at a tariff rate of 10%, which was was set to increase to 25% as of Jan. 1 until the two countries agreed to launch a new 90-day negotiating window (prompting Trump to delay the rate increase). More recently, Trump agreed to delay the March 1 deadline as talks continue.

The report also addresses the impact of China’s steel overcapacity.

“The domestic steel industry lost 14,100 American jobs in 2015 and 2016,” the report states. “Capacity utilization of American steel mills was only 69.4 percent in 2016, a level that inhibited efficient operations and discouraged American steel companies from investing in research and development. Meanwhile, China and other steel-producing nations dramatically increased their production capacity – despite growing evidence of global overcapacity. By 2016, China had enough capacity to produce as much steel as the rest of the world combined.”

The report touts the USMCA and the renegotiated trade deal with South Korea, the United States-Korea Free Trade Agreement, and lists negotiations underway for new trade deals with the U.K., E.U. and Japan.

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The full 373-page report is available on the USTR website.

On the heels of the doldrums of December, metals prices have made gains through the first two months in 2019.

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February was an especially strong month for a number of metals.

However, markets are especially sensitive to any snippets of news coming out of the ongoing U.S.-China trade talks. President Donald Trump recently delayed the March 1 deadline for a planned tariff rate increase as talks continued.

Whether the two countries reach a meaningful deal anytime soon remains to be seen; as of now, however, metals prices are enjoying a bit of upward momentum.

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Cutting through the polarized hype on climate change is one of the toughest challenges for firms trying to position themselves and their enterprises for the future.

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On the one hand there is a broad green or environmental lobby, which rightly shouts out the risks of rising global temperatures and the link greenhouse gases play in that rise.

Unfortunately, at the same time, many in that lobby claim a switch to a zero-carbon future would be simple.

On the other hand there are complete naysayers who do not even accept there is a climate change issue to address, let alone have any interest in finding less environmentally polluting options.

Governments rarely help; in fact, the U.S. is actively rolling back previous legislation, apparently in a perverse belief that if you say something is fake news enough, it actually does become fake news.

In many other countries, governments act with varying degrees of commitment, but at times appear to promote one solution while still supporting another cause of pollution in a different part of the economy. As a result, policies are not joined up.

Oil majors can hardly be said to be neutral in this debate, but their periodic reports are the subject of so much scrutiny that they have to be reasoned and their assumptions have to be logical or they would suffer ridicule.

So, when Andy Brown, Shell’s upstream director, told The Telegraph that zero net emissions are technologically and economically possible by 2070, his comments at least bare scrutiny.

He went on to add electric power would have to jump fivefold by that time. Wind and solar would have to increase by 50 times. It would require 10,000 Carbon Capture Sequestration (CCS) projects able to sequester six gigatons of carbon each year, accompanied by sweeping reforestation for such a goal to be reached, even over such an extended timeframe.

In the intervening decades, global temperatures may well have risen past the point of no return.

Ranged against that goal is the relentless demand for autos around the world. The same article points out a chilling statistic: Americans have roughly 900 cars per thousand head of population, yet the current figure is closer to 150 for China and 25 for India — and these rising nations aspire to The American Dream as much as anyone.

However, we should not fall into the same trap as many when looking at global warming; automobiles plays their part, but it is a relatively small part. Transportation — trucks and ships — play a bigger role, and the agricultural industry is even larger. If humans were to switch to a plant-based diet, we would buy ourselves decades to combat climate change.

Even so, for the energy industry, transportation and petrochemicals remain the focus. In an industry that operates on decade-long investment planning, it is no surprise that firms are changing priorities with increasing speed.

Saudi Aramco plans to switch 2 million to 3 million barrels per day to petrochemical production over the next 10 years, and potentially 7 million barrels per day over two decades. This is a staggering amount, The Telegraph observes — Saudi Arabia’s entire oil exports in January were 7.2 million barrels per day.  The Kingdom is also launching a $150 billion dash for lower-polluting natural gas, with plans for production to reach 23 billion cubic feet per day within a decade, equal to 60% of today’s global market for liquefied natural gas.

The following graph, courtesy of The Telegraph, illustrates the motivation for the shift in priorities.

Source: The Telegraph

Rarely has the energy industry been at such a crossroads and never has the oil industry faced such an uncertain future. Even in the febrile market of the early 1970s following what was then deemed an energy crisis did oil companies seriously doubt there would be a need for their product in the decades to come.

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But today there are genuine questions facing planners about what product mix oil companies should optimize for by the middle of this century, let alone what the landscape will look like 10 years from now.

The railways sector is one of the high-growth areas in India, so far as infrastructure is concerned.

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Much of it still runs on a setup that its former colonial ruler, the British Empire, left behind, and then some.

In a bid for modernization, which includes a bullet train, India wants steel for new and replacement rail tracks, wagon wheels and so on.

There are billions of dollars worth of contracts to be given out, but there’s a problem.

There are barely two domestic companies who can provide what the Indian Railways (IR) wants.

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Global crude steel production growth slowed in January, hitting its lowest level since August.

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According to the World Steel Association, global crude steel production rose 1.0% year over year in January, down from 3.8% growth in December. Global steel production in January hit 146.7 million tons (MT).

Crude steel production growth for China (in red) and the world. Source: worldsteel.org

As usual, China led the way in crude steel production, churning out 75.0 MT, marking a year-over-year increase of 4.3%. India, which recently passed Japan as the world’s second-largest steel producer, produced 9.2 MT, which was down 1.9% year over year. The country India passed in the steel production standings, Japan, saw its production fall 9.8% to 8.1 MT, while South Korea’s production fell 1.5% to 6.2 MT.

The U.S. produced 7.6 MT in January 2019, marking an 11.0% year-over-year increase. U.S. steel mills continue to fill an incrementally larger share of total capacity. According to the American Iron and Steel Institute, U.S. steel mills churned out steel at a capacity utilization rate of 80.9% through Feb. 23 of this year, up from 75.7% for the same period in 2018.

By tonnage, U.S. steel mills produced 14.6 million net tons in the year through Feb. 23, which marked an 8.0% increase over the same period in 2018.

In Europe, Italy’s crude steel production fell 3.6% to 2.0 MT, which France’s dropped 9.7% to 1.2 MT. Spain also produced 1.2 MT, marking an increase of 5.9%.

MetalMiner’s Annual Outlook provides 2019 buying strategies for carbon steel

Crude steel production in Ukraine hit 1.9 MT, down 4.9%, while Brazil’s crude steel production rose 2.3% to 2.9 MT.

Turkey’s steel sector continues to face challenges, with 2.6 MT in January marking a 19.5% year-over-year decline. Turkey’s steel remains subject to the U.S.’s Section 232 steel tariff, which the Trump administration increased to 50% from 25% last year amid diplomatic tensions. In addition, another Turkish export market, the E.U., recently imposed new steel safeguards in an effort to curb diverted steel supplies (which it sees as an outcome of the U.S.’s Section 232 action).

OPEC may not be what it once was, but in concert with non-OPEC countries like Russia the cartel is showing it can still influence prices to its advantage.

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After extensive negotiations behind the scenes, Saudi Arabia and Russia have agreed to reduce output to “manage supply”; that is, to support prices, the fruits of which are only just beginning to become apparent.

So far in February, Saudi Arabia has shipped 6.9 million barrels per day, its lowest level since August 2017 and down from 8.3 million barrels per day in November, the Financial Times reports, resulting in a significant fall in global output and directly supporting a rise in prices.

Source: Financial Times

As the graph notes, circumstances have conspired to aid a general tightening of supplies.

Venezuela has seen its crude exports drop to about 1.1 million barrels per day compared with 1.5 million barrels per day in November, while Iran has seen its exports average 1.2 million barrels per day so far in February (down from 2.5 million barrels per day a year ago due to U.S. sanctions).

But the most dramatic shift has been in Saudi Arabia with the fall in output coming in just a few months since November.

Optimism for rising demand took a fillip this week with apparent progress in U.S.-China trade talks, suggesting a deal may be within reach and pushing Brent crude futures prices to over $67/barrel (their highest since November).

But maybe the surprise is not that prices have risen, but that they haven’t risen further.

Ten years ago, such a curtailment in output coinciding with an optimistic view of future demand would have seen oil powering toward $100/barrel.

The fact that it isn’t is down to U.S. shale.

According to Reuters, quoting EIA data, the U.S. is set to be pumping 13.2 million barrels a day by 2020, making it by far the largest producer in the world. Shale oil and gas have proven the doubters wrong, showing immense resilience in the face of at times low oil prices and poor collection and distribution infrastructure within the U.S.

What started as largely a gas play now meets virtually all the U.S. oil and gas demand, with oil imports from the Middle East dwindling to an average of just 1.5 million barrels a day last year.

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Higher prices will only further fuel investment in U.S. shale. Growth so far has been dramatic despite poor collection and distribution infrastructure, the Financial Times says. However, new pipelines going in to serve the giant Permian field in Texas and New Mexico will fuel further increases in output.

In the face of such relentless growth, global oil prices are not going to rise as far or as fast as they would otherwise do; shale will continue to exert a drag on prices, much to the reassurance of consumers.

The association representing Europe’s automotive manufacturers recently weighed in on the latest developments in the U.S.’s Section 232 automotive probe.

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“Imports of cars and auto parts from the EU clearly do not pose a national security risk to the United States,” said Erik Jonnaert, secretary general of the European Automobile Manufacturers’ Association (ACEA). “Any trade restrictive measures in our sector will have a serious negative impact, not only on EU manufacturers but also on US manufacturers.”

On May 23, 2018, the Trump administration launched a Section 232 investigation into imports of automobiles and automotive parts. Section 232 of the Trade Expansion Act of 1962 is used to determine if certain imports are threats to U.S. national security. The Trump administration used Section 232 to impose tariffs on imported steel and aluminum last year.

Following the initiation of a Section 232 investigation, the U.S. secretary of commerce has 270 days by which to give the president a report with recommendations. The president then has 90 days to decide what to do with the findings, if anything.

Secretary of Commerce Wilbur Ross sent President Donald Trump his Section 232 auto report Sunday, Feb. 17, just hours before the deadline.

Unsurprisingly, European automakers are concerned at the prospect of new U.S. tariffs on imported automobiles. In its prepared statement, ACEA also posited the tariffs would have a deleterious effect on the U.S. economy.

“ACEA cautions that the application of additional duties on imports of passenger cars and parts would not only severely affect the EU industry, but also the US economy and consumers alike,” ACEA said in the release. “It would mean that all automobile manufacturers in the United States, whether domestic or international, would face a significant increase in costs.

“This cost increase would have to be mitigated by lowering margins, reducing production costs or passing additional purchase and repair costs on to consumers. Such measures would make American automobile manufacturing less competitive and hit US consumers in their pockets. In other words, the imposition of tariffs would have a counter-productive effect on the US economy.”

While the ongoing trade negotiations between the U.S. and China dominate much of the headlines, the U.S. and the E.U. are working through trade differences, too. For example, the U.S.’s Section 232 tariffs on steel and aluminum remain in effect for the trading bloc.

With the 90-day Section 232 window underway for Trump, the clock is ticking. According to Reuters, European ministers on Friday debated when to begin trade negotiations with the U.S.

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According to media reports last week, European Commission President Jean-Claude Juncker said Trump had promised him he would hold off on imposing automotive tariffs. However, Juncker added that if the U.S. went forward with the tariffs, the E.U. would retaliate in kind.

Currently, the E.U. has a 10% tariffs on imported U.S.-made vehicles, while the U.S. tariff on E.U.-made cars is 2.5%.

The Chicago Mercantile Exchange (CME) hot-rolled coil (HRC) steel futures market finally demonstrated increased liquidity during 2018, about five years following its introduction in February 2014.

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Both volume of trading and open interest numbers showed improvement during 2018, as evidenced by increasing trade volumes throughout the year. Additionally, the London Metal Exchange (LME) introduced a new Hot Roil Coil contract.

As a result, there’s been quite a bit of excitement and coverage lately of the HRC futures market — is it warranted?

Looking at Chart 1, since January 2018 or so, the CME HRC finally experienced an uptick in regular daily trading volumes, as demonstrated by the bars along the bottom of this daily settlement price chart.

Chart 1: Trade volumes are increasing, finally hitting a regular stride during 2018.
Source: Quandl.com

The next chart also shows a positive sign for CME HRC futures. Open interest shown by the red line in the chart continues to trend upward, charted along with the daily settle price.

Chart 2: Open interest in CME HRC futures continues to increase.
Source: Quandl.com

Have HRC Prices Moved Similarly to Other Steel Price Indexes?

Taking a full look back at prices of CME HRC against our own MetalMiner IndX(™) price tracking since the inception of the trading product, we see only small amounts of variability between historical MetalMiner IndX(™) HRC prices and CME HRC prices.

Chart 3: The MetalMiner IndX(™) U.S. HRC price versus the CME HRC close of day price, February 2014 to February 2019.
Source: MetalMiner IndX(™) and Fastmarkets

Taking a closer look, the next chart focuses on the year 2014 from the CME HRC’s inception date.

As shown in the first couple of charts, the U.S. HRC price was fairly stable around 2014. Comparatively speaking, the CME HRC price was less stable (although it may have offered a speculative opportunity, as it tended to fall faster than actual prices).

Chart 4: The MetalMiner IndX(™) U.S. HRC price versus the CME HRC close of day price, 2014.
Source: MetalMiner IndX(™) and Fastmarkets

Generally speaking, volatility increased in 2015, as the price dropped into December 2015. Thereafter, the price became more prone to fluctuations, but still traded mostly sideways in a band around the earlier price highs from 2013 and never returned to quite as low a price as it hit in 2015.

In early 2018, the price of HRC increased. Actual prices tracked by MetalMiner’s IndX(™)  seemed less volatile than CME HRC prices. However, prices trended very similarly.

Chart 5: MetalMiner’s U.S. HRC price versus the CME HRC close of day price, 2018.
Source: MetalMiner IndX(™) and Fastmarkets

What Does This Mean for Industrial Buyers?

The CME HRC futures liquidity amped up during 2018, the product’s fifth year on the market.

Volume and open interest increased. CME steel prices tended to follow a fairly stable trajectory, similar to what the major indexes report (e.g. CRU, TSI, Platts, etc).

Furthermore, large organizations with significant planning needs that buy in sizable volumes may benefit from the arbitrage play these contracts allow, as well as the overall benefits of using hedging instruments to lock in margins.

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