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The Automotive MMI got off to a hot start in 2018, picking up three points en route to a February reading of 100. The February reading marked the first triple-digit performance for the MMI since it posted a 101 in January 2014. 

As for the basket of metals, a majority of the bunch posted price increases this past month.

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U.S. HDG steel jumped 2.7% as of Feb. 1, while U.S. platinum bars rose 6.2%. Fellow platinum-group metal (PGM) palladium fell for the month, however, by 5.8%.

U.S. shredded scrap jumped 7.7% and Korean aluminum 5052 coil rose 6.7%.

U.S. Auto Sales

January proved to a be a mixed bag for automakers vis-a-vis their U.S. sales.

According to data from Autodata Corp released Feb. 1, topping the charts in January was General Motors Corp., with 198,386 units sold, up 13% year over year. Sales of light trucks carried the day, as they increased 12.6% to soften a 30.2% drop in car sales. (General Motors is expected to announce its fourth-quarter 2017 and full-year earnings Tuesday, Feb. 6.)

In mid-January, GM forecasted 2018 would be another good year. According to a GM release, the company benefited from “continued strength” in North America and China, plus improvement in South America.

“GM had a very good 2017 as we continued to transform our company to be more focused, resilient and profitable,” GM Chairman and CEO Mary Barra said in the release. “We are positioned for another strong year in 2018 and an even better one in 2019.”

GM touted its growth in truck sales in a release last Thursday.

“All of our brands are building momentum in the industry’s hottest and most profitable segments,” said Kurt McNeil, U.S. vice president, sales operations, in the prepared statement. “Chevrolet led the growth of the small crossover segment with the Trax as well as the mid-pickup segment with the Colorado. Now, we have the all-new Equinox and Traverse delivering higher sales, share and transaction prices.”

Meanwhile, Ford Motor Company, which called 2017 a “challenging” year during its earnings call last week, didn’t have quite as good of a month. Ford posted a 6.3% year-over-year sales drop, with 160,411 units sold in January.

Down the list, Fiat Chrysler had a rough month, posting a 12.8% year-over-year decline. Toyota sales jumped 16.8%, Honda‘s were down 1.7% and Nissan‘s jumped 10.0%.

Volkswagen, meanwhile, found itself adding to the bad press from its Dieselgate scandal when it was reported last month that the company conducted exhaust tests on monkeys. Volkswagen’s January U.S. sales were down a whopping 32.8% year over year.

China and EVs

Everybody knows about Tesla and Elon Musk — but what about China and its role in what will assuredly become an increasingly electrified automotive world?

According to Bloomberg, one small town in southeast China will house a planned $1.3 billion battery factory that could stymie the global competition.

“The company plans to raise 13.1 billion yuan ($2 billion) as soon as this year by selling a 10 percent stake, at a valuation of about $20 billion,” the Bloomberg report states. “The share sale would finance construction of a battery-cell plant second in size only to Tesla Inc.’s Gigafactory in Nevada—big enough to cement China as the leader in the technology replacing gas-guzzling engines.”

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Actual Metal Prices and Trends

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We have written before about the GFG Alliance and, in particular, within that Executive Chairman Sanjeev Gupta’s Liberty Group that has bought distressed steel and aluminum assets in the U.K. over the last 10 years. Last month, Gupta’s Liberty Group announced plans to add Europe’s largest aluminum smelter in Dunkerque, France, to its portfolio.

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Liberty already owns the Liberty British Aluminium smelter at Fort William in Scotland (formerly owned by Rio Tinto). But in what may prove to be another timely move, Liberty has announced plans to build a 2 million a year alloy wheelmaking production facility alongside the Fort Williams smelter, scheduled to begin production by 2020. We say “timely” because the U.K. is expected to exit the E.U. by March 30, 2019; although transition periods have been discussed, it is not clear what the tariff framework will be during any extension beyond that March date.

Source: The Society of Motor Manufacturers and Traders (SMMT)

The U.K. automotive industry is one of few success stories, exporting some 80% of its 1.67 million cars last year and nearly 55% of its 2.7 million engines. As the above graph from SMMT shows, output is down a little from last year due to a double whammy of uncertainty around the economy’s future due to Brexit and a general move away from diesel engines following the emissions scandal (and what that may mean in terms of changes in government policy).

GFG’s move is timely because the U.K. imports much of its alloy wheels at the moment; the imposition of tariffs will mean domestic suppliers will have a distinct advantage.

In GFG’s case, this will be enhanced by the location. With the smelter right next door, Liberty Group intends to ship liquid metal from the smelter directly into the casting works, giving the economics a distinct advantage over plants elsewhere that buy in primary metal ingot and remelt it.

The top 10 makers of alloy wheels are either global brands like Enkei and Ronal, or national champions like Germany’s Borbet or America’s Arconic and Superior, or China’s Foshan Nanhai Zhongnan Aluminum Wheel Co. Although the U.K. produces 1.67 million cars, its supply chain is highly integrated with continental Europe, a supply arrangement that is clearly at risk post-Brexit with no vision of what a post-Brexit landscape would look like — or what kind of post-Brexit landscape the British government even wants.

According to U.K. government websites, alloy wheels for automotive application represent the fifth-most attractive opportunity for domestic supply after components like engine castings, steering systems and engine forgings. Alloy wheels are valued as a £210 million per annum supply opportunity. GFG’s plant is planned to produce some 2 million wheels, or a fifth of all U.K. demand.

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Regardless of the tariff environment after Brexit, the new plant appears to make a solid financial case. However, if as expected the British government manages to make a complete hash of a “free trade deal” — that is, they don’t get one — the plant’s credentials look even more compelling.

According to a recent report from the U.S. Geological Survey, the U.S. mining industry produced $75.2 billion in minerals in 2017.

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The information was published in the USGS’s annual Mineral Commodities Survey.

Source: U.S. Geological Survey

In the import market, the U.S. was 100% reliant on outside sources for some raw and processed mineral materials, including rare earths, manganese, niobium and vanadium. The report adds that in 2017 the U.S. was 100% reliant on imports for 21 commodities — up from 100% reliance on imports for 11 commodities in 1984.

U.S. metal mine production in 2017 hit an estimated $26.3 billion, up 12% from 2016. Despite higher prices for metals, domestic production was actually lower than the previous year, the report states.

In that vein, for the aluminum sector — which is anxiously awaiting the results of the Trump administration’s Section 232 investigation of aluminum imports — 2017 proved to be another down year in terms of production.

Primary aluminum production fell for the fifth straight year, according to the USGS report, dropping 12% to reach its lowest level since 1951. Meanwhile, aluminum imports increased by 16% (a shade above the 15.5% increase in steel imports).

Which states led the way in mining production last year? Eleven states produced more than $2 billion in non-fuel mineral commodities. Those states were, in descending order: Nevada, Arizona, Texas, Alaska, California, Minnesota, Florida, Utah, Missouri, Michigan and Wyoming.

On the precious metals front, new gold mines opened in late 2016 and 2017 in Nevada and South Carolina. The South Carolina mine opening — rather, reopening — marked the first gold mine to open east of the Mississippi River since 1999. Gold was discovered at the Haile Gold Mine site, located in Lancaster County about 55 miles south of Charlotte, in 1827, according to the company website. The mine is currently owned by global mining firm OceanaGold.

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Metals used for high-tech applications like electric vehicles, including cobalt and lithium, saw their prices skyrocket in 2017. According to the report, the average lithium price jumped 61% last year, while cobalt prices more than doubled.

Normally when supply is constrained prices will rise, but China’s steel market is presently at the mercy of several dynamics.

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On the one hand, Beijing is constraining polluting industries like steel and coke production. Those same policy decisions, however, are hitting industries that consume finished products, such as construction (at least in the industrial northeast, where environmental pollution action has been most active).

Arguably, steel prices would have fallen further as a result of the constraints put upon the construction industry if it were not for the the constraints put on steel production, which has restricted supply. What is difficult to gauge from official figures is quite how much impact restrictions due to environmental measures have caused and what, if any, impact of a relaxation of those restrictions will have.

Average Daily Steel Output Drops in December, Still Up 5.7% for 2017

According to Reuters, China’s average daily steel output fell by 1.9% in December to 2.16 million tons per day from 2.205 million the previous month. Even so, full year output in 2017 still rose 5.7% to 831.73 million tons.

In part, this is due to higher output earlier in the year boosting the annual number, but also because the National Bureau of Statistics has altered what it does and doesn’t include in its numbers. China closed an estimated 140 million tons of illegal induction furnace capacity in the first half of 2015, a sector that has not been included in production numbers because it is not approved.

The sector was significant though, and its loss during 2017 was a significant factor in the strength of rebar prices as conventional blast furnace producers ramped up rebar production and prices to take the place of lost output from these illegal induction furnace producers. Since then, Beijing has been encouraging state mills in the installation of modern electric arc furnaces (EAF), in large part because of their lower environmental impact. It is the growth of these EAF facilities that lifted production in the latter part of the year and contributed to a switch from pig iron to scrap as a raw material source.

Iron Ore Prices Show Volatility

Although China’s iron ore imports rose 5% in 2017, hitting a record of 1.075 billion tons, iron ore prices have show considerable volatility of late as speculators struggle to gauge what demand is going to be like once heating season restrictions are lifted.

Both iron ore and coking coal prices have been sliding in recent days, but the expectation is they will bounce back during the first quarter.

What happens after that remains to be seen.

With steel output restrictions lifted by late March, steel production will almost certainly increase, finished steel prices could weaken and steel mill margins could suffer. Q2 and beyond will depend on the strength of domestic demand, particularly from the construction sector.

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With new iron ore supply continuing to come onstream, it will be interesting to see if miners are able to maintain prices as demand picks up or if current concerns about port stocks prove right and an excess of inventory and supply results in prices falling further.

In an approximately 80-minute speech ranging from jobs and manufacturing to North Korea and Iran, President Donald Trump’s first State of the Union address also touched on issues impacting the metals industry — albeit, perhaps not as directly as one might have expected.

(As a brief aside, according to the American Presidency Project, which tracks the length of State of the Union addresses, Trump’s speech was the third-longest since the speech lengths were tracked beginning with the Johnson administration. Bill Clinton’s State of the Union addresses of 1 hour, 24 minutes and 58 seconds and 1 hour, 28 minutes and 49 seconds are the only addresses longer than Trump’s speech last night.)

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Many in the metals industry were looking for good news regarding infrastructure (including, as we reported this morning, Nucor President and CEO John Ferriola during Tuesday’s quarterly earnings call). On that front, Trump called on Congress to put together a $1.5 trillion plan for infrastructure spending.

“Tonight, I am calling on the Congress to produce a bill that generates at least $1.5 trillion for the new infrastructure investment we need,” Trump said. “Every Federal dollar should be leveraged by partnering with State and local governments and, where appropriate, tapping into private sector investment — to permanently fix the infrastructure deficit.”

He also referred to streamlining the construction permitting process and reclaiming the country’s “building heritage.”

However, for those in the metals industry looking for policy specifics, particularly with respect to trade cases, Trump did not offer much.

For those paying attention to the ongoing Section 232 probes of steel and aluminum imports – of which Chinese excess capacity and state-aided commodities is a focus of much discussion — the president did not refer to those, or any other ongoing trade cases. This isn’t necessarily surprising for a State of the Union address, which are often short on policy specifics or nitty gritty minutiae, a which Section 232, Section 301, and other anti-dumping and countervailable duty investigations could fall under, depending on whom you ask.

Even so, the omission stood out, even as China — along with Russia — was mentioned as a threat.

Trump mentioned China three times: twice during a story about a North Korean defector and another time in a general call for defense spending. (Reuters reported recently that Trump is expected to ask Congress for $716 billion in defense spending for 2019, which would mark a 7% increase from 2018.)`

“As we rebuild America’s strength and confidence at home, we are also restoring our strength and standing abroad,” the president said. “Around the world, we face rogue regimes, terrorist groups, and rivals like China and Russia that challenge our interests, our economy, and our values. In confronting these dangers, we know that weakness is the surest path to conflict, and unmatched power is the surest means of our defense.”

In addition, the word “steel” was only mentioned once in the speech, and that in a metaphorical sense when extolling Americans’ perseverance and the “steel in America’s spine.” Aluminum was not mentioned once during the speech.

While anti-dumping and countervailable duty investigations didn’t get their time in the State of the Union sun, Trump did once again reiterate his stance on what he perceives as bad trade deals — particularly relevant in the shadow of North American Free Trade Agreement (NAFTA) renegotiation talks that concluded Monday in Montreal, capping the sixth round of talks focused on revamping the now 24-year-old trilateral trade deal.

On trade, Trump said the “era of economic surrender is over.”

Trump signed an executive order withdrawing the U.S. from the Trans-Pacific Partnership on his first day in office. He has also consistently attacked NAFTA, which he has called the worst trade deal ever made, citing the loss of American manufacturing and jobs.

“From now on, we expect trading relationships to be fair and to be reciprocal,” Trump said. “We will work to fix bad trade deals and negotiate new ones. And we will protect American workers and American intellectual property, through strong enforcement of our trade rules.”
According to U.S. Census Bureau data through November, the U.S. had a $65.68 billion trade deficit with Mexico last year and a $15.33 billion deficit with Canada.
Scott Paul, president of the Alliance for American Manufacturing, was not impressed with Trump’s presentation on trade and infrastructure.

In general economic indicators, Trump touted job creation figures, saying that since the election (a time frame which of course includes the final months of the Obama administration), “we have created 2.4 million new jobs, including 200,000 new jobs in manufacturing alone.”

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According to the Bureau of Labor Statistics, 2.1 millions jobs were added in the 2017 calendar year, down from 2.2 million in 2016.

We have long since stopped believing official China growth data. If that’s the case, what is the “real” growth rate in China and should we care that the numbers appear to be manipulated?

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Officially, China grew by 6.8% in the final quarter of 2017, taking annual growth to 6.9%. Yet, it is increasingly felt that the National Bureau of Statistics (NBS) numbers are massaged to iron out peaks and troughs from year to year and to support the authorities’ target growth numbers – to make the Party look like it is in total control.

In reality, The Telegraph suggests that 2016 official growth figure of 6.7% was probably overblown, with growth in reality being lower. Following an uptick in activity during 2017, this has resulted in the official figure for last year having to be reduced, as to report growth of more than 7% would have added to a disparity that builds up over time. Inflating poor years has to be balanced by underreporting good years, or eventually the statistics suggest the economy should be twice the size that it clearly is.

Independent assessments of 2017 growth are lower still. The Telegraph quotes Capital Economics, which believes growth to be nearer 6% for 2017, but their models agree that 2017 was better than 2016, saying they estimated GDP growth at 5.1% in 2016.

How this puts projections for 2018 is interesting, as most observers think there was a slowdown in the last three months of 2017, with official figures putting it at 1.6%, while independents, like Pantheon Macroeconomics, are putting it at just 1% for the same period (down sharply from an estimated 1.9% in the third quarter).

The reasons for a slowdown are not hard to see, as two factors are at interplay.

Drive Against Pollution

The first is Beijing’s drive to curb polluting activities, such as construction.

Output growth slowed in steel, cement and glass recently, as the government tried to rein in polluting industries in northern China. These restrictions will be eased at the end of the winter heating season and, as a result, activity is likely to pick up again in Q2.

Weakening Property Market

The property market in particular has weakened in the past six months, The Telegraph observes, noting average residential property prices rose by just 0.2% in December.

This raises a question, if construction activity and, therefore, the supply of new properties was constrained, logic would suggest prices would rise. The fact prices are easing may have more to do with the rising cost of borrowing in China following efforts by Beijing in early 2017 to limit the supply of money and dissuade growth in the shadow banking sector.

Interbank lending costs have risen as a result. If the Fed raises rates during 2018 as expected, global debt costs will rise regardless of currency. The knock-on effect may be that an increase in construction activity is rewarded with a fall in property prices later in the year.

As credit has become less readily available, the article notes, there has been a considerable slowdown in retail sales growth, falling to 9.4% in December from 10.2% in the year to November. A combination of a cooling property market, falling retail sales and an export market facing protectionist headwinds supports the hypothesis that growth in 2018 will be lower than last year.

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The Telegraph article concludes with Capital Economics’ prediction that growth this year could be just 4.5%. It will be interesting to see what quarterly numbers the NBS claims China is achieving as the year unfolds.

Tata Steel is turning bullish on growth in India. Its global CEO and managing director, T.V. Narendran, has said the time had come for Tata Steel Ltd to start its next leg of expansion.

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“We see great opportunity to grow in India and we have said we want to grow in India. We are well positioned because we have organic and inorganic opportunities to grow,” he told reporters recently.

The CEO said the company’s Kalinganagar project in the Odisha province of India had “shaped up well” and was in full production. It was time to move on the second phase of expansion, already approved by the board.

The Tata Steel board has approved the next phase of capacity expansion in Kalinganagar to 8 million tons per annum, up from 3 million tons at present. The expansion will cost over U.S. $4 billion.

The total capacity of Tata Steel India operations is 13 million tons per annum at present. The expansion is expected to be concluded in 48 months, Tata Steel said in a regulatory filing in December 2017.

What is interesting is that as part of its expansion plans, Tata Steel had submitted bids for at least three stressed steelmakers: Bhushan Steel Ltd, Electrosteel Steels Ltd and Essar Steel India Ltd.

The Tata Steel CEO said the current period was a “great opportunity” for anyone in the steel industry with the appetite and ambition to grow in India. To fund its aggressive expansion plans, the company’s board on Friday approved raising up to U.S. $2 billion (Rs 12,800 crore) through a rights issue.

Starting Feb 14, the rights issue will remain open for subscription for two weeks. Tata Steel had recently raised U.S. $1.3 billion (Rs 8,304 crore) at current exchange rate, through a sale of unsecured bonds in overseas markets. The proceeds of the issue will be used to refinance the group’s offshore obligations.

Incidentally, Tata Steel is also the chief sponsor of the triennial steel conference, organized by the Iron and Steel Institute of Japan, The Chinese Society for Metals, The Korean Institute of Metals and Materials, and the Indian Institute of Metals. It’s coming to India after 2003.

About 70 keynote speakers, half of them from countries such as China, Korea, Japan, Netherlands, U.K., U.S., Germany, Belgium, Canada, are expected to address the meet.

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“Academics from the University of Cambridge, and Chongqing University, China, heads of research labs at Nippon Steel and Sumitomo Metal, Japan and POSCO, Korea will address issues such as surface treatment and corrosion, steel products and applications and environmental engineering and waste utilization,” said Anand Sen, Tata Steel’s president of TQM and Steel Business.

The rise of aluminum in the automotive industry is something we’ve kept tabs on here, as some automakers have opted for the lightweight metal for their models, as opposed to steel.

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Not surprisingly, there are passionate supports of each metal, who will tell you why one is better than the other.

For supporters of aluminum — or, more importantly, automotive brands moving toward aluminum-intensive vehicles — the recent North American International Auto Show in Detroit offered some good news.

Aluminum-intensive vehicles were recognized during the show, which opened Jan. 13 and comes to an end Jan. 28.

The 2018 Lincoln Navigator was named Truck of the Year and the 2018 Honda Accord was named Car of the Year in the North American Car, Utility and Truck of the Year (NACTOY) Awards, which were announced Jan. 15. According to the aluminum Association, the awards marked the second straight year in which an aluminum-intensive vehicles has won a NACTOY award.

According to the Aluminum Association announcement, the 2018 Lincoln Navigator’s all-aluminum body dropped the car’s weight by 200 pounds. The 2018 Honda Accord, meanwhile, is lighter by 110 to 176 pounds, depending on the trim, according to the announcement.

“It’s no wonder Car and Truck of the Year winners innovate with aluminum,” said Heidi Brock, president and CEO of the Aluminum Association, in a prepared statement. “From performance, safety and durability, to fuel economy, battery range and emissions, aluminum delivers in every category consumers demand in new cars and trucks. That’s why recent surveys of automakers confirm aluminum is the fastest growing material, leading the multi-material trend. It’s also why the U.S. aluminum industry invested more than 2.3 billion dollars in domestic automotive capacity and we’re poised to invest further as our customers continue to innovate with aluminum in next generation automobiles.”

Other finalists at the show included:

  • The 2018 Ford Expedition (NACTOY Truck of the Year finalist)
  • 2018 Alfa Romeo Stelvio (NACTOY Utility of the Year finalist)
  • 2018 Honda Odyssey (NACTOY Utility of the Year finalist)
  • 2018 Toyota Camry (NACTOY Car of the Year finalist)
  • 2018 Kia Niro (NACTOY Utility of the Year semi-finalist)
  • 2018 Lexus LC500 (NACTOY Car of the Year semi-finalist)
  • 2018 Hyundai Ionic (NACTOY Car of the Year semi-finalist)
  • 2018 Audi A5 Sportback (NACTOY Car of the Year semi-finalist)

But what does the future hold for aluminum in the automotive industry?

While the metal is lighter than steel, it is more expensive. According to MetalMiner IndX data, LME primary cash aluminum is up 19.6% since this time last year, up to $2,235/metric ton as of Jan. 24.

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If aluminum price increases continue to rise — and outpace those of steel — it bears monitoring whether the allure of aluminum wears off in any way.

The World Steel Association released its 2017 annual crude steel report on Wednesday, which showed steel output increases in almost every part of the world last year.

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According to the report, the 1,691.2 million tons (MT) produced last year marked a 5.3% increase from the previous year. Crude steel output increased everywhere except the Commonwealth of Independent States (CIS), the region including Armenia, Azerbaijan, Belarus, Kazakhstan, Kyrgyzstan, Moldova, Russia, Tajikistan, Uzbekistan, and associate members Uzbekistan and Ukraine.

Source: World Steel Association

Chinese Share of Global Output Rises

Annual production for Asia was 1,162.5 MT of crude steel in 2017, an increase of 5.4% compared to 2016.

China’s crude steel production hit 831.7 MT, up by 5.7% on 2016. In addition, China’s share of world crude steel production increased from 49.0% in 2016 to 49.2% in 2017, according to the report.

Japan produced 104.7 MT in 2017, a 0.1% drop compared to 2016, while India’s crude steel production was 101.4 MT, up by 6.2% on 2016. South Korea produced 71.1 MT of crude steel in 2017, an increase of 3.7% compared to 2016.

U.S. Steel Output Jumps 4.0%

Meanwhile, in North America, total crude steel production was up 4.8% to 116.0 MT. The U.S. alone produced 81.6 MT, good for a 4.0% increase from the previous year.

In South America, crude steel output rose 8.7% to 43.7 MT, paced by Brazil’s 9.9% increase to 34.3 MT.

China Leads the Way, but Capacity Closures Will Tighten Supply

Not surprisingly, China once again dominated the global stage in steel production, churning out just under half of the world’s supply.

China led the way with its 831.7 MT output. However, capacity cuts will likely see that number drop going forward. The state-led capacity closures dating back to November aim to reduce pollution in the country.

In fact, according to a poll of analysts responding to a Financial Times survey, Chinese steel output is expected to grow by just 0.6% this year — a far cry from the 5.7% increase from 2016 to 2017. Some have expressed concerns that the capacity closures will simply be canceled out by new capacity starts — on paper, though, the Chinese government’s stated capacity closure agenda will do much toward bringing global output numbers down.

In that vein, China’s average daily steel output fell by 1.9% in December, Reuters reported last week.

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Rounding out the rest of the top 10, in descending order, were:

  • Japan: 104.7 MT
  • India: 101.4 MT
  • U.S.: 81.6 MT
  • Russia: 71.3 MT
  • South Korea: 71.1 MT
  • Germany: 43.6 MT
  • Turkey: 37.5 MT
  • Brazil: 34.4 MT
  • Italy: 24.0 MT

Silicon Valley and the modern-day entrepreneurs it has spawned cannot be accused of lacking blue sky thinking.

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Some of their ideas appear whacky and subsequently disappear from the news almost as soon as they are proposed. Others, however, have gone on to become real success stories, challenging our lack of vision and belief.

Take Elon Musk, for example. While he had his supporters for Tesla, there were many more detractors in the early days. Those detractors said he would never get his niche electric car company to a scale able to challenge the incumbents.

Here we are just a few years later and Tesla is worth more than Ford (optimistically in our opinion, but still in the market’s eyes).

SpaceX was ridiculed even more as a rich man’s ego trip, but the firm has achieved more in its few short years – on a much smaller budget — than the lumbering giant that is NASA.

So before we write off the following, think on the above. Elon Musk’s 2013 paper on the future of the Hyperloop (a futuristic, high-speed train running in a vacuum tube) seemed so much hot air back then. It has since been quietly gathering support, and undergoing tests, such that now results suggest that while his original Los Angeles to San Francisco route may not happen anytime soon, other routes and applications could be viable.

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