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The Department of Commerce handed down an affirmative preliminary determination in its countervailing duty investigation of steel wheel imports from China.

In the preliminary determination, the Department of Commerce said the imports benefited from countervailable subsidies ranging from 58.75% to 172.51%.

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Imports of steel wheels from China in 2017 were valued at $388 million, according to the department.

The petitioners in the case were Accuride Corporation (of Evansville, Indiana) and Maxion Wheels Akron LLC (Akron, Ohio).

The Department of Commerce is scheduled to make a final determination in the case by Jan. 9, 2019. If it rules in the affirmative again, the case would move to the U.S. International Trade Commission, which would then make a determination by Feb. 21, 2019.

According to the department’s fact sheet for the investigation, it assigned:

    • A preliminary subsidy rate of 58.75% for mandatory respondent Xiamen Sunrise Wheel Group Co., Ltd.
    • A preliminary subsidy rate of 172.51% for mandatory respondent Zhejiang Jingu Company Limited and Shanghai Yata Industry Company Limited “based on total adverse facts” available
    • A preliminary subsidy rate for all other Chinese producers and exporters of 58.75%

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The scope of the products covered by the investigation includes “certain on-the-road steel wheels, discs, and rims for tubeless tires, with a nominal rim diameter of 22.5 inches and 24.5 inches, regardless of width.”

You never quite know with Donald Trump whether a new announcement is a case of international headline grabbing or whether the true motivation is the financial deal.

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But the president’s push for the U.S. to create a sixth branch of the armed forces in the form of a “Space Force” could possibly be satisfying both objectives.

The need to create a sixth armed services — in addition to the Army, Navy, Air Force, Marines and Coast Guard — in the form of a Space Force is hard to justify when the U.S. is already so well-endowed with military capability and structure. However, it should be eminently possible to create an extension of, say, the Air Force with a space division at much lower cost; the need for U.S. to focus attention on the potential threat from new space-based or space-enabled technologies is undeniable.

Not since Ronald Reagan created America’s Strategic Defense Initiative, called “Star Wars” by some, 35 years ago has the threat to America suddenly so jarringly transformed from invulnerable to at risk. Both Russia and China are investing heavily in hypersonic projectiles and the president’s fear is that if the U.S. does not take the risk seriously it will be left behind.

If Congress agrees it would be a bonanza for aerospace and defense companies in the sector.

Already flush with both civilian and military programs, a heavy injection of federal defense dollars into R&D to develop such capabilities and the ability to counter them would further swell returns in the sector.

Hypersonics are one area that has come in for particular attention, according to a report in The Telegraph.  Russia and China are said to be actually testing such technology which operates at Mach 5 or higher, or at least five times faster than the speed of sound.

Traditional jet engines work up to about Mach 4, so a supersonic combustion ramjet (SCRAMJET) is required to power missiles and aircraft which can operate between Mach 5 and Mach 15. These would power a new breed of super-high-speed missiles able to outrun even the fastest fighter jets, or via piggybacking on rockets, could reach low-earth orbit and cruise until required.

According to CNBC, hypersonic cruise missiles are powered all the way to their targets and take just six minutes from the time of launch until the time it strikes. They can fly at altitudes up to 100,000 feet, after which hypersonic glide vehicles are preferable. They are placed on top of rockets, launched, and then glide on top of the atmosphere, the article reports, before being flown to target. Such missiles are almost impossible to counter with current anti-ballistic missiles systems because their trajectory can be varied and, hence, are unpredictable.

Washington isn’t taking the threat of foreign powers testing such technology lightly: it has already awarded a $480 million (£373 million) contract to Lockheed Martin to work on a similar weapon.

But the president — or, more likely, the industry lobbying behind the scenes — feels much more needs to be done.

The big winners, according to the Telegraph are likely to be Lockheed Martin, Boeing, Northrop Grumman, SpaceX and Aerojet Rocketdyne.

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Whether increased military focus on space in general and hypersonics in particular will result in a new Space Force is doubtful; in reality, it doesn’t need to.

Talk of a Space Force is grabbing headlines and creating some momentum to free up funds for the U.S. to develop such technology and the capability to deliver if ever needed.

Turkey may not be a big cheese in many ways, but its currency has taken a hammering following President Donald Trump’s threats of doubling tariffs and dire sanctions against a select few individuals close to authoritarian President Recep Tayyip Erdoğan.

But apart from the impact on one or two other emerging-market currencies, like South Africa’s, the rest of the world has barely noticed.

In one industry, however, Turkey is a sizable player: steel.

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Alexander Chudaev/Adobe Stock

Like a sudden and overwhelming springtime rainstorm, aluminum prices, as many are no doubt aware, received a shock in April.

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On the news of U.S. sanctions targeting Russian companies and their owners — including Russian aluminum giant Rusal, the second-biggest aluminum producer in the world — prices spiked on fears of Rusal’s supply being pulled from the market.

LME aluminum shot up to $2,597.50 per ton on April 19, marking its highest point since late July 2011.

However, the U.S. Treasury announced an extension, allowing businesses until Oct. 23 to unwind their business activities with Rusal (among others).

As a result, the price has come steadily down since then.

Source: LME

Since that April peak, the price has dropped 22.2% as of Aug. 23.

Exemptions and Escalations

As we noted last week, Turkey has sought consultations with the U.S., via the WTO’s dispute settlement system, in response to the U.S.’s doubling of both the steel and aluminum tariffs against Turkey (bringing them to 50% and 20%, respectively).

Turkey has argued the escalation goes against provisions of the Agreement on Safeguards and the General Agreement on Tariffs and Trade (GATT) 1994.

Meanwhile, according to a Haaretz report, Israel has decided to drop its attempts to win an exemption from the U.S. aluminum tariff.

According to the report, countries that have so far won exemptions from the tariff were able to do so on the condition that they will limit their exports to the U.S., which goes against Israeli export policy.

Israeli aluminum exports are valued at $25 million annually, according to the report.

Companies on the Tariff Effect

Unsurprisingly, a number of U.S. companies have noted the effect of the tariff on their bottom lines.

According to USA Today, Coca-Cola cited the tariff as the basis for its decision to raise prices on its soft drinks.

“Clearly, it’s disruptive for us. It’s disruptive for our customers,” CEO James Quincey was quoted as saying during the company’s Q2 earnings call. “But I think the conversations have been about how is this going to work for each and every customer.”

Meanwhile, automakers have also cited the tariffs’ impact on their bottom line.

However, during its FY 2018 Q1 — the three-month period ending June 30 — earnings call in July, Nissan Corporate Vice President Joji Tagawa said the Section 232 tariffs had a limited impact during Q1; going forward, the impact will depend on how much the tariffs will continue, citing the uncertainty of the situation.

He added the company will be operating under the mindset of localization.

“Globally, we have been promoting localization,” said Tagawa, adding they would like to “pursue localization [and] increase local content.”

Commerce Secretary Visits Century Aluminum

Bolstering the domestic steel and aluminum industries, particularly in light of rising imports, has been a stated goal of the Trump administration even since launching a Section 232 investigation on the matter back in April 2017.

In this vein, U.S. Steel’s twin announcements this year regarding the restarting of blast furnaces at its steelworks in Granite City, Illinois, was touted as a victory for the administration.

On the aluminum side, Century Aluminum’s recent announcement that it would invest $150 million to double its output was also seized upon by the administration as a victory, an affirmation of its tariff strategy.

Secretary of Commerce Wilbur Ross visited the company’s plant in Hawesville, Kentucky, last Wednesday.

“And while U.S. production has steadily declined since 2000, China’s output of aluminum has increased by 1,390 percent, from 2.4 million metric tons in 2000 to a whopping 36.2 million metric tons in 2017,” Ross said during an event celebrating the restarting of a smelter. “China’s output last year was 49 times higher than U.S. production, and almost all of it was sub-standard, and subsidized — produced by state-owned enterprises.

“For the first time in decades, we are changing the trajectory of the industry. Many have painted our efforts to create a level playing field and ensure the continued viability of the aluminum industry as the starting of a trade war. But you have been engaged in this fight for a long time.”

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The company aims to return to 100% capacity by early next year and add 300 jobs in the process.

How often have you seen headlines like “Copper rises on strong Chinese growth” and China’s industrial profits rise the most in four years on commodity prices“?

Apparently, a mutually supportive cycle of strong growth fuels rising commodity prices, and rising prices fuels strong growth.

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But recently we have seen a softening in commodity prices and often the reverse explanation has been cited (e.g., “Chinese demand concerns hit metals and related stocks“).

That relentless growth machine that has been China for the last two decades is finally showing signs of distress and, ironically enough, it is not the failure of the country’s long-term, export-led growth model that is to blame; according to The New York Times, it is domestic consumption that is slowing.

I say “ironically” because Beijing has been moving heaven and earth to refocus the economy from export-led growth to domestic consumption. This is in part because they could see the writing was on the wall regarding growing international resistance to China’s mercantilist trading approach. It’s also partly because it was fueling massive and often inefficient or wasteful investment in the country’s industrial sector and because environmentally heavy industry is a much more polluting source of GDP growth than consumption.

For those and other reasons, steering the economy toward meeting domestic consumption was a logical step in the maturation of the economy. Unfortunately, domestic house cost inflation, poor wage growth, an aging economy and trade wars are significantly depressing demand.

According to The New York Times, China is experiencing a “consumption downgrade,” as a generation of young Chinese, struggling with the high cost of property and slowing wage growth, downgrade their lifestyle expectations and spending. A blogger’s headline captured the mood, saying “This Generation of Young Chinese, Brace for the Bitter Days Ahead,” the paper reports.

As the article observes, China has played a major role in global growth. Chinese consumers help fuel growth at global companies like Apple, General Motors, Volkswagen and many others.

Yet retail sales this year have grown at their slowest pace in more than a decade. Wages in the private sector are growing at their slowest pace since the global financial crisis. The stock market has fallen by one-fifth.

In the longer term, consumers’ worries about the cost of living are postponing their decisions to have children, the article states, to the point they decide to remain childless for life. Generally, in developing countries this would not be an issue. Uniquely, China has a precarious demographic following decades of the one-child policy, which has resulted in a shrinking workforce that has been masked by a mass migration of peasant workers to the cities, but has now been largely played out.

Although the one-child policy was relaxed in 2013 to allow two children per couple, the change came about in a period when the high cost of living was pushing in the opposite direction, much as families in Europe and parts of North America, many elected to only have one or even no children.

China faces a demographic time bomb, according to Business Insider, as its aging population meets a dearth of new entrants into the job market.

With no state-supported social security or retirement safety nets, young workers have to save more, after high accommodation costs stretching budgets and dissuading the spending that had been a feature of a more rapidly growing wage economy just 5-10 years ago.

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If consumption doesn’t spur GDP growth and the export model suffers from rising protectionism, then metal prices will face a future without the customary support of robust Chinese GDP growth to spur investor confidence.

Just when environmentalists and shale oil had pretty much done for any more significant investment in tar sands, a couple of ex-oil industry veterans, David Sealock formerly of Chevron, and Jerry Bailey, formerly of ExxonMobil, are out to do to oil sands what modern drilling and fracturing did to tight oil.

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Where are they doing it? Utah, of all places.

According to an article in The New York Times, a Ukrainian-backed Canadian minnow, Petroteq Energy, is promoting the environmental credentials of a new solvent-based extraction process to release the riches locked up in Utah’s Asphalt Ridge. As its name suggests, the deposit is surface occurring and, somewhat like the Alberta oil sands, is a heavy crude saturated rocky outcrop.

Petroteq claims its process uses “benign” solvents to extract the oil, which are then recycled, leaving virtually clean sand as only waste product.

The process is different from that employed in Canada and elsewhere, which relies on steam and large quantities of water, resulting in toxic tailings pools and horrendous scarring of the landscape.

Few would argue the Alberta tar sands have been an environmental disaster, but Petroteq is at pains to stress its technology is completely different and set to revolutionize the industry.

Specifically, the process takes large chunks of the oil-saturated sands and crushes them into small chunks, then mixes with solvents. The mix is then transferred to a second tank, where a centrifuge spins the lumpy liquid, separating the oil from the sands. Clean sand is moved to a reclamation landfill. Finally, the solvents are distilled out of the oily liquid and recycled over and over again. The company claims virtually no chemicals are left in the sand that is put back as landfill.

Petroteq itself is not going to rock the oil industry boat; it only employs 20 people at present. Although it is shortly ramping up from proving outputs of 250 barrels a day to 1,000 barrels a day, even peak output is only put at 10,000 barrels, some years down the line.

But the cost of production is said to be U.S. $32/barrel, including all costs and taxes. So, on current price predictions, the technology appears feasible. Much will depend on the firm’s ability to support its claimed environmental credentials.

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Environmentalists call tar sands a carbon bomb, the article notes, and will lobby hard to prevent expansion if there is evidence that the plant is leaking solvents into the air, soil or water.

So much for peak oil.

The dollar dropped this week and stocks pulled back following comments early this week form President Trump that reversed earlier optimism over U.S.-China trade talks later this week.

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According to the Financial Times, the index tracking the U.S. dollar was down 0.3% at 95.606, its lowest since early August. The drop cut its year-to-date gain to just under 4% and prompted a modest rally in commodities, which have been depressed by a persistently strengthening dollar.

This graph from the Financial Times shows the relatively benign bounce after a marked period of strengthening:

Source: Thomson Reuters Datastream (via Financial Times)

Brent oil settled at $72.21 a barrel, up 0.5%, after some volatility while U.S. West Texas Intermediate was 0.8% higher at $66.46. Gold was up $5 at $1,189 an ounce, after hitting an 19-month intraday low of $1,160 last week. Commodities generally trade inversely to the dollar; if the dollar weakens, as it has this week, commodities tend to rise.

The president poured cold water on the prospects for a deal from the upcoming talks, but that may have been a calculated step to apply pressure to the other side to come to the table willing to compromise.

Talk of a meeting between Trump and Chinese President Xi Jinping in November is, at this stage, highly speculative and will depend on compromises being made on both sides — something Trump appears in no mood to make. He seems to feel the U.S. holds all the cards, and indeed from a trade balance point of view, an escalation of sanctions would likely hurt China more significantly than the U.S.

There is likely to be more currency-influencing news this week, with the minutes of the latest Fed meeting due to be released on Wednesday and opening speeches at Jackson Hole due later this week.

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In China, the Shanghai stock market is down about 20% this year, reflecting worries the economy was slowing before the tariffs were applied — a situation that is deteriorating as the weeks go by and the rhetoric is ramped up.

Futures markets are suggesting the currently benign level of natural gas price volatility may not remain through the winter months.

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According to the Financial Times, market volatility this year has been the lowest on record despite inventory levels falling 19.5% below average and by the time winter starts are set to be at their lowest in more than a decade.

Source: Bloomberg (via Financial Times)

The Financial Times puts this down to investors being lulled into complacency by a seemingly unstoppable wave of new supply from the shale market rising inexorably to meet rising demand. The government last week forecast 81.1 billion cubic feet per day in dry gas production for 2018 — a record high — and up by 7.5 billion cu ft/d from 2017, the Financial Times reports.

But is the market safe to assume shale gas will supply regardless of demand?

Natural gas producers are systematically hedging their sales throughout next year, often a sign they plan to continue an aggressive policy of drilling and expansion. That activity has contributed to a dipping of forward prices, as there are more sellers in the futures market than buyers.

But inventory levels are low — some would suggest dangerously low — after a high summer demand due to hot weather increasing demand for air conditioning. Natural gas “power burn” surged to a record 37.7 billion cubic feet per day during July, the Financial Times reports.

Such strong demand comes after a cold winter depleting stocks to unusually low levels. Inventory levels were low at the end of the summer and have not managed to be replaced during the normally slacker summer months. High demand is not helped by exports of natural gas and distillates running at record levels, aided by strong international demand and low U.S. domestic prices relative to global markets.

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Forward market spreads suggest there is already competition between companies buying gas for anticipated stronger winter-month demand are meeting power companies also trying to hedge their requirements.

Volatility is traditionally lower in the slacker summer months and rises as demand ramps up in the winter. If inventory levels are high, investors are less prone to panic, rightly seeing ample supply.

But when inventory levels are low, volatility is placing complete faith in the shale producers to meet rising demand — a faith that may yet prove misplaced.

India’s aluminum sector finds itself in a state of flux.

Secondary aluminum makers in India are not upset by the import levies announced by U.S. President Donald Trump, but have expressed concern at the inverted duty structure perpetuated by the Indian government itself.

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On the other hand, India’s largest aluminum producer wants the government to cap the quantity of imports of low-cost semis, wire rods and scrap from China and the U.S., as the percentage of inbound shipments in domestic demand is steadily going up.

As has always been the case, the primary and secondary producers are once again at loggerheads.

In all this, the sector, which is not yet on the core sectors list, has demanded a new policy itself, which the government says it is contemplating.

The Metal Recycling Association of India (MRAI), a representative body of the secondary aluminum producers, recently issued a statement urging the government to bring basic customs duty on imports of aluminum scrap to zero from 2.5%. This was in response to a move by the Aluminium Association of India (AAI), which wants the duty to be raised to 10%. MRAI feels the move of a hike will take away jobs of thousands of people working in the downstream & ancillary industry, (MRAI) said in a statement.

Ongoing exports of primary aluminum have upset the secondary producers more than the Trump tax. This lot claims the skewed duty structure has squeezed capacity utilization and affected margins.

In all this, the largest producer of aluminum, Hindalco, has asked the government to impose quantitative restrictions on imports in the near term.

A Bloomberg Quint report quoted Satish Pai, managing director and CEO, as saying the government should move to duty safeguards eventually, adding that while quantitative restrictions will be helpful in the short term and are allowed under the World Trade Organization regime, safeguards will take at least six months.

Hindalco has asked the government to limit imports based on the average of the last three years of imported quantity.

In this kind of tax regimes, India’s aluminum industry is barely remaining competitive because it has the highest production costs for aluminum among the largest producers (including Canada, Russia, the Middle East and China). Other hurdles include high power costs, which drove smelter metal’s cost 73% higher in the last 15 years compared with a 64% rise in the price of aluminum on the London Metal Exchange.

As India strives to meet its economic growth targets, aluminum is becoming increasingly critical for its infrastructural needs. In India, aluminum consumption is pegged at 2.5 kg per capita. To reach the global average of 11 kg per capita, India must up annual consumption by 16 million tons.

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Experts in India are calling for the government to formulate a National Aluminium Policy (NAP) focusing on holistic short- and long-term visions, identifying growth targets for demand augmentation and capacity addition.

The Trump administration’s Section 232 investigation led to new steel and aluminum tariffs on China, but an even bigger trade decision is looming.

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In August 2017, the Office of the U.S. Trade Representative (USTR) launched a Section 301 probe, which sought to assess unfair Chinese trade practices with respect to technology transfer and intellectual property. The office’s findings led to additional tariffs on some 1,300 Chinese products valued at $50 billion. In early July 2018, a first tranche of $34 billion in tariffs went into effect, with the remaining $16 billion being approved in August. In addition, President Donald Trump instructed USTR Robert Lighthizer to draw up a list of additional Chinese products, worth approximately $200 billion, to potentially target for duties.

The proposed product list includes exports from vaccines to nuclear reactors to numerous forms of metals used by manufacturers. With such an extensive list of potential new duties, companies have their work cut out for them identifying supply-chain risks, especially with China’s deep integration into the murky lower tiers of many supply chains.

To help assess the risks and recommended preventative strategies, MetalMiner sat down with Bindiya Vakil, CEO and founder of Resilinc, to discuss the implications of the Section 301 investigation and how supply-chain risk and resiliency solutions such as hers are helping companies prepare for impacts.

For businesses looking to navigate the tariffs and be proactive about limiting their exposure to risk, Vakil says it’s all about one thing: data.

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