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Sanjeev Gupta’s GFG Alliance and, in particular, its steel and aluminum subsidiary Liberty Steel, is rarely out of the news, it seems.

The firm’s insatiable appetite for bankrupt or struggling metals assets has the market split. One the one hand, boosters are cheering its entrepreneurial spirit. On the other, naysayers are questioning the opaque funding structure and apparently high levels of expensive debt underpinning what they see as a potential house of cards.

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Liberty Steel eyes Thyssenkrupp’s steel business

We are more interested in the implications for the steel market.

Liberty’s latest foray into acquisitions would create a potentially disruptive behemoth in a crowded European market. That market is facing intense foreign competition and declining demand as a result of a pandemic-induced slowdown in manufacturing.

That Thyssenkrupp is desperate to sell its loss-making steel business is not new news.

The steel division has been a major drag on the group. According to the Financial Times, the group is likely lose €1 billion ($855 million) this year.

This year, Thyssenkrupp sold its elevator business for $17 billion in an effort to shore up its finances. The firm has been in talks with other steelmakers, including Sweden’s SSAB and India’s Tata, the Financial Times reported.

So far, however, Thyssenkrupp hasn’t found a buyer that would pass competitions scrutiny.

Which raises the question: will Liberty?

Liberty’s bid

Liberty runs plants and mines across North America, Australia, and India. The firm has global revenues of $15 billion and a workforce of 30,000.

Thyssenkrupp’s beleaguered Steel Europe unit generates sales of approximately €9 billion with 27,000 employees. Together, the firms would become the second-largest steelmaker in Europe, behind only ArcelorMittal.

Logic says in a market suffering poor capacity utilization, rationalization would be one recipe for turning the group around. However, unions and state governments are likely to fiercely resist widespread redundancies.

The German union IG Metall has held demonstrations to oppose job losses and demand government bailouts. Brussels previously denied a Thyssen-Tata merger over fears it would reduce competition. As such, it remains to be seen how it will view a Liberty-Thyssen takeover.

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The U.S. steel sector continued to show incremental gains in capacity utilization last week.

Capacity utilization by U.S. mills rose to 69.4% for the week ending Oct. 17, 2020, according to the American Iron and Steel Institute (AISI).

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U.S. steel sector continues capacity gains

For the week ending Oct. 17, the U.S. steel sector’s capacity utilization rate rose to 69.4%, producing 1.54 million tons in the process.

The weekly output marked a 15.0% year-over-year decline. Output during the week ending Oct. 17, 2019, totaled 1.81 million tons at a capacity utilization rate of 78.0%.

Meanwhile, production for the week ending Oct. 17, 2020, rose 2.2% from the previous week. For the week ending Oct. 10, 2020, production reached 1.50 million net tons at a capacity utilization rate of 67.9%.

YTD output down 19.4%

Adjusted year-to-date production through Oct. 17 reached 62.48 million net tons. Capacity utilization rate during the period reached 66.3%.

The year-to-date output is down 19.4% from the 77.55 million net tons during the same period last year. The capacity utilization rate during that period reached 80.1%.

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Airbus and Boeing — or, more reasonably, Brussels and Washington — are still at it, haggling over subsidies both sides have received over the decades.

The action and counteractions, originally started by the U.S. to stem what it saw as a rising European rival to Boeing’s dominance, has been rumbling on for 16 years. Both sides are at fault, the WTO has ruled.

The latest development, as Reuters recently reported, is the WTO has ruled that European government loans to Airbus were unfairly subsidized through low-interest rates while Boeing received unfair support from tax breaks.

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Airbus and Boeing again take center stage

Both sides say they have remedied past flaws and are now in line with WTO rules.

However, the U.S. side feels loans still on Airbus’s books continue to provide unfair support. Furthermore, Washington thinks the European planemaker should repay interest on historic loans set at below-market rates.

Brussels says if that’s the case then Boeing should repay previous subsidies in the form of tax breaks.

The impasse has led to Washington applying $7.5 billion of, tariffs, that most favored tool, on E.U. goods. Meanwhile, the E.U. is asking the WTO later this month to apply $4 billion of tariffs on U.S. goods.

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According to the Financial Times, China’s President Xi Jinping surprised the global community by announcing last month a hugely ambitious plan to improve China’s environment and make the country carbon-neutral by 2060.

In addition, he said the country’s emissions would peak before 2030.

But does this really mean anything? If it does, what impact will it have on the country’s massive steel industry? The steel industry, of course, is the source of a significant proportion of the country’s carbon emissions?

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China’s environment and emissions figures

Firstly, let’s look at the scale of the proposition.

China is the world’s largest emitter of greenhouse gases (such as carbon dioxide and methane).

Last year, China’s emissions accounted for roughly 27% of the global total. The country’s total accounted for more than the U.S., Europe and Japan combined, the Financial Times reported.

Furthermore, the country consumes more coal than the rest of the world put together. In addition, China continues to commission new coal power plants.

On the one hand, China also leads the world in the deployment of solar power, wind power and electric vehicles. Its energy-efficiency policies are ambitious and successful. Significantly, there are no known climate change deniers in the Chinese leadership.

But is the pledge meaningful?

It contrasts poorly with that made by almost 70 countries and the E.U. Those countries have already pledged to make their economies “net-zero” greenhouse gas emitters by mid-century, or 10 years earlier than China’s pledge.

And the 2030 peak emissions date is a rehash of a commitment made back in 2014, suggesting peak emissions could be reached well before 2030 and the authorities are simply back-sliding.

Difficult changes

The scale of the challenge vis-a-vis China’s environment and emissions is considerable.

More than 85% of China’s primary energy last year came from coal, oil, and natural gas, all of which produce carbon dioxide. This came despite massive investment in solar and wind.

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The Raw Steels Monthly Metals Index (MMI) increased 2.8% for this month’s index value amid a steel market recovery.

October 2020 Raw Steels MMI chart

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Steel market recovery

All U.S. forms of steel prices increased throughout September.

HRC, CRC and HDG prices increased rapidly by 20.4%, 16.4% and 15.4%, respectively. Meanwhile, the plate price increased 4.3%. The wire rod price increased by 1.5%.

However, the Chinese steel market showed the opposite trend or traded sideways.

The Chinese HRC price dropped by 4.4%. CRC increased by 0.22% and HDG had a 6.4% jump the first day of September but remained flat for the rest of the months and through the first two weeks of October.

The prices’ increase in the U.S. market were followed by an increase in capability utilization rate. By the week ending Oct. 3, raw steel production increased to 66.1%. As such, the year-to-date capability utilization rate rose to 66.2% according to the American Iron and Steel Institute.

Over in the Asian market, there are overcapacity concerns.

The South East Asia Iron and Steel Institute (SEAISI) reported that the region, particularly Chinese steelmakers and banks, might have overinvested in new basic oxygen furnace (BOF) integrated mills.

The region’s current capacity is approximately 151 million metric tons. The proposed investment could bring it up to 50 million metric tons, creating 60 million metric tons of overcapacity from BOF alone. It is important to note that BOF mills cannot operate at low capacity.

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There is a looming crisis in the nickel market.

Some would argue it’s a good problem to have. Demand is set to rise on the back of increasing uptake of electric and hybrid vehicles through this decade. More and more governments will mandate the production of electric vehicles (EVs) over internal combustion engine (ICE) autos. In parts of Europe, there will be outright bans on new ICE vehicles inside 10 years.

However, if nickel supply becomes constrained, consumers are going to pay the price.

Nickel market numbers

It should be said that today the problem barely registers as a price lever.

According to a recent McKinsey report, the stainless steel industry consumers 74% of nickel produced today, dwarfing the 5-8% going into batteries.

But the type of nickel required for battery production is what makes supply so sensitive in the future.

As the report explains, there are two types of nickel. Class 1 predominantly comes from the concentration, smelting and refining of sulfide ores. Meanwhile, Class 2 comes from ores, called saprolites and limonites, with higher iron and other (for batteries) levels of contaminants, such as copper.

So, whereas the stainless steel industry, to a large extent, can use a mix of Class 1 and Class 2, the battery industry draws its raw material from just Class 1, representing a more restricted 46% of the nickel supply market.

Worse, after the all the focus on the cobalt market — with its environmental, social, and corporate governance (ESG) concerns from countries like the Democratic Republic of the Congo — major consumers like Tesla are keen to establish long-term supply arrangements with nickel producers in sustainable locations with more robust ESG standards.

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The Global Precious Monthly Metals Index (MMI) retraced 2.2% for this month’s index reading, as the gold price and the silver price both lost previous gains.

October 2020 Global Precious MMI chart

 

The MetalMiner 2021 Annual Outlook consolidates our 12-month view and provides buying organizations with a complete understanding of the fundamental factors driving prices and a detailed forecast that can be used when sourcing metals for 2021 — including expected average prices, support and resistance levels.

Gold price rally loses steam

Amid global economic uncertainty, precious metals like gold have benefited.

The gold price surged as high as $2,063 per ounce in August. The price proceeded to trade sideways for about a month before dipping from mid-September onward, falling to nearly $1,860 per once in late September.

Prices dipped Tuesday after President Donald Trump tweeted he would end negotiations over another federal stimulus package.

Central bank sellers

Central banks are some of the largest holders of gold reserves.

In that vein, the World Gold Council reported central banks switched from net buyers to net sellers in August.

“Global central banks sold a net 12.3 tonnes (t) during the month, continuing this year’s trend of a slower pace of accumulation compared to recent years,” the World Gold Council reported. “Purchases were concentrated amongst regular buyers: Kyrgyz Republic (5t), India (4t), Turkey (3.9t), UAE (2.4t), Qatar (1.6t), Mongolia (1.3t), and Kazakhstan (1.3t).”

However, the Council noted Uzbekistan reduced its gold reserves by nearly 32 tonnes.

Fed releases September meeting minutes

In other news impacting precious metals, the Federal Reserve on Wednesday released minutes for the Sept. 15-16 meetings.

“While the economic outlook had brightened, market participants continued to see significant risks ahead,” the minutes release reads. “Some noted concerns about elevated asset valuations in certain sectors. Many also cited geopolitical events as heightening uncertainty.”

Furthermore, absent a new stimulus package, the release explained “growth could decelerate at a faster-than-expected pace in the fourth quarter.”

As for currencies, the Fed noted the depreciation of the dollar. Traditionally, the price of gold and the U.S. dollar correlate inversely.

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The Rare Earths Monthly Metals Index (MMI) posted no movement for this month’s index reading, as President Donald Trump signed an executive order that aims to strengthen the domestic mining industry and mitigate dependence on foreign sources of critical minerals.

October 2020 Rare Earths MMI chart

 

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New executive order again takes aim at U.S. import dependence

Late last month, President Donald Trump issued an executive order that seeks to curb U.S. dependence on foreign sources of critical minerals.

Chief among those foreign sources is China, which controls an overwhelming majority of the world’s rare earths mining and processing.

“Our dependence on one country, the People’s Republic of China (China), for multiple critical minerals is particularly concerning,” the executive order reads. “The United States now imports 80 percent of its rare earth elements directly from China, with portions of the remainder indirectly sourced from China through other countries.”

The order calls for the U.S. to enhance its mining and processing capacity, including some minerals not identified as critical.

“By expanding and strengthening domestic mining and processing capacity today, we guard against the possibility of supply chain disruptions and future attempts by our adversaries or strategic competitors to harm our economy and military readiness,” the order continues.

Furthermore, the report calls for the Secretary of the Interior to consult with several other department heads. They will investigate the U.S.’s reliance on foreign sources for critical minerals. After the investigation, the Secretary of the Interior will submit a report to the president within 60 days.

The report, the order reads, will summarize the investigation’s conclusions and recommend executive action. Potential actions include tariffs, quotas and import restrictions against China and other “non-market foreign adversaries.”

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The Construction Monthly Metals Index (MMI) held flat this month, showing no movement from last month’s index value, as August 2020 construction spending picked up from the previous month.

October 2020 Construction MMI chart

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August 2020 construction spending

August 2020 construction spending in the U.S. reached a seasonally adjusted annual rate of $1,412.8 billion, per the U.S. Census Bureau.

The August rate marked a 1.4% increased from the revised July estimate. Meanwhile, August spending marked a 2.5% year-over-year increase.

Spending during the first eight months of this year totaled $927.7 billion, or up 4.2% compared with the first eight months of 2019.

Meanwhile, spending on private construction reached a seasonally adjusted annual rate of $1,061.4 billion, up 1.9% from July.

Within private construction, residential construction reached a rate of $589.4 billion in August, or up 3.7% from July. Nonresidential construction dipped 0.3% to $472.0 billion in August.

As for public construction, spending reached a rate of $351.4 billion, or up 0.1% from July. Under the umbrella of public construction, educational construction spending rose 0.6% for a rate of $82.6 billion. Highway construction rose 1.9% to a rate of $100.6 billion.

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The Automotive Monthly Metals Index (MMI) gained 2.2% for this month’s index value, as Q3 2020 automotive sales showcased some basis for optimism.

October 2020 Automotive MMI chart

The MetalMiner 2021 Annual Outlook consolidates our 12-month view and provides buying organizations with a complete understanding of the fundamental factors driving prices and a detailed forecast that can be used when sourcing metals for 2021 — including expected average prices, support and resistance levels.

U.S. Q3 2020 automotive sales

Despite the May restarts of automotive manufacturers, U.S. showrooms faced low inventories this summer, putting a cap on sales despite solid demand.

“Available inventory is far below last year’s levels, yet sales continue to show surprising strength,” said Charlie Chesbrough, senior economist at Cox Automotive. “Going into the fourth quarter, the key question is: Can this continue? Clearly new vehicle buyers haven’t been hit as hard as other consumers during this recession, so demand is likely to remain stable over the near-term.”

General Motors, for example, reported Q3 2020 automotive sales fell 10% year over year to 665,192 vehicles.

“In a sign of a recovering industry, sales improved sequentially each month within the quarter,” GM said in a release. “Industry and GM sales rebounded significantly in September, finishing the month with year-over-year sales increases.”

Meanwhile, Ford reported Q3 2020 sales fell 4.9% year over year. Ford truck sales, however, showed growth. Total truck sales jumped 0.6%, while retail sales gained 8.3%. The quarter marked Ford’s best third quarter for truck sales since 2005, the automaker reported.

FCA US sales dropped 10% year over year in the third quarter. However, third-quarter sales rose 38% compared with the previous quarter.

Similarly, while Honda’s Q3 2020 sales fell 9.5% year over year, sales in September alone rose 11.5%.

“September marks a high-water mark for Honda sales this year with double-digit gains and our first month in positive territory since the pandemic began,” said Dave Gardner, executive vice president of National Operations at American Honda.

Nissan sales fell 32.4% in the third quarter on a year-over-year basis.

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