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According to a recent PwC report, mergers and acquisitions (M&A) activity in the metals sector slowed in Q2 2018, in tandem with an escalation in global trade tensions.

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“Deal activity, particularly crossborder, may remain stagnant until the angst caused by the global trade climate has subsided.” said Brian Kelly, US Metals Deals Leader for PwC.

The value of M&A activity in Q2 ($8.1 billion) fell 51% compared to Q1. Total deal volume (117) in Q2 also dropped, falling 40% compared to the previous quarter. In addition, average deal size ($136 million) was down 30%.

However, in the year to date (i.e. January-June), total deal value was up 72% compared with the same period in 2017. Total deal volume was up slightly (1%), while average deal size was up 4%.

The Asia and Oceania region saw the majority of metals sector M&A activity, according to the report. Among that activity included Baotou Iron & Steel Group, China’s largest steelmaker, announcing the acquisition of Inner Mongolia’s Baotou Steel Union for $1.6 billion.

Source: PwC via Thomson Reuters and other publicly available sources
(1 In Million USD)

“The region accounted for 76% of target value and 84% of acquirer value in the sector this quarter,” the report states of Asia and Oceania. “Similar to the previous quarter, China remains the global leader in steel and aluminum manufacturing. While it is expected that the imposed tariffs on foreign imports will increase local valuations, certain risks remain as economic growth expectations stagnate due to increased trade risks.”

In particular, deals in the steel and aluminum categories suffered. This spring the U.S. imposed tariffs of 25% and 10% on steel and aluminum, respectively, with a select few countries managing to negotiate quotas (South Korea, Argentina and Brazil).

“Deal values in the Steel and Aluminum categories are 38% and 90% lower than last quarter, respectively,” the report stated. “Deal values in the Iron Ore and Other Metals categories were higher from last quarter helping offset this decline. Deal volumes were significantly lower in all categories.”

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For now, a recovery in deal activity waits, in part, on some sort of resolution to the rise in global trade tensions.

“Until the results of these geopolitical trade relations become more clear, cross-border deal activity and overall deal value in the Metals sector may continue at below recent historical average levels; despite steadily increasing global demand and other economic stimulus,” the report explains.

Source: wto.org

Ultimately, it went along expected lines.

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India and a handful of other nations held trade dispute settlement consultations with the United States over its steel and aluminum tariffs in Geneva, but got absolutely no concession from the latter, according to reports coming out of the meetings.

India, Canada and Mexico confabulated with the U.S. on the issue of the latter imposing additional duties of 25% & 10% on steel and aluminum imports.

Earlier this month, China, Norway and the European Union also held similar talks with the U.S., under the aegis of the World Trade Organization (WTO) in Geneva. Almost all such disputes are held under Article 4 dispute settlement consultations. MetalMiner previously reported about the Geneva meeting and its attempt to try and break the trade tariff imbroglio.

The U.S., as many had expected, stuck to its guns that no law required it to provide any reason for the Section 232 measures on steel and aluminum, since they remain “sovereign determinations” that fall under Article 21 of the GATT 1994, according to media reports.

Apparently, in an earlier meeting, the U.S. told the representative of another country in such a meeting that Section 232 revolved around issues of national security, and was thus not available for review or capable of resolution by WTO dispute settlement.

Representatives of India and other nations raised several questions around the proposed tariffs. They claimed the additional duties constituted a “disguised safeguard” measure, as the U.S. Department of Defense had said that there was no threat to the country’s national security from steel and aluminum imports.

The U.S. delegation, on the other hand, maintained it was unable to share the reasons for the decisions under the Section 232 provisions. Delegates also wondered how countries such as Australia, Brazil, Korea and Argentina had been exempted from similar additional duties, and why these imports did not pose a national security threat to the U.S.

Clearly, unable to get much from the U.S. at this meeting, the only recourse the six nations may have is to approach the WTO with a request to establish a disputes settlement panel to rule against the U.S. measures.

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In March this year, the U.S. had also launched a challenge at the WTO against India’s export subsidies, arguing the programs give Indian companies an unfair advantage. The U.S. claimed these export subsidy programs harmed American workers by creating an uneven playing field on which they must compete.

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The European Union (E.U.) posted a 3% increase in apparent steel consumption during Q1 2018 compared with Q1 2017, according to a recent European Steel Association (EUROFER) report.

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According to EUROFER, the E.U. steel market began 2018 on “relatively strong footing,” but that rising trade tensions could knock the sector off course.

“The latest data confirms the severe impact the US Section 232 tariffs are having by deflecting imports into the EU – with surges across almost all product lines,” said Axel Eggert, EUROFER director general, in a release. “This surge is occurring at the same time as growth predictions are being revised onto flatter trajectories. We cannot risk the ongoing recovery being put at stake– and welcome the recent EU safeguard in its efforts to stabilise the sector.”

According to the report, real steel consumption and seasonal restocking are factors explaining the 3% rise in apparent consumption during Q1.

Domestic deliveries to the E.U. market rose 2.1% during the aforementioned period. Meanwhile third-country imports rose by 9.8% to 10 million tons, hitting the highest quarterly total since Q3 2007, according to EUROFER.

“This confirms that the volume effects of anti-dumping measures imposed by the European Commission over the course of 2017 faded out rapidly due to other third country suppliers filling the gap left by the countries which had duties applied to them,” the report states.

As for steel demand, the EUROFER report projects growth to continue in 2018 and 2019, but notes the uncertainty of “international steel fundamentals.”

“The sharp rise in imports of specific steel product from some third countries confirms that steel trade distortions remain a threat, which could be exacerbated by trade deflection resulting from the Section 232 tariffs applied by the Trump administration,” the report argues.

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Other highlights from the EUROFER report:

  • In Q1 2018, all steel-using sectors in the E.U. posted production growth (except for steel-tube manufacturing).
  • Production activity is forecast to grow 2.8% in 2018 and 1.9% in 2019.
  • Economic growth in the E.U. fell to 0.4% quarter-on-quarter in Q1 2018, down from 0.7% in Q4 2017.

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After last week’s hearings on the Department of Commerce’s Section 232 investigation of automobile and automotive part imports, this week the Office of the United States Trade Representative (USTR) will holding public hearings on the proposed list of items to be subjected to tariffs pursuant to Section 301.

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The USTR hearing begin Tuesday, July 24, at 9:00 a.m. ET. The hearings will cover the $16 billion in proposed tariffs, the second tranche of the previously announced $50 billion in tariffs.

The first tranche of the tariff package, amounting to $34 billion, went into effect July 6. China responded in kind with $34 billion in tariffs on U.S. goods, sparking harsh words from the U.S. and threats of more tariffs.

Trade tensions have only escalated in the weeks since the implementation of the $34-billion tranche.

“As a result of China’s retaliation and failure to change its practices, the President has ordered USTR to begin the process of imposing tariffs of 10 percent on an additional $200 billion of Chinese imports,” UTSR Robert Lighthizer said in a prepared statement earlier this month. “This is an appropriate response under the authority of Section 301 to obtain the elimination of China’s harmful industrial policies. USTR will proceed with a transparent and comprehensive public notice and comment process prior to the imposition of final tariffs, as we have for previous tariffs.”

President Trump ramped up the stakes even further this past week, as he said in an interview with CNBC that he would be willing to impose $500 billion in tariffs on Chinese goods — or, essentially, tariffs on all Chinese imports.

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The schedule for the Tuesday hearing, including a list of individuals giving testimony, can be found here.

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What is one man’s meat is another’s poison.

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The proverb seems to be true for India’s coal supply woes.

The country’s power ministry has advised all provinces to start importing coal for the next three years in order to operate their power plants … which, in turn, is music to the ears of coal miners in the United States.

According to a report by the Energy Information Administration, U.S. miners, otherwise struggling to find buyers, may end up exporting 104 million tons of coal in 2018 — up 7.2% from a year ago.

In April alone, India purchased almost 7 million tons, which was one-fifth of all U.S. coal exports.

For the last few years, power plants in India have cut back on coal imports because of the fall in the value of the rupee, the rise in global prices, and increasing reliance of consumers on green energy.

Facing a major coal crunch, Indian coal ministry officials feel there’s no way out but to go ahead with larger imports.

Coal imports were likely to increase to 145 million tons (MT) in 2018, and the uptrend will continue in the next four years, according to a report prepared by the Minerals Council of Australia. The imports stood at 137 MT last year.

The Central Electricity Authority of India (CEA) has said in response to a power ministry directive to take stock of coal supply that government-run thermal power plants must import coal to fill the gap in domestic supply. By the CEA’s own reckoning, India needed to buy only 20 MT of coal from abroad. The power sector’s requirement for coal is estimated at 615 MT for fiscal year 2019.

According to the CEA, the coal stock at power plants had depleted to 15.3 MT in June 2018 — sufficient to power plants for an average of only nine days, compared with the normal level of 35.5 MT. It is the deficit of about 20 MT that CEA said must be imported.

Last year, India imported 7.54 million tons of U.S. thermal coal and 3.92 million tons of metallurgical coal (largely used in steelmaking).

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In the past, Narendra Modi’s government has repeatedly stressed that India was eventually looking to eliminate coal imports. India imported about 80MT in fiscal year 2016, but imports fell to 53 MT in fiscal year 2018.

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Announced by the European Commission yesterday, provisional steel safeguard measures went into effect today, covering 23 steel product categories.

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The measures were instituted in response to a challenge about which European leaders have frequently expressed concern: diverted steel as a result of the U.S.’s Section 232 steel tariff.

The provisional measures can only remain in place for a maximum of 200 days. After review, the European Commission will decide by early 2019 if permanent measures are needed.

“There are already indications that, as a consequence, steel suppliers have diverted some of their exports from the US to the EU,” the European Commission release states. “In order to avoid a sudden increase of imports that would cause further economic problems for EU steel producers – who are already suffering from global overcapacity – the Commission considers that provisional safeguard measures are necessary and justified.”

A 25% quota will be imposed on products from each of the 23 categories once imports have exceeded the previous three-year average.

Members of the European Economic Area (EEA) — including Norway, Iceland and Liechtenstein — are exempted from the measures, in addition to “some developing countries with limited exports to the EU.”

E.U. Trade Commissioner Cecilia Malmström emphasized that the U.S.’s steel tariff has left Europe with no choice but to act.

“The US tariffs on steel products are causing trade diversion, which may result in serious harm to EU steelmakers and workers in this industry,” Malmström said in a prepared statement. “We are left with no other choice than to introduce provisional safeguard measures to protect our domestic industry against a surge of imports. These measures nevertheless ensure that the EU market remains open, and will maintain traditional trade flows.

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“I am convinced that they strike the right balance between the interest of EU producers and users of steel, like the automotive industry and the construction sector, who rely on imports. We will continue to monitor steel imports in order to take a final decision by early next year, at the latest.”

Axel Eggert, director general of the European Steel Association, offered praise for the institution of the safeguard measures.

“The Commission has received overwhelming support for this vital safeguard measure from both member states and business,” Eggert said in a prepared statement. “The measure will go someway to ensuring the continued stability of the internal market for steel and ensure that EU steel producers do not suffer extreme surges of imports of steel deflected away from the now constricted US market.”

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Cobalt is a product we don’t often talk about, partly because of its relative scarcity but also because of the specificity of its industrial application.

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With that said, the industries it does draw interest from are high-profile ones, including the growing electric vehicle (EV) sector.

Given cobalt’s relative scarcity and the sometimes volatile state of its supply chains, even small shifts in supply can have massive impacts. According to a report by S&P Global Market Intelligence, global mined cobalt production in 2017 fell to 115,071 tons from 116,272 tons in 2016. Much of the drop came as a result of halted operations at the Lububashi Slag Hill operation in the Democratic Republic of the Congo (DRC).

A majority of the world’s cobalt is mined in the DRC (at 60.5% in 2017), meaning the cobalt price is subject, in many cases, to the political instability of the country, often leading to production stoppages.

According to the the Herfindahl-Hirschmann Index (HHI), which helps to assess the level of competition between companies in an industry, the cobalt sector is, unsurprisingly, very concentrated.

According to the S&P report, a reading greater than 0.25 indicates a concentrated market. As of 2009, the cobalt HHI stood at approximately 0.25 and, in the ensuing years, has risen to approximately 0.38 in 2017.

Per the report, that market concentration is likely to increase in the coming years, as the S&P report claims there is “very little likelihood that the DRC will cease to be the most important source of cobalt globally.”

Outside of the DRC, the S&P report indicates cobalt production has increased at Vale’s Voisey’s Bay operation in Canada. As we recently noted, Vale inked a deal with two Canadian companies worth a total of $690 million. That, combined with the approval of an underground mine at Voisey’s Bay, will provide a “significant source” of cobalt from outside of the DRC, with the mine life possibly extending into the 2030s, the S&P report states.

As for political considerations, elections in the DRC are scheduled for the end of 2018. The country has been entrenched in a state of political limbo after President Joseph Kabila refused to step down at the end of 2016 (the end of his mandate). Kabila assumed power in 2001 shortly after the assassination of his father, Laurent-Désiré Kabila, and was elected in 2006 and re-elected in 2011.

According to the S&P analysis, post-2016 unrest “has not had a significant effect on the historically restive Lualaba and Haut-Katanga provinces hosting the Roan copper-cobalt belt,” but that there has been “lingering concern that the violence and disturbance could spread throughout the country.”

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Large multinational miners have still, nonetheless, looked to cash in on the country’s cobalt reserves, despite the challenges to the business environment posed by political instability. In addition, miners have attempted to grapple with a revamped mining code, signed into law by President Kabila in April. The new code calls for higher royalties due to the government from minerals sales. With respect to cobalt, the revamped code called for a royalty increase to 10% (up from 2%).

The U.S. Department of Commerce. qingwa/Adobe Stock

Last week, the U.S. Department of Commerce announced it had launched anti-dumping (AD) and countervailing duty investigations of steel rack imports from China.

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The alleged dumping margins in the AD case are 130.0-144.5%, according to a DOC release.

The DOC added there 28 alleged subsidy programs for steel racks, “including five preferential loan and interest rate programs, one debt-to-equity swap program, six income tax and other direct subsidy programs, two indirect tax programs, seven less than adequate remuneration (LTAR) programs, as well as seven grant programs.”

The petition in the case was filed by the Coalition for Fair Rack Imports, which estimates that imports of steel racks in 2017 were valued at approximately $200 million.

Products covered in the investigation includes “steel racks and parts thereof, assembled, to any extent, or unassembled, including but not limited to, vertical components (e.g., uprights, posts, or columns), horizontal or diagonal components (e.g., arms or beams), braces, frames, locking devices (i.e., end plates and beam connectors), and accessories (including, but not limited to, rails, skid channels, skid rails, drum/coil beds, fork clearance bars, pallet supports, column and post protectors, end row and end aisle protectors, corner guards, row spacers, and wall ties).”

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The U.S. International Trade Commission is scheduled to make a preliminary ruling by Aug. 6, with the DOC following suit Sept. 13.

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The U.S. and India are scheduled to sit across the table this week in Geneva to discuss the case filed by India with the World Trade Organization’s (WTO) dispute settlement mechanism over the U.S.’s imposition of import duties on steel and aluminum.

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The talks will be held under the aegis of WTO’s dispute settlement mechanism, according to a news report by the Press Trust of India.

India is part of the group of nations — which includes China, Russia and Norway, among others — to have filed separate dispute claims on the topic with the WTO. The meeting is part of the consultations the U.S. will be holding with all such countries on July 19-20.

It may be recalled that the U.S. had imposed a 25% tariff on steel and a 10% tariff on aluminum imports from India. India’s exports of the two commodities to the U.S. stands at about U.S. $1.5 billion per annum. India had initially tried to raise the issue with the U.S., and then informally with the WTO, calling the move an “abuse of global trade provisions that could spiral into a trade war,” — sentiments similar to the one expressed by India’s neighbor, China.

In May, India dragged the U.S. to the WTO dispute settlement mechanism over the imposition of import duties.

Consultation is the first step of the dispute settlement process. Incidentally, both the countries are already involved in disputes at the global trade body in the areas of poultry, solar, and export subsidies, to name a few.

According to another news report, senior trade officials of India and the U.S. will meet later this month in Washington to conclude negotiations on a “mutually-acceptable trade package.” Quoting an unnamed official source, it said the meeting comes amid an escalation of the global trade war.

Since India’s proposed additional tariff worth U.S. $235 million on 29 U.S. goods — including almonds and apples — are retaliatory in nature, any rollback of the additional duty on Indian steel and aluminum by the U.S. will lead to a withdrawal of corresponding taxes by the Indian Government on U.S. goods, too.

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The U.S. sees good prospects for its companies in the Indian civil aviation, oil and gas, education service, and agriculture segments.

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Here’s What Happened

MetalMiner’s Global Precious Monthly Metals Index (MMI), tracking a basket of precious metals from across the globe, dropped four points (a loss of 4.5%) for the June reading after holding flat for three straight months.

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Incidentally, the July 2018 MMI value hit its lowest point since exactly one year ago, when it last clocked in at 84.

Individual price points within this precious metals basket hit some historic lows as well.

The U.S. silver price hit $16.09 per ounce for the July 1 reading, the lowest since January 2017 (when it took an anomalous dip down to $15.80 for one month before bouncing back up). U.S. gold bullion has languished back down to the mid-$1,200s, a one-year low.

And both platinum and palladium have come off considerably, with the U.S. bar price of the former dipping below $900 per ounce for the first time since February 2016.

What Buyers Should Consider

  • Keep an eye on the U.S. dollar. A stronger dollar of late, which had gotten a bump from recent better-than-expected U.S. manufacturing data at the beginning of the month, pressures platinum prices because “it makes greenback-priced precious metals more expensive for holders of other currencies,” according to Reuters.
  • Gold is also in the crosshairs of a stronger dollar. In fact, that has become “the biggest obstacle” for gold prices in the near and long term, according to a recent JP Morgan price forecast report cited by Kitco.
  • The threat of auto tariffs has also burned platinum pricing. Due to the pricey PGM’s use in diesel engines, “the threat of protectionist policies has fueled bets that slower trade activity will disrupt the global economy, reducing commodity consumption” — including that of platinum in cars, according to the Wall Street Journal (paywall).

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And Now For Some Mid-Summer Metal Fun

While the product contains trace amounts, at best, of gold’s shiny, less expensive cousin — not to mention that it’s fake — Alexa Silver is still pretty hilarious.