Although not yet at the coveted 80% mark, the U.S. steel sector’s capacity utilization rate is up over three percentage points in the year to date (up to Oct. 20) compared with the same time frame in 2017.
Through Oct. 20, domestic raw steel production hit 76,076,000 tons, good for a capacity utilization rate of 77.7%, according to the American Iron and Steel Institute (AISI). Production during the same time frame in 2017 was 72,542,000 tons at a capacity utilization rate of 74.3%.
For the week ending Oct. 20, however, the capacity utilization rate hit 80.0%, during which 1,875,000 tons were produced. Production during that week was up 10.0% from the same week last year, when production hit 1,705,000 tons. Production for the week ending Oct. 20 was down from the previous week, however, by 0.3%.
According to AISI, production by region amounted to: North East: 222,000; Great Lakes: 685,000; Midwest: 197,000; Southern: 687,000, and Western: 84,000.
Prior to the imposition of tariffs on imports of steel and aluminum amounting to 25% and 10%, respectively, the U.S. Department of Commerce explained that proposed remedies vis-a-vis imports of the metals aimed to bring the U.S. capacity utilization rate for each metal up to 80%.
Secretary of Commerce Wilbur Ross’ report to President Trump — required by Section 232 of the Trade Expansion Act of 1962 — identified the 80% benchmark as a goal for both the domestic steel and aluminum sectors.
“Each of these remedies is intended to increase domestic steel production from its present 73% of capacity to approximately an 80% operating rate, the minimum rate needed for the long-term viability of the industry,” a Department of Commerce release in February stated. “Each remedy applies measures to all countries and all steel products to prevent circumvention.”
The International Lead and Zinc Study Group (ILZSG) convened its 63rd session earlier this month in Lisbon, Portugal, during which it reviewed global demand forecasts for this year and next with respect to zinc and lead.
Global Zinc Picture
According to ILZSG, global zinc demand is set to rise by 0.4% in 2018 to 13.74 million tons (MT) and by 1.1% in 2019 (up to 13.88 MT).
In China, zinc demand is projected to fall 0.5% this year, while increasing just 0.8% in 2019.
Apparent zinc usage in the U.S. is projected to increase 2.1% this year and 0.9% in 2019. Elsewhere, demand is expected to rise in Europe by 1.6% this year and 1.0% in 2019. It’s also projected to rise in India, and remain stable in Japan and South Korea.
On the supply side, zinc mine production is projected to rise 2% in 2018 and 6.4% in 2019.
The global zinc market is projected to be in deficit both this year and next. According to the report, demand will exceed supply by 322kt in 2018, and by 72kt in 2019.
Lead demand growth is on the more modest size, projected to hit 0.2% in 2018 and 0.7% in 2019.
China’s lead usage is projected to fall this year and next.
“In 2018, Chinese apparent usage is expected to fall by 0.6% influenced by a combination of reductions in the motorcycle and e-bike sectors as consequence of increased penetration by lithium-ion batteries and a slower growth in the automotive sector,” the ILZSG report states. “Increases in the e-trike production are not expected to be sufficient to offset this declining trend. A further 1.3% fall in apparent usage in China is anticipated in 2019.”
European lead usage is forecast to rise 1.4% and 1.8% in 2018 and 2019, respectively. Meanwhile, U.S. usage is forecast to decline this year by 0.6% and rise 2.5% in 2019.
“Today’s stock buyback announcement, our smaller net pension and OPEB liability, and our results since launching Alcoa Corporation nearly two years ago all point to the success of our strategic priorities,” President and Chief Executive Officer Roy Harvey said in a prepared statement. “By reducing complexity, driving returns, and strengthening the balance sheet, we’ve made Alcoa a much stronger company even as commodity markets remain volatile. We’re pleased to announce a program to return cash to stockholders, and we look forward to improving our Company further as 2018 comes to an end.”
In addition, the Pittsburgh-based firm announced slightly upgraded full-year guidance. In its Q2 report, the firm downgraded its full-year guidance for earnings before interest, taxes, depreciation and amortization (EBITDA) from a range of $3.5 billion to $3.7 billion down to a range of $3.0 billion to $3.2 billion, citing “current market prices,” among other factors.
This quarter, however, the firm has upgraded the full-year guidance at the lower end, bringing its range to $3.1 billion to $3.2 billion.
Alcoa reported Q3 EBITDA excluding special items of $795 million, down from the $904 billion in Q2 but up 37% from the $582 billion in Q3 2017.
Meanwhile, Q3 revenue hit $3.39 billion, up 14% from the $2.97 billion in revenues posted in Q3 2017.
In the supply markets, the firm continues to project global deficits for aluminum and alumina, but a surplus for bauxite.
“In aluminum, the Company expects a global deficit ranging between 1.0 million and 1.4 million metric tons, down from last quarter’s estimate of between 1.1 million and 1.5 million metric tons,” the release states. “Global aluminum demand growth is projected to be between 3.75 and 4.75 percent in 2018, down from the second quarter estimate of between 4.25 and 5.25 percent, driven by China.
“In alumina, Alcoa is projecting a higher global deficit of between 400 thousand and 1.2 million metric tons, compared to last quarter’s deficit expectation of between 200 thousand and 1.0 million metric tons.”
On the operations front, the firm announced the beginning of a formal consultation process with respect to dismissals of workers at two of the firm’s plants in Spain.
“Alcoa today announced its intention to begin a formal consultation process for collective dismissals that would affect all employees at its Avilés and La Coruña aluminum plants in Spain, which are the least productive within the Alcoa system due to their inherent structural issues,” the release stated. “Avilés employs 317 employees and La Coruña 369. Per Spanish law, Alcoa will initiate a mandatory 30-day consultation period with the workers’ representatives to achieve the best possible outcome for the Company and its workforce.”
Global steel demand is projected to hit 1,657.9 million tons (MT).
Meanwhile, the SRO forecasts global steel demand will rise by 1.4% in 2019, hitting 1,681.2 MT.
“In 2018, global steel demand continued to show resilience supported by the recovery in investment activities in developed economies and the improved performance of emerging economies,” said Al Remeithi, chairman of the World Steel Association’s Economics Committee, in a release. “Demand for steel is expected to remain positive into 2019, growing at 1.4% globally.”
Within the U.S., Canada and Mexico, 2018 demand is forecasted to rise by 1.7% in 2018 and 1.0% in 2019. E.U. demand is projected to rise 2.2% and 1.7% in 2018 and 2019, respectively. In Asia and Oceania, demand is projected to rise 5.0% this year and 1.3% next year.
Unsurprisingly, the SRO refers to rising global trade tensions.
“While the strength of steel demand recovery seen in 2017 was carried over to 2018, risks have increased,” the report states. “Rising trade tensions and volatile currency movements are increasing uncertainty. Normalisation of monetary policies in the US and EU could also influence the currencies of emerging economies.”
Of course, that tension has a hand in the projected deceleration of demand growth in China, pending government-led stimulus measures.
“Both downside and upside risks exist for China,” the report states. “Downside risks come from the ongoing trade friction with the US and a decelerating global economy. However, if the Chinese government decides to use stimulus measures to contain the potential slowdown of the Chinese economy in the face of a deteriorating economic environment, steel demand in 2019 will be boosted.”
Elsewhere, the report states the E.U.’s steel demand recovery will continue in 2019, driven by domestic demand.
“With business confidence high, investment and construction continued to recover while the automotive market may see slower demand growth,” the SRO states. “Though the economic fundamentals of the EU economy remain relatively healthy, steel demand in 2019 will show some deceleration over the growth seen in 2017-18, partly due to uncertainties resulting from global trade tensions.”
The outlook for Japan is continued stability, the report states, while South Korean demand is expected to contract in 2018, with only a “minor recovery” projected for 2019.
In an announcement last week reported by Reuters, the 141-year-old exchange advised it was introducing a plethora of new contracts to woo customers increasingly attracted by products on competitors’ platforms.
New technology at the LME is said to enable the exchange to introduce alternative products more cheaply and quickly than previously and encouraged it to try several cash settled futures options that, historically, fear of low liquidity would have barred.
The exchange is said to be introducing some 10 new cash settled contracts, including two regional aluminum premium contracts, minor metal molybdenum, plus options in gold and silver.
But the most interesting is probably a hot-rolled steel coil contract, with three regional prices covering Europe, North America and China, as opposed to the CME’s contract (which just covers North America based on the CRU Mid-West Index).
The LME’s reference index has yet to be announced, but it is hoped the exchange’s intended global coverage will attract more liquidity than the CME’s North American contract, which has struggled to gain liquidity since launch (although it has been widely adopted as an index price for steel supply chain contracts).
The other contract that raised some eyebrows is one for alumina.
Traditionally, alumina prices were fixed under long-term contracts and often tied to the primary aluminum price. But a few years ago, Alcoa broke with tradition and started pricing its alumina on the spot market, a move that many other refineries have since followed.
A largely spot market has resulted in considerable price volatility, aided this year by tight capacity and supply disruption. The LME’s timing could not be better, as a few years ago an alumina contract would have gone down like a lead balloon; today, the market may well respond positively to the opportunity to hedge price risk.
Achieving volume — and with it, liquidity — is about attracting the major producers and consumers. The aluminum contract, now the LME’s largest, struggled in its early days because the producers would not touch it, seeing it as a vehicle to undermine their pricing power.
Today, those same primary producers are on the receiving end of price volatility and may be more welcoming of a mechanism to hedge their input costs and output prices on the same platform.
In the cards for 2020 is a possible lithium contract, a metal that has been propelled from back page news to the front page headlines in recent years due to surging demand from batteries for all kinds of electronics, from iPhones to electric vehicles.
The LME is rightly not rushing that one, as it is still a relatively immature market and one that entails a large proportion of mine to battery maker direct trade; a contract will take careful planning.
But resources the LME has in depth after 141 years are patience and experience.
LME aluminum prices fell slightly in September. However, the mid-term trend has moved mostly sideways, trading between the $1,970-$2,170/mt level. Movements outside this band could indicate bullish or bearish signals for aluminum.
Source: MetalMiner analysis of FastMarkets
Buying organizations may want to remember that the $1,970/mt level has served as a strong support level (or floor) since August 2017. Aluminum prices fell toward that support level two times during 2017 and 2018, but then rebounded from it.
Aluminum prices decreased in December and April. Therefore, buying organizations may want to closely follow how aluminum prices react to that level.
Alumina Supply Concerns
LME aluminum prices showed an anomaly with the sideways trend driven by supply concerns.
Last Wednesday, Oct. 3, LME aluminum prices rose sharply to over $2,222/mt, on the back of Norsk Hydro’s announcement saying it would cease alumina production at its Alunorte alumina refinery in Brazil due to an environmental dispute.
Aluminum availability remains particularly tight in North America. Therefore, LME aluminum prices responded swiftly to supply concerns and tight supply.
Source: MetalMiner analysis of FastMarkets
However, LME aluminum prices retraced as Brazil granted Hydro the permits it had wanted for new investments at the Alunorte plant in Brazil. Hydro will use new technology to extend the disposal area necessary to continue and expand alumina operations. The refinery will operate at 50% of capacity to start. The decision came late on Friday following difficult negotiations and after the company said it would halt production. The Alunorte alumina refinery has operated at half capacity since March.
The mere news of the alumina shutdown signifies how tight the aluminum market remains. Any indication of a production slowdown, even for raw materials, could send aluminum prices higher.
Chinese SHFE aluminum prices fell slightly in September and then increased in October.
SHFE aluminum prices followed a similar trend to LME prices; both have moved in a sideways trend.
Source: MetalMiner analysis of FastMarkets
U.S. Domestic Aluminum
As a result of the ongoing uncertainty in the aluminum market, U.S. aluminum Midwest premiums have skyrocketed this year.
However, the current premium has traded sideways for the third consecutive month. The current premium stands at $0.19/lb.
Source: MetalMiner data from MetalMiner IndX(™)
What This Means for Industrial Buyers
Despite the recent change to a sideways trend, the LME aluminum price trend suggests a continuation of the bull market that started last year. Tariffs, sanctions and supply concerns will act as a support to aluminum prices, both for LME aluminum and the U.S. Midwest Premium.
Adapting the right buying strategy is crucial to reducing risks. Only the MetalMiner monthly outlooks provide a continually updated snapshot of the market from which buying organizations can determine when and how much to buy of the underlying metal.
For more information on how to mitigate price risk year-round, request a free trial to our Monthly Metal Buying Outlook.
LME aluminum prices fell this month, with a closing price in September of $2,054/mt.
Meanwhile, Korean commercial grade 1050 sheet fell by 0.3%, following last month’s downtrend. Chinese aluminum primary cash prices decreased by 1.41%, while China aluminum bar fell sharply by 6.19%. Chinese aluminum billet prices also decreased 6.68% this month, to $2,158/mt. The Indian primary cash price fell by 2.42% to $2.01/kilogram.
GOES appears more challenging under Section 232 because both producers and manufacturers make the same national security argument. The sole producer of GOES wants tariff protections pitting supplier against customer, yet the power equipment manufacturers make an equally compelling case.
At issue is that the power equipment manufacturers want an exclusion for GOES not currently produced in the U.S. and the sole domestic producer has argued its products provide an “equal” substitute.
In its surrebuttal (a rebuttal to a rebuttal), ABB argued that AK Steel does not produce a substitute for Nippon Steel’s product. Specifically, ABB used the Bureau of Industry and Security (BIS) standard for exclusion requests regarding product substitution, which notes “a substitute product” must meet “quality (e.g., … internal company quality controls or standards) … or testing standards, in order for the U.S. produced steel to be used in that business activity in the United States by that end user” (83 Fed. Reg.46026, 46058).
Whereas AK Steel focused its argument against ABB on the issue of core loss data — suggesting its products meet the equivalent performance standards of Nippon Steel’s product — ABB argued that the actual data from 2016-2018 certified test reports using ASTM A804 test standards did not meet iron loss and core loss requirements. ABB also submitted confidential data not available for public review.
ABB also claims AK Steel does not meet internal quality controls and standards. This point appears significant, as ABB states,“ABB’s transformers are based on proprietary designs that incorporate quality requirements, including burr height, ‘white edge’ and holes, which have significant impacts on the performance of the transformers.” The company goes on to claim that AK’s manufacturing process is “more prone to creating holes than the process employed by Nippon,” and “white edge is an ABB internal measurement of coating adhesions to GOES products,” of which the coatings are important to prevent transformer failures.
More important, ABB claims that 11 of 12 suppliers, with AK as the lone exception, agree to ABB’s quality requirements on these specific parameters.
The argument is analogous to stating that a steak is a steak, whether you are at Peter Luger or Ponderosa. Sorry, folks, but I’m pretty sure that a Peter Luger filet mignon is going to be tastier than Ponderosa’s version of the same cut (with all due respect to Ponderosa).
Meanwhile, Eaton Corp (Cooper Power), although notably with much less detail, made a similar argument: “The AK Laser scribed material if post annealed, loses ALL of the benefits of the laser scribing process, which is to further align the grain structure to a more efficient configuration. The Japanese product that is Chemically or Mechanically etched retains these important properties even after post annealing. The Japanese material is designated as Permanent Domain Refined Electrical Steel.”
SPX and Posco
Meanwhile, SPX imports the following from Posco: “0.23mm thick DR-GOES of Grade 23PHD080 with guaranteed maximum losses of 0.96 W/Kg @ 1.7 kilogauss and 60HZ.” SPX has requested the exclusion for lack of availability of a similar substitute product.
MetalMiner has long reported that the lion’s share of GOES imports come from Japan (versus China, the primary target of the Section 232 steel and aluminum tariffs), suggesting that AK’s material may indeed not be a like-for-like substitute product.
A similar pricing-per-ton analysis would also show that Japanese imports are not “dumped” into the U.S:
The U.S. grain-oriented electrical steel (GOES) coil price fell for the third month in a row, down from $2,763/mt to $2,446/mt. The MMI fell 18 points to 182.
The GOES MMI® collects and weights 1 global grain-oriented electrical steel price point to provide a unique view into price trends over a 30-day period. For more information on the GOES MMI®, how it’s calculated or how your company can use the index, please drop us a note at: info (at) agmetalminer (dot) com.
The latest Copper MMI latest increase came from stronger LME copper prices in September. The current Copper MMI stands at 77 points.
LME copper prices recovered momentum in September and increased sharply. The LME copper price breached the $6,000/mt level.
Source: MetalMiner analysis of Fastmarkets
Readers may want to remember that the $6,000/mt level served as a price ceiling in 2017. Prices climbed toward that ceiling several times during 2017, but failed to breach it. However, prices skyrocketed in August 2017 when copper prices breached the ceiling. Copper has remained in a long-term uptrend since then.
In June 2018, copper prices started to fall. LME copper prices entered a short-term downtrend, which appears to have switched. LME copper prices increased sharply in September, and have continued to increase in October.
Despite concerns about a Chinese economic slowdown and Chinese manufacturing (with a falling Chinese Caixin Manufacturing PMI), copper looks stronger.
Despite an easing of supply in Chilean mines, copper remains in a 45,000-ton deficit. In fact, miner BHP forecasts an increase in copper demand.
The miner analyzed Chinese overseas construction projects, noting copper demand could grow by 1.6 million tons, or 7% of annual demand. If Chinese demand starts increasing again, the copper supply-and-demand balance may fall into a wider deficit and prices may find some additional support.
Chinese Copper Scrap
LME copper prices and Chinese copper scrap prices tend to follow the same trend. However, prices traded differently this month.
LME copper prices increased sharply, while copper scrap prices fell slightly. However, copper scrap price momentum appears to have recovered. Scrap prices could increase in the short term.
Source: MetalMiner data from MetalMiner IndX(™)
The spread has widened again. The wider the spread, the higher the copper scrap consumption and, therefore, the price.
What This Means for Industrial Buyers
LME copper prices showed strength this month.
Buying organizations will want to understand how to react to the latest copper price movements. Adapting the right buying strategy is crucial for reducing risks. Only the MetalMiner monthly outlooks provide a continually updated snapshot of the market from which buying organizations can determine when and how much to buy of the underlying metal.
It would have been a month or more back, but today it is a plausible statement.
A post by Edward Luce in the Financial Times refers to a Bloomberg expose reporting on how China’s People’s Liberation Army has installed secret micro-chips on motherboards that were used to operate big corporate data servers, giving them unprecedented access to American military and technology secrets on an epic scale.
The microchips are said to be smaller than a grain of rice and thinner than the tip of a sharpened pencil, yet could provide backdoor access into the most secret of American technology. We quote Luce when we say, according to Bloomberg, China may have infiltrated U.S. military hardware, including drones, fighter jets, and so on.
It must be said, major retail hardware providers like Apple vehemently denied the existence of such malicious chips, but Bloomberg’s investigation has been going on for three years and begs the old saying — no smoke without fire.
The investigation apparently is still ongoing. But the consequences, coming on top of an escalating trade war and recent military skirmishes in the South China Sea, herald a new superpower rivalry.
There may be some who scoff at the suggestion that China could rival the U.S. as a superpower, but that is to misunderstand the trajectory of history.
China is on the rise, faster in terms of technology than it is even economically.
Take these secret microchips. As Luce points out, the creation and clandestine inclusion of such sophisticated technology is so hard to pull off that it was likened by a professional hacker to getting a unicorn to jump over a rainbow. It would take years, the article suggests and the deepest knowledge of how to manipulate the most cutting-edge technology across the global supply chain, for China to do this — yet, it did.
Roughly 75% of U.S. smartphones and 90% of semiconductors are made in China; it is safe to bet that domination is set to decline, but it can’t happen overnight.
In a heated and politically charged scenario, it is not unrealistic to think government will mandate or reward firms that reshore technologically sensitive supply chains, with profound implications for what has become a hugely interdependent world.
Tariffs have been flying left and right this year, impacting a wide range of products, from steel and aluminum to everyday consumer goods.
Last month, the Trump administration imposed an additional $200 billion worth in tariffs on Chinese goods, marking a significant escalation of trade tensions between the two countries (the U.S. had already imposed a total of $50 billion in tariffs on Chinese goods).
But one sector that has avoided tariffs is perhaps not so difficult to guess: rare earths.
Given China’s overwhelming dominance of the market and the U.S.’s position as a relative non-factor in the industry (the U.S.’s only rare earths mine closed in 2015), the U.S. is thus dependent on China for many critical rare earths.
According to the U.S. Geological Survey, 78% of the total amount of U.S. rare earths imports from 2013-2016 came from China, followed by: Estonia (6%), France (4%), Japan (4%) and other sources (8%). The value of imports of rare earth compounds and metals reached $150 million in 2017, up from $118 million in 2016.