steel price

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Criticism of Donald Trump’s tariff action, particularly by archrival Sen. Elizabeth Warren, is too often cast as simply political maneuvering, but there is a very real issue underpinning this current argument. That is, to be successful tariffs need to block imports and support domestic production — otherwise, what’s the point?

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Unfortunately, the consequences of tariffs are not that simple.

Some domestic mills will object to imports of certain products on the grounds that they manufacture the same product. But as my colleague Lisa Reisman pointed out so eloquently in a recent post last month, quality comparisons are analogous to the quality of your steak joint: they all serve meat, but what do you want a Peter Luger or Ponderosa?

CNBC reports Warren’s criticism of the tariff waiver program, citing research done by her staff, that foreign-headquartered companies received more than 80% of all exemption requests (of 909 decisions posted by the Commerce Department in the first 30 days after the tariffs were announced).

The majority of waivers — almost 52% — went to Japanese-owned companies, and overall 84% of their requests were approved, the article states. The implication being the waiver program is in crisis and exemptions are being granted in favor foreign firms, undermining the objectives of the tariff program.

By way of background perspective, CNBC reported that as of of Oct. 29, 43,634 steel and 5,667 aluminum exclusion requests have been filed. Overall, 15,662 steel exclusion decisions have been posted (and 11,281 were approved), while 905 aluminum decisions have been posted (and 763 approved).

Yet, as Reisman pointed out, not all grades are equal, even if they are nominally manufactured to the same standard.

Taking her example, grain-oriented electrical steel (GOES) manufactured by a Japanese mill is superior, you cannot fault consumers for applying for tariff exemptions if the domestic product is below global standards. Of course, GOES and Japanese material in particular, is arguably a unique example (it is hardly vanilla HRC).

From a quality perspective, it is easy to understand why Japan has more exemptions than other countries: they simply make grades and materials that are not produced elsewhere in the world.

So, the number of exemptions by country doesn’t tell a complete story. By comparison, Turkey is having a tougher time because their products are, to put it bluntly, lower on the food chain and there are undoubtedly many top-quality producers in the U.S. of comparable material.

What does require further investigation, though, is why firms based in the U.S. but with foreign headquarters — essentially, subsidiaries of overseas firms — should be more successful than domestic consumers in achieving waivers.

As this graph from the Financial Times shows, Japan and Thailand have been by far the most successful in achieving waivers.

While material from Japan and Thailand has been the most successful, imports from Turkey, Canada and Brazil have been among the least successful.

There have been 135 requests decided for tariff exclusions for imports from Turkey, 32 from Canada and 23 from Brazil. The administration has granted just one request for Turkey, none for Canada and none for Brazil, the Financial Times reports.

These figures in themselves, though, do not explain why foreign-owned subsidiaries have had greater success in achieving waivers than U.S.-owned businesses.

The Commerce Department accuses Warren of misunderstanding the process — it wouldn’t be the first time a politician misunderstood a piece of legislation — but you would hope she was receiving expert advice, so let’s assume she has it right. If that is the case, the Commerce Department has a case to answer, and an audit is apparently underway.

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If these tariffs are to achieve the desired effect and if they are to be worth the cost to American firms and consumers (Ford Motor said it expects the steel and aluminum tariffs to cut $1 billion from its profits by the end of next year), then waiver decisions cannot be made in an arbitrary manner. These decision should work to an overall strategy that furthers the president’s aims, rather than hinders them.

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This morning in metals news, Shanghai steel prices are down, Shanghai zinc and copper prices are also down, and U.S. steel prices are up by double-digit percentages this year.

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Shanghai Steel Falls

Prices of Shanghai steel have dropped Wednesday for a third session in a row, Reuters reported.

The drop comes as manufacturing growth slows in the country, according to the report.

Copper, Zinc Also Down

The impact of a drop in manufacturing growth — and burgeoning trade tensions, in general — has not just been limited to steel in China.

According to Reuters, Shanghai copper and zinc prices have also dropped. China’s Purchasing Managers’ Index (PMI) dropped to 50.2 in October, down from 50.8.

U.S. Steel Prices Surge

On the other hand, prices of U.S. steel have been on the rise this year.

According to a research report by Business Forward Inc., prices of U.S. steel have surged by 11% since February, while prices of foreign steel fell 4.8% on average.

MetalMiner’s Take: It’s easy to blame tariffs for rising steel prices; certainly, tariffs provide price support.

However, most buying organizations MetalMiner has spoken to or worked with this year are having banner years with very healthy order books. The PMI data supports that assertion, as well. Strong demand, not just tariffs, provides price support.

In addition, as MetalMiner has written about extensively, commodities and industrial metals have been in a bull market since the end of July 2017. In bull markets, prices rise anyway, and that’s why buying organizations have also seen significant price increases for aluminum, zinc, nickel and, to a lesser extent, copper.

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The world price of steel has been depressed because Chinese overcapacity has nowhere to go except elsewhere, and those trade flows have put a lid on European prices. Now, the Europeans have begun to reconsider their own trade strategy so as not to harm the little steel manufacturing capacity that remains.

It seems almost inconceivable that Credit Suisse could be downgrading expectations for the US steel sector, as recently reported by Reuters.

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It feels counterintuitive that an industry buttressed by 25% import tariffs would not be riding the crest of a wave, particularly when you read one firm has just settled with its union, agreeing a cumulative 14% wage increase over a four-year period.

Surely that sounds like a firm making bumper profits. Indeed, the same article states, the company in question, U.S. Steel, posted a near 60% increase in pre-tax profits in the June quarter.

President Trump’s trade policy, coupled with a strong economy, has sent domestic steel prices soaring, and finally released a number of high-profile investments in new capacity said to total more than $3.7 billion to be started by the end of this year.

Big River Steel LLC, Carpenter Technology Corporation, ArcelorMittal S.A. and Attala Steel Industries are all set to join U.S. Steel in new investments spurred by the opportunity created by the import tariffs.

Even if, as seems likely, some kind of deal is carved out for Canada and Mexico now the revised NAFTA agreement has been agreed (now called the United States-Mexico-Canada Agreement, or USMCA), removal of the 25% tariff among the three is unlikely to decimate prices, as tariffs remain in place with the rest of the world.

Market leader Nucor is by all accounts doing very well, having booked its highest quarterly profits in the company’s history at $683 million in the second quarter, more than doubled the $323 million total in the second quarter of 2017. Third-quarter earnings, which Nucor reported Thursday, hit $676.6 million, up from $254.9 million in Q3 2017.

U.S. Steel, on the other hand, remains the laggard of the industry, and the markets know that.

Despite record prices — admittedly, we have seen softening since the summer — the company’s stock has continued to underperform, having lost some 40% since March 1, according to CNBC.

But back to Credit Suisse and its industrywide downgrade: is their downgraded view valid?

Much is predicated on oversupply, particularly if deals are struck to remove the tariffs on Mexican and Canadian steel. Although China is often cited as the tariffs’ target, in reality China has not been a major supplier to the U.S. for some years due to early action.

Apart from slab out of Brazil, Canada, Mexico and Russia have been the largest suppliers. If tariffs are removed for these countries, supply will definitely increase and domestic mills may have to reduce margins to fight for demand, which is theirs for the taking this year.

The fact that steel prices have softened this quarter suggests mills are already responding to the new normal.

Prices remain elevated from pre-tariff days, but mills are having to respond to the global price — plus the 25% tariff — environment. Domestic capacity utilization is over 70% — better than, say, China’s, which is hovering in the high 60s — but still far from the 80% and above level mills would like.

You have to hope for U.S. Steel’s sake the tariffs remain in place, not just for months but for years and that the administration does not agree to too many carve-outs.

If the barriers start to leak like a failing dam due to tariffs being removed on USMCA-origin metal and saddled with higher costs incurred by wage deals struck now or investments made on the back of strong current domestic prices, those higher costs (such as inflated wage agreements and debt as a result of significant new capacity investments) may prove too much to support in a lower market price environment.

Under such a scenario, maybe Credit Suisse has a point.

Consumers, naturally enough, are hoping that tariff barriers are removed — and quickly. Our own take is they will be disappointed. So long as the Trump administration remains in power, so too will the majority of the tariffs (at least with the rest of the world outside USMCA).

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We may have hit peak steel in the summer and be facing a winter of softer prices. However, the bar has been raised on price competition and domestic mills are likely to enjoy some advantage from that state of affairs for some time to come.

The Stainless Steel Monthly Metals Index (MMI) traded sideways in October. The current index stands at 72 points, back at January 2018 levels.

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The sideways trend was created by a less volatile nickel price and lower domestic stainless steel surcharges, while stainless steel prices overseas inched higher.

As MetalMiner highlighted last month, the drop in the index comes as a result of a MetalMiner adjustment to a couple of metals that make up the Stainless MMI. The adjustment is not due to a dramatic fall in nickel or stainless prices.

LME Nickel

LME nickel prices traded lower in September, but then switched to a sideways trend in October.

Nickel prices were more volatile in September, showing two sharp movements (down and up) at the beginning and the end of the month. Despite the recent downtrend, nickel prices have remained in an uptrend since last summer (June-July), when prices started to increase sharply.

Source: MetalMiner analysis of FastMarkets

Global Nickel Tightness

The Philippines, the world’s top supplier of nickel ore, will start limiting the land mines can develop following new environmental rules.

Under these new rules, mines will have a 20-meter “buffer zone” or ban on metal extraction. Nickel miners will see production limits ranging from 50-100 hectares (123-400 acres).

President Rodrigo Duterte has advised miners to reforest areas where they operate to reduce environmental concerns. In addition, all small-scale activities in mountainous regions stopped after the Mangkhut typhoon.

According to government data, nickel ore output decreased by 10% in the first half of 2018 when compared to last year’s 9.43 million tons during the same time frame. The output drop came as a result of the suspension of 11 mines this year, which had zero output during this period.

Domestic Stainless Steel Market

Domestic stainless steel surcharges fell for the third time since the beginning of the year.

The 316/316L-coil NAS surcharge fell to $0.94/pound, while the 304/304L decreased to $0.65/pound.

Source: MetalMiner data from MetalMiner IndX(™)

The pace of stainless steel surcharge increases seems to have slowed this month, along with steel (and stainless steel) price increases.

However, stainless steel surcharges still remain well above 2015-2017 lows.

What This Means for Industrial Buyers

Stainless steel price momentum slowed down slightly this month. Stainless steel’s slower momentum seems to go together with slower domestic steel price momentum. However, nickel prices still remain strong.

Buying organizations may want to follow the market closely for opportunities to buy on the dips. To understand how to adapt buying strategies to your specific needs on a monthly basis, request a free trial to our Monthly Outlook now.

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Actual Stainless Steel Prices and Trends

Both Chinese 304 stainless steel coil increased by 0.85%, while the Chinese 316 stainless steel coil price increased this month by 0.88%.

Chinese Ferrochrome prices decreased this month by 0.35%, down to $1,841/mt.

Nickel prices also increased slightly this month, rising 0.23% to $12,600/mt.

The Raw Steels Monthly Metals Index MMI again traded sideways this month.

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This marks the third consecutive month the index has held at 89 points. The current Raw Steels MMI is at May 2018 levels.

Domestic steel prices have decreased sharply and steel price momentum seems to have slowed. Prices traded lower in September and continued the downtrend in October. Buying organizations may want to remember that domestic steel prices have remained at more than seven-year highs this year.

Source: MetalMiner data from MetalMiner IndX(™)

All forms of steel fell in September. HRC, CRC and HDG showed weaker momentum. Meanwhile, plate prices held stronger in September. Plate prices had the support of low metal availability.

However, plate prices started to lose momentum and decrease at the end of the month.

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In recent years China’s steel sector — particularly the large, state-owned steel mills — have benefited from the enforced closure of capacity on environmental grounds during the winter heating season.

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Contrarian as it may at first sound, closure of private mills largely — on the basis they are unregulated  and are supposedly the most polluting steel mills — was a boost to larger competitors.

About 140 million tons of “illegal” production was closed last year, Reuters reports, only for capacity to be further restricted by Beijing’s war on smog during the winter heating season. The forced closure of steel mills in 26 cities around Beijing and Tianjin hit national output, accordig to the report, contributing to a year-on-year contraction in output during November and December last year.

Demand, however, remained buoyant. As a result, prices rose and exports, the relief valve for excess capacity, fell.

Source: Reuters

It should be no surprise that steel mills in the rest of the world all benefited from less competition and, as a result, higher prices (long before America’s 25% steel import tariffs lifted prices further). Indeed, cumulatively, strong domestic demand and state meddling on environmental grounds have allowed China’s steel sector to make good money and focus on the buoyant domestic market for the last two years.

That may be about to change.

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This morning in metals news, the Office of the United States Trade Representative (USTR) dished out criticism for a global steel forum and its efforts toward curbing excess steel capacity, Chinese steel rebar prices are up and Walmart warns tariffs could result in price increases.

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USTR Criticizes Global Steel Forum

Following the Global Forum on Steel Excess Capacity ministerial meeting held in Paris yesterday, the USTR released a statement questioning the forum’s efficacy in efforts to curb global steel capacity.

“The United States thanks Argentina for its chairmanship of the Global Forum and for its efforts to achieve meaningful outcomes from the Forum process this year,” the statement begins. “The United States has been an active and committed partner in this process, working to seek prompt implementation of the Forum’s past policy recommendations, which are aimed at reducing excess capacity as well as restoring balance and market function in the global steel sector.”

However, the USTR argued the forum has not done enough to realize its goals.

“Unfortunately, what we have seen to date leaves us questioning whether the Forum is capable of delivering on these objectives,” the statement continued. “We do not see an equal commitment to the process from all Forum members. Commitments to provide timely information critical to the proper functioning of the Forum’s work, for example, have gone unfulfilled. More importantly, we have yet to see any concrete progress toward true market-based reform in the economies that have contributed most to the crisis of excess capacity in the steel sector.”

Chinese Rebar Prices Rise

Chinese construction steel rebar prices were up Friday, according to a Reuters report.

According to the report, the most-active contract on the SHFE rose 0.1% on Friday.

Walmart Warns of Price Increases as a Result of Tariffs

On the heels of Washington’s announcement this week of the forthcoming imposition of tariffs worth $200 billion on imports of Chinese goods, Walmart wrote a letter to USTR Robert Lighthizer warning that it may have to raise prices, Reuters reported.

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According to the report, the letter cited products which could be hit with price increases, which included gas grills, bicycles and Christmas lights.

European steel producers have rarely had it so good— that’s not a statement you would expect to hear describing what has been a horribly cyclical industry that has struggled with overcapacity, political interference and significant legacy costs (such as expensive pension funds).

At the same time, the European market has been flooded with cheap imports from Russia, Ukraine, and China, to name a few.

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This year however, despite howls of protest from European steel producers and politicians when the U.S. imposed a 25% import duty on steel products, European steel producers have actually been doing rather well.

The imposition of U.S. import tariffs drove U.S. hot-rolled coil steel futures to a decade high around $900/metric ton this year, up 35%. Rather than lock out European steelmakers, the resulting price rise has been a boon as European mills have found they can still sell into the U.S. despite the tariffs, as domestic mills rapidly followed the market up.

While steel prices in the U.S. held up well over the summer, they are showing signs of weakening now.

According to Reuters, hot-rolled coil prices could be down by $100 per metric ton by the year’s end, as local steel producers ramp up production and higher prices crimp demand.

But in Europe, robust global growth and capacity cuts in China have reduced competition from cheap Chinese imports.

At the same time, importers have been nervous about overordering material since the imposition of the E.U.’s safeguard measures, which were initiated in March but formerly adopted by the Commission only in July. The safeguard measures are intended to impose additional duties if imports exceed what is termed traditional levels. The measures are part of a three-pronged E.U. response to the US decision to impose tariffs on steel and aluminum and are intended to prevent the impact of material being dumped in the E.U. market as a result of it being locked out the U.S.

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As a result, European mills have found their order books have remained strong during the seasonally quiet summer months.

Long products in the North European market are booked out for the next eight weeks, according to SPGlobal. Prices are already up €10 per ton from the early summer and further rises are expected in the coming weeks for rebar, as the current measures reduce imports by some 5 million tons per annum, or 3%, according to Reuters.

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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Even if U.S. steelmakers have been slow to add capacity following President Trump’s tariff protection, it would seem foreign steel makers are willing to commit to domestic U.S. production.

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The Financial Times this week reported on the announcement by BlueScope Steel, Australia’s biggest steelmaker, to examine adding 600,000 to 900,000 metric tons per year of steelmaking capacity to its North Star business in Ohio. This would raise the Ohio plant’s existing production of 2.1 million metric tons per year to some 3 million tons at a cost of between U.S. $500 million and $700 million.

The project would involve the addition of a third electric arc furnace and a second slab caster, according to the Financial Times report. A decision is expected at the company’s February 2019 annual results pending the outcome of the feasibility study, by which time a clearer picture may emerge of what the tariff landscape is going to look like longer term.

Interestingly, Australian steelmakers are exempted from the tariffs; in theory, BlueScope could have invested at home. Australia, however, along with Argentina, are subject to quota limits, so ramping up domestic production to meet U.S. demand is not considered a viable option.

According to the Financial Times, domestic U.S. steel producers are, not surprisingly, doing rather well from the tariffs.

The resulting price rises have fueled a rally in U.S. domestic prices, helping firms like ArcelorMittal surpass forecasts previously set by analysts. Arcelor’s earnings came in at $5.59 billion before interest, taxes, depreciation and amortization for H1 2018. That represented an increase of 28.6% on the same period a year before, as half-year sales rose 17.6% year-on-year in value terms to $39.2 billion, primarily due to higher steel selling prices. Net income was up by almost one-third to $3.06 billion. It hasn’t yet resulted in Arcelor announcing any increased investment in domestic U.S. production capacity — the real aim of the tariffs — but, arguably, steelmakers are waiting to see how the whole tariff situation develops and whether they are truly here to stay (in which case, investment could result).

The U.S. Department of Commerce found foreign steel accounted for about one-third of the 107 million metric tons of steel the U.S. economy used in 2017, the Weekly Standard reported.

Although U.S. producers still have a commanding market share, the report concluded that inexpensive foreign imports were causing domestic steelmakers to lose money, lay off workers, and close plants last year.

U.S. steel plants in 2017 ran at just 72% of capacity, below the 80% level they are widely considered necessary to be profitable. The blame for poor capacity utilization fell firmly at the door of “excessive imports of steel.”

Well, that was last year; this year is something very different.

Following tariffs, steel prices are up sharply, profits are up at the domestic mills and so is capacity utilization. The domestic mills have the option to price balance towards full capacity, shielded as they are now behind a 25% import tariff. They may choose to take higher prices and forego full capacity or adjust pricing to achieve full capacity; we will see what policy has been adopted when Q3 and H2 figures are released.

It is unlikely significant new capacity will be added in the short term, though, despite talk of planned new capacity.

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According to Reuters, steel output in the United States rose 2.9% in the first half to 41.9 million metric tons and gained 0.8% in June to hit 6.9 million tons for the month. Data from the American Iron and Steel Institute (AISI) show capacity utilization at U.S. mills in the year to July was 76.4%, up from 74.4% in 2017, suggesting domestic mills generally are opting for better prices as a route to profitability rather than pricing out tariffed imports.