Steel

President Donald Trump said last week that he would impose import tariffs on steel and aluminum from Brazil and Argentina, accusing them of manipulating their currencies and hurting American farmers.

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“Therefore, effective immediately, I will restore the Tariffs on all steel & aluminium that is shipped into the U.S. from those countries,” Trump tweeted — taking both countries and the markets by surprise.

Both Brazil and Argentina had been exempted from the 25% steel tariff and 10% aluminum tariff imposed in March 2018 following negotiations that settled in May of that year, which resulted in a quota system to limit imports to the previous year’s level.

The gist of the president’s case is both countries have devalued their currencies and, as a result, undercut American farmers looking to export agricultural products like soy beans to China and elsewhere.

It’s true to say both the Brazilian real and the Argentinian peso have fallen relative to the dollar, but Brad Setser, a senior fellow for international economics at the Council on Foreign Relations, is quoted in The New York Times as saying neither Brazil nor Argentina was manipulating its currency. In fact, both countries had been selling foreign exchange reserves to prop up the value of their currencies.

He added Argentina was in a “full-blown” economic crisis and was close to running out of such foreign exchange. The Argentinian peso has lost nearly 60% of its value against the dollar this year, the Financial Times reported, following the failure of populist politics and investor worries in the face of a rising debt burden.

To suggest either Brazil or Argentina have any control over their currencies is laughable.

Argentina faces debt repayments that it will struggle to pay, with more than $60 billion coming due in 2020, an earlier Financial Times article noted. The article reports the markets are rattled over concerns that Mr. Fernández may resort to printing money to cover some of the government’s spending commitments and to stimulate an economic recovery, with the country mired in recession.

The fear is that could fuel what is already one of the highest inflation rates in the world, running at around 50%. While the loss of steel and aluminum sales to the U.S. would be serious, the two products make up some 3% of Argentinian exports, paling in comparison to the agricultural sector, which dominates Argentina’s exports.

Like Brazil, Argentina is caught between a rock and a hard place.

Both economies are struggling. The Brazilian real recently fell to a record low against the dollar as the economy tries to tackle high unemployment and weak growth, while Argentina is in an outright recession.

Both countries need all the export dollars they can earn, but in many ways they need China more than the U.S.

Weaker currencies do help them win export business; it is true they have benefitted from the U.S.-China trade war, but it was not of their making.

As The New York Times states, China is a major purchaser of American pork, soybeans and other agricultural goods. As the U.S. and China have slapped tariffs on each other’s products, China has shifted to purchasing products from Brazil and Argentina instead, annoying Washington in the process.

Quite what they expect the two South American countries to do, though, is unclear. Both countries have been trying to support their currencies all year, to no avail.

Maybe Washington is hoping both countries will voluntarily limit sales to China? Would the U.S. do that if the roles were reversed?

Nor would the imposition of tariffs be a win-win for the U.S. steel industry.

Brazil exports some $2.2 billion of steel products to the U.S., but much of it is as semi-finished material, such as rolling slabs, the U.S. Department of Commerce reported this year. Raising costs for U.S. steel companies that import Brazilian slab and other semis will be the price for supporting American farmers — if this action is followed through as expected.

Nor has a grace period been suggested to allow material on the water to arrive and be cleared, as is normally the case with the imposition of such tariffs. The announcement said the tariff would be applied immediately, potentially imposing massive fines on companies with hundreds of millions of dollars of material on the water or in manufacture.

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No doubt the tariff announcement is intended as a negotiating tactic to force parties to come to the table.

Similar moves elsewhere have met with mixed success — let’s hope this case is resolved sooner rather than later.

Vertical integration may play well in classic corporate HBR (Harvard Business Review) circles, but steel industry observers may have a hard time envisioning the synergies Cliffs outlined in its merger announcement and presentation Dec. 3, creating a best-in-class, EBITDA-maximizing combined Cliffs-AK Steel entity!

Keep up to date on everything going on in the world of trade and tariffs via MetalMiner’s Trade Resource Center.

To us, the best rationale for the deal appears on slide 14, outlining AK Steel’s short-term debt position:

If you buy the notion that Cliffs can swallow AK and convert that company’s debts to its own and save on interest expense, then score one for the deal!

So why would Cliffs buy AK Steel?

A compelling reason appears on slide 11:

Despite AK Steel’s relatively improved financial performance under the leadership of CEO Roger Newport, if AK Steel represents ~30% of Cliff’s annual iron ore sales, Cliffs faces significant “customer concentration risk.” In other words, the health of AK Steel would significantly — negatively — impact Cliffs.

Forget about “renewal risk” — let’s just call it “customer risk.”

Cliffs would be hosed without a healthy AK Steel!

What about AK’s Ashland Works?

We continue to see different public announcements from AK Steel about the cost of Ashland Works. The Ashland Works facility today operates a hot-dipped galvanizing line (the blast furnace was idled nearly four years ago).

According to comments from AK Steel directly, “…the company announced it would close the ‘largely-idled’ Ashland Works facility by the end of 2019 to ‘increase utilization’ at its other U.S. operations. The plant employs 230 people and the closure would yield approximately $40 million in annual cost savings, according to the company.”

But by keeping it open, as detailed by Cliffs, the Ashland Facility, “Eliminates up to $60m of closure-related costs.” The Ashland facility will instead undergo a conversion, which it says, “Potentially provides a compelling, low-capex, high-return opportunity to be a significant merchant pig iron supplier in the Great Lakes.” (We presume U.S. Steel and ArcelorMittal will avail themselves of this compelling offering.)

So, we’re not sure if keeping Ashland Works open saves money or if closing it does.

We won’t pontificate over the “AK Steel best-in-class position in non-commoditized steel” for a variety of reasons that we have previously covered here in our GOES MMI series. (Or the fact that the rise of electric vehicles will start to make a dent in the need for the kinds of automotive exhaust grades, such as 439 and 441, produced by AK Steel.) We acknowledge AK does have a strong position in ultra-high-strength steels.

So, the real question comes down to the “synergies” outlined by Cliffs.

Does the margin Cliffs generates — approximately $30/$40 per short ton for every pellet produced and sold to AK — translate to an EBITDA jump of that same amount for steel products sold by AK, such that they leapfrog the EAF producers, as Cliffs suggests?

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Well, now isn’t that the $1.1 billion question?

U.S. President Donald Trump has tweeted that he will immediately restore tariffs on U.S. steel and aluminum imports from Brazil and Argentina, according to Reuters.

On Monday, Trump also urged the Federal Reserve to prevent countries from taking advantage of a strong dollar by devaluing their currencies, reports Reuters.

Both countries’ imports would get hit with 10% tariffs on aluminum and 25% tariffs on steel.

MetalMiner Expert Flash Analysis: Here’s the story behind the story

In terms of the currency angle, political turmoil has indeed devalued both Brazil’s real and Argentina’s peso in relation to the U.S. dollar, and whereas the degree of the impact is debatable, this storyline holds together, according to Don Hauser, VP of Strategic Advisory for MetalMiner.

“This tariff re-implementation does two political things — which are the real drivers of the story,” said Hauser. “First, it gives the impression of helping the [U.S.] farmers. While we battle China over trade — which is impacting the farmers — President Trump is doing everything he can to help them in every other place in the world. The second thing is helping the steel industry. In theory, and in public light, this will limit foreign steel entering the market, help drive prices up to a ‘sustainable margin,’ and comes at a time when mills are wrapping up their big annual contracts.

“States with both steel industry presence and farmers are a crucial part of Trump’s voter base,” Hauser continued. “It’s time to start pulling levers to solidify his voters as he heads into an election year. Trade has been the political weapon of choice for this administration and will likely continue.”

For details on which steelmakers would likely be most affected, or for further advisory, contact MetalMiner here.

Global crude steel production took a fall in October, including in No. 1 steel producer China.

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According to statistics compiled by the World Steel Association — using data from 64 data-reporting countries — global steel production fell 2.8% in October on a year-over-year basis.

October production from the reporting countries totaled 151.5 million tons, down from the 155.8 million tons produced in October 2018.

China’s production contracts

China’s crude steel production for the month dropped 0.6% year over year to 81.5 million tons.

In September, China’s production growth reached 2.2% year over year, while August growth reached 9.3%.

With the Chinese winter heating season underway, it remains to be seen how much steel capacity is shuttered for the season.

As MetalMiner’s Stuart Burns recently noted, the government is taking a closer look at new capacity starts.

“Demand in top consumer China remains surprisingly robust, yet inventories are falling — suggesting producers are struggling to keep up with demand,” Burns wrote.

“If that were not enough, Reuters reported new starts are being more vigorously investigated and the approval process reviewed, leading the industry to think supply will be curbed further during the winter heating period this year.

“A notice jointly issued by the National Development and Reform Commission, Ministry of Industry and Information Technology (MIIT) and the National Bureau of Statistics urges local governments and the State-owned Assets Supervision and Administration Commission (SASAC) to verify the steel firms’ capacity, production and fixed-asset investments.”

No. 2, 3 producers see production declines

Meanwhile, No. 2 producer India put out 9.1 million tons, down 3.4% year over year. Japan produced 8.2 million tons, marking a 4.9% decline.

South Korean production reached 6.0 million tons, down 3.5% year over year.

U.S. production totaled 7.4 million tons, which marked a 2.0% decline compared with October 2018. The U.S. steel sector’s capacity utilization rate remains above the important 80% mark (identified as a marker of industry health when the Trump administration first rolled out Section 232 tariffs on imported steel and aluminum).

The American Iron and Steel Institute (AISI) recently reported the U.S. steel sector’s capacity utilization rate for the year through Nov. 23 reached 80.3%, having now held at that level over the past month and a half.

In the E.U., Germany produced 3.3 million tons, marking a year-over-year decline of 6.8%, as overall recession concerns loom in the E.U.’s industrial stalwart.

Italy produced 2.2 million tons, down by 3.7%. France’s production fell 10.6% to 1.2 million tons, while Spain’s fell 7.6% to 1.2 million tons.

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October steel production in Brazil, Turkey and Ukraine was all down by double-digit percentages in each country — 19.4%, 15.0% and 12.7%, respectively.

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This morning in metals news, U.S. steel imports were down 16% through the first 10 months of the year, steel companies are raising their prices and protests continue in the world’s top copper-producing country.

Keep up to date on everything going on in the world of trade and tariffs via MetalMiner’s Trade Resource Center.

Steel imports drop 16% through October

U.S. imports of steel through the first 10 months of the year were down 16% on a year-over-year basis, the American Iron and Steel Institute (AISI) reported this week.

Steel imports through the end of October totaled 24.78 million tons, according to the report.

Meanwhile, U.S. steel imports for totaled 2.18 million tons in October, which marked a 14.5% increase compared with the September import total.

Steel companies raise prices

Amid slumping steel prices, companies like U.S. Steel and ArcelorMittal are raising prices for their products, the Times of Northwest Indiana reported.

According to the Times’ report, the steelmakers have raised their prices for flat-rolled steel three times in less than a month.

Chile protests continue

Widespread protests erupted in Chile in October, at first over a proposed metro fare hike; since then, the protests have expanded to encompass more widespread, systemic ills that are being called out by the protesters in the streets of Santiago and other cities.

Chile is the world’s No. 1 copper producer. Bloomberg reports the country’s recent protests could in fact threaten the status of the country’s major state-owned producer as the world’s No. 1 producer.

According to the report, state-owned Codelco — the world’s top copper producer — had been planning to spend $20 billion in Chile over a decade to modernize its mines.

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However, Bloomberg notes, demands raised by protesters in Chile could be at odds with government funding Codelco had looked for toward that aforementioned modernization. As a result, Codelco may fall from its No. 1 spot, according to Colin Hamilton of BMO Capital Markets, as cited by Bloomberg.

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This morning in metals news, the U.S. Census Bureau reported October steel imports increased from the previous month, U.S.-China trade talks continue and industrial production declined in October.

Keep up to date on everything going on in the world of trade and tariffs via MetalMiner’s Trade Resource Center.

Steel imports rise

According to the U.S. Census Bureau, U.S. imports of steel totaled 2.0 million metric tons in October, up from 1.7 million metric tons imported in September.

The value of October imports reached $1.8 billion, up from $1.6 billion the previous month.

U.S.-China talks continue

According to media reports, the Chinese government has indicated it is willing to negotiate in terms of intellectual property theft, which has been a primary gripe of the U.S.

Yahoo Finance reported the Chinese government released a statement saying it will work to curb intellectual property violations.

Among Chinese trade practices about which the U.S. has called foul has been forced technology transfer and intellectual property theft. The two sides are working toward an initial trade deal, from which it is hoped the economic superpowers can build momentum toward a wider trade deal.

Industrial production slips in October

According to the Federal Reserve earlier this month, industrial production fell 0.8% in October following a 0.3% decline in September.

In addition, manufacturing production fell 0.6% in October.

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“Much of this decline was due to a drop of 7.1 percent in the output of motor vehicles and parts that resulted from a strike at a major manufacturer of motor vehicles,” the Fed said. “The decreases for total industrial production, manufacturing, and motor vehicles and parts were their largest since May 2018, April 2019, and January 2019, respectively.”

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The U.S. steel sector’s steel capacity utilization reached 80.4% for the week ending Nov. 23, as steel prices have recently showed some signs of bouncing back as we inch closer toward 2020.

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Adjusted year-to-date steel production reached 87.20 million net tons at a capacity utilization rate of 80.3%. Production for the aforementioned period marked a 2.2% year-over-year increase, compared with the 85.29 million tons at a capacity rate of 78.1% produced last year.

Meanwhile, for the week ending Nov. 23, 2019, domestic raw steel production reached 1.86 million net tons at a capacity utilization rate of 80.4%. The weekly production total marked a decline from the 1.90 million net tons produced during the week ending Nov. 23, 2018 (when the capacity utilization rate reached 81.2%).

On a week-over-week basis, production for the week ending Nov. 23, 2019, declined 0.8% from the 1.88 million net tons produced the week ending Nov. 16, 2019.

By region, production totals for the week ending Nov. 23, 2019, totaled:

  • Northeast: 203,000 tons
  • Great Lakes: 673,000 tons
  • Midwest: 193,000 tons
  • Southern: 716,000 tons
  • Western: 76,000 tons

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Steel prices continue slight gains heading toward 2020

Last week, we noted U.S. steel prices had possibly hit a bottom and appeared to start to gain some slight upward momentum as we head closer and closer to 2020.

U.S. HRC is up 4.42% over the last month, reaching $520/st to start the week, according to MetalMiner IndX data. Since mid-November, the U.S. HRC price has moved off of MetalMiner’s short-term support level of $475/st.

U.S. CRC, meanwhile, is up 3.05% over the last 30 days, up to $709/st. Like HRC, CRC has pushed off of MetalMiner’s short-term support level ($671/st).

U.S. HDG’s gains have been more significant, as it starts to approach MetalMiner’s short-term resistance level of $798/st. HDG is up 6.31% over the last 30 days, having reached $792/st early this week.

U.S. plate prices, meanwhile, are bucking the trend — as if often the case with plate.

Plate is down 15.41% over the last 30 days, down to $615/st to start the week.

In previous downturns, Beijing has taken a range of stimulus measures to keep the economy growing robustly; as a result, it has contributed positively to global GDP and commodity prices.

Keep up to date on everything going on in the world of trade and tariffs via MetalMiner’s Trade Resource Center.

But this time around Beijing seems to have a greater tolerance for slowing growth.

While stimulus measures are expected as early as December, the Financial Times reported, they are not expected to be on the scale of those seen in 2008-2009 and 2015-2016.

Freya Beamish, an analyst at Pantheon Macroeconomics, is quoted by the Financial Times as saying China’s stimulus in the 2018-2019 period will be equivalent to about 7% of GDP over the two-year period. Measures taken in 2015 and 2016 were worth 10% of GDP, while the 2008-09 stimulus amounted to 19% of GDP, according to an OECD estimate.

Beijing appears constrained by a number of factors, policy-driven and economic, in what it can do and how far it can go.

Office space is at an all-time high in some Chinese cities, forcing the delay and cancellation to high-profile skyscraper projects and more general office developments, the Financial Times reported.

Following a surge in new residential housing starts earlier this year, growth has since moderated and is expected to slow further in 2020. Beijing seems reluctant to undermine the currency by further monetary easing and is particularly sensitive to avoiding property price rises by stoking demand.

The Financial Times reports that Chinese states and municipalities are already heavily indebted and banks are reluctant to increase bad debts. While infrastructure lending is the most likely form of stimulus, it will probably not be on the same scale as previous measures.

A former Chinese bank official is quoted as saying that due to previous infrastructure investments, “Cities and provinces are having trouble financing new projects as they must spend a significant portion of their cash-paying off debt.” Possibly as a result of this, investment spending grew by only 3.4% in the first three quarters of this year.

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This moderation in appetite for further stimulus coming on top of the cooling housing market undermines the case made in a recent article we reviewed suggesting steel prices could be set for a recovery, extrapolating on the apparent recovery of the Chinese steel sector.

If the Financial Times is correct in its analysis above, any current strength in Chinese — and, by extension, southeast Asian — steel prices could be relatively short-lived.

Steven Husk/Adobe Stock

This morning in metals news, trade experts cited by Reuters say the U.S. might have to find another route to impose tariffs on imported automobiles, Japan’s crude steel output dropped in October and U.S. steel prices have started to show some signs of upward momentum.

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Section 232 Auto Deadline Flies By

Last week, a self-imposed deadline for the Trump administration’s Section 232 investigation of imports of automobiles (and automotive parts) passed without an announcement of a decision (either to delay the decision, or to impose or not impose tariffs).

The self-imposed deadline fell late last week — the Trump administration had already delayed the decision once earlier in the year — but no decision was announced.

According to trade experts cited by Reuters, the U.S. might now have to look elsewhere other than Section 232 if it wants to impose tariffs on automobiles.

Japan’s Steel Output Falls

Japan’s October steel output fell 4.9% on a year-over-year basis, Reuters reported.

Japan is the world’s third-largest steel producer. According to Reuters, the drop marked the fourth straight month of production declines.

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U.S. Steel Prices Show Some Bounce

Some wondered whether U.S. steel prices had reached a bottom.

While it remains to be seen whether that is truly the case, prices have shown some signs of recovery over the past month.

According to MetalMiner IndX data, U.S. HRC is up 2.61% month over month, while U.S. CRC is up 1.89%. The U.S. HDG price is up 3.36%.

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It looks like India is not going to give up its fight with the U.S. and the WTO so easily.

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But first, the original story.

Last week, adjudicators of the World Trade Organization (WTO) rejected most of India’s claims related to its stance that the U.S. was not respecting an earlier WTO ruling related to anti-subsidy duties on Indian steel.

This has been a very convoluted trade case.

India’s contention was that the U.S. had failed to conform with an April 2016 deadline to fall in line with a previous WTO decision related to the U.S.’s imposition of countervailing duties on hot-rolled carbon steel products from India.

A few days ago, when the WTO panel rejected most of India’s complaints, it did accept that the U.S. needed to bring a legislative provision into line with WTO rules, marking a minor victory for India.

But India has decided to take the fight into a new round.

India filed an appeal Tuesday against the WTO panel report. An official statement by the Indian government said India had filed a plea concerning the WTO panel report in the case brought by the United States in “India — Export Related Measures.”

The WTO panel had backed the U.S. in many of its claims against export promotion measures adopted by India. Among those included the Merchandise Export from India Scheme (MEIS) and the Export Promotion Capital Goods (EPCG) scheme, the Hindu Business Line reported.

The WTO panel has also recommended that India should withdraw the “prohibited subsidies” under the EOU/EHTP/BTP Schemes, EPCG Scheme, and MEIS within 120 days from adoption of the report.

According to the Al Jazeera report, India had originally filed a complaint before the WTO in 2012 because the U.S. Department of Commerce had imposed an import duty of nearly 286% on a circular welded carbon-quality steel pipe product from India. The Commerce Department had done so after receiving a petition from Allied Tube & Conduit, JMC Steel Group, Wheatland Tube and United States Steel Corp.

In 2014, the WTO ruled the U.S. measures had breached global trade rules. The two parties agreed the U.S. would comply with that ruling by 2016.

After the expiry of the 2016 deadline, India had once again complained to the WTO that the U.S. had defaulted as the deadline had passed. India’s argument was that the market set the price of the steel pipe; however, the U.S. said the iron ore used to make it came from a state-run mining firm — the National Mineral Development Corporation — effectively constituting subsidization of Indian exporters.

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Last week, a WTO compliance panel issued a report largely supporting the U.S.’s stance. Now, the issue continues with India’s appeal of the report.