Steel

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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.

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Yes, yes, I know this has nothing to do with metal prices or trading fundamentals — but in my defense I will say it covers two of my passions (so just get over it, will you).

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ThomasNet occasionally puts out some great — if slightly quirky — reports, and this one from last week is in that form, covering the highly innovative watchmaker REC’s latest project to make a new range of watches from the wing skin of a World War II Spitfire. Nuts, maybe, but cool and rather clever (you can make your own judgement, but I will say it strikes a chord with me).

Firstly, REC hit on the neat idea of taking some kind of iconic piece of junk and turning it into a limited run of high-end watches.

That’s not totally unique, of course.

The Geneva watchmaker Romain Jerome SA took steel and coal from the Titanic and made them into a limited run of watches some 10 years ago, retailing between $7,800 and $173,100, according to Reuters.

REC’s first endeavor was much more accessible: a run of 250 watches made from the body of a rare 1966 Raven Black Mustang, costing “only” $1,500 each. Bravely, they asked clients what they would like to see next — the overwhelming choice was the British World War II fighter, the Spitfire.

REC located PT879, a MKIX, shot down in a dog fight over Russia in 1944. PT879 was one of something like a thousand Spitfires shipped to Russia under the terms of the Allied coalition against the Axis powers. The MKIX was the second-most popular variant of the highly successful Spitfire of which in total over 20,000 were made from just before World War II (in 1938) to a little after the war (in 1948), but of which less than 100 still fly today.

The Spitfire was remarkable in many ways.

Apart from being arguably the most beautiful aircraft ever produced, it was also highly effective, with a fast rate of climb, tight turning radius and an airframe that could be developed to perform and carry much more than it was originally designed to do.

In test pilot trials, one even set an airspeed record of Mach 0.92 (620 mph) — even though the resulting damage nearly ripped the wings off, it remains a remarkable story in its own right.

Part of the Spitfire’s novelty was the all-metal monocoque construction, in which the aircraft surface became a part of the airframe. Prior to World War II, most aircraft were designed around a wooden frame covered with a doped fabric skin, more akin to a World War I biplane.

The beautifully elliptical aircraft wings of the Spitfire were designed to reduce drag, but also gave the aircraft a beautiful and iconic shape that begged celebration in a personalized item, like a watch. The wing skin was made from a 2000 series aluminum-copper alloy and each dial will contain a piece of the wing skin, each carrying the unique service scars imparted during its brief life.

If it flicks your switch, a little piece of aviation history can be yours for around $1,300. If a Spitfire is not your thing, hang in there — REC will likely have some equally goofy, if no less alluring, idea in due course.

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A health warning: no spitfires were destroyed or otherwise damaged in the making of this article, or these watches. PT879 is being painstakingly renovated with modern hairline crack free aluminum wings and may yet bless our skies when it rises, phoenix-like, from the ashes of the scrap yard.

Growth is stabilizing in E.U. steel markets, according to the director general of the European Steel Association (EUROFER), but the sector nonetheless faces challenges, including trade barriers and high import levels.

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“Growth is stabilising in EU steel markets, in line with expectations,” said Axel Eggert, EUROFER’s director general in a release late last week. “However, the various challenges facing the sector will impact us in the coming months. Trade tensions could clearly upset the market’s balance, as could slowing demand in other parts of the economy.”

According to EUROFER, E.U. steel consumption in the second quarter jumped 4.4% year over year.

“Healthy levels of real steel consumption, in combination with stockbuilding in the steel distribution chain in this period, led to this growth,” the EUROFER report states.

Domestic deliveries from E.U. steel mills, however, were outpaced by imports.

Domestic deliveries rose 3.7% year over year, while third-country imports jumped 9.8%. The E.U.’s steel import market share rose from 23.2% in the first quarter to 25% in the second quarter.

“The continued, marked increase in import supply in the second quarter appears to confirm previous concerns about third country exporters pushing extra volumes to the EU market in anticipation of safeguard measures, and a willingness of buyers to take certain speculative risks,” the report states.

E.U. apparent steel consumption is forecast to rise 2.2% in 2018 and 1.1% in 2019.

With that said, ever-looming trade tensions could have an impact on steel demand, EUROFER notes, particularly with respect to the U.S.’s Section 232 automotive investigation.

Already in play is the U.S.’s 25% tariff on steel. The E.U. originally secured a temporary exemption from the tariff this spring (along with Canada and Mexico), but that was allowed to expire June 1.

In July, the E.U. announced the imposition of provisional steel safeguards, aimed at defending against supplies of steel diverted from other countries as a result of the U.S. tariff. The safeguards went into effect July 19, and are permitted to remain in effect for a maximum of 200 days. The European Commission is expected to make a final decision on whether to make the safeguards permanent by early 2019, according to a July release.

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As for steel-using sectors, output is forecast to grow by 3.5% in 2018 and by 1.8% in 2019, according to EUROFER.

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This morning in metals news, President Trump is reviewing the U.S.’s steel and aluminum tariffs with respect to their application to Canada and Mexico, copper prices are up and the World Trade Organization (WTO) has set up a panel for a dispute between Japan and South Korea.

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Could Metals Tariffs on Canada, Mexico be on the Way Out?

Kelly Craft, the Trump administration’s ambassador to Canada, said the president is reviewing the U.S.’s steel and aluminum tariffs on Canada and Mexico, according to a Bloomberg report.

Canada and Mexico initially secured a temporary exemption this spring, but that expired June 1. The countries hope that the U.S. will remove the tariffs before the signing of a finalized trade deal (the recently agreed upon United States-Mexico-Canada agreement, the successor to the North American Free Trade Agreement).

MetalMiner’s Take: Many readers believe Canada and Mexico will be exempt from the Section 232 tariffs with the passage of the new trade agreement. If the tough rules of origin language on USMCA is adopted, the lifting of the tariffs would certainly provide some relief, particularly for semi-finished aluminum products, which remain in short supply within the United States.

But it seems like passage of the deal remains contingent on the lifting of the sanctions, so it remains unclear who will win this game of chicken. Regardless, service center inventory levels have risen; rising inventory levels generally do not support prices.

Copper Prices Rise

LME copper prices were up Monday partially on account of shrinking LME inventories, Reuters reported.

LME copper jumped 1.1% on Monday.

MetalMiner’s Take: It is not just falling LME inventories that are supporting copper. Despite the impact on the Chinese stock market and much media hullabaloo around trade wars, copper consumption in China remains robust (both for refined and scrap).

The copper market is tight and continued global growth, permitting that lack of abundant supply, will continue to support the market.

WTO Launches Panel for South Korea-Japan Dispute

The WTO has set up a panel to deal with a dispute between Japan and South Korea over the latter’s anti-dumping duties on stainless steel bars, according to the Nikkei Asian Review.

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The duty has been in place since 2004, according to the report.

The ripples continue to spread across the pond of international trade from President Trump’s steel and aluminum tariffs.

In a recent post from India reported in Aluminium Insider, an analysis of the scrap, primary and downstream semi-finished metals trades into and out of India reveal how economies on the other side of the globe are grappling to contain the fallout of U.S. sanctions.

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India is becoming a growing force in the global aluminum market. With domestic bauxite reserves, relatively low cost (if environmentally polluting) coal-fired power and a huge domestic market, it should come as no surprise the country has invested heavily in aluminum production.

Naturally, that investment, much of it led by the private sector, is patchy and not fully integrated. The country imports significant quantities of scrap for its growing die casting industry, in large part because, as a newcomer to aluminum consumption, domestic arisings are far too low to meet demand.

The article states India’s overall scrap imports have risen 24% year-on-year, so far fueled by cheap U.S. exports looking for a home after China raised import tariffs. Domestic primary producers are complaining because die casters and billet casters are therefore incentivized to use more scrap than primary metal.

Primary producers are facing competition not just from scrap, the article explains. India is facing increased imports of wire rods and aluminum alloy ingots from the Association of South East Asian Nations (ASEAN) region. India signed free trade agreements (FTAs) with the countries comprising the ASEAN at a time when market dynamics allowed Indian producers to compete more effectively.

Now, with duty-free trade and a distorted regional market awash with product, India has become a target for excess supply.

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

The U.S. Department of Commerce (DOC) earlier this week issued an affirmative preliminary determination in its countervailing duty investigation of imports of steel propane cylinders from China.

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The DOC determined Chinese exporters of steel propane cylinders received countervailable subsidies ranging from 42.77% to 145.37%.

According to the DOC, imports of the cylinders from China were valued at $89.8 million in 2017.

The domestic petitioners in the investigation are Worthington Industries (Columbus, Ohio) and Manchester Tank & Equipment Co. (Franklin, Tennessee). The petitioners filed their cases May 22, 2018.

“The merchandise covered by this investigation is steel cylinders for compressed or liquefied propane gas (steel propane cylinders) meeting the requirements of, or produced to meet the requirements of, U.S. Department of Transportation (USDOT) Specifications 4B, 4BA, or 4BW, or Transport Canada Specification 4BM, 4BAM, or 4BWM, or United Nations pressure receptacle standard ISO 4706,” the DOC fact sheet for the investigation notes.

The DOC identified several Chinese exporters for the upper end of the countervailable duty range (145.37%):

  • TPA Metals and Machinery (SZ) Co. Ltd.
  • Guangzhou Lion Cylinders Co. Ltd. 
  • Hubei Daly LPG Cylinder Manufacturer Co. Ltd. 
  • Taishan Machinery Factory Ltd. 
  • Wuyi Xilinde Machinery Manufacture Co., Ltd. 
  • Zhejiang Jucheng Steel Cylinder Co., Ltd. 

Meanwhile, the DOC identified Shandong Huanri Group Co. Ltd. for the 42.77% duty. The 42.77% duty figure was also applied to all other Chinese exporters.

The DOC is scheduled to make its final determination in the investigation by March 4, 2019. If it rules in the affirmative, the investigation moves to the U.S. International Trade Commission (USITC), which would be scheduled to rule by April 18, 2019.

If the USITC also rules in the affirmative, the DOC would issue countervailing duty orders by April 25, 2019.

Imports of the steel cylinders surged last year.

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According to the DOC fact sheet, citing Census Bureau data, the U.S. imported 4,006,413 units last year, up 148.3% from the 1,613,360 units imported in 2016.

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This morning in metals, Ford Motor Co. says prices of U.S. steel are higher than anywhere else in the world, China’s alumina exports surged in September and the LME copper price dropped Tuesday.

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High Prices

U.S. automaker Ford has been vocal about what it views as the negative impact of the U.S.’s steel and aluminum tariffs.

According to a Detroit News report, Ford’s president of global operations on Monday said “U.S. steel is costing more than anywhere else in the world” as a result of the tariffs.

MetalMiner’s Take: It’s a bit difficult to understand what has driven the public complaints from Ford about steel and aluminum tariffs, particularly when most OEMs take long positions on their metal spend.

Some OEMs have locked-in contract prices that simply do not fluctuate, according to MetalMiner benchmark data. The manufacturing organizations that make stronger arguments against tariffs are those that remain subject to spot-price movements, have a corporate policy that forbids hedging or lack the buying power to demand fixed prices.

Perhaps the vocalization of the complaints have heated up because many OEMs have entered the fourth quarter contract negotiation season and the producers want to open discussions at much higher price levels. In defense of Ford’s complaints, the multi-tier extended supply chain remains far more exposed to metal price volatility than a company like Ford.

In this environment, OEMs will need to work double time to create programs and opportunities for aggregating volumes across supply chains, developing directed buy and enablement programs, aggregation opportunities and using technology to better support the entire extended global supply chain.

China’s Alumina Exports Rise in September

China’s exports of alumina hit a 2018 high in September, Reuters reported.

Exports of alumina in September hit 165,839 tons, up from 29,722 tons in August.

LME Copper Falls

The LME copper price fell 1.1% on Tuesday, Reuters reported.

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The drop comes a day after London copper had reached a one-week high.

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This morning in metals news, global aluminum production jumped in September, Germany’s steel sector warns against an abrupt withdrawal from coal-fired electricity and Tokyo Steel’s prices hold steady again.

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Aluminum Output Rises

Global aluminum output jumped 2.5% year over year in September, according to an International Aluminum Institute (IAI) report.

September output hit 5.3 million metric tons.

MetalMiner’s Take: World aluminum production rose 2.5% in September, reaching 5.3 million metric tons. January-September production for the base metal is also up by 0.3%. While both Chinese aluminum production (up by 3.6% year over year) and European production (up 0.8% year over year) are rising, North American production is down 4.3% down on a year-over-year basis.

Therefore, buying organizations may continue seeing scarcity in the North American aluminum market, which will lead to a higher U.S. Midwest premium. North American companies are currently struggling with aluminum supply, despite the increase in world production.

However, one of the great failings of “fundamental analysis,” in particular the study of supply and demand fundamentals, involves statistics such as those recently released from the IAI highlighting rising primary production on a year-over-year basis.

Yet ask any U.S. buyer of semi-finished material if they think that rise in primary production has led to or will lead to the easing of supply for semi-finished materials and rest assured you won’t find a single supporter.

MetalMiner seeks to study and analyze the specific underlying metal price trends and exchange-traded volumes — along with trends in the broader industrial and commodities markets — to assess potential price direction for underlying metals.

Rising primary production levels have little to no correlation with material availability and, in some respects, even primary aluminum ingot prices.

Not So Fast

With respect to coal-fired electricity, Germany’s steel sector is arguing against an abrupt withdrawal from the power generation method, Reuters reported.

According to Hans Juergen Kerkhoff, the head of Germany’s steel association, withdrawal from the power source would result in an increase in electricity costs for steelmakers of at least $161 million per year, per the Reuters report.

MetalMiner’s Take: The German steel sector should protest from the mountaintops about the country’s withdrawal from coal-fired electricity. With the phaseout of nuclear power by 2022, the loss of coal-fired energy will make the largest economic power in the European Union even more dependent on natural gas and oil imports.

Besides Germany’s steel-producing sector, access to competitively priced energy units goes well beyond basic steelmaking industries. The irony of Germany’s move to curtail the production of coal-fired electricity is that steel consumers will need to source finished goods like steel elsewhere —  likely to countries with even poorer environmental track records.

Tokyo Steel Holds Prices Steady

Prices of Tokyo Steel products will hold steady for the ninth straight month, Reuters reported.

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The firm last altered its prices in February, according to the report.

For those wondering how the surge in domestic steel prices have impacted many domestic steelmakers, there is perhaps no better indicator of that impact than quarterly earnings reports.

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Steelmaker Nucor Corporation reported its third-quarter earnings late last week, reporting net earnings of $676.6 million. That total is up from $254.9 million in Q3 2017, but down slightly from Q2 2018’s $683.2 million.

In addition, through the first nine months of the year, Nucor reported net earnings of $1.71 billion, up significantly from the $934.8 million reported for the first three quarters of 2017.

“The strong financial performance we have had this year continued into the third quarter, and we are on pace for 2018 to be a record year for earnings,” Chairman, CEO and President John Ferriola said in a release. “Our financial results are evidence that Nucor was primed and ready for this long-awaited upturn in the steel market. Our strategic initiatives, including capital projects, acquisitions and enhanced customer engagement, as well as our active participation in industry trade actions, have solidified our industry leading performance. Our extensive investments have grown our peak earnings power and enhanced our many competitive strengths.”

Rising steel prices have uplifted U.S. steel companies this year, with many committing to significant operational investments.

In September, Nucor’s board of directors approved a $650 million investment aimed toward expanding its flat-rolled sheet steel mill in Ghent, Kentucky. According to the firm, the investment would increase the mill’s capacity from 1.6 million to 3 million tons.

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Looking ahead to the fourth quarter, Nucor projects earnings to decline compared with the third quarter, but also expects them to exceed Q4 2017 earnings.

“However, we expect the fourth quarter of 2018 to be another strong quarter as we believe earnings will be noticeably higher than those generated in the fourth quarter of 2017,” the Nucor release states. “We continue to believe there is sustainable strength in steel end use markets.”

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.