Steel

Quite a bit has happened since late November, when the leaders of the U.S., Canada and Mexico signed the United States-Mexico-Canada Agreement (USMCA), the intended successor to the North American Free Trade Agreement (NAFTA) and sometimes dubbed “NAFTA 2.0.”

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More recently, President Donald Trump threatened to impose an escalating tariff, beginning at 5%, on all imports from Mexico as of June 10 if the countries could not reach an agreement on immigration enforcement. Days before the deadline, the U.S. announced it would back away from the tariffs amid a deal reached with Mexico.

The U.S. also recently lifted its Section 232 steel and aluminum tariffs with respect to imports from Canada and Mexico, one high-profile sticking point in the USMCA approval process.

The legislatures of all three countries must ratify the USMCA before it can go into effect; as such, the deal has been in a sort of limbo since the countries’ executive leaders signed the deal during the G20 Summit in Buenos Aires.

Until recently, none of the countries’ legislatures had approved the USMCA. That changed this week, however, as the Mexican Senate became the first to ratify the USMCA.

In a press conference Thursday, Mexican President Andrés Manuel López Obrador lauded the USMCA’s passage, saying the approval conveys confidence to national and foreign investors and is good for the Mexican economy.

In the U.S., President Donald Trump in public statements has continued to put pressure on the Democrat-majority House of Representatives to pass the USMCA.

The United States Trade Representative (USTR) lauded Mexico’s approval.

“The USMCA is the strongest and most advanced trade agreement ever negotiated,” USTR Robert Lighthizer said in a prepared statement. “It is good for the United States, Mexico, and Canada in a way that truly benefits our workers, farmers, and businesses. The USMCA’s ratification by Mexico is a crucial step forward, and I congratulate President López Obrador and the Mexican Senate on this historic achievement.”

In his opening statement during a Senate Finance Committee hearing Tuesday, Lighthizer called the USMCA the “gold standard.”

“It is the gold standard for rules on the digital economy, financial services, intellectual property, etc.,” he said. “It will help stop the outflow of manufacturing jobs and return many to the United States. Its labor and environmental provisions are the most far-reaching ever in a trade agreement. The agricultural chapter will lead to increased market access and eliminate unfair trading practices by our trading partners.”

Among other clauses, the USMCA includes language on labor practices (aimed particularly at lifting labor conditions in Mexico), automotive regional content rules (increasing to 75%, up from 62.5% under NAFTA) and activities of or dealings with state-owned enterprises.

Sen. Ron Wyden (D-Oregon), in testimony during the Senate Finance Committee hearing this week, applauded parts of the deal but questioned aspects related to enforcement.

“The president campaigned on ripping up existing trade deals, but the new NAFTA sure resembles the old one,” Wyden said. “That said, there are areas of meaningful progress. It goes further than before on digital trade and state owned enterprises. It takes a modernized approach to customs and duty-evasion. I commend Ambassador Lighthizer for obtaining some strong outcomes in the labor and environment chapters.

“But particularly when it comes to enforcement, there’s some hard work left to be done. Commitments from other countries aren’t any good if there’s no way of holding those countries to them. The new NAFTA retains a weak enforcement system from the old NAFTA, which was too easy on trade cheats. That’s a bad deal for American workers, particularly the enforcement of labor obligations.”

Senate Finance Committee Chairman Chuck Grassley (R-Iowa), meanwhile, touted the USMCA’s potential positive impact for U.S. farmers.

“American farmers, workers and businesses stand to benefit greatly from USMCA,” Grassley said.  “More market access for agriculture, new commitments in critical areas such as customs, digital trade, intellectual property, labor, environment, currency, and the lowering of non-tariff barriers will translate into higher wages, greater productivity, and more jobs.

“In fact, the U.S. International Trade Commission’s economic analysis found that USMCA will create 176,000 new American jobs. We shouldn’t squander this opportunity to update NAFTA, which is now a quarter century old but has been critical to the success of American farmers and businesses.”

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Now, the USMCA awaits approval from the legislatures in the U.S. and Canada.

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This morning in metals news, the U.S. and China will resume trade talks, Tokyo Steel announced its first steel price cuts in nearly three years and Rio Tinto recently celebrated the launch of its automated heavy-haul rail network.

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Trade Talks

After last month’s tariffs fireworks, President Donald Trump indicated the U.S. and China will restart trade talks before this month’s G20 summit in Japan, Reuters reported.

Talks fell apart last month after Trump raised tariffs on $200 billion in Chinese goods, to which China responded with tariffs on $60 billion in U.S. goods.

The G20 summit is scheduled for June 28-29.

Tokyo Steel Announces Price Cuts

Japanese steelmaker Tokyo Steel announced it would cut prices for its steel products in July — marking the first price cut in 33 months, Reuters reported.

According to Reuters, the steelmaker is reducing all prices of steel bars by 7.8%, down to $591 per ton.

Rio Tinto Hails Automated Rail Network

Miner Rio Tinto recently celebrated the deployment of its long-distance rail network, AutoHaul, which it calls the “world’s first automated heavy-haul long distance rail network.”

The rail network will serve to move the miner’s supplies of iron ore through Western Australia.

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“The success of AutoHaul™ would not have been possible without the expertise, collaboration and dedication of teams within Rio Tinto and our numerous partners,” said Ivan Vella, Rio Tinto’s iron ore managing director of rail, port and core services. “I’d also like to commend our train driving workforce for their support and professionalism during the transition period.

“This project has cemented Western Australia as a leader in the heavy-haul rail industry and has attracted interest from around the world. The successful deployment of the world’s first heavy-haul long distance rail network demonstrates the potential for significant further improvement in such operations with others around the world looking to replicate.”

(Editor’s note: This is the second of a two-part series. Read Part 1 here.)

The International Monetary Fund (IMF) recently lowered its 2019 growth forecast for China from 6.3% to 6.2%.

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China’s current economic slowdown shows in the FXI, a large-cap market index. After showing unexpected strength early in the year and rising through the first part of April, performance turned around and the index began to fall once more.

After falling back to nearly start-of-year values, gains managed to hold at around 40 points. This seems to coincide roughly with press reports that stimulus measures from early in the year had begun to wane.

Crude Steel Production Remains High as Prices Weaken

According to the monthly Caixin report numbers, steel production totaled 85 million metric tons, apparently the highest monthly production total on record and about 5 million metric tons higher than the previous month.

Demand from the construction sector remains robust, but Wu Jingjing, a deputy director for the China Iron and Steel Association (CISA), warned demand growth from the sector will wane during the second half of the year. CISA maintains its 2019 forecast for 1-2% demand growth. However, demand from the automobile, household appliances and energy sectors looks weaker.

CISA reported a 1% steel price drop in May and an iron ore price increase of 7%. Higher iron ore prices hurt operational profitability, with CISA’s members reporting a 19.38% year-on-year decrease in profits for the January to April period (despite an 11% increase in sales revenue).

Consolidation of the Steel Industry is Underway

According to Reuters, the Chinese government is seeking to consolidate its steel industry to some extent by 2020 in order to boost the industry’s efficiency.

If government plans to constrain production through consolidation succeed, this would support higher prices for the industry. U.S. prices would also benefit, given that China’s prices tend to lead U.S. prices by about one month.

China Baowu Steel Group, the second-largest steel producer worldwide in 2018, announced its intent to acquire a majority stake in Magang Group Holding Co Ltd, of which Maanshan Iron & Steel Co Ltd, the 16th-largest producer, is a listed entity.

Baowu Steel Group produced 67.43 million metric tons in 2018, according to the World Steel Association, while Maanshan produced 19.71 million tons in 2018.

Raw Material Inputs Continue to Face Supply Issues

Iron ore prices remain high as supplies remain tight. According to customs data, imports recovered to some extent during May, rising by 37% to 83.75 million tons. Overall, shipments dropped by 11% compared with May 2018. Imports for the first five months of the year dropped by 5.2% compared with the same period in 2018.

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According to the Xinhua News Agency, as reported by Reuters, all coke plants that do not meet special emissions standards slated to go into effect on Oct. 1 in Shanxi — China’s top coke-producing region — will be closed.

Additionally, the government is seeking to reduce capacity for 2019 by 10 million tons. The region failed to comply with similar capacity reduction goals in the recent past.

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(Editor’s note: This is the first of a two-part series examining Chinese flat-rolled steel prices. The first part examines historical steel price trends. The second part, which will be published Tuesday, will cover the economic outlook for China.)

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Chinese steel prices started to weaken in late May and continued to decline into the second week of June (after generally increasing this year).

A seasonal steel price change typically happens at the start of the summer due to the change in weather, which impacts construction and, therefore, steel demand.

Source: MetalMiner data from MetalMiner IndX(™)

Looking at the longer-term pattern since 2016, prices have dipped around the June time frame and tend to correct or show a clear change of the longer-term direction in July.

Theoretically, demand starts to pick up again as fall seasonal restocking picks up, supporting prices. However, in some years, demand may fail to pick, vis-a-vis available supply (as in 2015, when prices kept falling).

In 2018, the seasonal pickup did not last long. Prices turned down again by October, although they stayed relatively flat overall.

Source: MetalMiner data from MetalMiner IndX(™)

From a longer-term perspective, prices continued to increase overall when considering the period since mid-2015, as shown in the chart above. Considering January 2017 forward only, prices have moved sideways overall.

HRC, CRC and plate prices mildly increased in the first quarter, but the rate of increase looked weaker during 2019 than in previous years. More recently, all three prices have grown weaker; CRC for example, only increased into March and grew weaker by April.

Chinese HRC prices dropped slightly in early June after generally rising since the start of the year and into late May. Government stimulus measures have not provided price support lately, although additional support measures, especially continued fiscal stimulus measures and tax cuts aimed at providing support to the economy during the second half of 2019 and into 2020, could provide support.

CRC prices dropped again between May and early June, by 3%, to CNY 4,111/mt, down by around 5% from the short-term April high of CNY 4,331/mt. With CRC prices dropping more steeply of late, the China HRC-CRC spread narrowed to CNY 191/mt.

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As pointed out in MetalMiner’s June Monthly Metal Buying Outlook, CRC prices suffered from a supply glut due to blast furnace restrictions that led producers to invest in downstream production, like CRC and HDG, instead of HRC.

The Raw Steels Monthly Metals Index (MMI) came in at 76 this month, a 5% drop, after several months of sideways movement and a May reading of 80.

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U.S. steel prices formed a clear downward price trend. A mix of factors led to the weakness: sluggish demand, companies working off inventory and macroeconomic uncertainty.

Source: MetalMiner data from MetalMiner IndX(™)

Even plate prices dropped this month after stubbornly sticking at around $1,000/st for a lengthy stretch after rising longer term. This month the price dropped by nearly 7%, from $962/st at the start of the month to $902/st in early June.

Similarly, the Chinese economy has shown weakness lately in steel-intensive sectors. However, government stimulus measures still generally kept HRC prices supported, with some weakness in the other form of flat-rolled products.

Recently, the China Caixin Manufacturing PMI held flat for the May reading, but the industrial and manufacturing production readings both declined by several points.

Source: MetalMiner data from MetalMiner IndX(™)

Meanwhile, U.S. steel prices dropped more steeply than Chinese prices, which edged down slightly this month. Looking at a price comparison of U.S. and Chinese HRC prices, the price gap continues to close.

Source: MetalMiner data from MetalMiner IndX(™)

The chart above shows the spread between U.S. and Chinese prices dropped to just over $100/st. In December, the price gap held at over $300/st, so U.S. products look more affordable based on a greater price drop, while Chinese prices stayed relatively flat.

What This Means for Industrial Buyers

Plate prices finally dropped this month, joining HRC, CRC and HDG in a downward price trend.

Given the shifting price dynamic, industrial buying organizations seeking more pricing guidance should try a free two-month trial of our Monthly Metal Buying Outlook report.

Buying organizations will want to read more about our longer-term steel price trends in our free Annual Outlook.

Actual Raw Steel Prices and Trends

This month U.S. prices registered the largest price drops in the index with the U.S. Midwest HRC futures spot price down 11.3% to $580/st and the 3-month price down 10.4% to $586/st. U.S. shredded scrap prices dropped 8.1% to $295/st.

Korean standard scrap steel prices fell by 6.8% to $127/st. Korean pig iron prices fell by 1.2% to $333/st.

Chinese steel slab prices were down by 5.9% to $489/st and steel billet dropped by 3.2% to $482/st.

Chinese iron ore PB fines for both high- and low-priced 58% Indian iron ore dropped by 2.4%, both at $59 per dry short ton.

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Chinese coking coal prices increased this month by 1.6% to $278/st, the only price in the index to increase this month.

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This morning in metals news, U.S. steel executives are concerned about the impact of proposed tariffs on Mexican goods, bidders are looking at the liquidated British Steel in parts and Norsk Hydro released its Q1 2019 financial results.

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U.S. Steel Executives Express Concern About Mexico Tariffs Impact

Recently, President Donald Trump threatened to impose a 5% tariff on all goods imported from Mexico; according to Bloomberg, executives of the biggest U.S. steel companies aren’t too keen on the proposed duties, particularly as the United States-Mexico-Canada Agreement (USMCA) still hangs in the balance.

According to the report, executives from AK Steel, Nucor and Steel Dynamics spoke at an industry conference Tuesday, expressing concerns regarding the potential tariffs’ impact on the USMCA talks carrying on among the U.S., Canada and Mexico.

“Our reaction was surprise,” Nucor CEO John Ferriola was quoted by Bloomberg as saying. “We hope it does not impact the USMCA — we think that’s a good thing for the steel industry and manufacturing in general in the U.S. and the economy as a whole.”

Piece by Piece

After the U.K.’s second-largest steelmaker, British Steel, was ordered liquidated last month, the race has been on to save the company from the brink.

With a deadline fast approaching, bidders have been making offers for the firm; however, they’ve been doing so in parts.

According to Reuters, none of the bidders are interested in buying the entirety of British Steel due to the capital expenditures that would be required.

Norsk Hydro Releases Q1 Financials

The first quarter of 2019 was a challenging one for Norsk Hydro, as the firm dealt with a cyber attack and the ongoing ramifications of production curtailment at its Alunorte refinery (where it recently got the green light from Brazilian authorities to resume full production).

“I am pleased that the production embargoes at Alunorte have been lifted, so that we can focus our efforts on safely returning Alunorte, Paragominas and Albras towards normal operations,” President and CEO Hilde Merete Aasheim said in a company release. “Our Brazilian operations are a fundament for Hydro’s overall agenda and our ambition to lift profitability.”

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Hydro reported underlying earnings before financial items and tax of NOK 559 million (USD $64.0 million) in Q1 2019, down from NOK 3,147 million (USD $360.7 million) in Q1 2018, due to lower aluminum prices, higher raw material costs and the production curtailment at Alunorte.

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This morning in metals news, European steel sector leaders are asking the E.U. for action in the face of rising imports, the U.S. says China is playing the “blame game” and U.S. Commerce Secretary Wilbur Ross met with Mexico’s Secretary of Economy Graciela Márquez Colín.

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European Steel Sector Looks for Help

Amid challenging times for the European steel sector, steel chiefs there are asking the E.U. for help.

European steel sector leaders sent a letter to the E.U. asking it act, arguing the U.S.’s Section 232 steel tariff has resulted in an influx of diverted steel to the E.U., Reuters reported.

According to the steel sector leaders, E.U. steel imports have doubled since 2013.

Playing the ‘Blame Game’

The U.S. accused China of playing the so-called “blame game” in the two countries’ ongoing trade talks.

Despite auspicious signs, trade talks took a hit last month when President Donald Trump opted to raise tariffs on $200 billion in Chinese goods, after which China retaliated with tariffs on $60 billion in U.S. goods.

“The United States is disappointed that the Chinese have chosen in the ‘White Paper’ issued yesterday and recent public statements to pursue a blame game misrepresenting the nature and history of trade negotiations between the two countries,” the Office of the United States Trade Representative said in a release. “To understand where the parties are and where they can go, it is necessary to understand the history that has led to the current impasse.”

Another Front

Elsewhere, President Donald Trump recently threatened to impose an escalating tariff on all Mexican goods, beginning at 5%.

U.S. Commerce Secretary Wilbur Ross met with Mexico’s Economy Secretary Graciela Márquez Colín to discuss the issue.

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“Today, I met with Mexico’s Minister of Economy, Graciela Marquez, to discuss bilateral trade and United States’ upcoming plan to tariff Mexican goods at 5%,” Ross said in a release. “We also discussed next steps for the U.S.-Mexico-Canada Agreement. I reiterated the President’s message that Mexico needs to do more to help the U.S. address immigration across our shared border.”

The planned merger of Chinese behemoth Baowu Steel Group with a smaller rival is painted in rather dramatic terms, as if it is to be something that is feared.

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In practice, we should see this as a positive move.

The Financial Times reported this week that Baowu Steel Group is to buy a majority stake in smaller domestic rival Magang Steel as part of the state’s wider drive to close outdated capacity and merge the country’s fragmented steel sector — all part of the move to improve efficiencies and control.

The two companies had combined crude steel output last year of 87 million metric tons, the Financial Times reports, surpassing total U.S. steel output of 86.6 million tons. The combined group is only slightly behind the world’s No. 1 steelmaker, ArcelorMittal, which produced 92.5 million tons of crude steel in 2018.

Capacity of the merged group would be in the region of 90 million tons, making it likely that further acquisitions will see Baowu exceed ArcelorMittal at some stage in the not-too-distant future.

Beijing is actively encouraging state champions to absorb smaller rivals, as its plan is for the top 10 producers to account for some 60% of steel production (up from 35% now). In the process, Beijing can exert better control over the industry than it has managed in the past.

Baowu itself is the product of an earlier merger between Baosteel Iron & Steel and Wuhan Iron & Steel Corporation in 2016.

Baowu has a production target of 100 million tons by 2021. With standing capacity in the Chinese market said to be some 928 million tons while output was only 828 million tons last year, there is room for Baowu to achieve its target through acquisition of underperforming rivals.

The Chinese steel market is facing slowing demand and margins are weak – down 46% at Baosteel Iron & Steel, the Financial Times states – and widely reported to have already surpassed peak steel output.

The path from here on out will be based on consolidation, rationalization and better environmental controls  — all of which would be good for the wider global community.

A fragmented steel industry is less disciplined and more likely to seek local state support to maintain employment (while simultaneously dumping excess production on the world market).

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Consolidation improves the chances of a managed rationalization of facilities and output. It’s not guaranteed, of course, but it’s more accountable, with politically appointed and controlled management in place — prospects are improved where policy directives have failed in the past.

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This morning in metals news, the iron ore price slipped Thursday, the Indian steel import market is dominated by Japan and South Korea, and trade tensions between the U.S. and China continue to gain.

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Iron Ore Slows Down

Supported by supply-side concerns, the iron ore price has surged so far this year.

However, on Thursday, Chinese iron ore futures slipped, Reuters reported, with the most-traded iron ore contract on the Dalian Commodity Exchange falling 0.5% (albeit on lower volumes after higher transaction fees went into effect).

Japan, South Korea Dominate Indian Import Market

According to government data cited by Reuters, Japan and South Korea increased their share of the Indian steel import market to nearly two-thirds in April.

India’s steel imports from Japan increased 27% in April on a year-over-year basis, while imports from South Korea jumped 15%, according to Reuters.

Rising U.S.-China Tensions

Trade tensions between the U.S. and China are on the rise once again on the heels of the countries’ recent tariff tit-for-tat, in which President Trump raised tariffs on $200 billion in Chinese goods and China responded with tariffs on $60 billion in U.S. goods.

China on Thursday accused the U.S. of “economic terrorism,” CNN reported.

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As Stuart Burns noted this week, the situation could escalate further should China opt to leverage its dominance of the rare earths market.

The tariff war between the United States and China is being watched with trepidation in India.

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There’s no unanimous view yet on the fallout of the tariffs with respect India. Most in India are in a wait-and-see mode as things unfold.

Overall, some analysts have said the situation could be good for India, as the U.S. would now start sourcing more and more goods from other Asian countries, including India. That belief is underlined by a recent report by the Coalition for GSP, a group of U.S. companies and trade associations.

Based on official trade figures, the Generalized System of Preference (GSP) had saved U.S. companies U.S. $105 million this March, marking an increase of 36% from March 2018 and the second-highest level on record, The Asian Age reported.

But U.S. President Donald Trump’s March warning regarding removing India from the GSP list has not gone down well in Indian trade circles; the 60-day notice period ended May 3.

The report noted that Chinese imports, subject to new tariffs, were down significantly, and had risen significantly from countries like India.

For India, 97% of increased 2019 GSP imports are on the China Section 301 lists, so it is only logical that what is China’s loss is India’s gain.

But with Trump’s announcement, nobody knows what’s going to happen on this front yet.

That is specifically true on the metals front. Indian steel companies are already apprehensive that it will lead to an increase in the dumping of cheap steel into the Indian market.

The Indian steel industry has already appealed to the Indian government to impose safeguard duties of 25% to protect it from growing imports.

News agency Reuters quoted an unnamed source as saying that China’s excess steel capacity was “a concern” for India, as the former could reroute it through other countries like Vietnam and Cambodia.

The new agreement signed a few days ago between the U.S. and Canada to prevent cheap imports of both products from entering North America will only compound the problem for India.

The world’s second-largest steel producer, India turned net importer this year on March 31, 2019, according to official statistics. Along with China, other countries that export steel to India are Japan and Korea, who, incidentally, are also major exporters of steel to the U.S. and Europe.

Fearing the dumping of additional steel, a group of Indian steel companies recently met with Indian government officials asking for more safeguards. For now, with the national election just having been completed, there may not be much movement as everyone awaits the next government to get into the saddle.

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According to a World Steel Association report, India is expected to finish as the second-largest user of steel in 2020. The usage of finished steel products in India is forecast at 102.8 million tons in 2019, rising to 110.2 million tons (mt) in 2020. The country’s steel use in 2018 reached 96 million tons.