Steel

Unlike the steel mergers of the mid-noughties, the mergers currently in the news are born out of weakness, not strength, a recent Financial Times article suggests.

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According to the piece, profitability among the continent’s steelmakers plunged from a peak in the third quarter of 2008 — when each ton shipped delivered on average €215 in earnings before interest, tax, depreciation and amortization — to just €46/tonne in the first quarter of 2016, according to calculations by UBS.

The figure has recovered since to about €83/tonne in the first quarter of 2017, but at the cost of 86,000 job losses since the financial crisis and years of losses contributing to the bankruptcy of the continent’s largest steel production plant, Ilva, in Italy.

Source Financial Times

Despite years of suboptimal capacity utilization, there has been limited rationalization of production continentwide, with governments fiercly opposing job losses in their backyard and steelmakers hoping the other guy will make the cuts. Even Ilva is now being taken over by ArcelorMittal rather than closing completely, and following a major investment will be back in production next year.

Source Financial Times

Although the industry acknowledges Europe will never need as much steel as it once did, ArcelorMittal is quoted as saying the industry is looking to governments to do more to stem imports from Russia and China, and facilitate the planned and phased closure of persistently loss-making plants. Less foreign competition and more consolidation is the agenda in the hope fewer more-consolidated steelmakers can achieve greater clout with buyers in a more constrained market, forcing through higher prices.

Source Financial Times

When ArcelorMittal’s takeover of Ilva is complete, the combined entity will control some 30% of European flat-rolled steel production, up from 26.5% for ArcelorMittal now. While Tata Steel’s proposed and much-delayed merger with ThyssenKrupp’s steel division — currently Europe’s second-largest steel producer — would raise their combined market share for hot-rolled flat products to over 20%.

Steel prices are already up nearly 60% from the bottom in 2015 on the back of improved recovery in steel demand and a gradual increase in anti-dumping legislation restricting some types of steel imports into Europe. Producers would like to see this go a lot further, of course, but consumers are fighting to keep the import market open, fearing — with some justification — that more action will reduce competition and result in significantly higher prices.

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For the first time in years, steelmakers at least seem to have a plan and are actively pursuing it. Whether that plan is to the eventual benefit or detriment of consumers remains to be seen — but a healthier domestic steel industry must certainly be advantageous to all.

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This morning in metals news, China pressured iron ore traders not to buy from North Korea even before the newest round of U.N. sanctions were imposed, a Chilean copper company is preparing to invest in Mongolia and China produced a record amount of steel in July.

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China Puts Pressure on N. Korean Iron Ore Business

As the political situation on the Korean peninsula continues to intensify and President Donald Trump criticizes China for allegedly not doing enough to rein in North Korea, a Reuters report indicates China has taken some action against North Korean interests.

According to Reuters, China pressured its iron ore traders not to buy North Korea iron ore, pressure that even preceded the latest round of U.N. sanctions.

Per two traders Reuters spoke to, the Chinese government stopped issuing permits to bring in iron ore “several weeks ago.”

Codelco Looks to Make Investment in Mongolia

Chilean state miner Codelco is planing to make an investment in faraway Mongolia, Codelco’s chief executive told Reuters on Friday.

According to CEO Nelson Pizarro, the company is looking for medium-term investments in the country, which may have untapped copper deposits.

Chinese Steel Output Hits 74M Tons in July

Chinese steel producers had a prolific July, churning out  a record 74 millions tons, Reuters reported.

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The output bested the previous month’s then-record total of 73.23 million tons, reached in spite of government efforts to combat pollution.

gui yong nian/Adobe Stock

This morning in metals news, steel prices in China are up and the government is looking to strike a balance, German company Thyssenkrupp isn’t in a rush to forge a merger with the European business of India’s Tata Steel and China responds to the U.S. Department of Commerce’s ruling this week regarding Chinese aluminum foil, which the DOC determined was being unfairly subsidized by the government.

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Steel Prices On the Way Up in China

Rising steel prices have Beijing looking for ways to adapt, according to a CNBC report.

On the heels of efforts to cut excess Chinese steel production, prices are rising — but the government is looking to strike a balance.

“For Beijing, it’s a tough situation: tackle steel overcapacity, rebalance economic growth, control environmental pollution and also manage market stability — especially in advance of a leadership shuffle due in the fall,” CNBC’s Sophia Yan writes.

No Rush to Merge, Thyssenkrupp CFO Says

Talks of a merger between the European businesses of Thyssenkrupp and India’s Tata Steel have hung around since last year.

They even seemed to get a boost in light of news reported yesterday about Tata’s plans to separate its British pension scheme from its businesses.

Despite that step, Thyssenkrupp CFO Guido Kerkhoff says not so fast.

Kerkhoff told reporters Thursday that while they prefer a “fast solution” in potential merger talks, quality comes first.

China Warns U.S. After DOC’s Aluminum Foil Ruling

Unsurprisingly, the U.S. aluminum industry applauded the Department of Commerce’s preliminary determination Tuesday regarding Chinese aluminum foil.

Also unsurprisingly, China had something to say about it, too.

The Chinese Ministry of Commerce wrote in a statement on its website that the DOC’s claims were “without foundation” and urged the U.S. to “act cautiously and make a fair decision to avoid any negative impact on the normal economic and trade exchanges between China and the U.S.”

On Tuesday, Secretary of Commerce Wilbur Ross announced the findings of the countervailing duties investigation, declaring that Chinese exporters of aluminum foil received countervailing subsidies of 16.56 to 80.97 percent. As a result, the U.S. could impose duties of up to 81 percent on Chinese foil in return.

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Meanwhile, the outcome of the Section 232 investigation into aluminum imports, however, remains pending.

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

This morning in metals news, the still-pending Section 232 investigations into steel and aluminum imports, raw steel production is up 2.7% in the U.S. year-over-year and aluminum has reached its highest point in 2.5 years.

Uncertainty Growing in Aluminum Market

It’s not exactly surprising that some in the aluminum and steel industries are feeling anxious about the Section 232 investigations, still unresolved, initiated by the Trump administration in April.

According to a report in Platts, that’s exactly how some are feeling on the aluminum side. Not only that, the uncertainty is making what was already considered a volatile aluminum market even more volatile.

Another potential consequence of the investigation? The cost of downstream products could go up, according to industry sources cited by Platts.

Raw Steel Production Down From Previous Week, Up For the Year

The American Iron and Steel Institute released its weekly raw steel production data on Monday, and the numbers are both up and down.

For the week ending Aug. 5, production was down 0.4% from the previous week ending July 29. Production for the week ending Aug. 5 amounted to 1,762,000 tons.

Production for the year to date, however, was up 2.7%, with 53,870,000 tons produced through Aug. 5 this year.

Aluminum Heats Up

The durable metal reached a 2.5-year high Tuesday on news of Chinese supply cuts and signs of strong Chinese demand, Reuters reported.

According to the report, 3.21 million tons of production will be shut down in China’s Shandong province.

LME aluminum eclipsed the $2,000/ton mark on Tuesday, reaching as high as $2,007 — the highest since December 2014, according to Reuters.

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This morning in metals news, Indian steel company JSW Steel Ltd. could partner with a Japanese firm to acquire distressed Indian companies, steel import permit applications fell 12.3% in the U.S. last month and Chinese aluminum capacity cuts are sending prices up.

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Steel Tycoon Sajjan Jindal Open to Partnership with JFE

A deal might be in the works between Indian and Japanese companies.

Bloomberg reported Sajjan Jindal and his JSW Steel Ltd. would be open to investment from the Japanese firm JFE Holdings Inc., per JSW Joint Managing Director Seshagiri Rao. According to the report, JSW is looking to acquire distressed companies in India.

With plants in southern and western India, JSW is looking to expand into the eastern half of the country.

Steel Imports Permit Applications Fall in July

According to the Commerce Department’s most recent Steel Import Monitoring and Analysis (SIMA) data, steel import permit applications fell 12.3% in July compared with the previous month.

According to a release from the American Iron and Steel Institute (AISI), in July the largest finished steel import permit applications for offshore countries were for: South Korea (333,000 net tons, down 14% from June preliminary), Turkey (211,000 net tons, down 36%), Japan (149,000 net tons, up 20%), Germany (144,000 net tons, up 24%) and Taiwan (136,000 net tons, down 17%).

Through the first seven months of 2017, the largest offshore suppliers were South Korea (2,261,000 net tons, down 5% from the same period in 2016), Turkey (1,681,000 net tons, up 11%) and Japan (935,000 net tons, down 12%).

Chinese Capacity Cuts Lead to Rising Aluminum Prices

The longevity of the positive effects of China’s capacity cuts has been debated here and elsewhere. In some cases, capacity cuts have simply given way to new capacity elsewhere, effectively negating the initial cuts’ support of aluminum prices.

For now, however, the most recent round of aluminum capacity cuts in China has been good news for the metal’s price, which has risen in recent days.

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According to Reuters, China is “forcing the suspension of aluminum plants that have not obtained proper permits to build or expand, or that have not met strict environmental standards.”

According to Reuters, shares of Aluminium Corp of China rose 47 percent since the start of July. Shares in Shenzhen-listed Yunnan Aluminium rose even more, by a whopping 55 percent.

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Talk of tariffs stemming from the Trump administration’s Section 232 investigations of steel and aluminum imports has seemingly softened over the last couple of weeks, but the overall trade dynamic between the to countries remains tense.

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First, President Trump told the Wall Street Journal last week that “we don’t want to do it at this moment” in reference to trade actions on steel imports resulting from the administration’s Section 232 investigation.

Section 232 of the Trade Expansion Act of 1962 gives the Secretary of Commerce authority to conduct comprehensive investigations to determine the effects of imports of any article on national security. The investigations were announced open in April. By law, the investigation must be concluded, including a submitted report, within 270 days of its opening.

More recently, a shift toward a negotiated agreement seems to be gaining favor. According to Inside U.S. Trade ($), Secretary of Commerce Wilbur Ross suggested “voluntary” agreements, according to House Ways & Means Committee members who met with Ross on July 27.

However, in terms of getting any additional clarity on what the administration plans to do, the committee members left the July 27 briefing without much of that.

“I don’t think that there was a lot of clarification,” Richard Neal (D-MA) told Inside U.S. Trade.
The deadlines for the Section 232 investigations are well down the road (not until January), but, until then, talk is likely to continue about what the administration will or won’t do, in addition to what other relevant parties could do in retaliation.
In similar news, the administration and many in the U.S. steel industry have pointed to China’s excess capacity as the major problem for the domestic industry, leading to suggestions of tariffs or quotas targeting China (but also affecting other steel-producing countries).
Talk of trade remedies against China, however, hasn’t just been limited to steel and aluminum.
Bloomberg reported earlier today that the Trump administration could go after China for perceived intellectual property violations.
According to the Bloomberg report, the administration is considering invoking another article — Section 301 of the Trade Act of 1974.
In essence, Section 301 is the mechanism by which the U.S. can respond to countries in violation of trade agreements or engaging in unfair trade practices. The move would further increase tensions between the U.S. and China, particularly in light of Trump’s admonishments of China for not doing enough to rein in North Korea.

The steel market is doing rather well, particularly in the U.S., but an improvement in demand is helping lift earnings in Europe, too.

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The phrase “a rising tide lifts all boats” is probably true of steel companies — it is also true to say it doesn’t lift all boats equally.

ArcelorMittal, part way through a major re-structuring program to re-focus the business on value add growth areas and exit less attractive market segments, is doing rather well judging by both the share price and recent reporting.

The Northwest Indiana Times reported last week that the world’s largest steelmaker grew its second-quarter profit by 19% to $1.3 billion, lifting its first-half profit to $2.3 billion (compared to just $696 million during the same period in 2016).

Demand in the U.S. — though it has been impacted by imports, the firm claims — was high, as the firm shipped 21.5 million tons of steel in the second quarter, a 2% increase over the first quarter. So far this year, however, its steel shipments in H1 declined by 2.4% to 42.5 million tons compared to the year before.

So, margins are up but volumes are down. North American shipments dropped 3.4% to 5.4 million tons and crude steel production fell 7.3% to 5.8 million tons, the Northwest Indiana Times reports. Yet, with sales prices up 5.7%, sales values were up 3.3% to $4.6 billion in North America, leading to much-improved profits.

Even U.S. Steel is doing better. CEO Dave Burritt said U.S. Steel saw “higher prices and volumes in all of our segments.” Burritt also said management believes that if the steel market continues going as it is currently, it could earn as much as $1.70 per share this year – adding the caveat that unfortunately it doesn’t see the market continuing in the same manner for the rest of the year.

Analysts are questioning whether the present share value is justified, suggesting after falling some 30% already this year it could have further to go.

Analysts such as Citi see major “downside” in 2018 and 2019 to U.S. Steel’s share price, predicting a loss for the year even though the first half has been relatively (for U.S. Steel) strong.

Waning Optimism and What Comes Next

Some steel sector share prices were boosted earlier this year by the hope President Trump would pump billions into infrastructure. Then, as hopes faded for that outcome, they got a sugar rush from the prospect of trade measures to curb imports of foreign steel.

But the Motley Fool, quoting the Wall Street Journal last week, reported comments by the president suggesting he was kicking trade action into the long grass.

Trump said he does not want to impose tariffs and quotas on imported steel “at this moment.” Objections from trade partners (who don’t want their exports curbed), and from domestic steel users as well (who like the idea of cheap foreign steel) are sapping the administration’s support for the trade action. It’s hardly surprising, but until recently the steel lobby had been putting a powerful case for action, and it took time for counterarguments to gain traction.

The president went on to say that instead of imposing sanctions “very soon,” as the steel industry was hoping, his staff will need to do “statutory studies … addressing the steel dumping” issue. And while the president promised action “fairly soon,” he also said the administration plans to address health-care reform, tax reform, and may even want to get an infrastructure bill passed by Congress before returning to the steel issue.

So, for the time being, forget about it — “he has other fish to fry” seems to be the position.

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Without curbs to imports, the view for steel companies’ profits remaining robust becomes less compelling.

Companies like Nucor and Arcelor will continue to do well, but others, like U.S. Steel and AK Steel, will struggle later this year and into 2018.

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This afternoon in metals news, a recent survey of automakers indicates aluminum’s use in vehicles will grow in a big way over the next decade, U.S. steel production for the week is down slightly from the previous week and copper keeps on soaring.

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The Rise of Aluminum

According to a recent survey of automakers released by The Aluminum Association and conducted by Ducker Worldwide, automakers expect usage of the light, durable metal to increase significantly in the manufacturing of automobiles.

Total aluminum content for North American lightweight vehicles will increase to nearly 9 billion pounds, reaching 565 pounds per vehicle (PPV) and representing 16% of total vehicle weight by 2028, according to the survey results.

“As our automotive customers embrace a multi-material approach to new car and truck design, that directly translates to increased amounts of aluminum,” said Heidi Brock, president and CEO of the Aluminum Association, in the release. “On top of 40 years of uninterrupted growth, the aluminum industry is experiencing a level of sustained growth not seen before in any market or product sector. However, the true winners of this change are American consumers who can choose next-generation cars and trucks that are high performing, efficient, safe, sustainable and more fun to drive.”

According to the release, the expected rise in aluminum use is “consistent with the emerging trend of automakers transitioning to a multi-material vehicle (MMV) design approach, choosing aluminum for doors, hoods and trunk lids, body-in-white, bumpers and crash boxes.”

Steel Production Has Small Week-Over-Week Dip

U.S. steel production dipped 0.2 percent from the week ending July 22 to the week ending July 29, according to data from the American Iron and Steel Institute (AISI).

Approximately 1.67 millions tons were produced last week, compared with 1.77 million tons during the week ending July 22.

However, the July 29 total is a significant step up from total production for the same week in 2016. Production last week was up 6.1% from the same week in 2016.

Copper Continues Surge

Copper continues to have a great 2017, recently hitting its two-year peak. According to CNBC, the metal jumped 7% in July alone.

A global supply deficit and a flagging dollar have supported copper prices this year.

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While some think copper could keep its momentum in the short term, many analysts predict a slowdown as the year progresses.

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This morning in metals news, copper hits a two-year high, economic signals in July for China were a bit of a mixed bag and the London Metal Exchange continues a balancing act between tradition and change.

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Copper Reaches Highest Point in 2 Years

It’s been a big year for copper.

Copper reached a two-year peak on Monday, partially a result of solid manufacturing data in China, Reuters reported.

LME copper reached $6,431 per ton, its highest since May 2015.

Construction Up in China

Speaking of China, July saw a dip in factory growth but a surge in construction, Reuters reported.

China’s Purchasing Managers’ Index (PMI) remained above 50, however, as the Chinese government spent money on construction, fueling demand for building materials.

The Chinese steel industry, for example, had its strongest month of growth since April 2016.

Changing Times at the LME

Matthew Chamberlain became the boss of the world-famous London Metal Exchange at age 34.

A lot has changed for the LME, which was founded in 1877.

The exchange was sold to HKEX in 2012, and is currently engaging in efforts to bring back volumes, The Guardian reports.

The so-called “ring” where LME traders do their work is governed by a set of long-standing rules, like the prohibition on chewing gum. According to the report, Chamberlain says those rules aren’t likely to change.

However, he also acknowledges that the LME needs to be prepared to deal with changing demands — for instance, for cobalt and lithium to be used in electric car batteries.

Free Download: The July 2017 MMI Report

Felipe Peroni and Ana Paula Camargo of MetalBulletin spoke July 19 during a webinar about the Brazilian steel market — particularly, the slab market and hot-rolled coil (HRC).

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Brazil is the largest steel exporter in South America, with increasing production this year. Brazil exports primarily to the U.S. and Mexico, with Mexico serving as the second-largest steel producer in South America. According to preliminary U.S. Census Bureau for June 2017, the U.S. imported 590,473 metric tons of steel from Brazil, up significantly from the 259,285 metric tons imported in June 2016.

Source: TradingEconomics

Macroeconomics in Brazil

Brazil’s political crisis resulted in the impeachment of President Dilma Rousseff at the end of August 2016, which negatively impacted the economy and reduced investment activity in Brazil.

The lack of investments and spending have negatively impacted steel demand.

Although many expect demand to improve in the next few years, the Brazilian economy has not yet rebounded.  The recovery has taken longer than expected.

Source: MetalMiner analysis of MetalBulletin data

Brazilian GDP from construction has decreased since 2013. As construction activity has shown weaknesses, steel long products demand remains weak, as well.

Source: TradingEconomics

Even Brazilian auto sales remain in a downtrend since 2013 (when they last peaked).

Positive auto sector activity would positively impact flat steel market demand. Auto sales have increased by 22% this month. We’d expect to see more robust demand for hot-dip galvanized (HDG) and cold-rolled coil (CRC) steel.

Source: TradingEconomics

Brazilian Steel Drivers

In terms of domestic Brazilian steel prices, China is the main driver of the steel industry.

Both Chinese CRC and HRC prices have increased since April of this year. Considering a long-term perspective, the uptrend started in February 2016. Chinese steel prices, like they do in the U.S., also drive other domestic steel markets, including Brazil’s.

The latest increase in Chinese prices gave upward price momentum to Brazilian steel prices, together with the recovery of the steel industry. Brazilian mills increased margins to remain profitable.

Source: MetalMiner data

Iron ore prices also support the steel price uptrend. An increase in raw materials commonly goes along with an increase in steel prices, as production costs are higher. Oil and coking coal prices have also increased during July, adding price support.

Even though the Brazilian steel industry is recovering from its previous downtrend, it does not yet appear anywhere on the list of the top steel producers around the world. According to the Top Steelmakers 2017 edition published by MetalBulletin, the top Brazilian mill took 20th place.

What This Means For Industrial Buying Organizations

Even if Brazil is not currently a top producer of steel, the country currently exports steel to the U.S. If prices increase in Brazil, we expect U.S. buying organizations to source elsewhere.

In fact, buying organizations have reported to MetalMiner that prices for steel in Italy and Spain are some of the lowest in the world.

Free Download: The July 2017 MMI Report

Moreover, rising Brazilian steel prices point toward a general uptrend. Specific price dynamics will depend on the specific form of steel.

Further analysis and industrial buying strategies can be found in the Monthly Outlook Report.