Steel

The October 2019 Monthly Metals Index (MMI) report is in the books.

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

This month, just one of the Monthly Metals Indexes (MMIs) increased, while six declined and three held flat.

Some highlights from this month’s MMIs:

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This morning in metals news, the U.S. steel sector’s capacity utilization rate inched down another tenth of a percentage point, the U.S. raised its steel tariffs on Turkey to 50% and Chinese iron ore futures fell Tuesday.

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

U.S. Steel Capacity Utilization Rate Falls to 80.3%

The U.S. steel sector’s capacity utilization rate for the year through Oct. 12 reached 80.3%, down from 80.4% the previous week.

Steel production for the year through Oct. 12 reached 76.1 million tons, up 2.9% on a year-over-year basis.

Trump Raises Turkey Steel Tariffs

In yet another turn in U.S.-Turkey relations, President Donald Trump signed an executive order halting trade negotiations with Turkey and raising the tariff on Turkish steel imports to 50%.

Last year, the Trump administration raised its Section 232 steel tariff on Turkish steel to 50% amid a row over Turkey’s detention of American pastor Andrew Brunson; the U.S. eventually brought the tariff back down to the standard 25% rate.

However, after the U.S. announced a withdrawal of its forces from Syria, followed by Turkey’s military offensive in the region, Trump released a statement announcing the U.S. would sanction Turkish government officials and “any persons contributing to Turkey’s destabilizing actions in northeast Syria.”

Chinese Iron Ore Futures Down Amid Vale Production Uptick

Chinese iron ore futures dropped to an over two-week low amid Brazilian miner Vale’s announcement of elevated third-quarter production, Reuters reported.

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The most-traded iron ore contract on the Dalian Commodity Exchange fell 1.2% on Tuesday, down to 644 yuan ($91.05) per ton, according to the report.

The Raw Steels Monthly Metals Index (MMI) took another hit this month, dropping three points to 67. The index has now dropped for seven consecutive months — following an early 2019 high of 82 in March — on the back of falling steel prices.

U.S. steel prices dropped in September, with plate prices recording the greatest loss. However, historically, plate prices tend to track lower than CRC.

Based on technical analysis, prices for plate could still demonstrate more downside momentum compared to other forms of steel (HRC, CRC and HDG).

Source: MetalMiner data from MetalMiner IndX(™)

U.S. capacity utilization for the year to date remains above the critical 80% mark at 80.4%. During the period, production totaled 74.3 million tons, a 3% increase compared to the same period last year, according to the American Iron and Steel Institute (AISI).

However, weekly data for the week ending Oct. 5 indicated capacity utilization of 78%, with 1.8 million tons produced, a 3.9% decrease compared to the same period last year.

Chinese Prices Weaken

China CRC and plate prices nudged down recently, while HRC prices dropped to a greater extent.

Meanwhile, HDG prices took a clear downward turn in September.

Source: MetalMiner data from MetalMiner IndX(™)

During the course of 2019, Chinese steel prices looked fairly flat overall, with prices now lower than at the start of the year.

HRC, CRC and plate prices looked just slightly weaker compared to January prices. HDG prices dropped more noticeably, priced at CNY 5,690/mt in early October compared to the January price of around CNY 6,040/mt.

China’s Share of Total Global Production Continues to Increase

Based on data from the World Steel Association (WSA), global production of steel during the first eight months of 2019 totaled 1,239 million tons, up 4.6% percent compared to the first eight months of 2018.

China’s total share of global production totaled 53.6%, based on WSA data through August. Based on an estimated 664.04 million tons through August, production increased by 9.4% compared to the same period of 2018.

Additionally, in terms of monthly data, China’s steel production increased once again. China’s August production reached 87.25 million tons in August after dropping during the two months prior from June’s peak 2019 production of 89.09 million tons.

Meanwhile, production in Japan, the world’s third-largest steel-producing country, fell by 3.7% during the eight-month period, down to 67.589 million tons. The country’s share of global production dropped to 5.5%, compared to 5.9% during the first eight months of 2018.

U.S. production totaled 59.23 million tons through August, an increase of 4% compared to the same period of 2018, according to WSA numbers. Share of global production remained static at 4.8%. Likewise, production in India, the world’s second largest producing country, also remained flat at 6.1%, in terms of total global share of production.

Ongoing GM Strike Continues to Hurt Steel Demand

Given that demand from GM represents around 5-9% of annual steel demand in the U.S. (by various estimates), the ongoing strike continues to place a drag on U.S. steel prices.

As of Oct. 10, the strike had reached its 25th day.

What This Means for Industrial Buyers

Global growth in the production of steel appears to remain in excess of growth in steel demand, exerting downward pressure on prices.

Therefore, industrial buying organizations may benefit from understanding exactly when and how much to buy in this falling market.

Buying organizations interested in tracking industrial metals prices with ease should request a demo of the all new MetalMiner Insights platform.

Buying organizations seeking more insight into longer-term steel price trends may want to read MetalMiner’s Annual Metal Buying Outlook.

Free Partial Sample Report: 2020 MetalMiner Annual Metals Outlook

Actual Raw Steel Prices and Trends

Steel prices weakened further in September.

Korean scrap prices registered a 16.9% decrease, falling to $116/st. Korean pig iron dropped 0.2% to $358/mt.

U.S. shredded scrap prices dropped 13.6% to $254/st. The U.S. Midwest HRC futures spot price dropped 10.9%, while the Midwest HRC futures three-month price fell by 3.6% to $522/st and $530/st, respectively.

LME billet three-month prices dropped 12% to $234/st.

Chinese prices in the index showed mixed, mild movement. Chinese billet prices increased the most, rising 2.1% to $488/mt. HRC prices decreased the most, dropping 1% to $505/mt.

An interesting article in the Financial Times this week struck a chord with us at MetalMiner where we often debate how we see metals and manufacturing will go. As such, we often try to shoot holes in oft touted but poorly researched “trends” found in the popular media or espoused by politicians.

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One that crops up repeatedly is the inevitability of electric vehicles (EVs) burying the internal combustion engine (ICE), a proposition with which the Financial Times article would agree, it seems.

Anyone reading the mainstream media can be forgiven for thinking EVs are the fastest-growing sector of the automotive market. We are often bombarded with new model launches but, also, the ramifications of this surging demand are painted as an imminent threat to price stability for a host of key battery metals, like lithium, cobalt and nickel, or motor metals, like copper.

Indeed, the only trend said to be supporting copper prices is “surging” EV demand.

As the FT observes, EV numbers are growing.

Worldwide, some 5.1 million EVs were on the roads by the end of 2018, an increase of 2 million from the year before. Global sales of EVs are likely to be between 2.4 million and 2.9 million this year.

EV sales, however, are still being outstripped by growth in fuel-guzzling SUVs.

The between 7 million and 8 million EVs that should be on the road by the end of 2019 represent less than 0.1% of the 1.1 billion cars and other light vehicles that use internal combustion engines. Some 85 million ICE vehicles were sold worldwide in 2018 and, even from this much higher base, SUVs are experiencing rapid growth in outright numbers.

After growth of over 20% a year earlier in the decade, global demand growth for SUVs is now stabilizing — but at a high level of market share.

In the U.S., SUVs account for 45% of new car sales, the Financial Times reports.

But the trend is not limited to the U.S.

In Europe, SUVs take 34% of new sales, in China 42% and in India 23% the article advises, equating to some 25 million to 30 million annual SUV sales worldwide. While some of these may be hybrids, anyone who owns an SUV hybrid will know they are far from fuel efficient; in fact, they rarely even approach the level of fuel efficiency the manufacturers claim in their glossy sales brochures.

The reality is, despite governments and even oil companies pouring millions into infrastructure and commitment from traditional manufacturers — like all product lines having an EV version by 2020 or 50% of the fleet being EV by some future date) — Joe Public is not voting with his or her wallet to buy them. At least, not in enough numbers to drive a meaningful switch to EVs.

Indeed, the statistics suggest the switch is to larger, gas-guzzling SUVs, rather than EVs.

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If that is the case what does that say about metals demand?

It suggests, as far as the automotive market is concerned, it will continue to be driven by steel and aluminum, with support for copper — but not the tsunami of imminent demand for lithium ion batteries, as some have touted.

Steven Husk/Adobe Stock

The Automotive Monthly Metals Index (MMI) held flat this month for an MMI reading of 85.

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U.S. Auto Sales

The Big 3, which now all report sales on a quarterly basis, released sales figures for the third quarter.

General Motors reported third-quarter deliveries of 738,638 vehicles, marking a 6.3% year-over-year increase.

Negotiations between GM and the United Automobile Workers (UAW) union entered their third week this week, UAW rejected the latest GM offer on Sept. 30, according to a UAW statement.

“This proposal that the Company provided to us on day 15 of the strike did not satisfy your contract demands or needs,” UAW Vice President Terry Dittes said in a release. “There were many areas that came up short like health care, wages, temporary employees, skilled trades and job security to name a few.  Additionally, concessionary proposals still remain in the company’s proposals as of late last night.”

Earlier this month, MetalMiner Executive Editor Lisa Reisman weighed in on a lingering strike’s potential impact on steel prices.

“Given that the U.S. market consumes about 110 million tons annually, and GM’s share represents about 8% of domestic steel production, it would take a 39-day strike to lower demand by 1 million tons, or 1%,” she wrote.

As of Thursday, Oct. 3, the strike has reached its 18th day.

Ford reported third-quarter vehicle sales of 580,251, down 4.9% on a year-over-year basis. However, Ford truck sales increased 8% year over year.

Fiat Chrysler’s third-quarter sales were flat compared with Q3 2018.

Honda sales were down 14.1% in September compared with September 2018 sales.

Toyota reported sales fell 16.5% in September on a volume basis and by 9.2% on a daily selling rate basis. Nissan’s September sales fell 17.6% on a year over year basis.

According to a jointly released forecast by J.D. Power and LMC Automotive, accounting for fewer selling days, September vehicle sales were down 7.8% compared with September 2018.

Ford, Mahindra Team Up

Ford recently announced a joint venture partnership with India’s Mahindra, which will aim to “develop, market and distribute Ford brand vehicles in India and Ford brand and Mahindra brand vehicles in high-growth emerging markets around the world.”

Ford will own a 49% controlling stake in the joint venture, with Mahindra owning a 51% stake.

“Ford and Mahindra have a long history of working together, and we are proud to partner with them to grow the Ford brand in India,” Ford’s Executive Chairman Bill Ford said in a release. “We remain deeply committed to our employees, dealers and suppliers, and this new era of collaboration will allow us to deliver more vehicles to consumers in this important market.”

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Actual Metal Prices and Trends

The U.S. HDG price fell 3.8% month over month to $804/st as of Oct. 1.

LME three-month copper was essentially flat, moving to $5,640/mt. U.S. shredded scrap steel fell 13.6% to $254/st.

The Korean aluminum 5052 coil premium rose 0.6% to $3.14 per kilogram.

Pavel Ignatov/Adobe Stock

Global crude steel production increased 3.4% in August on a year-over-year basis, the World Steel Association reported.

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Production for the month reached 156 million tons, according to the World Steel Association report, which collects production data from 64 countries.

The 3.4% increase comes after a 1.4% year-over-year increase the previous month.

Broken down by individual countries, top steelmaker China produced an estimated 87.3 million tons, up 9.3% on a year-over-year basis — a sharp jump from last month’s 5% year-over-year increase.

As Stuart Burns explained yesterday, China’s production in recent years has continued to rise despite mandated production closures aimed at mitigating high pollution levels in many parts of the country. Production cuts were at first mandated by Beijing, but last year local authorities were set their own production cut levels.

“Fears are therefore rising that China could be on track to create a glut this winter despite the now normal winter closures,” Burns wrote.

“China’s rivals in southeast Asia are looking on warily concerned that rising exports will further depress regional prices as the domestic market fails to absorb the anticipated record output.

“That’s not good news for the rest of the world.

“Even markets protected by high tariffs like the U.S. will be dragged down by lower global prices and imports undercut domestic U.S. mills.”

As the winter heating season approaches in China, the scope of this year’s production cuts will prove to be a critical factor monitored by steel-producing nations around the world.

Elsewhere, Japan produced 8.1 million tons in August, down 7.8% year over year. South Korea’s crude steel production fell 2.6% to 5.9 million tons in August 2019.

In Europe, German production ticked up 0.8% to 3.3 million tons, while Italy’s production plunged 26.7% to 900,000 tons. France produced 1.1 million tons, up 11.2% year over year, while Spain’s production dropped 4.6% to 1.1 million tons.

U.S. production, meanwhile, hit 7.5 million tons, up 0.3% on a year-over-year basis.

According to the America Iron and Steel Institute (AISI), U.S. steel production for the year through Sept. 28 reached 72.6 million tons, up 3.4% compared with the same period last year.

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The U.S. steel sector’s capacity utilization rate checked in at 80.6% for the year through Sept. 28.

U.S. steel prices have been on the decline of late.

The U.S. HRC price is down 5.13% over the last month, down to $555/st as of Monday. U.S. CRC is down 1.98% to $741/st, while U.S. HDG is down 4.4% to $804/st.

The drop for plate has been even steeper, as U.S. plate is down 7.65% to $736/st.

The primary reason to pay attention to Chinese steel prices pertains to the country’s price leadership in the global marketplace.

However, since currency dynamics shifted recently, now is a good time to take a more tactical look at the U.S.-China steel price spread.

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The price spread between U.S. and Chinese steel increased during the months following the March 2018 implementation of tariffs on steel imports into the U.S.

After peaking around June 2018, the price spread between U.S. and Chinese steel commodity prices then shrank again by July 2019 — to its lowest level since December 2017 — largely due to falling U.S. prices.

Source: MetalMiner data from MetalMiner IndX(™)

The spread for CRC looks similar, but at different dollar amounts.

Source: MetalMiner data from MetalMiner IndX(™)

As shown on the chart of the spread below, for HRC, the spread between prices narrowed significantly several times in recent history, but came closest to approaching zero in December 2017 and then again in January of 2019.

A smaller spread benefits U.S.-based producers, since similar prices disincentivize imports.

Source: MetalMiner data from MetalMiner IndX(™)

Once accounting for additional costs associated with shipping, finance, the cost of carry and margin, any time the spread exceeds around $90/st — meaning U.S. costs exceed Chinese steel costs by a minimum of $90/st — imports start to look attractive, all other things being equal.

With tariffs, this cost should theoretically provide a buffer against import competition for U.S. producers to the extent of the tariff cost, plus the original competitor’s price, shipping and related costs associated with imports.

For example, assume a tariff rate of 25% on a China HRC price of $485/st and a U.S. price of $585/st. With import freight plus costs at an estimated $90/st, the tariff adds an additional cost of $143.75/st, with an end price total of $718.75/st.

In this example, at this price point and tariff rate, we would need to see the price spread exceed $233.75/st (cost of importing, plus costs of tariffs) before imports theoretically make sense, as shown by the purple line in the chart above.

For CRC, the red line in the chart below indicates where a $90/st import charge intersects the spread line.

For a short time during the start of the tariffs, U.S. producer prices surged; therefore, producers may not have actually allowed the tariffs to render protection as intended by their use, per the HRC model shown above.

U.S. producer prices look to have already corrected from the aforementioned price surge.

Source: MetalMiner data from MetalMiner IndX(™)

Looking at the chart above, CRC imports should be more heavily impacted by the imposition of tariffs, since imports make more sense from a price perspective.

Instead of seeing tariffs as providing a buffer allowing higher prices, what seems closer to reality has more to do with China’s need to lower prices. With U.S. prices corrected, we expect to see lower Chinese prices, as producers drop prices to stay competitive.

In fact, recently we did see lower Chinese HRC prices and a fairly weak, but still sideways, domestic CRC price. Weaker demand in China is a key factor underpinning the price weakness.

Source: MetalMiner data from MetalMiner IndX(™)

Since June, as shown in the chart above, the domestic price of HRC steel in China trended lower, but just slightly (note the narrow range shown on the vertical axis).

In early August, the Chinese government allowed the currency to weaken to a 7-to-1 level vis-a-vis the yuan versus the dollar. This effectively dropped the price of Chinese steel for international buyers and the amount of the related percentage-based tariff.

Source: MetalMiner data from MetalMiner IndX(™)

Compared to HRC, China’s domestic CRC price trend has looked more firmly sideways since June 2019.

Source: MetalMiner data from MetalMiner IndX(™)

In the case of CRC, we can see more clearly in the chart below how the adjusted exchange rate impacts the international price of Chinese CRC steel exports, as the domestic price has nudged up overall since June.

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Source: MetalMiner data from MetalMiner IndX(™)

What This Means for Industrial Buyers

Chinese producer prices looked flat to weak during the summer months and into the fall, as the exchange rate adjustment made steel imports from China look more attractive.

Given the high levels of production from China, generally speaking, we can expect to see the highly competitive price environment to continue, providing industrial buyers with ample options for negotiations.

buhanovskiy/AdobeStock

This morning in metals news, U.S. steel imports fell in August compared with July, House Speaker Nancy Pelosi called for the beginning of an impeachment inquiry of President Donald Trump and Indian mining companies are concerned about the impending expiration of leases for non-captive iron ore mines.

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Steel Imports Drop

According to preliminary U.S. Census Bureau data, U.S. steel imports reached 1.8 million metric tons in August.

The August steel import level marked a decline from the 2.7 million metric tons imported in July.

Markets React to Impeachment Inquiry News

Democratic House Speaker Nancy Pelosi on Tuesday announced her intention to initiate impeachment inquiry regarding President Donald Trump.

As a result, stock markets dipped Tuesday morning, but recovered later in the day.

The CBOE’s volatility index, the VIX, reached a three-week high, ascending to 17.77 early Wednesday before dipping just below 17 later this morning.

Indian Companies Worry Over Mining Leases

According to the Economic Times, concerns abound in India regarding the expiration of 31 non-captive iron mines March 31.

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RK Sharma, secretary general of the Federation of Indian Mineral Industries, told the Economic Times that the mines in question account for 45% of the domestic steel industry’s iron ore requirements.

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Earnings guidance recently released by U.S. steel companies have a common denominator: the impact of falling steel prices.

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Last year, upon the Trump administration’s implementation of Section 232 steel tariffs, domestic steel prices surged. However, since mid-2018, steel prices have steadily declined.

As such, steel industry optimism, buoyed by rising capacity utilization rates and restarts of idled production — bringing jobs with them — has subsided in the last year.

On the one hand, steel prices seemed to find a floor earlier this year.

In mid-July, the U.S. HRC price dropped down to $530/st before eventually bouncing back up to $590 over the ensuing month, according to MetalMiner IndX data.

However, the price has once again declined. The U.S. HRC price is down 3.39% over the last month, down to $570/st.

Meanwhile, HDG prices have followed a similar trajectory, reaching a bottom in July and steadily recovering after a shorter-term downtrend that began in March. HDG prices, too, are down in the last month, having fallen 2.38% to $832/st.

CRC prices have not fallen like HDG and HRC prices have over the last month. Plate prices, however, are down 7.63% over the last month, down to $738/st.

All of this is to say that falling steel prices are impacting U.S. steel firms’ decisions.

Last week, Steel Dynamics, Inc. reported its third-quarter earnings were expected to be down compared with the previous quarter.

“The reduced earnings are primarily related to lower profitability from the company’s sheet steel operations, as shipments and average steel pricing declined in the quarter, more than offsetting lower scrap costs,” the company said. “Underlying domestic steel demand remains principally intact for the primary steel consuming sectors, with particular strength in construction.

“Third quarter 2019 profitability for the company’s metals recycling platform is also expected to decrease when compared to sequential second quarter results, as a result of declining ferrous and nonferrous commodity prices coupled with steady shipments.”

Similarly, U.S. Steel’s outlook regarding a pair of blast furnaces was impacted by falling prices.

“The positive flat-rolled steel market indicators experienced earlier this summer have softened after a brief recovery in steel selling prices,” the steelmaker said in its third-quarter earnings announcement last week. “The impact of falling steel prices through the second quarter, combined with the impact of a larger than expected drop in scrap prices on market sentiment, is expected to negatively impact Flat-rolled earnings in the second half of the year.

“As a result, our current assessment of the Flat-rolled segment suggests two blast furnaces will remain idled through at least the end of the year.”

Nucor Corporation also noted falling steel prices in its guidance for the third quarter.

“The performance of the steel mills segment in the third quarter of 2019 is expected to decrease compared to the second quarter of 2019 due primarily to lower prices for sheet and plate steel,” the company said. “Although we still see stability in most of the end use markets that we serve, there has been some softening in automotive, agricultural products and power transmission markets.”

Steel companies have also faced pressure from a raw material perspective, given this year’s surge in iron ore prices (on the back of supply-side disruptions in Australia and Brazil). Iron ore prices have put the squeeze on steelmakers’ margins, with prices of the steelmaking material surging to around to five-year highs earlier this year (above $126/mt).

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On the bright side — for steelmakers, that is — iron prices have subsided of late, falling below $100/mt.

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This morning in metals news, members of the United Steelworkers union ratified a new Alcoa labor deal, the European Steel Association (EUROFER) recently released its 2019 European Steel in Figures report and LME copper prices were up Friday.

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USW Ratifies Labor Agreement

The United Steelworkers union has ratified a new labor agreement at Alcoa, which covers 1,700 employees at five Alcoa facilities.

“The Company and the union leadership tentatively agreed on August 30 to the terms of the four-year contract, subject to ratification by the union’s members,” Alcoa said. “The USW announced the outcome of that vote on Thursday, Sept. 19.

“The new agreement, which is now in effect, covers employees represented by the USW at Warrick Operations in Indiana, Massena Operations in New York, Gum Springs in Arkansas, Wenatchee Works in Washington, and Point Comfort in Texas.”

EUROFER Releases European Steel in Figures

EUROFER’s recently released European Steel in Figures painted a “mixed” picture of the European steel landscape.

“On the face of it, the overall performance of the steel market was relatively positive in 2018,” the document states. “Apparent consumption was up 3.3% in 2018 to 164 million tonnes of apparent consumption – though there was a marked loss of momentum compared to 2017.”

However, as evidenced by Europe’s imposition of permanent steel safeguards earlier this year, imports remain a challenge to the European steel sector.

“However, imports have exploded to new highs, and rising domestic demand has been almost entirely absorbed by this foreign supply,” EUROFER said. “Steel-using sectors, such as automotive, are beginning to see reversals – which has an impact on their current and anticipated demand for steel. Apparent consumption is expected to fall by 0.4% in 2019.”

Copper Prices Rise

Copper prices received a boost Friday from positive U.S. housing data, Reuters reported.

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With August home resales at a 17-month high, LME three-month copper ticked up 0.2% as of 1:48 GMT, according to the report, after trending downward in each of the previous four sessions this week.