Steel prices have been on a tear since November. However, prices came under pressure in early February.
After having lost some ground over the past month, U.S. steel companies now seem to be pushing for another round of price hikes. But, can U.S. steel prices rise from current levels?
In February, new findings by Greenpeace East Asia and Chinese consultancy Custeel stated that despite China’s high-profile efforts to tackle overcapacity, China’s operating steel capacity increased in 2016. The report suggests that 73% of the announced cuts in capacity were already idle — in other words the plants were not operating. Only 23 million metric tons of cut capacity involved shutting down production plants that were operating. For 2016, China saw a net increase of 37 mmt of operating capacity.
According to the data released by the World Steel Association, China’s January steel production rose 7.4% to 67 mmt while global steel production rose 7% from a year ago.
These numbers give us reason to doubt that China can deliver this year in terms of capacity caps. Given the country’s pollution issues, China is now under pressure to demonstrate progress on capacity cuts, but financial and legal incentives to keep marginal firms running will cause regulators to struggle to enforce capacity cuts. Can the steel price rally continue just on promises of supply cuts?
Despite resilient output, investors have focused on China’s increased appetite for steel. Thanks to the country’s stimulus measures, demand for metals rose there. As a result, Chinese steel exports have fallen double digits for five consecutive months.
China exported 7.4 mmt of steel products in January, down 23.8% from the same period last year. In addition, January steel exports were at their lowest level since June 2014.
Steelmakers are using the argument of rising iron ore, coal and other raw material prices to press steel buyers to pay more for their steel products. Iron ore is currently trading in the ballpark of $90 per dry mt, the highest since mid-August 2014. After an 85% rise in 2016, the price of iron ore has improved by more than 16% so far this year and has more than doubled in value since hitting near-decade lows at the end of 2015.
It might not be prudent to draw a conclusion based on January’s steel data alone. But given current trends, China may need to intensify its efforts to curtail excess steel capacity. Demand growth alone might not be a strong argument for U.S. mills to continue to hike prices at the pace the did over the past few months.
U.S. construction spending unexpectedly fell in January as the biggest drop in public outlays since 2002 offset gains in investment in private projects, pointing to moderate economic growth in the first quarter.
The Commerce Department said on Wednesday that construction spending declined 1% to $1.18 trillion. Construction spending in December was revised to show a 0.1% increase rather than the previously reported 0.2% decline.
Economists polled by Reuters had forecast construction spending gaining 0.6% in January rather than the loss that was booked.
Our Construction MMI held steady this month despite the falling spending. The component metals of the sub-index still have bulls behind them, despite the flat performance. Steel construction materials such as rebar and h-beams are still posting big gains but scrap and others saw a loss.
It’s almost as if construction products are still in demand, particularly in China’s construction sector, even as U.S. construction experiences a pullback.
In January, public construction spending in the U.S. tumbled 5%, the largest drop since March 2002. That followed a 1.4% decline in December. Public construction spending has now decreased for three straight months.
Outlays on state and local government construction projects dropped 4.8%, also the biggest drop since March 2002. This could be an ominous sign for construction spending this year, provided, of course, that a major infrastructure plan, such as the $1 trillion plan President Trump continues to promise, doesn’t pass quickly enough to boost construction prices. The longer that it takes to pass an infrastructure plan, the less likely it is to boost contractors’ bottom lines this year.
That boost is needed for our aging infrastructure, too. Spending on state and local government construction projects has now dropped for three straight months. Federal government construction spending plummeted 7.4% in January, the largest decline since May 2014. The drop snapped three consecutive months of gains.
Spending on private construction projects actually rose 0.2% in January, but could not make up for the loses in government projects.
Our stainless MMI gained in February as nickel prices rebounded. Prices had fallen in December and January as Indonesia relaxed its ban on exports of nickel ore. But nickel bulls ran over the bears last month as the Philippines ordered more mine shutdowns. As we expected, the shutdowns in the Philippines are a great driver of prices.
On February 2, the Philippines ordered the closure of 21 mines, and seven others could be suspended. The nickel mines recently ordered to shut down account for about 50% of the country’s annual output. As a result, investors sent nickel back to $11,000 per metric ton by the end of February.
Stainless buyers will need to monitor nickel’s supply. These two major producer nations’ actions will continue to move the gauge on price direction this year. Meanwhile, the demand side of the equation will likely limit any significant downside in nickel prices this year.
The Caixin Manufacturing PMI in China beat market expectations in February, rising to 51.7 from 51 in January. It marked the eighth straight month of growth, driven by faster rises in output and new orders. In addition, stock markets in China hit new highs, signaling that investors’ sentiment on China’s economy remains strong. This is usually a bullish sign for industrial metal prices, including nickel. This relationship has been really strong since China became the world’s top producer and consumer of commodities. In the U.S., the closely watched ISM manufacturing index hit 57.7 in February, marking the highest level since August 2014.
Also in February, the Department of Commerce placed final, affirmative anti-dumping and countervailing duties on imports of stainless steel sheet and strip from China. Domestic flat-rolled mills are benefiting from these actions, with lead times of eight weeks.
Industrial metals continue to rise on robust demand and shrinking supply. The supply/demand fundamentals of the nickel industry look more complex than those of other base metals. However, higher import duties in stainless markets and the ongoing bullish sentiment on industrial metals will at least, prevent nickel prices from significant downside moves.
Copper prices remained supported in February, trading in the ballpark of $6,000 per metric ton as a return to production at two top mines — which are combined responsible for some 8% of global output — looks increasingly doubtful in the near term.
A strike at the Escondida in Chile, the world’s largest copper mine, appeared far from ending during February. The strike increasingly turned more violent as protesters blocked roads and battled police. The events reflect the increasing bitterness and division between the two sides, as positions still appear to be far apart after almost four weeks of strike. Key differences include disagreement over changes to shift patterns and the level of benefits new workers receive.
Meanwhile, Freeport-McMoran is under a concentrate export ban as it negotiates a new operating license from the government of Indonesia. Having limited storage capacity, the company will be forced to drastically cut output if Indonesia doesn’t give the company an export license to send material to its local smelter for processing.
In late February, the company announced that it sees “no returning to business as usual,” as the miner cut output and laid off workers. Copper concentrate production at the mine has been stopped since Feb. 11, and ore output is being limited to stockpiling for future processing.
In a memo, The company stated that during February it revised its operating plans, slowed its underground expansion and announced plans to drastically reduce manpower levels in an effort to cut costs as the company needs to survive while it works with the government to achieve a mutually viable solution to resume exports. So far, that agreement doesn’t seem close to coming together in the near term.
This year, there will be other temporary suspensions at smaller copper mines such at El Soldado mine in Chile. In addition, some major contract negotiations in large mines are due this year.
Copper prices might look expensive compared to what they were just three months ago, however sentiment in the industrial metals complex remains quite bullish and current supply issues could turn into large deficits if stoppages and disruptions are prolonged. It’s seems early to call for an end on copper’s bull market.