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Exit the Dragon? New Steel Tariff Could Divert Chinese Steel Back to Asia

Multiple Operators Suffer Damage to Fiber Networks from Hurricane Michael

Factbox: Hurricane Michael Impact Turns from Production Loss to Demand Destruction

Storm Tracker: More than 860,000 customers still in dark in Michael's wake

Factbox: Utilities, Oil Producers Brace for Hurricane Michael Along U.S. Gulf


Exit the Dragon? New Steel Tariff Could Divert Chinese Steel Back to Asia

With new steel tariffs imposed by the US, Chinese and ASEAN steel is becoming more expensive in the US. While China contributes only 2% of finished steel entering the US, Chinese items made from steel and aluminium – along with countless “transiting metals” – are likely to take a far greater share.

In fact, China was the second-largest source of imports of steel and aluminum products into the US in 2017, second to Canada but above Mexico. Should a strong uptick in US domestic steel production fill the gap, Chinese steel may be forced to retreat from the US market, meaning around 1 million mt would be redirected to Asia.

A worst-case scenario would be the entire export surplus remaining in China, adding to already high domestic inventories and potentially having a bearish impact on sentiment and prices.

Table+-+US+steel+production-determined+scenarios+on+trade+flow+shift%2C+price+impact

More Than 2%

China and the US are the world’s largest steel exporter and importer, respectively. However, trade between the two countries has long been in decline, accounting for approximately 2% for each in 2017.

This can be seen in steel data from 2017 showing total US imports of 34.6 million mt, in of which China accounts for only 2%, or 881,000 mt. This is equivalent to just over 1% of China’s total exports of 75 million mt in 2017. However, when we look at Chinese exports of not only finished steel but all items manufactured from steel and aluminium, such as pipes, tubes, sheet piling, tanks, drums, fabricated sections, nails, cables and even barbed wire, the impact is far greater.

We have used Harmonized System trade data that classifies traded products into internationally standardized groups to analyse China’s trade with the US. The chart shows China’s exports of three groups of metal products to the US: Iron and steel (HS code 72), primarily finished steel like hot rolled coil and bar; products manufactured from iron and steel (HS code 73); and also aluminum and products manufactured from aluminum (HS code 76).

Chart+-+Chinese+steel+and+aluminum+is+18%25+of+the+US+market+in+2017

As can be seen in the chart, trade in steel and aluminium metals and products has risen over the last couple of years to $17 billion last year, with articles manufactured from steel items accounting for 75% of this trade.

This makes China the second-largest source of imports (18%) of steel and aluminum products into the US after Canada (19%) but above Mexico (8%), according to UN Commodity Trade Statistics.

In addition, this 18% does not include the countless Chinese-originated metals that were transiting through a third-party country such as Vietnam and a number of other ASEAN countries. The true exposure of “Chinese metals” to the US, therefore, could be much greater than 2%.

ASEAN Provides an Alternative Market for 'Returned' Chinese Steel from the US

Since 2015, Chinese steel exports have fallen sharply due to the numerous countervailing duties and anti-dumping tariffs the US and EU have applied to Chinese finished steel products. This has facilitated the shifting trade flows from the West to the East, with Asian destinations taking the lion’s share. Southeast Asian (ASEAN) countries are the largest receivers, accounting for 28% of the Chinese steel and aluminium products (HS code 72, 73 & 76), or $26 billion in value in 2016.

Chart+-+9+of+top+10+destination+markets+for+CHinese+steel+stay+in+Asia

In 2017, Chinese exports of finished steel fell a sharp 30% from 2016 to 75 million mt. Total Chinese shipments to ASEAN also even more, by 41.5% to 22.78 million mt. However, it is still the largest destination, taking over 30% of Chinese steel exports. Given the size of ASEAN demand, it will likely provide continued optionality for Chinese exports, and potentially absorb the 1 million mt shifted from the US.

An important caveat, however, has been the US complaints against Chinese-originated steel imports from Vietnam and other ASEAN markets. The US has accused China of routing goods through another country to disguise their origin. Although this seems more political posturing than something which might have an impact, whether or not ASEAN will be able to absorb the Chinese export surplus remains to be seen. If it is unable to, an estimated steel surplus of 1 million mt will most likely stay inside China.

What Does a 1 Million MT Steel Surplus Mean?

In the unlikely event of China's immediate retreat from the US steel market, along with lackluster ASEAN demand, the additional supply will be added to Chinese stocks. At present, domestic inventories are estimated at around 17 million mt, so 1 million mt will be equivalent to a 6% increase. This volume does not appear to be large, and is more likely to be phased rather than in one big hit, but China is currently sitting on its highest inventories since 2013. Adding to these could hit sentiment and prices.

Graph+-+Worst+case%3A+Chinese+steel+inventory+increased+to+18+million+mt

From the chart it is clear seasonal factors play a major role in Chinese steel inventories, which typically peak in March, followed by a steady decline throughout the year. This is largely a result of inventory rebuilding ahead of the Chinese construction season that starts in April after the Chinese Lunar New Year.

At present, it appears that the market is following the seasonal trend, with inventories shrinking from the peak of near 20 million mt in March, to around 17 million mt now. The chart shows a five-year average inventory level of around 7.6 million mt, which is about 9.4 million mt lower than now. It also illustrates an erratic relationship between steel stocks and steel raw materials in China.

This could be due to the complexity of the steelmaking supply chain, which requires a certain lead time of over 30 days for inventory pressures to be passed on from steel to raw materials.

If China retreats from the US market before domestic inventories are down to normal, this potential addition of 1 million mt could be the straw that breaks the camel’s back.



Multiple Operators Suffer Damage to Fiber Networks from Hurricane Michael

Communications providers are working to restore services in areas impacted by Hurricane Michael, but storm debris, power outages and significant fiber damage are hindering progress in those counties most devastated by the storm.

As of Oct. 14, a number of counties along the Florida Panhandle had more than half of their cell sites down, including Bay County — home of Panama City and Mexico Beach, described as "ground zero" of the storm by U.S. Federal Emergency Management Agency administrator Brock Long — where 66.1% of cell sites were down. Similarly, neighboring Gulf County had 69.6% of cell sites down, according to data from the U.S. Federal Communications Commission.

Based on the amount of damage in the area and ongoing power outages, it could be weeks before services are restored. Long said Oct. 12 that after search and rescue, restoring communications in impacted counties is among FEMA's top priorities.

"You have to be able to communicate to appropriately respond and we are trying to do everything we can to get the private sector vendors, the Verizon [Communications Inc.]'s of the world, to get in to try to get their systems back up and running," he said.

Long added, however, that the process is not easy. "There was a tremendous amount of debris. When you look at the damage in Mexico Beach, that is where the ocean rose potentially 14 feet … and shoved buildings out of the way. When you have that type of damage, it takes time to get in and go through," he said.

Hurricane Michael made landfall Oct. 10 near Mexico Beach as a Category 4 hurricane with 155-mile-per-hour winds.

For its part, Verizon said the "vast majority" of Florida and Georgia service has been restored, with 99% of the company's network in Georgia in service and 97% of its network in Florida. But the company noted there are pockets, particularly near Panama City, where the damage is severe.

"The storm caused unprecedented damage to our fiber, which is essential for our network — including many of our temporary portable assets — to work. Our fiber crews are working around the clock to make repairs, and while they are making good progress, we still have work to do to get the fiber completely repaired," the company said Oct. 14.

Fiber is the connecting component of a network that carries data from point to point. It is necessary for Verizon's permanent and temporary cell sites to be operational. The company noted that while it has multiple fiber paths to carry data, "The severity and intensity of the storm caused damage to all duplicate routes in the Panama City and Panama City Beach area."

In terms of wireline services, the FCC said 291,300 subscribers remain out of service as of Oct. 14, including 205,643 subscribers in Florida. The figures were down from a day earlier, when a total of 337,223 subscribers were without service, including 233,843 in Florida.

The top residential video and broadband provider in Bay County is Comcast Corp., according to MediaCensus data from Kagan, a research group within S&P Global Market Intelligence. Comcast, the largest cable operator in the U.S., said in an Oct. 12 statement that it is working to get Xfinity services back online.

"As power returns … and it becomes safe for our technicians and restoration crews, we will work to repair any damages affecting our network," the company said.

As of Oct. 15, more than 162,000 customers in Florida remained without power, including all 27,275 customers served by Gulf Coast Electric Cooperative. The cooperative said in an Oct. 12 Facebook Inc. post that its distribution system "suffered catastrophic damage"

In Gulf County, the top residential video provider is AT&T Inc.'s satellite video service DIRECTV, according to MediaCensus data, while the top residential broadband provider is Mediacom Communications Corp., the fifth-largest cable operator in the U.S.

Mediacom said Oct. 14 that its recovery efforts are underway but its network in Florida has 14 miles of severely damaged fiber near Walton County, as well as 25 miles of damaged fiber east of Panama City that is obstructing video transmission from Gulf County to Walton County.

"Our current priority remains focusing on repairing damage to our high-speed data transport network and main transmission facilities and repairing downed lines where we have access to the area. We have outages from widespread loss of commercial power along with downed lines, and structural damage throughout our systems," the cable operator said.



Factbox: Hurricane Michael Impact Turns from Production Loss to Demand Destruction

Houston, Oct. 11 2018 — Hurricane Michael made landfall at the Florida panhandle as a Category 4 hurricane Wednesday with 155 mph winds, quickly destroying demand for power, natural gas and refined oil products. Shut-in oil production rose modestly from Tuesday to over 700,000 b/d, but the storm has stayed east of much of the region's production, which means supply should be back online quickly.

Meanwhile, the severity of the storm has surprised to the upside, which could a mean longer lasting and more severe impact on demand for power, natural gas, refined products and ultimately crude oil.

"We expect the impact on refined products demand to be below that of previous hurricanes in the Gulf Coast such as Harvey in 2017, as the region impacted by Michael has lower population density than Houston ... Nevertheless, the impacts are favoring the high side of our estimates given the sheer severity of the storm," said Claudio Giamberti, Head of Demand and Refining at S&P Global Platts Analytics.

As of 7 pm EDT, the eye of Michael was moving over southwestern Georgia with maximum sustained winds still at 100 mph, according to the National Hurricane Center. The storm is expected to move northeast across the Carolinas before heading back out to sea Friday morning.



Storm Tracker: More than 860,000 customers still in dark in Michael's wake

Highlights

Florida, Georgia, Carolinas hardest hit

Peakloads down about 20% on week

Houston, Oct. 11 2018 — As the remnants of Hurricane Michael churned through the South Thursday, it cut power to more than 870,000 customers, shaving large chunks off daily peakloads and, while more than 30,000 technicians began working to restore service.

The center of Tropical storm Michael was about 25 miles south of Greensboro, North Carolina, as of 2 pm EDT Thursday, the National Hurricane Center said. It still had maximum sustained winds of 50 mph, moving northeast at 23 mph with an expected move offshore from southeastern Virginia Thursday night.

Since it made landfall near Mexico Beach on the Florida Panhandle between 1 pm and 2 pm EDT Wednesday, the storm left more than 860,000 people without power, but some of those services have been restored.



Factbox: Utilities, Oil Producers Brace for Hurricane Michael Along U.S. Gulf

Houston, Oct. 09 2018 — With Hurricane Michael expected to make landfall on the Florida Panhandle as a Category 3 storm Wednesday, offshore oil and gas producers were busy evacuating crews and shutting in production Monday. By mid-day, nearly 20% of Gulf of Mexico oil production had been taken offline. That number will likely have risen when reported Tuesday as operators continued to shut down platforms Monday afternoon.

Meanwhile, just 24 days after Hurricane Florence made landfall, electric utilities were gearing up for Hurricane Michael restoration efforts by staging crews and supplies in the storm's path. Lost power demand is likely to have a knock-on effect on natural gas demand and prices.

After it brings over 100 mph winds to the western-most portion of Florida, Hurricane Michael is expected to turn northeast, bringing wind and rain to Alabama, Georgia and the Carolinas before heading back out to sea. Thiis article covers the key takeaways across commodities.