Listen: The Decisive | Episode 4 - Metal mayhem in the supply chain

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You're listening to The Decisive Podcast, insights and analysis to empower confident decision making.

John Anton

My name is John Anton. I'm with the S&P Global Pricing and Purchasing Service with Market Intelligence. And we're here to look at the forecast we just finished, what it means for the remainder of this year, and we're actually starting to look at 2025 because companies are actually starting to set next year's budget or at least think about it. We're going to give you a look at the pricing situation.

With me today, we have Amanda Eglinton joining me. I'll be doing ferrous metal. She's doing non-ferrous. So what are we looking at for the remainder of this year and into next year? I'm going to start very briefly with steel because it is actually the more calm, nonferrous is where the action is. So most of the time will be given to Amanda.

I wanted to start out with a little bit of trade data and the expectations there and what it means for pricing around the world. The first thing is recently, President Biden raised tariffs from 7.5% to 25% on mainland China. And there was a lot of question as to what the impact would be. Pretty much nothing. The United States already had such extreme anti-dumping and countervailing duties up to 570%, adding another 17.5% is really a hiccup in a hurricane, to use the phrase once again.

We, in the United States, started cutting back when the anti-dumping and everything came in, in 2014 and 2015. Even in 2017 and '18 when the 232 tariffs came in, we weren't buying steel from mainland China even then. It's not a nonissue globally. Mainland China had been exporting about 50 million tons of steel per year to all the rest of the world.

As a point of reference, the world makes about 1 billion tons of steel. World, not China, makes about 1 billion tons. So this was 5% of non-Chinese steel China was exporting through the world. They've doubled their exports. It's up to 10% of global production. And the world economy is not booming strong enough to accept another 50 million tons a year of exports. So, 1 of 3 things will happen or probably some combination. The rest of the world will start doing protectionism against Chinese steel as the U.S. did or mainland China will cut production or steel will keep flowing and it puts downside risk to the rest of the world steel pricing.

I have built into my forecast an expectation that the rest of the world puts in levels of protectionism. If the rest of the world does not introduce protectionism, then steel prices around the world, they're probably about USD 50 to USD 100 per ton lower than my forecast.

So what it really means for you for the rest of the year is chaos. There will be times where the imports make too much supply in other countries, prices could drop and then people will be reacting to it. So there will be supply issues. There will be price issues and there will be reaction to it.

The basic price forecast -- and again, this assumes that there will be some level of protection of the rest of the world against mainland China and in response, mainland China will cut production deeply -- it is really pretty flat for thin-gauge coil. Hot-rolled sheet in the U.S., it's sawtooth but the trend is sideways. Rising price in Europe, that's much because the dollar gets weaker and these are dollar-denominated prices.

Near the floor in India and China, there will be movement. There will be probably price drops when inventory accumulates and people like to liquidate it, but they will last -- the one in March only lasted 3 weeks. So it didn't impact the quarterly number so much. So you won't see the downward spikes because we do quarterly data, but do expect there will be some downward spikes.

You have rebar, it's a proxy for the other bar products. It's much the same but a bit different. Production in Europe has been cut very deeply on the bar side, so they actually have a stronger profile than does sheet. Bar, plate, everything in the United States other than sheet has not come down much from the peak. There's still downside left. So if it's not sheet, it falls in the U.S. And then mainland China rises on currency, but also because prices right now are low enough that they must cut production.

There will be more production cuts, risk to the downside, if the protectionism gets very strong and they don't cut production. So China is a rising forecast, but the risk is to the downside. With that, I'm going to turn it to Amanda to go through non-ferrous where there are some big things going on.

Amanda Eglinton

Great. Thank you, John. We have seen a real blistering rally in nonferrous metal markets really across the board throughout the second quarter. This has been really driven by extreme bullishness amongst investment funds. When we look across the base metals complex, we've seen a big surge in that long positions amongst investment funds, especially in the copper contract.

So what has really fueled this? Well, one, we have had some stronger-than-expected policy support announced in China. And given China's footprint in these markets anytime you get any sort of stimulus announcements in China, the market interprets it as a big boost for metals demand and you see prices jump, but then we've seen prices come back down. And I think the other thing to note is that the fact that the stimulus and policy support measures have come in stronger than expected, it does underline the fact that demand is weaker than it's expected at the moment.

The recent sanctions on Russian metal and increased tariffs on Chinese imports haven't really directly contributed to this rally. In a way they certainly have maybe driven some of that investor bullishness. But what we see at the global level is still a very well-supplied market but an increasingly bifurcated global market.

We see much tighter supply conditions in Europe and the United States as a result of several factors, including higher shipping costs, domestic production cuts, those logistics disruptions as well as the self-imposed restrictions on imports and tariffs that the anti-dumping duties, restrictions on Russia, that has had a bigger impact on Europe and the United States, but buyers had been self-sanctioning Russian metal for the better part of 2 years in the U.S. So these recent sanctions didn't really move the needle in a big way there.

But what has also happened as a result of this is, especially in the case of Russia, a lot of that tonnage that previously would have gone to the U.S. and Europe is being diverted to Asia. And this is contributing to oversupply of many of these metals and especially the Chinese market. And so when we look at the market fundamentals, we do think that prices really rallied ahead of those market fundamentals and its prices are really not supported at current demand levels. We did see prices peak back in late May around May 20, May 21, and we have seen the price correction start. In many cases, prices are down close to giving back all the gains seen in May back down to those early or late April levels. But we do think that there is more downside to go, given that commodity markets tend to overshoot on the way up and overcorrect on the way down.

So if we jump into a few specific metals, I'm going to highlight aluminum, copper and nickel. Certainly, in the case of aluminum, this is probably the market that's really experiencing the greatest amount of bifurcation. The increased tariffs on Chinese aluminum imports to the U.S. don't really pose a big risk as in the case with steel, the U.S. doesn't really import much aluminum from China. Canada is really the top source of supply. So that really shouldn't have a big deal. And as I mentioned, the U.S. and Europe had already started self-sanctioning Russian supply over the last 2 years. And so that wasn't necessarily a big shock, but it certainly did have an impact on the ability to deliver aluminum to the LME exchange, for example.

So what we are seeing as a result of this bifurcation is certainly in the case of Europe and the U.S., that upward pressure coming through on premiums as U.S. and European aluminum buyers have to really search further afield for some of those imports, go greater distances to get them, and that then subjects them to more of those shipping issues and higher shipping costs.

On the flip side, we've seen a big surge in Russian aluminum exports to China in addition to rising Chinese aluminum production, and this again is contributing to this oversupply in that market. So if we look at the overall outlook for prices, we have seen this big increase coming through from where we were late in February.

In the case of aluminum prices were at or near bottom, and so we were expecting them to rise. But the rally that we've seen thus far, we have seen much of that correction play out. So in this case, we would say it's a good idea to buy as needed as those additional logistical bottlenecks and especially production cuts in the U.S. and Europe can lead to tighter pricing as we go into the second half of the year, especially in the U.S. with the Buy America requirements.

Moving on to copper. Copper has really been front and center in the latest speculative rally that we've seen and it was really compounded by a full-blown short squeeze on the COMEX contracts. But when we look at the copper market, it's really investment funds pricing and expectations of a future deficit emerging.

Looking at the market right now, the market has actually been in surplus through early 2024. And so it's really this view that we're going to see a recovery in demand and ongoing disruptions to supply, and that's going to drive a surplus later this year. But if we look at what's been happening with visible inventories, it's been steadily rising over the beginning of this year and with the Shanghai copper cathode premium in China now falling to a discount, certainly pointing to oversupply in that market.

What we're expecting, as we go forward is with this oversupply in China and recent arbitrage opportunities as a result of the COMEX short squeeze, we're likely to see a rise in exports of cathodes out of China and increased delivery to the LME and some of the other exchange warehouses, and this will continue to exert downward pressure on copper prices over the near term.

Moving on to nickel. Nickel is another one that rallied for really no good reason over the second quarter other than it just rode copper's coattails higher. This is a market that does also continue to look very well supplied. We've had over 170,000 tons of new Chinese brands that have been approved for delivery to the LME since June of last year.

The first Indonesian brand was just approved in the last month. So all of this growth in new supply and nickel coming into the market is really also contributing to a structural oversupply as we see these new technological processes and growth in nickel metal production capacity in China and Indonesia really start to shift that oversupply of class 2 nickel products into the class 1 nickel market.

So we have seen prices fall below $18,000 per metric ton this week. We do think they will continue to move lower over the immediate near term as part of this correction and are looking for prices to average a little over $17,000 per metric ton over the second half of the year.

And finally, on the stainless steel side, it's a very similar story to what John outlined for carbon steel. Pricing conditions are very soft. And in China, in particular, we have excess inventory and structural oversupply of stainless that has been weighing on prices. There is over the immediate near-term downside risk because of the growing inventories that we've seen and the risk that you could see prices come under pressure like inventory is liquidated. But beyond that, similar to carbon steel, we see prices rising just because they are so low right now, they really can't stay at this level.

Europe demand remains weak, but we continue to see supply side disruptions and that is going to provide support to prices as we go through the rest of the year, even in a tepid demand environment. The U.S. remains much stronger in terms of pricing in the rest of the world, but we're starting to see increase in cracks and pricing here as we see demand continue to slow and rising imports coming in and also increasing that competition. So it is a good time to start negotiating. If you're buying from domestic U.S. mills, you're in a much better position now than you've been for many years.

Kristen Hallam

Thank you for listening to The Decisive Podcast from S&P Global. Please subscribe and join us for next week's episode. Until then, stay curious and stay informed.