Nothing is more satisfying than a story with clearly defined goodies and baddies.
Here’s one for the world’s steelmakers: Decades ago, China’s Communist overlords hatched a plan to destroy their trading partners. By building a bloated domestic steel industry, they could drive down global prices and suck profits from competitors. With its industrial base on life support, the West would become economically — and even militarily – defenseless.
That’s an only modestly exaggerated version of the yarn that’s supporting moves to restrict trade in steel. President Donald Trump will take “bold action” to address “serial dumpers” of metal “in the context of national security,” Commerce Secretary Wilbur Ross told Bloomberg Television this week.
Chart of global steel trade
Set aside the alarm this has caused in some of the U.S.’s trading partners. 1 Is China really to blame for the world’s steel woes?
The country’s industry is certainly hard to miss. Its 808 million metric tons of crude steel production last year accounted for almost half the global total. Exports have doubled since 2012 to 108 million tons, representing about 23 percent of international trade. Some 46 percent of the world’s 725 million tons of excess annual production capacity is located in China, according to a 2016 paper sponsored by the Alliance for American Manufacturing, or AAM, a lobby group.
Buried in those numbers is the germ of a more realistic story. Chinese steel exports have certainly jumped in the past four years, but the U.S. industry’s woes date back much further, to the aftermath of the 2008 financial crisis. And if China’s share of global overcapacity is outsized, it’s not because the country is uniquely predatory, but because its share of the industry as a whole is so big.
Here’s a better way of looking at it: With Chinese consumption leveling off and India just starting to boom, the world is going through a temporary plateau in steel demand. Global output of 1.63 billion tons in 2016 was below the totals for 2013 and 2014, and barely ahead of 2015’s 1.62 billion tons.
As a result, an industry that tends to plan for continual growth has more capacity than it needs. This isn’t a uniquely Chinese issue: Based on data from AAM’s study, Japan is about the only major steel market that has capacity utilization above 80 percent, generally considered a baseline for profitability.
Far from dragging its feet, China has been unusually active in addressing the issue. About 45 million tons of steel capacity was cut in 2016 and a further 32 million tons has been shuttered so far this year, according to the State Council. If the country hits its 2017 targets, it will have eliminated capacity equal to a year of U.S. production within 24 months. U.S. annual capacity, by contrast, remains at about 110 million tons, the same level as a decade ago when utilization was last in consistently positive territory.
As Gadfly pointed out last week, complaints that China’s steel mills are killing their American rivals are hard to square with the country’s blink-and-you’ll-miss-it share of U.S. imports. The more sophisticated version of the blame-China argument, espoused by Ross, doesn’t claim a direct link between the Asian and American gluts. Instead, low-cost Asian metal is assumed to be pushing down prices in the U.S.’s larger steel trading partners, who are in turn exporting their underpriced surpluses to America.
There’s an obvious problem with that position. As economist David Ricardo pointed out two centuries ago, while import competition can lower prices, it can’t cause demand to disappear. But demand for steel does appear to be disappearing in most rich countries, at least judging by the World Steel Association’s estimates of apparent usage:
What’s happened? Part of the explanation is simply that as people get richer, they consume less metal. But something else is going on that does relate to trade.
While America’s steel producers haven’t suffered overly from Chinese competition, their customers have been laid low. A swathe of steel-intensive manufactured goods that were made domestically a decade ago are now produced on the Pearl and Yangtze deltas instead. U.S. imports of machinery from China almost doubled to $107 billion over the decade to 2015, according to the International Trade Centre; those of commodity iron and steel rose just 54 percent, to $2 billion, before slipping to $685 million last year.
Restricting imports of commodity metal will be great news for America’s steel mills, whose share prices jumped on Ross’s comments this week. But they don’t need much assistance: At Nucor Corp., the biggest producer, Ebitda margins reached 16 percent in the first quarter, the highest since 2008. Across all steelmakers in North America, Europe and developed Asian countries, margins last fiscal year were 9.8 percent, just below the post-financial crisis record of 9.9 percent in 2010.
Nucor’s 1Q Ebitda margin
The real victims of a trade war will be the millions of rust belt voters employed by companies that consume American steel, not the several hundred thousand involved in producing it. Ross should think hard before pulling the trigger.
Speculators axed a massive short position in the corn market within 11 days earlier this month. And what do they have now to show for it? Lower prices.
Specs, usually hesitant to become buyers in such an oversupplied market, bought nearly 1 billion bushels of corn in the form of CBOT futures and options – equivalent to 200,000 contracts – between June 6 and June 16.
That buying among money managers reversed the 200,981-contract short position held as of May 30. By June 13, the net short had dwindled to 17,929 contracts and fund buying activity in the days after strongly suggested that the net short no longer existed by the end of last week.
During the 11-day buying rally, July corn futures peaked on June 8, a 5 percent gain in price. By the end of last week – which is when the funds had presumably evened out their bets – the total gains amounted to only 3 percent. Prices have fallen further since, as Tuesday’s $3.70 settle was the lowest of the month.
This probably sets the record as the biggest fund buyback with the most pitiful price move, as gains were significantly less than those produced by the spring and early summer short-covering rallies of the last two years.
In 2015, funds depleted a hefty short position within the last nine days of June, culminating in a 17 percent jump in July futures. They did the same within nine days in mid-April 2016 for an 11 percent gain in the July contract on increasingly unfavorable South American weather. The 2015 move was sparked initially by U.S. weather concerns and capped off with bullish government stocks and acreage reports on June 30.
Balance sheets from the previous two years show ample domestic corn supply relative to previous years, but apparently not as ample as this year given the stubbornness in the futures market.
Corn futures finally broke above the relentless 20-cent range earlier this month, spurring action on the commercial side of the market, including U.S. farmers who have been hoarding last year’s crop in hope of better prices. CBOT corn trading volume broke records on June 7 with help from intense selling by commercial handlers, which pushed against price gains from speculative buying.
Data from the U.S. Commodity Futures Trading Commission suggests commercial corn hedgers had their third-biggest net sell-off in the week ended June 13, which suggests significant farmer selling. Not surprisingly, the top spots are occupied by weeks in April 2016 and June 2015.
WEATHER THE ONLY HOPE?
It has been exactly one year to the day since front-month corn futures traded above $4. With lots of old supply still sitting in bins throughout the Midwest, prices may struggle to notch gains comparable to years past unless U.S. weather genuinely takes a turn for the worse.
Weather thus far in the 2017 growing season has not been perfect, which has been reflected in lower crop ratings than in the previous three high-yielding years. Forecasts have been relatively benign this week, but the outlooks will become even more important in the next two months as pollination followed by grain fill occurs – more chance for volatility should they call for hot and dry stretches.
Even if July and August weather is not glaringly adverse, crop shortfalls that may have arisen amid the wet and cold spring will come to light as soon as the combines begin to roll in September, which could give a late-season boost to futures.
A similar situation arose in 2015 as disappointing early harvest results and a cut in expected production from the U.S. Department of Agriculture sparked a 12 percent futures rally in the first half of September.
Monstrous output in Brazil will also offer pressure to corn prices as the ongoing harvest could touch 100 million tonnes. This is 50 percent larger than last year’s drought-stricken crop, which carried the original April 2016 futures rally into mid-June with even bigger price gains.
In the past decade, funds were net short corn during July and August only twice. In 2013, the U.S. corn crop was on track to easily surpass the previous year’s disastrous harvest, and in 2016, the eventual record-large output appeared very likely by the midpoint of the summer under nonthreatening weather conditions.