EnIt’s sanctions and steel day. We find that the new round of U.S. sanctions against North Korea matter less than China’s ongoing trade surplus with the DPRK. In metals we investigate Mexico and Brazil’s leverage in America’s s232 case, take a look at the impact of pollution curbs on China’s steel industry. Also: Canada and Mercosur agree to work on an FTA; global trade activity rose for a 23rd straight month; Chinese container handling had a stellar start to 2018; export surveys in Europe have worsened; the seventh round of NAFTA negotiations have started; Lighthizer will meet Liu to discuss worsening U.S.-China relations; Yang Ming expects to make a small profit; and container rates continue to rise.
Daily Datum: 23
straight months of growth in global trade activity through December 2017
NEED TO KNOW
DPRK Shipping Sanctions Matter Less Than a 3.4x Leap in China’s Trade Surplus
The U.S. Treasury Department has extended its sanctions against North Korea to focus on the shipping industry. That came after evidence of sanctions evasion in the oil industry emerged. While the move may help with enforcement of existing sanctions, China continues to hold the main economic power over North Korea.
China appears to be applying current sanctions with the result that its total trade with North Korea fell 52% in January on a year earlier. Yet, there was still a $216 million trade surplus on China’s behalf, bringing the 12 month trailing total to $1.7 billion. That’s 3.4x the level of a year ago, and it isn’t clear how this is being financed.
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Source: Panjiva
Mexican Metals Leverage Could Foil s232 Review, Spill Over Into NAFTA Talks
The U.S. Commerce Department’s section 232 reviews of steel and aluminum came just before the seventh round of NAFTA negotiations, and risk damaging relations with Mexico as well as Canada. While Mexican exports of the products under review were only 6% of U.S. imports, they were worth $2.8 billion in 2017. The U.S. took 70% of Mexican exports of those products, making it likely the Mexican government will aggressively push for exemptions.
Key products exported include flat-rolled uncoated ($638 million of exports in 2017) and coated steels ($508 million) as well as steel pipes used for oil and gas ($509 million). The latter is unlikely to get an exemption given the Trump administration’s push for the energy industry to “Buy American”. Should exemptions not be forthcoming the Mexican government may retaliate. That could be significant given Mexico imports $14.6 billion of all steel and aluminum products (i.e. not just the section 232 lines) from the U.S., including fastenings, aluminum plate and silicon-electrical steel.
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Source: Panjiva
Tangshan Pollution Limits Have Outsize Steel Export Impact, s232 Will Matter More
The Tangshan city authorities in Hebei province, China, may extend and deepen cuts to steel production in order to control pollution. The current cuts, equivalent to 15% of capacity, have had an outsized effect on exports. Shipments from mills around Tangshan fell 54% in December vs. a year earlier to hit the lowest since at least 2013. Among major export lines steel bars/rods fell 82% and high-speed steel slumped 98%.
The impact on total Chinese steel exports shouldn’t be overstated though as the city only accounted for 5% of exports in 2016 and 3% in 2017. More important will be the U.S. section 232 restrictions, which will likely target China. Guangdong (25% of Chinese steel exports to the U.S. in 2017) and Zhejiang (18%) are the biggest exporting provinces, while Hebei is fifth.
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Source: Panjiva
GLOBAL TRADE WRAP
Continuing the metals theme, the Brazilian government is sending a delegation to the U.S. to discuss the section 232 review. It is one of the 14 countries specifically targeted under “alternative two”. While Brazil was only the sixth largest supplier of all steel and aluminum products under review, suppliers including the local subsidiaries of ThyssenKrupp and ArcelorMittal accounted or 57% of semi-finished steels. Yet, the stakes are higher for Brazil (the U.S. took 51% of Brazil’s semi-finished exports) than the U.S. With Brazil taking just 1% of U.S. steel and aluminum exports it has little retaliatory leverage. (Panjiva Research – Industries)
Canada and the Mercosur trade group (including Brazil) have reached an agreement to develop a free trade deal. That will likely to take years rather than months to develop, and will likely get hung up on agricultural issues. Brazil’s exports globally are led by coffee (8% of the total), sugar, wood pulp and poultry (all 4% each). It currently sells little of the last two to Canada. It is unlikely to get improved market access given Canada is also a forestry exporter and protects its domestic dairy industry. (Panjiva Research – Policy)
Global trade activity in December rose for a 23rd straight month, with the monthly and annual increases on a year earlier being 4.5%. That was led by a 7% growth in the month from Japan, while emerging Asia – including China – rose 6%. The U.S. outpaced the EU, which may continue given protectionism from the former won’t kick in until later this year and new trade deals from the latter have yet to be implemented. (Panjiva Research – Industries)
Looking ahead though the data outlook is mixed. Chinese mainland container handling had a stellar start to 2018 with an 11% growth on a year earlier. That was up from 2% in December, but may have been flattered by the later lunar new year. Shanghai grew the mostly slowly at 3%, and may still be suffering from capacity constraints that won’t easily be fixed. (Panjiva Research – Logistics)
As a counterpoint the export situation in Europe may be about to worsen. The latest surveys from IFO and the CBI (Germany and the U.K.) both worsened on a month earlier. German export sentiment dropped to its lowest since May on a weaker outlook from the automotive and metals industry. The metals industry may be anticipating the section 232 review in the U.S. discussed above. The CBI survey also showed a setback, with a net 10% of businesses seeing an expansion in orders from 19% a month earlier. (Panjiva Research – Industries)
NAFTA Watch: The seventh round of NAFTA negotiations have started in Mexico City. As discussed in our report last Friday the thorny topics of agricultural market access and the automotive sector are being tackled upfront. That will either set a positive tone for the remainder of the negotiations, or bog them down in controversy. (Panjiva Research – Policy)
Meetings will be held 2/27 between U.S. Trade Representative Robert Lighthizer and NDRC Vice Chairman Liu He (a Politburo member in China and senior economics advisor to President Xi) with a view to addressingworsening trade relations between the two countries. As outlined in our 2/15 research China appears to be prepositioning retaliation via the agriculture sector against the potential outcome of the U.S. section 301 review of IP policies. (Reuters)
Container-line Yang Ming should make a small profit in 2017, according to Chairman Hsieh Chih-chien. That compares to average analyst estimates of a net loss of 446 million Taiwan dollars ($15 million) and is the result of cost-cutting according to Mr. Hsieh. Notably he also stated that the process of industry consolidation is over following a period of industry recovery. That’s different to the other container-lines who have reported so far – typified by Maersk – as discussed in our 2/09 report. (Bloomberg)
The first reports of container shipping rates out of China following the new year show an increase of 0.4% vs. the pre-holiday period, making for a ninth straight increase. In contrast to prior weeks it was shipping to Europe that led the way with a 1.9% rise to reach the highest level since 9/01. South Korean routes saw a 3.0% drop to levels last seen on November 17. The divergent performance of the regions suggests pricing and capacity discipline remains fragile – a key risk to profitability this year as outlined in our 2018 Outlook for logistics industry profits. (Shanghai Shipping Exchange)
