Aluminum stockpiles at the GMT Ponte Eritrea Terminal, Genoa, Italy. Image © 2018 Google

How Satellite Data Helps Measure Tariff Effects on Global Metal Supply

MetalSignals satellite data from RS Metrics tracks inventory at 400 key smelters and storage sites to help model global metal supply flows. Get more background in our overview or updated price and inventory forecasts.

In December 2017, aluminum, copper, zinc, and other base metals were priced near five-year highs supported by solid global growth, a soft dollar, and falling exchange stockpiles. At the same time, significant changes to U.S. trade policy were underway as tariff related actions and investigations started to emerge out of the new administration. Now, a little over one year later, the U.S. is in a “trade dispute” with China, claiming existing trade deals undermine the U.S. economy, sovereignty, and national security.

“The U.S. believes Chinese laws undermine intellectual property rights by forcing foreign companies to engage in joint ventures with Chinese companies, which then gives the Chinese companies access and permission to use, improve, copy or steal their technologies. The U.S. also raises concerns that China fails to recognize legitimate patents and copyrights, and discriminates against foreign imported technology. And that China has instituted numerous non-tariff barriers, which has insulated sectors of the Chinese economy from international competition.” [1]

U.S. Trade in Goods with China (source):

One of the first metal-related actions taken against China occurred in November 2017 when the U.S. Commerce Department took the unusual step of “self-initiating” an anti-dumping investigation on Chinese aluminum alloy sheet metal distributors, with potential tariffs above 57 percent. This investigation was unusual since it occurred without a formal complaint being filed by a U.S. company, the first time such actions were taken since 1985.

Not long after this investigation was announced, RS Metrics satellite data captured a large increase in aluminum stored outside Chinese smelters and storage facilities (see chart below). This spike in aluminum inventory corresponded with prices at 5-year highs, which may have helped initiate a rush to export aluminum out of China ahead of any official implementation of U.S. Tariffs. Interestingly, the increase occurred even as winter production restrictions were in place, which may have targeted only older, less-efficient smelters.

This spike in satellite inventory measurements corresponded with a surge in Chinese export statistics throughout most of 2018. The chart from Reuters below shows exports of Chinese semi-manufactured aluminum throughout 2018. Official statistics on export growth finally slowed in September and October but surged back in November once a new favorable aluminum export tax rebate was implemented. Interestingly, the export strength is occurring even as Chinese aluminum production is reported to have slowed in 2018, contrary to official statistics, which are questioned by many analysts and experts.

While reported exports were strong throughout most of 2018, production of aluminum in China may indeed be slowing faster than official statistics show. And it’s not just aluminum. More recently, satellite data has captured declines in outdoor inventory of most major metal types with peak-to-trough declines of -47% for steel and general metals, -36% for aluminum, and -23% for copper.

Satellite inventory levels in the rest of the world have been trending downward as well, although the decline in China has been much more pronounced. The most recent data for December shows inventory ticking up in other countries, while satellite measurements of inventories in China continued to decrease (although this may be due in-part to winter production restrictions). The satellite data provides a key to understanding how, when, and where the metal tariffs impacted global metal supply flows.

Looking deeper into the data, the steel tariffs of 25% seem to be having a positive effect on U.S. based manufacturing. Satellite data shows the U.S. starting to gain back a small amount steel manufacturing market share from China during the second half of 2018. This is consistent with data from the American Iron and Steel Institute, which estimates adjusted year-to-date production in the U.S. to have increased 6.1% through December 22nd.

Satellite imagery based data enables users to watch and evaluate events in near-real time, including new capacity ramping up as new smelters phase from construction to operation. First satellites measure growth in employee cars and materials shipments, followed by outdoor storage of finished metal products. The RS Metrics platform automatically measures change for each new observation and delivers daily updates to a data feed and cloud-based analytics application.

Even for locations where metal is usually stored inside (such as LME warehouses), satellites frequently image inventory as it’s moved outside during shipping or receiving. This occurs at a train stations, ports, or other storage locations along the journey to end users. In most cases, metal moves to multiple locations as it’s traded between LME, CME, SHFE and other “off-warrant” warehouses.

Declining inventory at the Al Taweelah Aluminum Smelter near Dubai:

By tracking change at important global locations, MetalSignals can help metal market participants identify trading or arbitrage opportunities based on local instances of over-supply or under-supply of inventory. For example, the chart below shows movements of copper at a handful of large smelters and storage facilities throughout the past two years. The Wuxin copper smelter at the top shows expanding inventory and market share during the end of 2017 and beginning of 2018, followed by a quick decline in 2018 after the tariffs were implemented near the end of March:

As we start 2019, volatility in the equity markets has investors on edge and experts concerned about trade wars, interest rate increases, quantitative tightening, China’s slowing economy, and almost 10 years of economic expansion in the U.S. If not resolved soon, some of these concerns could continue to drive downward trends on prices, inventory, and demand over the next 12 months. A lot will depend on whether the U.S. and China can agree to a deal before the self-imposed deadline of March 1, 2018.

To learn more about MetalSignals please visit our overview page or contact the author directly at adiamond@rsmetrics.com. You can also follow recent developments on Twitter and LinkedIn or purchase a monthly subscription here.