Author Archives: Stuart Burns

Physical delivery premiums are a pretty accurate measure of primary aluminum metal supply. They reflect the balance between suppliers’ aspirations for the highest price and buyers’ determination for the opposite.

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The setting of physical delivery premiums is, therefore, a function of supply and demand — or, more accurately, the availability of physical metal in the marketplace.

So when Metal Bulletin announced that third-quarter main Japanese port (MJP) premiums have fallen 7.4% quarter on quarter and settled for the July-September period at $118-119/ton, from $128/ton in the second quarter, it supported anecdotal evidence that, despite supply disruption from Australia and New Zealand, the Asia-Pacific market remains well supplied.

Source: Reuters

Credit for this — if “credit” is the correct term — goes in part to China’s failure to sufficiently implement supply-side reform of its aluminum sector.

The aluminum price rose strongly in the first quarter with the expectation that Beijing’s announcements regarding curtailment of excess aluminum capacity would be vigorously implemented this year.

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China is far from alone in worrying about an investigation by the U.S. Department of Commerce into the impact of imported steel on the U.S. steel industry (due to be announced this week).

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The Section 232 investigation is the result of a campaign pledge by President Donald Trump to protect domestic steelmakers against foreign steel imports. Section 232 uses as its test whether imports have been detrimentally harmed the U.S. ability to produce steel for its defense industry, and while it is not country-specific there was little secret at whom it was primarily aimed.

The worry in Europe, generally, and in the U.K. in particular, is that supplies from the region will be caught up in a blanket Section 232 ruling, applying onerous duties that could hit some local steelmakers disproportionately hard.

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It is not unusual for the wrong thing to be done for the right reasons.

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Whether it is the rule of unexpected consequences or blind adherence to doctrine, there are countless historical examples of individuals, companies and governments that made decisions, claiming the moral high ground, which have resulted in damage or impoverishment to those the decision was intended to assist.

The mining sector and even some unions have reacted angrily to South Africa Minister of Mining Mosebenzi Zwane’s announcement last week at a presentation in Pretoria of a new mining charter intended to further extend South Africa’s Black Economic Empowerment (BEE) rules.

The charter sets out a number of significant changes to the rules governing ownership of South Africa’s vast mining industry.

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It won’t have escaped your notice that the shine has gone off the metals market.

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Prices have been softening across not just metals but other commodities, like oil, too.

Consumers, of course, will not be complaining, but are nevertheless keen to understand what is going on and whether we are seeing a temporary dip or a move into a prolonged bear period.

Commodities in general are facing multiple headwinds.

While demand for iron ore and oil is steady, both markets are in oversupply. Oil prices have received short-term support from favorable comments around output cuts. Prices have subsequently continued to soften as long positions have been unwound and investors have concluded prospects of a supply balance are receding.

In China, the authorities have been squeezing investors by increasing shadow banking borrowing costs, resulting in positions being unwound and prices softening.

In the U.S., markets surged after President Donald Trump’s election victory with the expectation his campaign promises of trillion dollar infrastructure investment would create a building and consumption boom.

Since those heady days, the realization has set in that the desperately needed investment may not be quite as significant as first thought.

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British elections and referenda have recently proved to be anything but boring.

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Last week’s general election — called just a few short weeks ago at a time when Theresa May’s Conservative Party had a small but solid majority and the left wing Labour Party appeared in complete disarray — has delivered a crushing defeat for the prime minister’s hard Brexit policy.

The election result has once again thrown wide open the debate on what kind of deal the U.K. will — or even can — seek to strike with the European Union (EU) over the year ahead.

Theresa May called the election to give herself a stronger mandate to argue with the Europeans that no deal — meaning a break with Europe, falling back on basic World Trade Organization (WTO) rules — would be preferable to any kind of compromise the EU tries to impose.

Although not stated, it was tacitly understood the election was also intended to deliver her a larger majority in the House of Commons. That larger majority would have enabled her to ignore disruptive minor elements of her own party who may disagree with elements of a deal as the negotiation process unfolds.

What transpired was a dramatic swing to the left, with the loss of Conservative seats to the Labour Party. The result? No party enjoyed an overall majority.

The Conservatives have therefore been forced into a loose coalition with Northern Ireland’s Democratic Unionist Party (DUP), whose agenda differs from the Conservatives in one significant way.

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Editor’s Note: This is the first of two posts on the effects of the decision by several Gulf Cooperation Council (GCC) nations to sever diplomatic ties with Qatar. First, Stuart Burns expands on the political backdrop of the decision. On Monday, he’ll focus on the timing of the decision and its economic impacts. 

We tend to view Middle East politics as a simple rivalry between Sunni and Shiite sects — or, more recently, as a regional power play between predominantly Sunni Saudi Arabia and predominantly Shiite Iran.

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Although these regional differences are often portrayed in religious terms, they have as much to do with national politics as they do with religion.

Our simplistic view is probably not helped by the tendency for the powers that be to historically resolve their differences or arrive at solutions behind closed doors, with little or no public debate.

The complexity of Middle East politics is often lost on us in the West. Our understanding is maybe not helped by our politicians, who paint various parties as either with us or against us.

But action led by Saudi Arabia and the United Arab Emirates this week illustrates the complex nature of regional politics and brings into focus how rapidly alignments and priorities are changing.

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An article this week in Bloomberg catches the eye with a title announcing “hard-to-believe” steel shortages in China.

After years of excess supply, over-capacity and atrocious levels of resulting pollution, it would be a bit much to hear the country was short of steel — but that is what Fortescue’s CEO Nev Power is quoted as saying in an interview with Bloomberg Television in Beijing on Monday.

The gist of his claims? Closures of induction furnaces are creating a shortage of rebar, not because market demand is strong but because supply has become constrained, Power explained.

Benchmark Your Current Metal Price by Grade, Shape and Alloy: See How it Stacks Up

Actually, the story is not a new one.

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Amid political instability, Brazil is attempting to work its way out of its economic recession. readytogo/Adobe Stock

Brazil is struggling with corruption, particularly among the ranks of the elites, according to the Financial Times.

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Just a year after Brazil’s Congress impeached former President Dilma Rousseff, her replacement, 76-year-old Michel Temer, is hanging on to power by a thread following revelations last month that he had engaged in secret talks about bribes with Joesley Batista, the former chairman of meat packing firm JBS. Temer is the least popular president ever, according to a separate FT article, but business leaders and economic analysts say the Brazilian economy desperately needs his reforms if it is to pull itself out of a two-year recession (the worst on record).

Source: Financial Times

A meager bounce in the first quarter offered scant comfort, coming as it did on the back of a record soy bean harvest, up 13.4% and pushing the agricultural sector into positive territory.

Economy Stuck In Recession

The broader economy, however, remains mired in recession.

Interest rates are still at 10.4% to protect against runaway inflation last year. Imports and exports are down 21% in the first quarter of this year compared to the same quarter in 2015, the FT reports.

Although markets have recovered their shock following the exposure of Temer’s apparent acceptance of high-level bribery, Jimena Blanco, head of Latin America research at Verisk Maplecroft, a risk consultancy, is quoted by the FT as saying, “The government is hanging from a thin thread.”

Ripple effects of the Brazilian economy’s struggles

In a more isolationist America, some may ask: Should we care? Brazil’s problems are Brazil’s — it may be the largest economy in South America, but it is still a long way away, some might say.

Well, yes, we should care, despite all the U.S. talk about retrenchment. The U.S. economy is still highly reliant on global trade. Brazil is America’s 10th-largest export market, fitting between France and Taiwan in dollars earned.

Brazil is also an important geopolitical stabilizer for the South American region. While no one is talking of defaults, the prospect of the recession extending indefinitely raises debt servicing, currency and social stability issues.

Temer may not be the best prospect for open and honest government. At the moment, he may be the least bad option.

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It is something of an unholy alliance, but Russia and Saudi Arabia are becoming ever closer allies in a graphic example of realpolitik.

The two would probably be implacable enemies if their contrarian positions in Syria were any gauge – Russia closely aligned with Iran in their support of Bashar al Assad, yet Iran is Saudi Arabia’s public enemy number one and only major rival in the Middle East.

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But economics trumps almost all, and the two’s interests are certainly aligned in trying to reverse the damage done by Saudi Arabia’s failed bid to squeeze U.S. shale drillers out of the market and the corresponding glut of supply forcing prices to painfully low levels – painful at least for oil producers.

As the FT observed in quoting RBC Capital Markets as saying, “Saudi Arabia and Russia are essentially now co-pilots of this operation (of restricting output to boost prices) and they’ve made it clear there will be no going back to chasing market share.” The article goes on to quote: “It’s a huge change from two years ago when Russia would not co-operate with OPEC and even questioned its relevance in the age of shale.”

The two agreed last week to not only extend but deepen production cuts for a further nine months into 2018.

But not all agree with the International Energy Agency’s prediction that the cuts will be enough to balance supply and demand later this year.

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Last week President Donald Trump announced to the world his decision to pull the U.S. from the Paris climate accord, but a little-discussed change in the sulphur content of marine fuel oil is likely to have a significant impact on transport costs by the end of this decade.

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The international shipping industry is a major atmospheric polluter. In terms of carbon dioxide greenhouse gases, it is projected to account for 17% of global emissions by 2050, according to the Guardian newspaper last year.

In addition, the shipping industry burns the dirtiest of fuel types. Marine bunker fuel is produced from the waste leftover in refineries when more volatile and valuable fractions are extracted from crude oil. As a result, current levels of sulphur in maritime fuels can be as high as 3.5%, representing a major source of pollution, as anyone who has seen a large tanker or cruise ship fire up prior to departure — spewing out dirty, unscrubbed funnel fumes in vast plumes — can attest.

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