Author Archives: Stuart Burns

What with news of the terrorist massacre in Manchester reverberating around the world, while President Donald Trump first snuggles up to the Saudis and then to the Israelis — it is hardly surprising that news of yet a fourth Greek bailout has failed to make much headway in the headlines.

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News that the International Monetary Fund (IMF) is working on a compromise with Greece’s creditors that would smooth the way for a €7 billion ($7.8 billion) disbursement of rescue cash all sounds rather calming and reassuring. But rest assured Greece is in danger of yet another default this summer as it seeks to get its hands on the latest tranche of an €86 billion rescue package to meet debt obligations this July.

According to an article in The Telegraph, Greece’s debt currently stands at nearly 180% of gross domestic product. The Greek economy fell back into recession in the first quarter of 2017, and it is an economy that is still some 27% smaller than in 2008, crushed under the EU-IMF austerity program.

According to the Associated Press, the IMF has argued that the Eurozone forecasts underpinning the Greek bailout are too rosy and that the country as a result should get substantial debt relief so it can start growing on a sustainable basis. The Greek economy has spent more time in recession than growth since the financial crisis.

The Eurozone, on the other hand, has so far ruled out any debt write-off, saying it would rather extend Greece’s repayment periods or reduce the interest rates on its loans after the bailout next year. Germany and the Netherlands are keen to avoid debt relief, probably because they do not want to set a precedent that others such as Italy could turn to later to solve their own problems. Read more

One could say it’s slightly ironic that an industry championed in the U.K. as an area of expertise to be taken to the world is in practice dominated here by a Danish company, Dong Energy.

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The industry is offshore wind turbines — and I make the distinction between onshore and offshore because many countries have been early adopters of wind turbines. The U.S. invested $14.5 billion in wind power project installations in 2015, and China leads the world in onshore wind generating capacity. Offshore, however is only just taking off — no pun intended.

The principal driver in offshore’s growth is cost, according to an article from Wind Energy Update: “Danish company Vattenfall’s record low offshore wind price of 37.2 ore per kWh (49.9 euros/MWh; $53/MWh) for the 600 MW Kriegers Flak project last year showed how falling costs and new tenders are spurring intense price competition in the offshore wind market.”

Cost reductions are being driven in part by the development of ever larger turbines, more practical off shore than on shore, where aesthetic objections are more frequent with giant wind turbines accused of spoiling the landscape. Wind also blows more consistently off shore, increasing the utilisation rate of offshore turbines closer to that of conventional power sources. Read more

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You should credit them for trying. As one of the first foreign multinationals to invest in the Indian market, General Motors has been persevering for over 20 years.

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This month, however, it has finally pulled the plug, announcing that it will stop making cars in India for the Indian market by the end of this year. That doesn’t mean it will cease all manufacturing. Although the firm has already stopped its production in Gujarat, it will continue with its manufacturing foundry at Talegoaon in Maharashtra, making parts and cars for export to the Asian and South American markets.

As part of a wider re-structuring aimed at improving profitability, the BBC reported, GM has put a $1 billion investment plan for India on hold, while also pulling back in South and East Africa. The firm plans to sell a 57.7% shareholding and grant management control to Isuzu in its East African operations, as well as stop selling cars in South Africa and sell its Struandale plant there to the Japanese firm in a re-structuring aimed at creating savings of $100 million per annum.

To be fair, minor successes aside, GM has struggled in India and failed to make much impact on a market originally dominated by domestic brands but latterly by Japanese and Korean firms. Even after more than 20 years, GM’s Chevrolet brand only has 1% of the market.

Commenting on the earlier plan to invest $1 billion in the market to develop its product range in what is forecast to become the world’s third largest car market, GM’s International president Stefan Jacoby is quoted as saying, “We determined that the increased investment required for an extensive and flexible product portfolio would not deliver a leadership position or long-term profitability in the domestic market.” Read more

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It isn’t an idle question. Oil prices are a proxy for energy prices, and a rising oil price can be supportive for energy intensive metals like aluminum.

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A rising oil price is also taken as a proxy for rising industrial demand – a bullish indicator that global growth is strong. A falling price, on the other hand, should be good for consumer spending as it keeps more money in drivers’ pockets and lowers the cost of goods sold for companies far and wide – but particularly for those in the transportation or more energy intensive sectors.

But despite rising last year following the agreement on the parts of OPEC and major non-OPEC oil producers to limit output, the price has since fallen back so consumers are not surprisingly wondering where it goes from here.

Just this month the two architects and key players in last year’s agreement, Saudi Arabia and Russia, announced they would continue with the agreement, set to shortly expire, until March 2018 and indeed will accelerate cuts to reduce near record inventories. It should be said the announcement still must be officially agreed at next week’s meeting of OPEC ministers in Vienna.

While initially slow to contribute, Russia has stepped up cut backs of late and combined non OPEC cuts are said to be some 255,000 b/d in April, but others such as Brazil and Canada are expected to increase output in Q2 and the USA has added substantially since last year. According to Oilprice.com, U.S. oil production has risen to approximately 9.3 million barrels a day and is projected by the EIA to reach 10 million barrels a day by 2018. Read more

The headline of this article from The Telegraph provocatively reads “The end of petrol and diesel cars? All vehicles will be electric by 2025, says expert.”

However passionately the argument is made, the 2025 deadline that comes from a report entitled “Rethinking Transportation 2020–2030” by Stanford University economist Tony Seba is almost certainly wildly optimistic. Nevertheless, it makes a good headline, and The Telegraph loves nothing better than good attention grabber.

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Seba is well known for his challenging and — some would say — self-publicising proclamations. But the basic logic of his argument that a combination of trends and converging technologies will have a transformational effect on the energy and transportation markets sometime in the next decade is probably out only in terms of timing.

Long a vocal advocate for renewable technologies, the professor has repeatedly pointed to the falling cost of solar power supported by wind, hydro and, in some cases, geothermal and biomass as sounding the death knell for conventional carbon fuels such as coal, oil and natural gas. In that respect, his case is hard to argue against.

As an outlier, the British government remains stubbornly committed to subsidising a nuclear power station at Hinckley Point at a cost of around £92.50/MWh ($120/MWh) — when even in the overcast U.K., solar was being won at £71.00/MWh in 2015 and prices have fallen further since.

Wind power can be even cheaper, at least in windy Britain. Although it is widely acknowledged that the power delivery from both wind and solar is intermittent, renewables can be made increasingly viable through a combination of improving storage technology and greater integration of power grids and smart technologies allowing transmission companies to partially even out the generation and consumption over a wider area. Read more

So much has been written in recent months about China and the Chinese aluminum market that we are in danger of losing sight of the performance of major producers outside of that market.

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The position of producers like Alcoa and Rusal arguably have more impact and more significance for Western consumers than those behind the tariff barrier walls of China’s borders. The Financial Times reported last week that Rusal (still the world’s second largest producer, according to Statista) is in robust health and has reported rising profits on the back of stronger first quarter prices.

According to the FT, net profit for the first three months of the year was $187 million, up 48% from $126 million in the same period last year, on the back of 20% rise in revenue to $2.3 billion. While not quite reaching analysts’ predictions, it allowed the firm to reduce debt levels and encouragingly was achieved on the back of only a modest 0.7% increase in production to 910,000 metric tons. Likewise, alumina production was up a correspondingly small 0.9% to 1.889 million tons.

Costs, however, have remained a bugbear with electricity prices, transportation – principally railways, and other raw material costs rising in Q1, in part due to rising commodity prices but also due to a 6.7% strengthening of the ruble.

Nevertheless, demand growth remains robust, and supply outside China remains relatively tight with the forward market spreads not favouring the roll-over of stock and trade storage of primary metal with only a 3.5% margin over 18 months.

Much will depend on China going forward and how seriously Beijing continues to pursue its policy of clamping down on environmental non-compliance and limiting new smelter investment. Aluminum demand in China grew at 7.5% in the first quarter, according to Aluminium Insider, and it is growing at 5.0% in the rest of the world.

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Prices may have slipped back of late but that was probably to be expected after the surge of enthusiasm following Beijing’s clampdown. As the realisation sinks in that China’s winter heating period closures are still six months away, some softening is to be expected.

There are certain models that economists use to explain markets or to illustrate market behaviour. Cyclical commodity markets are one such model, and the principle of swing producers is another.

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Among metals, nickel has been a wonderful example of both in recent years, and a Financial Times article written by a team from consultancy Woods Mackenzie ably illustrates how the metal’s current poor price performance is a result of both.

Cyclical commodity markets are invariably caused by violent swings in supply and demand. In times of rising prices, miners invest in new mines. As they take time to come to fruition, they often unhelpfully come in at the end of a commodity bull run, flooding the market with oversupply just as demand falls. Prices then collapse.

In the case of nickel, as the article reported, five years of surpluses meant nickel prices have more than halved between 2011 and 2015. Having just invested in new capacity, the miners tend to be slow to adjust. But in the end, mine closures ensue, and in the case of nickel, this resulted in the loss of about 6% of global mine supply. Supply, however, has remained more than adequate with many countries competing for market share. Read more

Regular readers of The Telegraph, arguably Britain’s only remaining decent broadsheet paper, will be familiar with the writings of Ambrose Evans Prichard, the international business editor.

It has to be said that he has a slightly sensationalist reporting style, but his articles are always liberally supported with facts and figures. Even though he seems to argue more often than not that markets about to drop off the edge of a cliff, he has, at times, been right. Yet an article this week titled “Commodities slump on China tremors and OPEC failure,” while making a plausible argument based on the facts and figures presented, could equally have an alternate explanation if one looks over a slightly longer timeframe.

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Clyde Russel of Reuters takes just such an approach in an article posted just a day or so later, which all goes to underline the challenge for buyers in interpreting fundamental supply and demand data and extrapolating workable strategies.

Source: The Telegraph

The Telegraph looks at a gradually sinking Brent oil price coupled with falling Chinese crude oil imports, and it suggests that the former is in part a result of the latter. Reuters looks at the same data, and whilst the article acknowledges that imports are down in April, it goes on to look at the last 12 months trend line.

Reuters notes that in the first four months of 2017, crude oil imports were up 12.5% from the same period last year to around 8.46 million bpd. The article goes on to point out that this is also substantially higher than the 7.6 million bpd imports averaged for 2016, suggesting that China’s appetite for crude has jumped substantially so far this year, notwithstanding the pullback in April. Read more

Earlier this decade, there was no lack of hype around electric and hybrid cars. Sales were expected to take off, driving demand for lithium, nickel, cobalt and a host of rare earth elements above supply.

That was, in part, motivation for a rare earths bubble, but demand have remained manageable as high sales of electric vehicles have failed to materialise. In reality, electric and hybrid cars have gained traction only gradually as the range of EVs grew and as hybrids struggled to make dramatic improvements in fuel efficiency resulting from advances in internal combustion, particularly diesel engine technology.

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

Sooner or later, however, a combination of improving technology and pressure from legislation forcing changes in buyer choices should result in electric vehicles merging into the mainstream. A sure sign that the day is drawing nearer would be when established main brands set targets for themselves.

Well, this week Volkswagen did just that. The Financial Times covered an announcement made by Herbert Diess, head of the VW brand (the largest part of the VW Group), that the brand would sell one million electric cars by 2025 and leapfrog Tesla as the world’s premier volume EV manufacturer. As part of VW’s central plan, the FT reports, the firm is going to sell electric cars at the price of today’s diesel models and intends the entire electric fleet to be profitable from day one. Read more

President Donald Trump has come in for a fair amount of criticism for his perceived failure to achieve many of his campaign promises in the 100-day deadline he set himself (and now denies, but that’s another issue).

Implementation of a case against China as a currency manipulator and building the U.S.-Mexico border wall has given way to the greater pragmatism of coercing China to put pressure on North Korea with both carrot and stick incentives, and of a “last minute” retraction of a supposed imminent announcement to withdraw from the North American Free Trade Agreement (NAFTA) last month as a precursor to talks down the line.

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The Economist, as usual, gives an impartial and balanced assessment of events in two recent articles. The first reports that although the president has not been able to implement much of the headline objectives, the combination of executive orders, tweets and off-the-cuff announcements have set in motion a number of significant developments.

Pulling out of the Trans-Pacific Partnership (TPP) gave a clear message from day one that here was a president who meant what he said — that you took all the bluster as hot air at your peril. The very uncertainty in his lack of planned policy and spur-of-the-moment reaction to events has put trade partners, friends and enemies alike on uncertain ground — not a bad negotiating position to force on the other side, if you see all interaction as a negotiation.

More significantly, the U.S. has started an investigation into whether steel imports are a threat to national security and followed up with a similar probe, announced late last month, into aluminium imports. Trade negotiators at home and abroad are said to be aghast at the former leader of the rules-based trading system and a major backer of the World Trade Organization completely shunning the system it created and resorting to obscure legislation to achieve the president’s promises. Read more