Author Archives: Stuart Burns

Jean-Claude Juncker, president of the European Commission, is reported by the London Telegraph to have warned China that the country’s chances of gaining market economy status are directly related to its steel exports.

Two-Month Trial: Metal Buying Outlook

In a speech in China, Juncker is reported to have said “I do not want to dramatize this issue… but there is a clear link between the steel overcapacity of China and the market economy status for China.”

Steel Overcapacity Through the Years

China makes more than half of the world’s1.6 billion metric tons of steel but it’s suffering from slowing domestic demand and has turned to exports to dispose of its surplus. In the first quarter of the year Chinese steel exports to the European Union rose 28%, driving prices down by more than 30% according to some reports.

Steel mills Molten iron smelting furnace production line

Beijing wants to shut down unprofitable steel production, but the provinces are merely reclassifying the mills and giving them new loans.

Although China has made conciliatory comments, Chinese Foreign Minister Wang Yi said this week the E.U. and China were forming a bilateral mechanism to review, discuss and deal with overcapacity in the steel industry. Beijing may have it’s work cut out for it if it actually wants to force through closures. The government has been trying it reign in excess capacity for some time, restricting credit and urging provinces to close older polluting plants but a recent Reuters article suggests provincial governments are doing anything but cooperating. Read more

Much of the focus so far, and nearly all of it gloomy, has been on the impact of the U.K.’s decision to leave the European Union at some point in the future. Most are proceeding with caution because, as yet, no formal announcement of intent has been given and the exit process will take a minimum of two years, so once the dust has settled both sides will dig in for a prolonged period of trench warfare during which the real work will be done, negotiating the exit terms.

Two-Month Trial: Metal Buying Outlook

Although most (apart from a naive few who are still gazing at the sunlit uplands of total independence) concede Britain will be worse off, at least in the short to medium term, not so much has been said about the impact on Europe.

Durable Trade in Durable Goods

Apart from the fact that the U.K. runs a massive trade deficit with Europe, Germany alone exports close on $100 billion a year of goods and services to the U.K., mostly cars and high-end consumer goods. The UK is also a net contributor to the E.U. budget. Net is the key word here, as Brexiters made much of a spurious £350 million a week figure that supposedly Britain paid to the E.U.

In fact, when the payments the E.U. makes back to British farmers — such as aid to deprived areas, support for research, etc. — the net figure is probably half that, but the U.K. contribution remains a significant part of the E.U.’s €145 billion annual ($160 billion) budget.

Screen Shot 2016-07-11 at 16.18.40

E.U. Positive and negative contributor states. Source: Financial Times.

This chart from the Financial Times shows the contributions per capita, not the total contributions, so those countries in the upper section with the larger populations are the major source of funds – Germany, France, the U.K. and Italy

Screen Shot 2016-07-11 at 16.18.22

The E.U.’s 2015 budget. Source: Financial Times.

The FT says that, under the pre-Brexit status quo, Britain would have made a net contribution of £65.7 billion from 2014 to 2020, with £47.5 billion ($60 billion) of the total coming in the years 2016-2020. Read more

The U.K. is far from alone in recognizing that in order to achieve any meaningful reduction in greenhouse gas emissions, nations have to embrace renewable energy and nuclear power. For those energy generation technologies without obvious natural benefits, like hydro-electric power, it isn’t a case of one technology or the other.

Two-Month Trial: Metal Buying Outlook

Both renewable and nuclear energy require essentially subsidized energy tariffs to make them viable. In the case of renewables it is feed-in rates and the provision of back-up power for when the wind doesn’t blow or the sun doesn’t shine that add to the carbon footprint. Britain’s proposed Hinckley Point nuclear project has an index-linked, guaranteed feed-in tariff at $121.54 per megawatt/hour (£92.50 MWh) for 35 years in order to make the $21.02 billion (£16 billion) project for two reactors with a combined output of 3.26 gigawatts viable. Compare that to recent auctions for solar projects which went at around $104.10/MWh (£79.23/MWh) and that number gets close to the price of natural gas before back-up power is factored in.

Carbon Emissions Flourish Elsewhere

Of course, many countries in the world are doing no more than paying lip service to reducing carbon emissions. India, for example, has its sights set on bringing onstream as much new generating capacity as possible to meet rising population and industrial demand. As anyone who has spent time in the sub-continent will know, reliable electricity supply is a still a luxury for many of the massive country’s regions.

Nuclear may be thought of as yesterday's technology, but its emission-less power generation makes it attractive. Source: Adobe Stock/mandritoiou.

Nuclear may be thought of as yesterday’s technology, but its emission-less power generation makes it attractive. Source: Adobe Stock/mandritoiou.

A 1.3 billion and rising population lives there so it should come as no surprise that — although new solar and wind is being added at breakneck speed including some 36 gw of renewables or 15% of its demand, not shabby by any means — India is planning to add another 69 gw of coal-fired power generation as well. New capacity will be progressively better technology, but much of the existing coal infrastructure is of low efficiency and, therefore, particularly polluting for every KWh produced. Where Japan manages efficiency levels around 40%, the U.S. is said to be around 35%, but India struggles to meet just 25%. Read more

Rarely do a government’s stated aims and the aspirations of industry align quite so perfectly as they do in today’s India regarding steel.

Two-Month Trial: Metal Buying Outlook

Prime Minister Narendra Modi’s government has been championing a “Make in India” mantra since coming into power in 2014. It has manifested itself in various ways and most intensely with the state-run enterprises who are more open to government pressure. Even so, it has become a pervasive theme across the entire national economy, coercing companies to finds ways of buying domestically in rupees rather than directly importing materials and paying in foreign currency. Read more

As if there hasn’t been enough fall out from the U.K.’s decision last month to leave the European Union, a Financial Times article reveals that European Commission president Jean-Claude Juncker is set to ditch fast-tracking the European Union’s trade deal with Canada, officially known as The Canada and European Union Comprehensive Economic and Trade Agreement (CETA), a deal that has already taken five years to negotiate.

Two-Month Trial: Metal Buying Outlook

In a move criticized as undemocratic, Juncker had sought to push approval through on the nod of trade ministers and ministers of the European Parliament, giving no recourse to the 38 parliaments (some of them are regional, only 28 are national members of the E.U.) if they don’t agree to it.

France, Germany Block Fast-Track

Apparently, Berlin and Paris put a stop to the Commission’s move, seen by some as yet another example of the Commission’s undemocratic behavior put into the spotlight by Britain’s objections to rising control from Brussels. Read more

Before anyone with shares in nickel mines goes out and orders their new Maserati, a word or two of caution is in order.

Two-Month Trial: Metal Buying Outlook

Yes, by some accounts nickel swung into deficit this year after five years of surpluses as global demand rose by some 4% and supply has been constrained by a lack of new investment, Indonesia’s export ban on nickel ore exports and, more recently, a fall in exports from challenger Chinese supplier, the Philippines where low prices have reduced output.

Investors Are Cashing In

The euphoria among investors is not simply due to a change in outlook. Nickel prices have surged this year by some 13% according to the Financial Times with the latest boost coming from the Philippines’ new environmentalist mining minister Gina Lopez, who has announced plans to audit domestic mines for compliance with environmental standards, the expectation is up to 70% could fail resulting in them potentially having their licenses revoked. Two have already lost their licenses. Read more

If the European steel industry wasn’t beset with problems of poor profitability and overcapacity before Brexit, it now has a sharply increased element of uncertainty to add into the mix.

Two-Month Trial: Metal Buying Outlook

Steel mills across Europe have been criticized for not addressing overcapacity since the financial crisis but if you think closing steel mills in the U.S. is a problem, with states lobbying mills to maintain operations, it is nothing compared to the 28 nation states of the European Union, for whom the continued existence of a national steel industry — each country generally has only one or two champions — is a matter of political survival for many governments.

This steel plant at Port Talbot in South Wales, U.K., could close if Tata Steel can't find a buyer. Even as steel prices increased last week. Source: Adobe Stock/Petert2

Port Talbot in South Wales, U.K., could close if Tata Steel can’t strike a deal and Brexit could make it harder to get one done. Source: Adobe Stock/Petert2

So, for transnational steel producers to moot the possible rationalization of a mill in one country is to invite howls of protest and a political storm. Plus, governments sometimes offer financial support, although, technically, that is against E.U. rules, but ways are often found.

Steel Deals Now in Peril

Tata Steel’s proposed closure or sale of it’s U.K. operations has stuttered along this year with long products being successfully sold to various parties and the major blast furnaces and flat-rolled operations at Port Talbot, South Wales, being circled by a couple of bidders. Read more

You wouldn’t expect the ripples to have spread quite this far, but Britain’s Brexit from the E.U. is lapping on the shores of the South China Sea and has forced the People’s Bank of China (PBOC) to intervene to “stabilize” the yuan in the face of a slump in the pound and euro and a surge in the U.S. dollar.

Two-Month Trial: Metal Buying Outlook

Chinese policymakers have guided the yuan to a 5.6% decline against an index of its trading partners this year as exports fell every month apart from March. The 13-currency gauge fell to a 20-month low last week as the PBOC continued its policy of “stability” while maintaining responsiveness to market forces — plainly such a policy can be contradictory at times, especially in times of volatility as we are now facing.

Source: Bloomberg

Source: Bloomberg

The PBOC, after years of gradual appreciation, has presided over a period of depreciation again in an attempt to help exporters, but an unexpected downward adjustment last August spooked markets and caused shares to fall causing an estimated $1 trillion capital outflow from the country as investors panicked, fearing the prospect of their assets falling in dollar values. Read more

The European Union is to meet this week — all 27 of them without their 28th member, the rebellious U.K. — to discuss the implications of its voters’ momentous decision to leave the political and economic pact in a national referendum last week.

Two-Month Trial: Metal Buying Outlook

Most say the decision to leave will hurt the U.K. economy. The Bank of England said before the vote the economic hit on the country will be considerable, with permanent loss of economic growth, higher unemployment and lower tax receipts.

Banks Gird for Policy Battle

The New York Times quoted sources that said British economic growth could be zero or negative in the short and medium term, with a secondary impact over time as London’s financial services sector, which makes up about 12% of the economy — which is more than manufacturing — begins to move staff members and headquarters to Frankfurt, Paris or Dublin.

The web of international banking could be disrupted if there are tighter restrictions on U.K. labor. Image: Adobe Stock/Sergey Givens.

The web of international banking could be disrupted if there are tighter restrictions on U.K. labor. Image: Adobe Stock/Sergey Givens.

London’s banks have lost no time in applying for banking licenses in the above cities and identifying staff they could move to overseas branches if negotiations do not look like they will guarantee continued open access. Read more

So, as we discussed above, if the new, post-Brexit U.K. allows open access to workers from the European Union — and not allowing open borders and easy employment for other Europeans was the central plank and sticking point of the entire Leave campaign — it might be easier to make a deal with those former partner nations in the E.U. That would also raise the question, “what was all of this for?”

Free Download: The June 2016 MMI Report

If discarding the objective of banning open access proves too much of a barrier, the U.K. may opt to fall back on World Trade Organization rules which will mean tariffs and possibly other bureaucratic barriers such as quotas will be established between the U.K. and Europe. That will encourage firms to locate future investment inside the single market rather than in the U.K.

What Might A Future Deal Look Like?

In the meantime, and a final solution could be two years away, the U.K. benefits from a lower pound which will boost exports to the single market and rest of the world. There are a number of models the U.K. could agree with Europe on, long-term, to establish trade rules and coexist in the future.

Germany exports the third-most of its goods to Great Britain behind only the U.S. and France. Negotiators are already trying to solve the puzzle of how to let the U.K. leave the E.U. without Germany leaving all of that business on the Brexit table. Source: Adobe Stock/Luzetania.

The Remain camp’s favorite is the Norwegian model that gives tariff-free access to the single market in return for free movement of labor, acceptance of many of the E.U.’s laws and payment into the E.U. budget, although no say whatsoever, into how that money is spent. The movement clause is likely a dealbreaker for Leave hardliners. Read more