Stuart Burns

Occasionally it is interesting to step back and look at global trends over a longer term than one month to another or one quarter to the previous, and sometimes it is downright scary.

Why Manufacturers Need to Ditch Purchase Price Variance

Today, we are all a little disappointed by a poor Q1 in the US. Europe is feeling a little better about a slight upturn and Japan, well Japan is struggling to gain traction in spite of repeated attempts to kick start its economy.

Several emerging markets are in outright recession, according to the Telegraph, namely Russia, Brazil, Argentina, and Venezuela are all contracting sharply. So is this a temporary setback or are these aspects of a deeper malaise?

Growth Crawling

Global growth is slowing, and not just on a month-by-month or quarter-by-quarter basis. The UN has cut its global growth forecast for this year to 2.8%. That’s still growth, of course, but this pace is only slightly above the 2.5% rate that used to be regarded as a recession for the international system as a whole, the paper says.

It would be easy to blame China but China, actually, is only part of the problem. All economies seem stuck in a global malaise of slow growth and falling productivity rates. An FT article illustrates the problem of productivity. As emerging markets are reaching the limits of easy growth based on catch-up technology, advanced economies are concentrating on services, which tend to have less scope for rapid efficiency gains.

New technology has centered on consumer products, which have made people better off and able to do more than in the past, but have not necessarily improved the quantity or efficiency of their work.

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That China uses overseas investment as a tool for political as well as economic advancement is no surprise to anyone.

Why Manufacturers Need to Ditch Purchase Price Variance

Beijing has come under criticism in the past for investing in places like Zimbabwe and Sudan regardless of the human rights flavor of the regime in power, but such criticism is like water off a ducks back. China is in it for China’s gain and cares little for what others may say.

It will be intriguing looking back 10 years from now to see what some of these emerging markets have given away to China in return for much-needed investment. Beijing is not stupid and exacts a price for it’s infrastructure and development investments in in the form of ownership of mines and agricultural assets useful for their industry and food supplies.

A Tale of Two Centuries

Many would argue this is no different from western nations’ exploitation of African and South American countries in the last century, but you would certainly hope the recipients had learned from such experiences. One advantage China wrings from such deals is often the supply of materials and equipment in addition to expertise and finance.

In many cases even the workforce is supplied, too, in the construction of infrastructure projects. In the face of growing global alarm at rising Chinese steel and aluminum exports, recipients of direct investments can hardly complain about the provider supplying materials, so major road, rail and power projects provide an opportunity for substantial Chinese exports.

China in Brazil

This appears to be one of the major attractions in investment decisions made this month in Brazil following Premier Li Keqiang’s visit to Brazil, Columbia, Peru and Chile. Li announced billions of dollars of investments while there last week, potentially up to some $50 billion to Brazil alone according to Reuters, on top of a similar amount in other South American countries.

In return, Brazil has gained not just desperately needed finance and investment but concessions for exports such as a lifting of the 2012 beef ban following an outbreak of mad cow among Brazil’s herds. According to the Guardian newspaper, trade between China and Latin America as a whole exploded from barely $10 billion in 2000 to $255.5 billion in 2012, while Chinese-Brazilian trade mushroomed from $6.5 billion in 2003 to $83.3 billion in 2012.

Although China is just the 12th-largest investor in Brazil, it is Brazil’s largest export market, mostly of raw materials, a situation Brazil would dearly like to change if it were only competitive when it comes to manufactured goods. One area of expertise is aircraft, part of the recent deal is a $1.3 billion sale of 22 Brazilian Embraer commercial jets to China’s Tianjin Airlines.

Anyone familiar with the trials Vale SA has been going through gaining agreement to use its fleet of new Valemax super ore carriers docking at Chinese ports, will not be surprised to hear the iron ore producer has finally caved in and sold four of the vessels to China Merchants Energy Shipping Co. Ltd. for an undisclosed sum. It was only ever about China having a role in that trade.

Construction has started on a 2,800-kilometer transmission line by China’s State Grid Corp., the world’s largest utility to link the Belo Monte hydroelectric dam under construction in the Amazon to the industrial state of Sao Paulo whilst much talk is being made of a possible railway from the southeastern Brazilian port of Santos more than 3,500 km (2,200 miles) to the Peruvian Pacific port of Ilo.

For Brazil, it offers the chance to avoid the Panama Canal and, for China, lower-cost access to Brazil’s markets via the Pacific in addition to the steel, rolling stock and associated equipment that would no doubt be part of the deal.

China has become adept at, as the Japanese before them, combining finance, expertise and material supply in their overseas investments. State driven and financed, they can afford to play the long game and maximize political and well as commercial aims. In that regard, cash-strapped but economically more developed South America has much more potential than Africa did. Expect more of the same in the years ahead as China seeks to both spread its influence and put those massive reserves to use abroad.

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Nickel has perplexed and confounded investors for the last year or more.

Prices had been expected to rise on the back of an anticipated shortfall in ore supply, only for the expect opposite to happen. Yet Norilsk Nickel, in it’s latest 2015 Strategy update, reported in a Platts blog that China’s inventories of nickel ore are down significantly, with only around two months of consumption left.

Why Manufacturers Need to Ditch Purchase Price Variance

Norilisk also believes China’s dependence on imported refined nickel is set to rise. It estimates that total nickel demand in China in 2015 will be made up of 42% imported refined nickel, 47% imported feed, and around 11% of domestic feed.

Imports Rising

In 2014, by comparison, total nickel demand in China consisted of 28% imported refined nickel, 61% imported feed, and 11% domestic feed. In its 2014 full-year results, the company forecast a 20,000 metric ton global deficit this year down from a 93,000 mt surplus in 2014. While a number of analysts are also forecasting a revised deficit between 20,000-45,000 mt this year, you have to say previous predictions have failed to materialize so why would this time be any different?

Maybe the issue here is that Norilisk is a producer and they are going to be bullish by nature, and indeed not all agree with Norilisk’s estimate of the current situation. The World Bureau of Metal Statistics reported just this week that the nickel market was in surplus From January to March 2015 with production exceeding apparent demand by 32.9 kilotons, less of a surplus than was running in 2014 but still significant.

Nor did they see it trailing off, in March nickel smelter/refinery production was 147.8 kt and consumption was 137.1 kt suggesting the surplus is continuing and may run through Q2.

The long-awaited dearth of ore supply resulting from the Indonesian export ban last year has failed to materialize. Chinese buyers have switched to a blend of Indonesian and Filipino ores for making nickel pig iron and an increase in refined nickel imports to meet demand.

Demand: Still Down

Demand is down, anyway. The Chinese economy is growing more slowly and stainless production (the source of two-thirds of nickel demand) is, at best, lackluster. In addition we are now coming towards the quieter summer period when demand falls and so it is unlikely the demand side is going to force a change in the downward trend in prices. Demand has stabilized in Europe after previous years’ weakness, but distributors are said to be well stocked and a restocking cycle is unlikely when most are anticipating further weakness in the nickel price.

As prices have fallen, stocks have risen, most obviously on the London Metal Exchange. Part of this rise can be attributed to finance stocks moving out of China and into supposedly safer LME Asian warehouses, but even so some 446,000 mt of LME stocks are going to take some working through and those speculators that have headed for the exits are not likely to pile back in again until they see a sustained downward trend in stocks.

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China has changed its tack on steel exports.

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In previous years it has sought a more conciliatory position to complaints by trade partners, a WSJ article says in the past CISA, China’s steel trade association, has sought to persuade local steel mills to curb exports and show restraint but this year, in the face of an unprecedented surge in volumes, Ministry of Commerce spokesman Shen Danyang is quoted as taking a much more defensive line saying the rise in steel exports is due to higher global demand and is a result of Chinese steel products having strong “export competitiveness.”

Chinese Now Say Exports ‘Justifiable’

Set against a backdrop of the EU’s recent investigation into dumping of cold-rolled coil from China and Russia, Shen is reported to have come out fighting, saying “Under such circumstances (demand and competitive pricing), I feel that it’s quite normal for Chinese steel exports to these countries to be rising, and it’s quite justifiable.”

Meanwhile, the WSJ adds the US, Australia and South Korea have also signaled that they are lining up support for trade action against Chinese steel exports, which rose by 50.5% last year to a record 93.8 million metric tons and have continued at a high level this year.

Chinese steel mills are on a roll according to data reported by the WSJ. Between September last year and January this year, the volume of China’s outbound steel shipments each month shattered the preceding month’s record. While in the first four months of 2015, steel exports were 32.7% higher than a year earlier.

The reason isn’t hard to find, domestic steel prices in China have been on a slide as demand has collapsed. According to a Bloomberg article Infrastructure and construction together account for about two thirds of China’s steel demand, citing HSBC research, and construction is slow as housing prices fall there.

Construction Slump Continues

New home prices slid in 69 of the 70 cities tracked by the government in April from a year earlier, according to National Bureau of Statistics data. As a result construction-related steel prices such as rebar have hit their lowest level since 2003.

What’s worse is the peak buying period for the construction sector is now in the past and demand would fall for seasonal reasons even if construction was strong. According to Reuters, prices have dropped 13% so far this year with the most-traded rebar futures contract for October settlement on the Shanghai Futures Exchange down to 2,355 yuan ($379.71) per ton, while MetalMiner’s own China tracking service has recorded a 16% fall in domestic steel prices this year from 2,810 yuan/mt at the beginning of the year to 2,340 yuan now.

What is Chinese ‘Cost?’

Such a slump in prices has aided steel mills in their drive to dump excess capacity overseas. Is it below cost? What is the cost price in China? what are a mill’s true costs for state enterprises that receive all kinds of support both at the regional and state level?

Steel mills are under pressure to close excess capacity but so far the result has been limited, excess capacity is being offered for export rather than any real attempt made to exercise market discipline and shutter plants. The trend is likely to get worse before it gets better, particularly if Beijing’s hard line continues, we can expect more trade disputes and possibly lower prices in the year ahead.

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There is a lot of talk in the business press about trade agreements.

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Most of us skip such articles on our way to the sports pages as it’s that impacts on such a macro scale that it is of little relevance to us day to day, but that is to overlook the massive impact trade liberalization has had on our lives over the last twenty years.

Although the low-hanging fruit has already been plucked, further agreements could yet impact, for good and bad, in the years to come. Lawmakers are split on many lines over the issue. Some are intrinsically against liberalization on the basis that it can expose domestic industries to unfair competition from abroad, that by reducing trade barriers, it encourages off shoring and the export of jobs overseas.

What is Trade Liberalization?

Others say trade liberalization raises GDP for all and the rising tide lifts the boats of everyone’s income levels, in developed and developing markets. The experience of the last 20 years can be used to support both arguments and, in reality, both are true to a greater or lesser extent.

Currently considerable argument rages about the President’s two plurilateral (by which we mean between a limited number of partners) trade agreements known as the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP).

Why Only Certain ‘Partners?’

The fact these agreements will be between a limited number of countries is itself a bone of contention. Many argue only multilateral agreements such as the failed Doha negotiations are the way to go because they encourage a universal set of rules and standards, but with the more readily agreed issues resolved further progress is proving increasingly difficult and acrimonious.

The FT did a quick idiot’s guide to the TPP and TTIP summarizing them as follows. The TPP is a negotiation with 11 countries, most importantly Japan. Its partners account for 36% of world output, 11% of population and about one-third of merchandise trade. The TTIP is between the US and the EU, which accounts for 46% of global output and 28% of merchandise trade.

The main partner not included in these negotiations is, of course, China. Import tariffs are only a part, arguably a small part of what these agreements are about. In the FT’s analysis, the agreements are more about making rules more compatible with one another and more transparent for business, particularly around intellectual property rights.

Not a Trade Booster, An IP Defender

They are an effort to shape the rules of international commerce, the FT argues and quotes Pascal Lamy, former director-general of the World Trade Organization, saying that “TPP is mostly, though not only, about classical protection-related market access issues . . . TTIP is mostly, though not only, about . . . .  regulatory convergence.”

The benefits of each to national incomes is small. Even supporters do not claim the level seen in earlier trade agreements. The FT quotes independent analysis suggesting between 0.4% and less than 1% rise in national incomes as a result, with the US-EU TTIP towards the upper end of the range and the US-Asia TPP towards the lower end. The most reliable guess is they will be positive but modest. That will make the President’s job correspondingly harder to get past a skeptical Congress.

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OK, got over laughing yet?

Why Manufacturers Need to Ditch Purchase Price Variance

Yes, the European Union will impose anti-dumping duties of up to 35.9% on imports of a grade of electrical steel from China, Japan, Russia, South Korea and, yes, the United States, which those countries are allegedly selling at below cost.

European Commission Acts

According to Reuters it is the EU’s second set of measures this year to protect European steel producers such as ArcelorMittal, Stalproduckt STP, ThyssenKrupp and Tata Steel UK. Apparently the European Commission has just set tariffs on imports of grain-oriented, flat-rolled electrical steel (GOES, for those of you that regularly read our MMI coverage) following a complaint lodged in June 2014 by the European steel producers association, Eurofer.

The duties are provisional, pending the outcome of an investigation due to end in November, but as we all know the moment a duty looks like a real possibility importers stop importing in case they get caught retroactively. Normally, such duties would then continue for five years, the paper reports.

More specifically duties of 28.7% will cover imports from Chinese companies, including Baosteel and Wuhan Iron and Steel Corp. and of 22.8% from South Korean producers such as POSCO. The rate for US producers including AK Steel is 22% and for Russian firms such as NLMK 21.6%.

Meanwhile, Japan’s JFE Steel Corp. will face duties of 34.2% and Nippon Steel and Sumitomo Metal Corp., among others, 35.9%. Eurofer is quoted as saying the dumped imports have damaged the EU industry by driving prices to below the costs of production, causing substantial losses. It said the market share of dumped imports into the EU rose to 47% in 2012, with most from Japan and Russia.

2nd Anti-Dumping Action This Year

This action follows anti-dumping duties being applied in March to flat-rolled stainless steel from China and Taiwan, a new investigation into specific grades of steel rebar and attempts to prolong the existing duties on Chinese wire rod.

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An interesting post in the FT by a leading economist examines the growing concern that seven years after the financial crisis and the use of unprecedented stimulus measures and extended near-zero interest rates,the world may be stuck in a long-term trend of low growth.

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The author, Gavin Davis, is not to be dismissed as just another academic, he was head of the global economics department at Goldman Sachs from 1987-2001, and served as an economic policy adviser to the British government in addition to being an external adviser to the British Treasury.

Chinese, Japanese Growth Down

Global growth is unquestionably slowing.

The three largest independent economies are all struggling to achieve strong growth. Chinese activity dipped sharply last month, and the estimated rate of growth is now 5.3%, well below the government’s 7% target for the 2015 calendar year leading many to hope yet another stimulus is on the way, but so far we have not seen much more than a relaxation in lending and reductions in interest rates.

Japanese growth remains weak in spite of Abenomics. Remarkably, after recessions in parts of the Eurozone the only major economy showing some resilience is the EU where overall growth could be approaching 1.8% in spite of excessive austerity measures.

Davis cites a colleague’s research that tracks two measures of US activity used to summarize the “state of the economic cycle.”

The Slow Normal

According to his models, the probability that the economy is now in a state of strong expansion has dropped from 70% in December 2014 to under 40% now. Over the same period, the probability that the economy is in recession has risen from zero to 14% – still low he admits, but not entirely negligible.

The expectation is that US growth will rebound in Q2 but will not be enough to raise 2015 growth as a whole and could well result in a downgrade for the year as a whole. It’s hard to see China, the engine of growth for the last ten years or more, suddenly creating the level of demand that will significantly lift global GDP in the next few years.

US Growth Nearly Halted

In the US, the official GDP growth rate in Q1 was only 0.2%, while Davis’ model of underlying activity is showing 1.8%. This may, as in some previous years, be more down to a weak first quarter due to weather but the real worry is that the rate of productivity growth is slowing and with it the potential for a long-term rise in living standards and, hence, growth. The long-term growth rate of the US economy has fallen from 3.3% in 2003 to 2.3% now.

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Like most governmental, or worse intergovernmental, bodies the Organisation for Economic Co‑operation and Development is more dedicated to talking shop than legislating, and a report following the recent meeting of the OECD Steel Committee is no exception. Long on talk and short on hard recommendations.

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As a snapshot of the current, global steel market it deserves a pause and review even if its recommendations are likely to be largely ignored by those governments that can most have any beneficial impact on the market.

Their first finding, and this will come as no surprise to anyone in the industry, is global apparent steel use has nearly ground to a halt in 2015. According to the OECD’s March 2015 “Interim Economic Assessment,” the effects of lower oil prices and monetary policy easing have led to a slight improvement in economic growth prospects in the major economies, but the near-term outlook is still one of reduced world GDP growth.

Miniscule Growth

Global crude steel production grew by only 1% in 2014, driven by China’s slowdown and modest growth in developed economies. In the first quarter of 2015, global crude steel production decreased by 1.8%, while Chinese crude steel production in the first quarter of 2015 fell by 1.7%, reaching 811.5 million metric tons in annualized terms.

In the rest of the world, crude steel production was 810.8 million mt in the first quarter of 2015, in annualized terms, down 1.9% compared to the previous year. Looking forward, global apparent steel use (of finished steel products) is expected to grow by only 0.5% in 2015 and by 1.4% in 2016, after 2014 when it grew by an equally anaemic 0.6%.

Anyone active in the North American market will not be surprised to hear that OECD expects demand here to decline by 0.9% in 2015 and remain weak in Central and South America. Only the Middle East and Asia, outside of China, are expecting to show decent growth with India probably leading the way.

In light of the poor growth prospects, and discussion went so far as to suggest we may be in a permanently low steel growth environment from here on as population growth slows and populations age, overcapacity and the consequences thereof featured highly in the committee’s attentions.

Too Much Investment

Too much new steel investment continues to be made, often aided and abetted by governments even though overcapacity is chronic globally and severe in markets where normal market forces do not provide counterbalancing controls. As a result, steel-related trade actions are on the rise, with complaints accounting for as much as 25% of the total number of complaints brought to the WTO in recent years.

This isn’t going to get any better in 2015-16 and will create distortions in markets as producers switch their sales focus in response to legislation.

Mandatory Climate Change Comment

No intergovernmental meeting would be complete without reference to climate change or environmental factors and, not to disappoint, the OECD wraps up with the observation that progress on low-carbon industrial innovation over the next decade is crucial. The iron and steel sector accounts for about 22% of total industrial energy use and 31% of industrial, direct CO2 emissions. So, like it or not, changes in environmental legislation are going to have a major impact on the industry in coming years, particularly in those countries where these standards are actually enforced.

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It may seem absurd at first sight to compare an icon of America’s heritage, the Harley-Davidson, with a British transplant to India from the 1940’s, but both the Harley and Enfield share at least one thing in common. Both trade on a marketing image that is soundly retro, much as Harley has tried to appeal to a younger audience, it’s old guys like me that drool over those classic lines and make up the majority of their owners.

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The Enfield also has a decidedly retro appeal with the range being largely unchanged from the original 1940’s designs; it oozes rugged simplicity and economy. The Bullet 500 single cylinder machine is essentially the same as made by Enfield from the 1940’s in the UK before Eicher Motors, a Mumbai-listed manufacturer of engines and commercial vehicles, bought Enfield’s Indian unit in 1994 and kept the brand alive as Royal Enfield after it closed in the UK.

Modern Design, Classic Appearance

Changes such as using aluminum instead of steel for engine components and fuel injection instead of carburetors have improved the reliability and economy but not changed the appearance.

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n the face of it Aluminium Bahrain’s Alba smelter’s recent first quarter results underline the huge advantage Middle Eastern smelters have over most of those in the US and Europe.

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The company’s net income for the first three months of 2015 was 37.2 million dinars ($98.7 million), up from 17.1 million dinars in the same period a year ago according to a post on Yahoo Finance. This came on top of a cracking fourth quarter last year. The company made a net profit of 34.6 million dinars ($91.8 million) in the three months up to Dec. 31, up from 13.7 million dinars in the prior-year period.

Alba Expansion

The solid results will have helped the firm’s expansion plans, which are at an advanced stage. The post advises Alba is close to selecting the financial adviser for its $2.5 billion Line 6 expansion project, aimed at lifting capacity from the current 900,000 metric tons.

The scheme will make Alba the largest single-site aluminum smelter in the world by boosting annual production to around 1.3 million mt. Conditional on the projects go ahead was an agreement on gas pricing, but the days of exceptionally low natural gas prices may be drawing to an end.

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