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.
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.
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?”
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
Whatever you may think of the merits of Britain’s decision to leave the European Union, and you’d be hard pressed to find any of those merits, one early casualty is likely to be the British Steel industry, of which the most high profile example is Tata Steel’s Port Talbot steel mill.
It has been the subject of huge speculation and media attention since the Indian owners mooted closure or sale in the Spring of this year.
Has the Brexit doomed any sale of Tata Steel’s Port Talbot facility? Source: Adobe Stock/Petert2
After initially inviting bids to buy the massive steel works and associated facilities, Tata had begun to enter serious talks with the British government about keeping the plant when it became clear millions of pounds of financial aid, lower power costs and a 25% government stake in the business may be in the cards.
Is a Port Talbot Sale Viable?
That has now been thrown into doubt, in fact scuppered is probably more accurate as Tata assesses the viability of keeping a steel production plant in Britain if Britain is probably no longer part of the European single market. Read more
Britain has voted by a narrow majority 51.8/48.2 to leave the EU. What happens now is anyone’s guess. We are in uncharted territory, even those leading the charge for a Leave vote seem somewhat perplexed by the outcome and have been busy backtracking on promises and commitments made during the campaign about what they could deliver.
David Cameron, Britain’s prime minister, has announced he will step down before the conference season in October to make way for a new leader of the party’s choosing. The automatic assumption is this will be Boris Johnson with Michael Gove as Chancellor, but the party is deeply divided and a lot could happen between now and the Fall.
In the meantime, the markets have taken the decision badly. The FTSE 250 — which is considered a close barometer of the UK economy — fell by 12.3% before paring losses back to 7.1%, while the pound tumbled to $1.30, before recovering slightly to $1.36 against the dollar. Read more
In a surprise move, Andrew Harding, the head of iron ore at commodities miner Rio Tinto Group has been passed over as CEO to replace outgoing Sam Walsh on July 2 by relative newcomer to the group, Jean-Sebastien Jacques who only joined in 2011 and has headed up Rio’s copper and coal divisions, the Sydney Morning Herald reports.
Harding has been with Rio for 25 years and had been expected to replace departing Walsh in part due to his experience in iron ore which is central to Rio’s existence. The miner generates about half its revenues and around 90% of its earnings from iron ore sales, just 9% from aluminum and copper and the balance from diamonds and other minerals.
Rio Tinto’s Future
The move is seen as part of future plans for Rio to reduce reliance on iron ore and to divest itself of coal assets. Although the firm would argue otherwise — its cost of production for iron ore is a fraction of what it was five years ago — the firm’s expansion into an already oversupplied market is seen by many as a dead end.
Rio Tinto increased iron ore production by 11% last year to 327.6 million metric tons, and that should rise another 7% to 350 mmt by the end of this year, the Telegraph’s Questor column reports. The miner is not alone as rivals BHP Billiton and Fortescue also ramp up production to offset falling prices.
This year, the policy appears to have paid dividends as Chinese demand has risen on the back of a short-term boost from a huge government backed loan splurge at the start of the year, but there are signs the economy there is slowing again. Read more
A recent Reuters article draws an interesting comparison between the Chinese aluminum and steel industries and then goes on to draw some not-so-encouraging conclusions for aluminum. Excess aluminum production there is damaging the prospects of aluminum producers in the rest of the world, purely because of the size of China’s massive aluminum industry.
Both metals face excess production at home due to rampant overinvestment and slowing domestic demand. Reuters lists a number of similarities between the two industries: China is the world’s largest producer in both markets, accounting for 51.5% of global steel output and 54.4% of global primary aluminum output in April.
Chinese Steel vs. Chinese Aluminum
In both industries, China has been exporting excess production of steel and aluminum in the form of semi-manufactured products, with steel product exports last year totaling 112.4 million metric tons, representing around 14% of the rest of the world’s output and aluminum product exports of 4.2 mmt representing 17% of the rest of the world’s output. In both cases, exports have damaged prospects for producers elsewhere, forcing closures, losses and delaying investments.
In the case of steel, though, the threat of a delay to China’s application for market economy status by the World Trade Organization has forced a more conciliatory response by Beijing in recent discussions, and the promise of large-scale closure of older capacity in China.
Aluminum Overproduction Unabated
How effective this will be remains to be seen but, even so, it is in marked contrast to the position aluminum is in, where Beijing seems unable or unwilling to curtail new investment. As prices on the Shanghai Futures Exchange have risen this year, idled smelters have restarted and new capacity has continued to come on-stream.
Annualized run rates increased by almost 650,000 mt over the course of April and May, Reuters reports, with May’s average daily output of 86,290 mt the highest since November 2015 before prices fell below $1,518 (10,000 yuan).
The other factor apparently effecting Beijing’s attitude is the rapid rise in capacity is coming from new state of the art low cost aluminum smelters in China’s northwestern provinces. Aluminum is not seen as an old-fashioned, state-dominated industry operating polluting plants close to urban areas.
China’s new aluminum capacity is cutting-edge, world-class technology and — at current prices at least — is making money. As a result, Reuters concludes capacity is unlikely to be trimmed anytime soon, at least by government intervention. For aluminum producers outside of China, that is not good news, and although recent rises in price to $1,600/mt are better than the $1,450-1,500/mt levels of late last year, it doesn’t offer much upside in the short- to medium-term if China keeps flooding the market with excess semi-finished products.
The artist, Wolfgang Buttress, has created a 56-foot-tall aluminum beehive among a wildflower meadow on the grounds of London’s Kew Gardens as both a visual thing of beauty and an aural experience like no other.
“The Hive,” as it is known, was first created as Great Britain’s entry in last year’s World Expo in Milan, Italy, according to the AluminiumInsider from whom this photo is replicated.
The Hive is a visual and aural art experience. Source: AluminumInsider.
Over three million visitors passed through it before it was taken down and returned, only to be recreated here in the U.K.
The structure is made up of 169,300 aluminum bars joined at spherical nodes to form abstract, honeycomb-like hexagons that spiral into the sky. Their rhythm follows the Fibonacci mathematical pattern found throughout nature from shells to trees, and in the proportions of classical architecture an article reports. Others, still, say the structure is resembles a skep — yes I had to look that up, too — the open-ended straw baskets used for thousands of years by beekeepers.
Within the structure, there are small speakers which relay the noises live from inside Kew Gardens’ nearby hives and the sounds are overlaid by human voices and stringed orchestral instruments said to harmonize with the sounds of the bees. 1,000 LED lights embedded in the structure add to the experience in a pulsating light display and must make the experience even more impressive at night.
The aim of the installation is not purely artistic, though. Buttress and Kew Gardens intend it should create awareness of the plight of bees that have been dying inexplicably in the developed world, yet play such a crucial role in pollination of commercial crops that places like California have to import swarms from Australia and New Zealand to keep their agricultural industry productive.
Regardless, the Hive is a novel and intriguing application for a metal whose properties of lightweight, relatively low-cost, good corrosion resistance and ease of use make it almost uniquely suitable for the challenge of such a project.
After the biggest corporate scandal of the decade, VW finds itself in an invidious position. Last year it posted a $1.82 billion (€1.6 billion) net loss, its worst ever result in 78 years, as it recorded $18.3 billion (€16.2 billion) of charges to cover the cost of fixing diesel cars caught up in the emissions reporting affair.
Share Prices Down
Sales held up remarkably well when you consider the betrayal of trust the firm’s actions invited, but the share price remains 28% below its pre-scandal level after recovering from an initial 40% fall. Nevertheless, VW’s share of its home European market have fallen to a 10-year low and although sales rose slightly in May they rose more slowly than the 10 other top-selling marques across Europe according to an Financial Times article. From 12.9% market share in 2013, VW has fallen to 11.1% in May and spurred the board into action.
Can VW turn its fortunes around? Perhaps with Electric Beetles? Source: VW
VW has announced a number of targets. First, an ambitious move into electric vehicles, saying the company will introduce 30 electric models by 2025 with annual sales of between 2 and 3 million units. To achieve this, VW is opening up the doors for collaboration with external parties, planning to spend $11.2 billion (€10 billion) on new technologies, acquisitions and venture capital investments. Read more
While London Metal Exchange warehouse queues have all but disappeared, with the exception of Vlissingen in the Netherlands for aluminum and New Orleans for zinc, the even better news is physical delivery premiums have dropped back closer to historically lower levels and more importantly taken on a flat, stable pattern.
As Reuters’ Andy Home points out in a recent article, the reasons for the horrendous spike in physical delivery premiums last year were always contentious and, in reality, multiple in origin but arguably long load-out queues played a part, although we always maintained they were as much symptom as cause of a deeper malaise in the physical aluminum market.
Aluminum Premiums Easing
Still, the return to a steady $170-180 per ton level for the Midwest premium and a stable range of $90-120 per metric ton range for Japanese Port premiums is a welcome relief for consumers after the sky high levels of 2014-15 when Japanese rates hit $425 and the MW premium was well over $500. Read more
Sounds counter intuitive, doesn’t it? Well, not really when the you look at the reality of the situation as the Financial Times has done in a recent article based on research and commentary by Australia’s Macquarie Bank.
2016 marked a turning point for most commodities. After 18 months of declines, prices have surged this year in a manner not seen since the 2009-10 Chinese stimulus. Plentiful Chinese liquidity has boosted sentiment and order books, the FT points out, across a range of industrial metals and oil, in spite of an underlying backdrop of excess production capacity and inventory overhang.
What Has China’s Stimulus Done?
Beijing has pumped liquidity into the real economy through property and infrastructure projects getting the latest new five-year plan off to a flying start.
However, despite the strong macro number the FT observes, there is a growing sense hopes for future demand are proving uncertain and that this year’s strength is proving to be just another mini-cycle around the much larger trend. Read more