Author Archives: Stuart Burns

While there may be much eye-rolling and tutting, observers of Europe’s prevarications over ratification of the CETA, the European and Canadian Comprehensive Economic and Trade Agreement, the reality is the E.U.’s deep divide over the merits of this agreement are but the tip of a much larger iceberg.

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Within any free trade agreement there are always winners and losers. When the government to government FTAs are negotiated and agreed, a balanced judgement is made as to whether the agreement has overall benefits for each party. But, when the right to pick agreements apart and focus on the detail is given to interest groups down to a granular level of interested parties, there are bound to be those that find one or two issues unacceptable.

How One Region is Killing an EU-Wide Deal

In the case of CETA, Wallonia (a German-speaking region of Belgium) has taken exception to the rights of major corporations to take legal action against governments in the event of subsequent legislation which goes against the terms of the agreement.

They also dislike some of the changes to agricultural trade. Both the E.U. and Canada are making last-ditch attempts to secure agreement prior to the intended signing on Thursday, but after all these years of negotiation even if matters cannot be resolved this week no doubt both sides will continue to try and find solutions.

The problem, though, is not really one of minor vested interests, rather it is a rise in anti-globalization among mature economies who see their standard of living, their manufacturing base and their very future threatened by the rise of global competition.

The Implications for TPP and TTIP

Where CETA leads TTIP — the Transatlantic Trade and Investment Partnership — follows. If Europe does not ratify CETA, TTIP is almost certainly dead in the water. Maybe more significance for U.S. foreign policy is the fortune of TPP, the Trans-Pacific Partnership.

Andrew Hammond an Associate at the Centre for International Affairs, Diplomacy and Strategy at the London School of Economics, writing in the Telegraph, says that TPP represents a major plank of U.S. policy to pivot towards Asia and is said to contain elements to counter the economic threat of a rising China not playing by the same rules.

The Obama administration was seeking, with TPP, to set standards of trade for the 21st century. And not just of trade but investment, data flows and intellectual property. TPP has an important rules-setting component, Hammond said, perhaps more so than any other previous trade deal.

The agreement sets rules to limit subsidies to state-owned companies which could become very important should China eventually join TPP. With the bill languishing in the U.S. Congress and a rising tide of populist sentiment against globalization, championed by both Republican and Democratic candidates, serious questions are being asked about whether TPP will see the light of day.

Free Download: The October 2016 MMI Report

Other parties such as Canada, Australia, Japan, and New Zealand, including Southeast Asian members would collectively account about 40% of world GDP.  Yes, there would be winners and losers on both sides, that is the nature of free trade agreements, the job of government is to judge whether any agreement is on balance in their country’s best interests. The US conceived of and largely set the agenda for TPP. It is not in agreement that is being forced on the US by some foreign power, quite the contrary.  Failure to enact the agreement will have repercussions for US foreign economic policy for decades to come and the failure of CETA, TTIP and TPP would set the tone for a more introverted, protectionist and isolationist World to come.

Chinese GDP is on a roll this year. After turning out less steel in 2015 than the year before, the first time in more than three decades that steel production declined, 2016 is back on the rise.

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According to Bloomberg, crude steel output totaled 603.78 million metric tons in the first nine months of this year, up 0.4% from a year ago. Demand has been boosted by stimulus measures encouraging investment in the real estate and infrastructure sectors. The September output of 68.17 mmt implies that Chinese apparent steel consumption jumped 9% from a year earlier, RBC capital markets is quoted as saying.

Surging in September

This makes September the strongest month so far in 2016 and October will probably stay high as consumption typically rises in the Fall. Steel mills are being encouraged by a return to profitability and, in spite of protectionist moves from overseas, markets around the world say China’s exports in the first nine months rose 2.4% on a year earlier at 85.1 mmt, the highest ever Bloomberg says.

Nor is this stimulus and debt-fueled binge restricted to steel. Global daily average aluminum production rose to 164,600 mt from 159,800 mt in August, led by a rise in China’s output for the month to 2.75 mmt, the highest in 15 months.

A rally in Shanghai aluminum prices and demand from housing and infrastructure encouraged Chinese smelters to bring back some 1.8 mmt of capacity this year in addition to adding some 2.9 mmt of new capacity. Chinese output is expected to continue to rise, Reuters mentioned in a recent note, and suggested that prices could soften to $1,550 per mt by the end of the year as a result of excess supply. While total global primary aluminum production increased to 4.937 mmt, up 1.2% from the same month last year,  growth continued to be at the expense of western smelters with North American output falling 11%  to 325,000 mt last month.

Markets React to Stimuli

As we have seen in the past, China’s stimulus measures are rather like the sugar rush that comes and goes. Chinese GDP has been boosted or at least stabilized at 6.7% this year on the back of measures introduced by Beijing towards the end of last year.

Free Download: The October 2016 MMI Report

But, like previous stimulus measures, the result is increased debt progressively at lower rates of return and ultimately adding to more of a global overproduction problem. In the short term then, demand for iron ore, coking coal, bauxite and alumina looks set to remain firm at least until the winter slow down begins to bite. Depending on how marked that is we will either see a drop in raw material demand, and hence prices, or a drop in finished steel and aluminum output. Neither scenario being particularly positive for prices.

China reported last week that its economy grew at 6.7% in the third quarter compared with a year ago.

Free Download: The October 2016 MMI Report

That’s bang on the money where most analysts had expected it to be and was identical to the GDP figures posted in the first and second quarters of the year. The consistent numbers have caused some to question the accuracy. A New York Times article suggests that a lending binge in China this year has helped to sustain growth and create some uplift for the property market. Read more

After more than seven years of negotiations, a trade agreement between the E.U. and Canada known as the Canadian-European Trade Agreement (CETA) was supposed to have passed into law this month and — on the original schedule — would’ve been ratified by now.

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No one now expects ratification this year and many are questioning whether the free trade agreement ever has any hope of being accepted by Europe’s 27 member states. Opposition has been widespread says an article in the Telegraph explains.

Particular mention is made of the regional government of Wallonia (a German-speaking region of Belgium) but, in practice, opposition has been widespread, even resulting in street demonstrations in Germany and an announcement by the Austrian government that they intend to veto acceptance. Read more

A recent CRU note shined some useful light on how the reporting of aluminum inventory in China has been distorted by changes in the supply chain between smelters and downstream consumers. Our reporting of primary metal inventory generally measures exchange stocks of ingot, sows and t-bars, and adds in an estimate for off-market stocks held by trade buyers and the reported inventory held by smelters.

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It is a process that has generally held us in good stead for decades — with the one glaring omission of off-market stock and finance trade inventory running into millions of tons that we have no visibility on, but that’s another matter! Well add to that, says CRU, the changing nature of the Chinese aluminum manufacturing industry.

China’s Shadowy Aluminum Industry

Lured by cheap coal and, as a result, low-cost power, Chinese smelters have relocated in droves to the north and north east provinces, remote from traditional downstream clients on the east coast.

Liquid Molten Metal

Is the future of aluminum liquid? Source: Adobe Stock/kybele.

Transportation costs are high and can be unreliable, particularly in winter. So, Chinese customers have come to their metal suppliers, relocating cast-house and direct casting facilities adjacent to the smelters. The products they, in turn, produce are higher value and better able to absorb those transportation costs. So far, so good. Read more

With the closure of western aluminum smelters and widely reported global growth in demand of 5 to 6% per year, why have London Metal Exchange aluminum prices remained rangebound in the mid-1600s per metric ton? Why do physical delivery premiums continue to fall?

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Thomson Reuters recently reported that Japanese buyers have agreed quarterly premiums of $75 dollars per ton over the LME cash price for the shipments in the fourth quarter of this year. This will be the lowest premiums have been since Q3 2009 and a massive drop from the level Japanese buyers were paying in Q1 2015 when premiums reached $425 a ton. Read more

An interesting article in the Financial Times explores ThyssenKrupp’s quandary as both steelmaker and industrial conglomerate.

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On the one hand, as a steelmaker, it is exploring the possibility to merge its European steel operations with those of Tata Steel. The European steel market desperately needs consolidation, but no one is willing to bear the brunt — politically or economically — of closing multiple plants and laying off thousands of workers.

One attraction of a merger could be that ThyssenKrupp and Tata might keep open its German and Dutch facilities, but try to close or scale down Tata’s Port Talbot operations in South Wales. After Brexit, Britain — and maybe all of what’s presently the U.K. — will no longer be of much concern to the rest of Europe. Regardless, the article’s main focus is on protectionism. The E.U. is in the process of applying historically high duties to Chinese steel; some as high as 73.7% for heavy-plate and 22.6% for hot-rolled, levels said by the Chinese to represent “reckless trade protectionism.”

Protected Bubbles in a Global Marketplace

That sours the air between Europe and China on the question of open trade relations. ThyssenKrupp, one would think, would benefit, though. Of its six divisions — Steel Europe, Steel Americas, Components Technology, Elevator Technology, Industrial Solutions and Materials Services — the steel divisions represent 30% of its revenue but only turned a modest profit in Q2 not least of which because prices were depressed in part by China’s low-priced imports.

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In microcosm, ThyssenKrupp is an example of a wider issue, the article suggests. You can’t adopt selective punitive tariffs on some products and not expect some form of retaliation or more willing adoption of reciprocal tariffs on other products or services areas by those affected importers. Steel generates just 2% of Thyssen’s profits, so 98% come from its much more promising elevator and industrial products divisions… divisions that benefit most from a free and open global market place.

Diversified Companies, Single-Industry Tariffs

The article berates ThyssenKrupp for its capital-destroying and high loss-making forays into primary steel production in Brazil and processing operations in the U.S. that the company has since sought to extract itself from. The share price, the FT says, has made no progress in five years.

Source ThyssenKrup

Source: ThyssenKrupp

But, from our perspective, the impressive fact is that even after these massive loss-making ventures — said to total some $15 billion — the share price has still managed to maintain its level from five years ago. Other steelmakers that have not made such, in hindsight, poor investment decisions are doing no better. ArcelorMittal is much the same, if not worse. The trend has been consistently down.

Source: Yahoo Finance

Source: Yahoo Finance.

What has held ThyssenKrupp up, kept the faith of its shareholders and created growth and promise for the future, is those elevator and industrial products divisions. Those divisions that rely on open, unfettered, access to world markets. Read more

A report in the Financial Times last week covered falls in metal prices due to recent Chinese trading data.

MetalMiner Price Benchmarking: Current and Historical Prices for the Metals You Buy

The data showed a 10% fall in China’s exports last month and a greater than expected drop in imports sent copper down nearly 3% late last week before a slight recovery on Friday. The FT quotes Caroline Bein analyst at Capital Economics saying “ to drop in exports is negative for industrial commodities raising concerns about weakness in the manufacturing sector and import figures raise concerns about domestic demand.”

Broad Drop

Copper was not alone in reacting to the poor trade figures, although the Shanghai market seemed remarkably sanguine, European and U.S. stock markets dropped sharply, driving stocks lower and boosting gold, bonds and safe haven currencies like the Yen.

Are the trade figures quite as bad as they seem? And do they justify the markets sharp reaction? There are broadly two issues at work here. First, the wider issue of China’s trade data. Back to the FT, China’s trade data showed that the country’s exports last month were down 10% from a year earlier — following a 2.8% contraction in August — suggesting that global demand was decidedly weak. Read more

The shipping industry would argue that it moves more cargo with a lower carbon footprint per ton than any of the alternatives.

Airlines, by comparison, move a fraction of the cargo (even including passengers) and yet emit comparable global CO2 emissions. Yet, while automakers and car buyers have been forced to accept the costs and burdens of substantial legislation, the manufacturing (particularly in Europe) has had to pay ever higher power costs to subsidize national reductions in greenhouse gas emissions from their power industries and heavy industry has been regulated on emissions of just about everything, the shipping industry has gotten off relatively scot-free.

Escaping Regulation

Frugal as the shipping industry is in terms of CO2 emissions per mile/ton, it is still a major polluter as anyone who has witnessed a ferry boat or ocean liner firing up its boilers will testify. Not only does the industry account for some 3% of greenhouse gas emissions on current trends, it is forecast to rise to 5% by 2050, when all other targets are set to halve from 1990 levels.

Source European Commission report on Shipping

Source European Commission report on Shipping.

The problem is compounded by the fact that a ship’s bunker fuel is probably the most hazardous and polluting of fuels burned for any major industrial application anywhere, with higher levels of sulfur and other health damaging constituents. Read more

It may be strong political lobbying or maybe a perception that the industry is crucial for economic development, but the aerospace and shipping industries have certainly avoided the worst of environmental regulation over the last decade or so.

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The energy and heavy industry sectors have borne the brunt of what some would call over-regulation. But that’s all about to change. 191 Countries gathered in Montréal last week to adopt a global market-based system to tackle the rise of carbon emissions from international air travel an article in the Telegraph explains.

Offset Market

Under the new deal, airlines will be expected to offset their emissions growth after 2020 by buying “offset credits” in line with their carbon footprint, the terms of the agreement layout. The carbon costs are expected to incentivize the industry to develop lower carbon fuels and more efficient technologies, according to the newspaper. Read more