Author Archives: Stuart Burns

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Although oil and gas remain Iran’s most important exports by far, one beneficiary of the relaxation in trade embargoes has been the metals industry.

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According to an analysis by the Ministry of Industries, Mining and Trade, reported in the Financial Tribune, the data show growth in the production of crude steel, finished steel products, iron ore, coal concentrate and sheet glass in the last Iranian financial year running March 2016 to March 2017 compared to the year before, showing a significant uptick in output (much of it for export).

Coal concentrate saw the greatest increase with the rise of 10.6%, from 1.113 million tons in March 2015-16 to 1.232 million tons last year. Crude steel output had the second-largest gain, rising from 16.538 million tons to over 18 million tons (a 9% increase).

Iran holds the world’s 10th-largest reserves of iron ore. Despite dominance by Australia and Brazil, Iran still managed a 4.2% increase to 31.711 million tons, helping lift production of steel products 1.4% to 17.681 million tons.

These sound like modest increases for a country recently facing lower barriers to trade, but that may be because the benefits have yet to percolate through to the wider economy.

In the meantime, it is direct exports that have benefited the most. The Financial Tribune reported Iran’s total mineral products shipments last year registered a 17% and 38% increase in value and volume, respectively, year-on-year.

Source: Trading Economics

From a value perspective, it is difficult to make a judgement year-on-year for total exports because some 82% by value is oil and gas, for which prices have been highly volatile.

Even so, with a depressed oil price, Iran’s exports are heading back above their historical long-term trend of some $20 trillion, as the above graph from Trading Economics shows. The oil-price-induced spike of 2006-10 was an anomaly not seen before or since.

Economically, Iran would benefit enormously from a full and unfettered return to the international markets, but that is not going to happen while the autocratic mullahs remain in control. Liberal parties are dissuaded from the political process and many opposition politicians remain in jail. As in so many authoritarian regimes, those in power live well while the clear majority fail to enjoy the standard of living they could achieve based on their high standards of education and young, dynamic population.

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Even so, the country’s economic situation is trending positively. Foreign firms are showing greater confidence in returning to the Iranian market after years of sanctions.

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Despite U.S. oil stocks falling 7.6 million barrels, the biggest drop since September, a recent Financial Times article reports, quoting U.S. Energy Information Administration data, that the oil price is struggling to get back to $48 per barrel, let alone the heady heights above $50 it achieved in May.

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U.S. refineries are running flat out to meet summer demand, drawing down on U.S. stocks — but still, the price is not responding.

Meanwhile U.S. exports are booming. Rather than being constrained by OPEC cuts, global production is rising. Ironically, even Saudi Arabia is pumping above its target, reporting to the cartel that last month it raised output to 10.7 millions barrels per day, a 190,000 b/d increase on the previous month and 12,000 b/d above its own target.

The Kingdom claims it needed to increase output to meet peak electricity-generating demand experienced during the summer months, but the Saudi increase contributed to total OPEC overproduction of 393,500 b/d from last month, according to the Financial Times.

Source: Financial Times

Iraq, Nigeria and Libya are all pumping more oil than at any time this year and Iran is close to its own year’s highest output, too.

In addition, Canadian oil sands production is rising, Production is predicted to be higher still next year as new projects come on-stream (despite the low prices), making many projects marginal or even loss-making, debts must be repaid and oil sands producers are hanging in there hoping for firmer prices.

News south of the border is not encouraging, though. U.S. tight or shale oil production has continued to rise this year, although at a more gradual rate than seen over the last 12 months. Nevertheless, shale oil producers have become adept at squeezing profits out of production, even at sub-$50 per barrel prices, and show no signs of backing off at current levels.

Long-position holders are hoping OPEC may take further action to curb supplies, but members are sticking to their mantra that they expect stocks to decrease and, therefore, prices to rise, as the current restrictions bite.

But as the Financial Times notes, OPEC’s own monthly report indicates the group still faces an uphill struggle to balance output under the terms of its supply deal, what with cheating and non-OPEC production.

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A balanced oil market seems a distant dream for producers.

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Defining the root cause of Britain’s predicament is not as simple as a sweeping “foreign competition” argument. But there’s no doubt that is part of the problem, as Britain’s steel industry has been decimated over the last 25 years.

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A House of Commons report last year said output from the UK steel industry was £2.2 billion in 1990, compared to £1.6 billion in 2015, a 30% fall (in 2013 prices).

Source: House of Commons Library Briefing Paper No. 07317, Oct. 28, 2016

The decline has left the U.K. producing just 11 million tons of steel, compared to 166 million tons for the EU as a whole and 804 million tons from China. A combination of global excess supply and lackluster government support has left the U.K. as the fifth-largest steel producer in the EU, after Germany, Italy, France and Spain.

In line with most European producers, surviving U.K. steelmakers have had to move up the value chain in order to remain profitable. Inevitably, however, the market for more value add, niche product areas is smaller than the bulk commodities end of the market.

The U.K., in turn, is a relatively small consumer of steel products, as medium to heavier industry has also declined over the years. As a result, the U.K. has lost the ability to make some of the grades or forms necessary for more demanding or critical applications.

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A readable and well-argued article in the Financial Times last week by Wolfgang Münchau explores the risk that we all face in the media and metal-buying communities in allowing our bias to influence our interpretation of data.

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Even as past and current practitioners, we at MetalMiner have to be constantly vigilant to the possibility that our own expectation of market trends is not influencing our interpretation of data. Münchau uses the recent announcement of an EU-Japan trade agreement — an announcement conveniently released on the eve of the G20 summit — to illustrate his point.

The other critical section of the EU-Japan trade story, he argues, is a good example of what psychologists refer to as confirmation bias, or the tendency to filter out everything that is not consistent with our beliefs. We believe in free trade, hence we want an EU and Japan deal to be true, therefore we accept the announcement as fact even though most of the detail has yet to be sorted out and the timing of the announcement is a shameful attempt at media manipulation by the G20.

By way of illustration, Münchau uses the debate about the future of the euro to show how opposing sides have fervently talked up developments that support their belief.

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Anxiety is rising among Europe’s steelmakers that a potential U.S. plan to levy steel tariffs, on national security grounds, could have a disastrous impact on the region’s sales into the market.

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Reuters reported that the European steel association Eurofer is worried that “….measures potentially stemming from the U.S. section 232 investigation may lead to a proliferation of disastrous global trade flow distortions.”

Eurofer is worried on two counts. First, it is worried that with China largely already cut out of the U.S. market by anti-dumping legislation, the axe will fall on imports from other regions, of which Europe is a major supplier. Many European countries are already experiencing steep declines in sales to the U.S. between 2015 and 2016 — in some cases of 50% — but the largest, Germany, remains the fifth-largest external supplier to the U.S. of flat-rolled products, according to International Trade Administration data.

The second worry is that should the investigation support bans or large duties, suppliers in the affected countries will look for alternative mature, high-value markets for their products, namely the EU. This would potentially flood an already overcrowded market with more low-priced material.

Having championed free trade in recent statements, Europe may have to eat its own words if it is forced to find ways to counter such a flood. Reuters reports that moves are already afoot, at the G20 summit in Germany last weekend, leaders from the world’s 20 leading economies set an August deadline for an OECD-led global forum to compile information about steel overcapacity. That also includes a report on potential solutions, due in November, which could result in the region acting of its own.

In reality, Europe may not be the primary target of the president’s 232 action. Supplies from Canada, Brazil, Mexico, South Korea, Japan and Russia dwarf those from Europe, but that will not necessarily stop the region from suffering considerable collateral damage.

The move would come at an unfortunate time for the European steel industry.

After prices rose nearly 50% last year, they have since fallen back some 10% this year, according to Reuters. Demand, however, is recovering with a 1.9% rise forecast for this year, according to Eurofer, suggesting prices could stabilize (although demand growth is expected to ease again next year, with only 1% growth forecast).

EU Strikes Back?

However, The Guardian reports Europe is also looking at retaliatory measures, should they suffer exclusion or tariffs because of the 232 action. The paper quotes the European Commission president, Jean-Claude Juncker, who is reported to have said that if the U.S. took measures against Germany and China’s steel industries, the EU would “react with counter-measures.”

The article says one industry in the Europeans’ crosshairs is Kentucky bourbon, worth $166 million to the state last year and directly employing some 17,500.

Kentucky was staunchly supportive of Trump during his campaign, with 62.5% of the electorate voting for him.

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“I am telling you this in the hope that all of this won’t be necessary,” Juncker said during the G20 summit. “But we are in an elevated battle mood.”

Bellicose talk, indeed.

China’s campaign to cut environmentally polluting steel, aluminum, power generating and similar industries, like cement plants, is understandably catching the headlines.

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For producing industries like steel and aluminum, the cutbacks have supported prices. The expectation is the closures made this year will accelerate during the November to March heating period, when there will be forced closures of plants, even some that have passed the environmental tests.

All this has supported the expectation that there will be supply shortages in the face of an economy that continues to grow strongly and where recent PMI data supports current growth levels persisting at least through to the end of the year.

Yet while the headline announcements are all about capacity cuts, a recent Reuters article illustrates they are only part of the story.

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On Monday, our Irene Martinez Canorea wrote about copper prices, which have been on a bullish run. Today, Stuart Burns writes about investors’ copper positions. 

Reuters reported last week that the LME copper price reached a three-month high after a surprise rise in China’s Purchasing Managers Index (PMI).

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Investors jumped into copper after the official Chinese PMI rose for an 11th consecutive month, to 51.7 in June. Hedge funds and other investors increased long positions by 9,531 contracts to 58,816. Reuters reported that net long copper positions are now nearly double the 29,787 contracts reported back at the beginning of May and a dramatic reversal from the net short position of 47,109 contracts just a year ago.

The jump in the LME price was short-lived, dropping back as the dollar strengthened and LME data showed copper stocks gaining, but the Reuters report went on to question whether the current bullish run for copper is likely part of a longer-term recovery or a short-term case of overexuberance.

Although Chinese PMI numbers are not an exact measure of copper demand, they have been a good indicator over time. But after nearly 12 months of positive PMI numbers, many analysts are said to be expecting weaker readings in the second half of the year.

Chinese stimulus measures have boosted growth for longer than most had expected, but cracks are beginning to show in the housing market and Beijing’s tightening of credit is impacting small- to medium-size enterprises. The performance of those enterprises are not reflected in the official PMI figures, which are focused more on the large corporate sector.

Smaller businesses are measured by the Caixin PMI, which fell to its lowest level this year in June and is now hovering around the break-even point between contraction and expansion.

With the impact of stimulus measures beginning to decline and global stocks of copper remaining plentiful, it’s hard to see a case for copper’s continued strength in the second half of the year, despite the bullish bets indicated by the increasing long positions.

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If Reuters’ analysis is correct, we can probably expect an easing of copper prices, if not during the summer then into the fall.

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The announcement this week that Norwegian aluminum firm Norsk Hydro had agreed to buy the 50% of extrusion company Sapa that it did not already own from its partner Orkla probably makes good sense for all parties concerned.

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Norsk Hydro and Orkla took on Sapa in 2013 as a joint venture, but the Norwegian consumer goods company Orkla was never an obvious fit to be owning aluminum extrusion mills. Meanwhile, Norsk Hydro, with its significant position at the primary end of the market, makes a natural buyer for downstream assets, particularly if it carries the strong brand name of an established producer like Sapa.

The $24 million deal is said by the Financial Times to value Sapa at $3.2 billion. Assuming the deal passes regulatory approval, it will make Hydro the second-largest Norwegian company, trailing only the energy group Statoil.

The markets seem to agree with the logic of the deal. Orkla’s shares rose 2.44% on the news while Hydro’s rose a more modest 0.74%. But while Hydro said it planned to make $24 million of synergies a year from the deal, analysts said it really only made sense if the Norwegian group could achieve more cost savings over time.

While Hydro is a very significant primary and flat-rolled products producer, it is only through its shareholding in Sapa that it has held any significant position in extrusions. The purchase will allow Hydro to justifiably call itself a vertically integrated aluminum producer with a broad product range rivaling the likes of Alcoa and Rusal.

No doubt a question in the minds of many Sapa employees and of their clients is whether the purchase will result in a cutback of Sapa’s global operations.

On the back of an upturn in aluminum prices, both Norsk Hydro and Sapa have been doing well lately. However, the aluminum industry faces headwinds from excess Chinese production and price pressure from resulting Chinese exports. One benefit of the purchase mentioned by the Financial Times was that of European consolidation in the face of excess Chinese supply.

With no comment from the company yet, both employees and customers may justifiably be wondering what that means for them.

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While we read presidential tweets, or worse, listen to megalomaniacs gloat about successful missile launches, a quiet shift has been going on in the financial markets.

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Political risks as a driver of exchange rates have either faded into the background or have already been fully priced into non-dollar currencies. Meanwhile, the driver in currency markets has shifted back to central bank actions and the macroeconomic factors that drive them.

You only have to see the sharp reaction in Europe to recent comments made by Mario Draghi, president of the European Central Bank, concerning “reflationary pressures” at work, causing an immediate 2% spike in the Euro, to see the market’s focus is firmly back on inflation-related indicators, with wage growth in the different currency areas taking on a particularly critical role.

The Associated Press reported last month that inflation across the 19-country Eurozone held up better than anticipated in the face of waning energy prices — a sign that the region’s economic recovery is reverberating across the single-currency bloc.

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Swedish carmaker Volvo is betting the farm on electric vehicles.

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In an announcement this week, Volvo cars said beginning in 2019, it will no longer launch new car models powered only by an internal combustion engine. According to the Financial Times, pure and electric hybrid cars will be the only game in town for the Swedish carmaker.

Following hot on the heels of Tesla’s launch of its most affordable mass-produced Model 3 — which, since March last year, has taken nearly 400,000 pre-orders, a remarkable vote of confidence in what has become one of the most exciting brands in the automotive industry — does Volvo’s announcement spell the end of the internal combustion engine?

Regardless of the headlines, Volvo is not turning its back on petroleum and diesel engines just yet.

Reading between the lines, the pledge is to launch five new models between 2019 and 2021, all of which will have petrol and diesel hybrid options, plus electric vehicle EV) versions, not five new models which are EV only. Although Volvo is owned by Chinese manufacturer Geely — and as such does not have to report to shareholders on a quarterly basis, giving greater flexibility to invest today for the longer term — the Swedish carmaker is still not saying it can achieve this on its own.

Rather, Volvo’s announcement is saying to the market it is seeking cooperation among battery manufacturers and infrastructure providers to provide solutions to the two biggest challenges EVs face: limited range and limited charging infrastructure.

The first challenge, range, requires continued massive investment in research and development to drive down battery costs and increase power density. The latter challenge requires a massive investment, not just in charging points, but also in configuring electricity grids to cope with demand if EVs achieve scale.

Volvo’s Chinese ownership probably influenced these strategic goals in another way.

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