Author Archives: Stuart Burns

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You would think that a stiffening of Washington’s backbone when it comes to Russia would be welcomed by Europe. After all, it was Germany’s Angela Markel that has led the tough stand taken against Moscow following the Russian-sponsored uprising in eastern Ukraine and annexation of Crimea.

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But on the contrary, cross-party support in the U.S. House of Representatives led to a 419 to 3 vote in favor of new financial sanctions against Russia this week, a move that has faced fierce criticism from Bonn and considerable debate about the wider implications.

The EU probably does not care about the inclusion of North Korea in the proposed sanctions, although it has taken a distinctly different and more tolerant line on Iran (the third regime included in the action).

But it is Russia that is really raising the hackles in Bonn according to Carnegie Europe, a Brussels-based think tank.

Impact on Europe

A post on the site reports the action could not only severely impact many European companies who have already invested heavily in projects, particularly in the oil and gas sector, but that it could also precipitate a political divide among Europe’s partners. Seen in the context of this development, President Donald Trump’s focus on Poland during his recent visit to the continent for the G-20 summit takes on a more sinister slant — at least, that is the view many Europeans are taking.

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India’s move to a Goods and Services Tax (GST) last month has been generally heralded as a good thing.

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Unifying tax codes across states and allowing the free movement of goods between states will speed up internal trade and simplify companies’ reporting — that is, if the government had resisted the temptation to meddle with multiple tax rates.

The introduction of the GST in India creates complexity out of simplicity. Whereas markets like the U.K. that have a similar VAT system have one main rate of 20%, with a reduced rate for home power of 5% and zero on a very limited range of goods like food and children’s clothes, India has five rates (0%, 5%, 12%, 18% and 28%), with many very similar products falling into a lower or higher bracket – encouraging distortions in the market as producers switch ingredients, product focus or labeling to try and circumvent higher bands.

Still, the benefits are expected to be significant even if reality doesn’t live up to expectation. The metals industry is predicting savings of 40-45% in the time taken to move goods as border tax points to collect state taxes and hence lengthy delays of up to 10 hours will become unnecessary.

For metals producers, it will come down to what rates apply to inputs and outputs for the industry — and there does appear to be some good news on that front.

Steel producers, at least, will face lower input tariffs, as raw materials like iron ore and coking coal will attract one of the lowest rates at 5%. Of course, like all GST systems, firms can either claim back what they pay to suppliers and collect for the Treasury what they raise — such that GST becomes net neutral for processors — but there remains a cash-flow implication. If producers are only paying out 5% but collecting 18%, it is beneficial for them from a cash-flow perspective.

Maybe not surprisingly, power costs are exempt from GST (that is not the case in other countries), but for an emerging economy and one with a large contingent of poor people, exempting energy costs from the taxation system has some logic.

A pre-GST Clean Energy Tax of Rs 400 per ton is not recoverable but was previously, so its exemption now represents a minor cost to steel producers that they will not be able to reclaim. Likewise, a state royalty of 15% on iron ore is another tax outside of GST, as are various Forest Development Fees and contributions to the District Mineral Foundation and National Mineral Exploration Trust, which are considered to in effect be taxes that steel producers cannot reclaim, according to the Indian Express.

Steel producers’ input costs for natural gas — a fuel source increasingly becoming the preferred choice for steel producers switching to intermediate sponge iron or hot briquetted iron — will face some impairments as a result of these taxes being unreclaimable (either partially or completely).

Like the old swings and roundabouts, there will be some opportunities to win and some that will lose, but in general the industry sees it as positive – not least because it will encourage the unregulated end of the market to join the mainstream and take part in the tax system.

For firms that are not operating within the tax system, there will be significant cost implications and no opportunity to reclaim.

More than anything, that is probably the underlying purpose of India’s GST: to bring all enterprises into the tax system, speeding up boarding crossings and eventually simplifying tax collection and transparency are welcome benefits.

But getting everyone to pay their fair share will, in the long run, be the biggest win.

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Aluminum may have been the best-performing metal on the LME this year, but copper is making a good showing, too, with the price hitting a 4 1/2 month peak last Friday.

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Supporting the price earlier this year was a long strike at Chile’s Escondida, the world’s largest copper mine. However, as that dispute was settled workers contracts have come up for renewal at other mines in Chile and Peru, causing if not out-right strikes then the fear of supply disruption.

Workers at Chile’s Zaldivar mine came out on strike after talks failed while nearby Centinelais is also in negotiations with the threat of strike action.

According to Reuters together the two mines produced 340,000 tons of copper in 2016. Unionized workers in Peru, the world’s second-biggest copper producer, began a nationwide strike on Wednesday protesting against labor reforms, Reuters reported.

Meanwhile, recent data from China show the economy picked up in the second quarter and the expectation that the world’s largest copper consumer is likely to hit growth targets for 2017 set earlier this year have only added fuel to the fire in supporting prices.

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I could be committed for heresy for what I am about to write, but it isn’t a foregone conclusion that Britain will leave the European Union (EU).

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On the balance of probabilities, a break with the EU is more likely than not. In recent weeks, however, the realization of what leaving the single market will mean to voters’ pockets, not to mention the fiasco of the Conservative government in-fighting, has encouraged some to think a rethink may yet prevail. A second referendum is, while not likely, at least not impossible.

I say heresy because the debate is becoming increasingly acerbic.

Leave supporters, in particular, shout shrilly anytime the topic is raised that “we cannot thwart the will of the people” and to even suggest a rethink is “anti-democratic.” As Gideon Rachman wrote so eloquently in the Financial Times this week, this sounds rather like a third-world dictator, who having unexpectedly achieved a vote in his favour says — “one man, one vote, one time.”

In other words, once a decision has been taken by referendum, it cannot be revoked.

But as Rachman observes, this denies the fact that the electorate was, putting it politely, profoundly misled during the campaign.

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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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