Author Archives: Stuart Burns

It seems like a bizarre question when iron ore has been on a bull run this year and coking coal producer Glencore has just agreed first-quarter contract prices with Nippon Steel that are the highest since 2011.

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But Morgan Stanley, in its 2017 Outlook, takes a bullish stance on base metals but forecasts bulk commodities such as iron ore and coking coal will do no more than tread water next year. Trying to call a peak in any market is, at best, a stab in the dark, but coking coal spot prices appeared to be easing just as contract prices set a new near-term record. Read more

President-elect Donald Trump isn’t even in the White House yet, but he has managed to shake up America’s foreign policy more severely in the last few weeks then many presidents that have served a full-term.

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His choice of Rex Tillerson, the chief executive of ExxonMobil, for the position of Secretary of State has rattled not just Democrats but many Republicans. Tillerson is accused of being too close to Russia and too friendly with Vladimir Putin following years of interaction between the world’s largest oil company and the Russian regime. Specifically, some accuse him of having a conflict of interest due to ExxonMobil’s investments in the Russian Federation.

Rex and Vlad: Best Buds?

ExxonMobil has a profitable operation at Sakhalin Island in eastern Russia and had begun a drilling program in the Arctic Kara Sea. The firm had agreed to explore shale oil areas of western Siberia and in deep waters of the Black Sea if sanctions are lifted. According to the Washington Post, deciding whether to lift economic sanctions on Russia will be one of the first priorities if Tillerson secures his position as Secretary of State. Read more

So, an unprecedented coming together of the Organization of Petroleum Exporting Countries and non-OPEC oil producers has finally created the circumstances in which oil’s price decline has been reversed and sustainable higher prices assured.

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According to Oilprice.com, NOPEC producers have agreed to cut 558,000 barrels a day and OPEC producers will cut 1.2 million bpd. Saudi Arabia will take the biggest hit, cutting 486,000 bpd. Russia will contribute 300,000 bpd to the total NOPEC production cut.

All this amounts to is 2% of global supply, the article reports. Azerbaijan, Oman and Mexico will also contribute, reducing production by 35,000, 40,000 and 100,000 bpd respectively, although it should be said Mexico is suffering a slow and steady decline due to reservoir depletion and would struggle to maintain current output next year anyway.

We should all, therefore, be expecting higher oil prices in 2017, right? Maybe not. We have, after all, been here before.

Agreements signed in the early 2000’s collapsed due to the inability of OPEC members to keep to their commitments. There is a growing anxiety that if this agreement does not result in higher oil prices and the global stockpile does not reduce, then Saudi Arabia and Russia, in particular, could revert to full production.

The oil price.com article quotes former Saudi oil minister Ali al-Naimi who commented at a recent Washington symposium that OPEC members “tend to cheat” and therefore any tangible results from this latest agreement “remain to be seen.” With severe pressure on fiscal budgets, both Saudi Arabia and Russia would be tempted to cheat if they did not see tangible benefit, that is a rising price, resulting from their respective cutbacks.

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Source: Oilprice.com.

Over the last month, the price has risen strongly as the prospects of the deal have improved but, after the initial euphoria, prices eased back a little this week as anxiety grew over whether the participants would stick to the deal.

Inventory continues to build at Cushing and the Energy Information Administration’s short-term energy Outlook released last month is not supportive for continued price rises during the next year, saying. “EIA forecasts Brent crude oil prices to average $43 per barrel (b) in 2016 and $52/b in 2017. West Texas Intermediate (WTI) crude oil prices are forecast to average about $1/b less than Brent prices in 2017. The values of futures and options contracts indicate significant uncertainty in the price outlook.”

Two-Month Trial: Metal Buying Outlook

So, the short answer seems to be a continued rise in the oil price off the back of this agreement is dependent on the price of oil continuing to rise all by itself. The extent to which consumers feel the need to hedge their exposure into 2017 will depend on the level of that exposure and the nature of their business, but just because OPEC and NOPEC producers have managed to reach an agreement with the aim of supporting prices, it does not automatically follow that they will continue to rise much above current levels during next year.

The European Union has launched a new investigation into Chinese steel imports, this time to determine if corrosion-resistant steel grades merit further investigation and possible duties.

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The E.U. currently has 40 anti-dumping and anti-subsidy measures in place, according to Reuters. 18 of these are products from China and a further 20 investigations on steel products are ongoing. The European Commission said it would start another anti-dumping investigation into cast-iron products from both China and India while reviewing whether existing duties on Chinese seamless steel pipes and tubes should continue for another five years. The E.U.’s action is being met by a rising level of concern in China which sees protectionist overtones in the E.U.’s moves.

Ascension Debate

The timing of the E.U.’s latest action is viewed with some suspicion in Beijing, coming just days before the 15th anniversary of China’s accession to the World Trade Organization. China says that from December 11 the E.U. should consider China’s prices as fair market value. Others say China must make minimum standards of market participation. Up until now, the E.U., like all WTO member nations, could compare Chinese prices with those of another country of their choosing, in this case Canadian prices. Not surprisingly, Chinese steel prices are consistently below Canadian prices, supporting legislation and anti-dumping penalties. Read more

Well, Tata Steel works operations across the U.K. are safe, at least for now, following an agreement between the company and its unions last week.

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According to the BBC, almost 7,000 people are employed by Tata Steel across Wales, including more than 4,000 in Port Talbot. In a significant turnaround, the company has committed to keep both blast furnaces at Port Talbot operating for a minimum of five years. In addition, they have promised to invest $1.27 billion (£1 billion) over a 10-year period to support steelmaking at the site. Included in this investment, will be refurbishment of the number two blast furnace.

This steel plant at Port Talbot in South Wales, U.K., could close if Tata Steel can't find a buyer. Even as steel prices increased last week. Source: Adobe Stock/Petert2

This steel plant at Port Talbot in South Wales, U.K., has been saved by a new pension deal between Tata Steel and its union. Source: Adobe Stock/Petert2

Apparently, Tata has committed to a policy of avoiding compulsory redundancies for five years both at Port Talbot and across smaller steel plants the company operates in Wales. Needless to say, the announcement was met with enthusiasm by steelworkers and those in a supply chain estimated to be worth some $4.18 billion (£3.3) billion a year to Wales.

Why Reinvest?

So, what secured this remarkable turnaround? Was it a slashing of energy costs? A cut in fiercely criticized business rates? Barriers on the import of foreign steel or a government subsidy? No, apparently all it took was an agreement to replace the current final salary pension scheme with a defined contribution plan involving maximum contributions of 10% from the company and 6% from employees. Read more

Domestic aluminum and zinc prices in China have been supported this year by a doubling in coal prices, due to a perception that higher coal prices lead to higher energy prices and directly translate to higher energy intensive metal prices.

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China’s central government probably feels it has little alternative than to rationalize thermal coal production which, a year ago, was suffering from some 2 million metric tons of overcapacity. The irony is that investment in coal mines would fall if the government would trim plans for new coal-fired power stations.

Is Coal-Fired Capacity Actually Decreasing?

Yet in a market which has seen the world’s largest investment in renewable energy, Greenpeace is quoted in the Guardian newspaper saying China is adding two new coal power station projects each week across 10 different provinces. The environmental campaign group estimated in July that China already has up to 300 gigawatts of excess coal-fired capacity with another 205 gw under construction and plans for an additional 405 gw. As of July, China already had 895 gw in coal-fired power stations representing more than half its electricity generation London-based Carbon Tracker is quoted as saying. Read more

After rising strongly for the last month or more, copper prices now appear to be buffeted by every scrap of news that comes out.

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“Copper prices fell this week as investors cashed in gains after the previous session’s rally,” news.com in Australia reported yesterday. The gist of the argument seems to be the 23% rise in the copper price last month was a step too far. The site quoted Caroline Bain of Capital Economics saying “You only have to look at the levels of investor buying to see that quite a lot of these rallies have been based on euphoria rather than grounded in fundamentals. We think we will see some profit-taking inevitably as we end the year”

Reuters, on the other hand, took a somewhat contrary view, reporting copper prices climbing mid-week, buoyed by a pickup in U.S. manufacturing. The newspaper reported new orders for U.S. factory goods recorded their biggest increase in nearly 1-and-a-half years in October, evidence that the manufacturing sector is gradually recovering after a prolonged downturn and as demand signals from China also improve. Read more

We wrote recently about the probable impact of President-elect Trump’s forthcoming economic policy, particularly his focus on infrastructure spending, Global trade and putting U.S. manufacturing, particularly steel, at the heart of his economic policy.

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His promises have been generally well-received yet they raise an awkward question: Creating demand and limiting supply — first by rolling out steel-consuming infrastructure projects and second by taking more aggressive action against steel imports — will inevitably raise domestic steel prices.

This would be good for domestic U.S. steel producers, in as much as construction companies could pass along the costs infrastructure projects, it would incur only marginally higher input costs as a result paid the taxpayer. But it would inevitably also have a wider impact on the steel market, rising prices for steel consumers and higher prices, in turn, for the wider population buying automobiles, refrigerators and other products manufactured with any significant steel content.

How We Got Here

The U.S. steel industry has suffered grievously at the hands of cheap imports. Steel dumped by producing countries with a massive overhang of spare capacity and hidden subsidies such as China have depressed prices and pushed many major producers such as U.S. Steel into loss-making positions that resulted in downsizing and the loss of jobs. Read more

In much the same way as President-elect Donald Trump conducted his election campaign, he has kept himself very much in the headlines in the interim period until he takes charge as president in January.

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Trump won by promising infrastructure investment and that he’d protect American manufacturing jobs. What’s that mean for American steel? The two were seen by many as mutually supportive. Read more

There has been a long running debate about the loss of American manufacturing jobs over the last decade. Blame for job losses is largely laid at the door of globalization, specifically China.

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The rhetoric was ramped up in the recent presidential election campaign when both candidates came out firmly against more globalization but Donald Trump in particular, strongly criticized China for stealing American jobs and vowed to return those jobs to the U.S., has placed the issue even more sharply under the spotlight.

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Is globalization really the culprit for moving jobs from the U.S. to elsewhere? Or is it merely automation and efficiency? Source: Adobe Stock/Ruiponche.

Certainly, jobs have been lost because of offshoring, but recent research suggests the extent may have been overestimated. Michael Hicks, a professor of economics at Ball State University in Muncie, Indiana, is quoted in a Financial Times article saying he could show that just 13% of the estimated 5.6 million job losses from U.S. manufacturing during 2000-10 were caused by international trade, while the rest came from that holy grail of economic progress, rising productivity!

Why Are Jobs Moving?

True, the effects have been disproportionate. Some industries have been hit hard, some hardly at all. Labor-intensive sectors relying on lower pay grades were hit much harder by international trade, Professor Hicks believes. About 40% of the job losses in the furniture industry and 45% in clothing were caused by shifts in trade, he estimated. Low wages in Asia were undoubtedly the main draw but labor costs in China have been rising rapidly of late and even China is now losing jobs to places like Vietnam and Bangladesh. Read more