Author Archives: Stuart Burns

The London Metal Exchange steel scrap contract is coming of age much more rapidly than the old steel billet contract did. Unlike its older sibling, the steel scrap contract has the prospect of becoming a meaningful and valuable tool both for the trade but also for analysts and financial players.

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The LME Ferrous Monthly Update report for February reported there was steady uptake of both scrap and steel rebar contracts last year and that there was  a surge of activity in January, for both February dates and out to September of this year. LME Steel Scrap and LME Steel Rebar both traded record volumes last month. LME Steel Scrap traded the equivalent of 262,450 metric tons composed of almost 2,500 individual trades, the LME reports.

Source London Metal Exchange

As volume and liquidity builds, the contract will become more representative of real market prices and as a result increasingly relevant as a viable tool. One measure of liquidity is the narrowing of bid/offer spreads. In a non-liquid market buyers and sellers are harder to find and spreads tend to be wider, but as volume has built market makers have been able to narrow the spreads reducing trading costs and increasing the attractiveness of the contract for hedging. Read more

One of the major gripes about environmental legislation is that while the West creates ever stricter laws and ever lower emissions targets, many parts of the world completely flout agreements or do not even sign up to them in the first place.

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The steel industries of Europe and the U.S. frequently complain that they must meet tough emission targets that their competitors in China, India and elsewhere can avoid either because their governments have not signed up to such restrictions, or because they simply are not enforced.

The True Cost of Air Pollution

Well, finally after years of complaints it appears the tide is turning but tragically it has come about due to an appalling loss of life that is only just being recognized. Air pollution alone causes 6.5 million early deaths a year the Guardian newspaper reports. That is double the number of people lost to HIV/AIDS, tuberculosis and malaria combined, and four times the number killed on the world’s roads. In Africa, air pollution kills three times more people than malnutrition. Read more

I am not sure this would go down well in the U.S., but take the most populous country in the world, with an estimated population of 1.3 billion of whom 22% are judged to be living in poverty and give them a state-provided universal basic income (UBI) payable to every single person. Sound like madness? Sound like a recipe for financial disaster? Sound like a socialist pipe dream? Maybe, but the idea is being actively debated in India according to the Economist.

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Although the pre-annual budget economic survey, published on January 31, did not make any promises, it did outline an idea to pay every citizen 7,620 rupees ($113) a year. Far from a king’s ransom — it is equivalent to less than a month’s pay at the minimum wage in a city, but it would cut absolute poverty from 22% of the population to less than 0.5%. The money would largely come from recycling funds from around 950 existing welfare schemes, including those that offer subsidized food, water, fertilizer and much else besides. Altogether, these add up to roughly the 5% of GDP that the UBI would cost, the government’s chief economic adviser, Arvind Subramanian estimates. Read more

You may feel it cynical to say anyone would engage in a blue sky thinking if someone else is going to pay for it, but you have to question whether Voestalpine AG and its partners would be embarking on a research program that appears to have little prospect of economic viability in the next 20 years if the European Union was not funding the lion’s share of €18 million.

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The Austrian steelmaker Voestalpine, Siemens of Germany and Austrian renewable energy company Verbund party are building an experimental facility to economically produce hydrogen from water, which would then be used in place of coking coal for steelmaking. You may remember that my colleague, Jeff Yoders, noted that Voestalpine touted research into using hydrogen to reduce iron ore at its new DRI facility in Texas when the facility opened last year.

Voestalpine Corpus Christi

Voestalpine’s $750 million direct-reduced iron ore facility in Corpus Christi, Texas, could one day be fueled by hydrogen and not natural gas. Image: Jeff Yoders.

By the consortium’s own admission, an economically viable hydrogen process could take 20 years but should it eventually prove successful the benefits in decarbonizing a range of energy intensive industries such as ceramics, aluminum, glass, and cement in addition to steel could dramatically reduce emissions from one of the largest sources of industrial CO2 emissions. Read more

Nickel was said to be in a supply deficit last year of 209,000 metric tons, according to Bloomberg, and is projected to remain in deficit this year to the tune of 188,000 mt.

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The Philippines has just ordered the closure of 21 mines and the suspension of another six. The island chain is a source of around half of the country’s nickel output. After Indonesia’s 2014 export ban, the Philippines became the world’s largest exporter of nickel ore and the primary supplier to China’s massive nickel-pig iron industry, raw material for the alloying of stainless steel.

Stagnant Prices

Yet, while there has been an uptick in prices, nickel’s performance can hardly be said to have been stellar. Since the middle of the summer the London Metal Exchange‘s LMEX index of six key base metals is up almost 18% yet nickel has risen by only 1.2%.

Deficit or not, the market does not seem to be in short supply yet. Between Indonesia and the Philippines the two countries produced about 700,000 metric tons of nickel a year in 2014 and 2015, with about 170,000 mt of that coming from Indonesia due to the export ban.

Chinese buyers simply switched to the Philippines as supplies dried up from Indonesia and drew down on extensive stocks they had amassed in advance of the export ban. Just as the Philippines’ new firebrand environment and natural resources secretary, Regina Lopez, moved to close environmentally damaging open pit mines, Indonesia is increasing exports again. Investors have their eye on a probable surplus towards the end of the decade as both countries return to some level of consistent supply. This graph illustrates the rise of the Philippines and since the export ban the relative decline of Indonesian shipments.

Nickel production

Nickel from major producers in the last nine years. Source: U.S. Geological Survey.

Of course, it’s not clear at this stage how quickly mining companies will be able to implement stricter environmental conditions that are likely to be applied by the new administration of Philippines President Roderigo Duterte, but it would seem that the action is not unjustified with comments in the Financial Times describing the Philippines’ nickel supply chain as an environmental disaster. Read more

One of the biggest social challenges facing the authorities in Beijing is that of environmental pollution. It’s not just the western media that is fixated by measures of particulate matter and images of impenetrable smog in Beijing, the general population has been moved to outright demonstration and the impact on the health of those living in the affected areas is an extremely serious issue causing widespread discontent. Beijing knows it must come to grips with this problem. Drastic action is required, and recent reports suggest the authorities are finally considering just that.

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According to CRU Group, the Chinese Ministry of environmental protection is consulting industry groups such as the China Nonferrous Industry Association about a proposal to shut down 30% of the aluminum smelting capacity and 50% of alumina refining capacity during the big winter heating period from November to March in an effort to reduce coal-fired power consumption. Rumous of this proposal contributed to recent rises in aluminum prices even though the impact would not be felt before the end of 2017 and there is still considerable debate on how viable such a policy would-be.

Shutdown Plan

The provinces in question are Shandong, Shanxi, Hebei and Henan, home to a significant portion of China’s aluminum smelting and alumina refining capacity. According to an article by Aluminum Insider, Shandong produces 11 million metric tons of aluminum per year, Henan turns out 3.8 mmt, Shanxi is good for 1 mmt, while Hebei puts out 100,000 mt a year. Those four provinces account for 37% of the country’s total output of aluminum. Shandong refines 23.5 mmt of alumina per year, Henan produces 12.6 mmt, and Shanxi produces 20 mmt each year, combining to produce around 78% of the country’s total alumina output. Read more

India is the world’s second-largest importer of gold after China.

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India’s gold import bill was up 12% in 2015 reaching $35 billion. 2016 final numbers are expected to come in at about the same rate, although a sharp drop in demand during December — said to be due to Prime Minister Narendra Modi’s move to scrap 500- and 1,000-rupee banknotes as a “demonetization” crackdown on corruption and tax evasion — is said to have hit the largely cash-facilitated gold jewellery market hard in the short term.

Even so, Gold imports are a considerable burden on India’s balance of payments coming second only to oil in the demand it puts on India’s foreign exchange reserves. India imports 900 to 1,000 metric tons per year, but local gold output is just 2 to 3 mt per year. In the same way that the Indian government has encouraged onshore and offshore oil exploration, you would expect indigenous gold mining would be an industry the government actively encourages.

Although India has mines that go back more than 120 years, its annual gold production is miniscule. According to an article in the Hindu times that could be about to change. The Kolar gold field was forced to close in 2001 due to mounting losses at operator Bharat Gold. The state-owned company had been mining the Kolar reserves since independence in 1947 but the mines are deep — down to 3 kilometers — and Bharat was operating with outmoded technology and a large, unproductive legacy workforce. But Mineral Exploration Corp. estimates show reserves to be worth $1.17 billion in the mines, with another $880.28 million in gold-bearing deposits estimated to be left over in residual dumps from previous mining operations.

How Can India Mine More Domestic Gold?

It is debatable whether state-owned Bharat gold has the expertise to economically exploit such deep and relatively low-grade reserves, but established global miners such as Vedanta may hold more potential. In February 2016, the firm became the first private company to successfully bid for a gold mine in India — the Baghmara gold mine in Chhattisgarh — a mine with potential gold reserves of 2.7 mt of contained metal. Sure, that’s a fraction of Kolar’s 35-mt potential but a good start for a firm of Vedanta’s standing to start in India’s gold mining sector.

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India is never likely to rival South Africa, Canada or Australia as a gold miner, but that’s not the point. Any contribution to the domestic market will lessen the impact gold imports have on the country’s balance of payments. With domestic reserves estimated at over 100 mt there appears to be scope, with the right state and government backing, for miners to reduce some of those imports and create domestic employment.

After over 14 hours of debate over two days and bitter clashes in Parliament, the U.K. government’s Brexit legislation has cleared its first hurdle as ministers of Parliament voted by a large majority to approve the leaving the European Union (Notification of Withdrawal) Bill by 498 votes to 114.

Source Telegraph Newspaper

The size of the majority does not reflect the relative position of “remainers” to “leavers” but, rather, the position taken by many remainers that the popular vote was to leave and, regardless of their own position, they do not have the right to vote against the decision of the people in a national referendum. The debate was more an opportunity for politicians to have their say than actually change the decision to start formal leave proceedings.

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This means Prime Minister Theresa May’s government is cleared to trigger article 50 next month, the formal start of departure from the E.U. Not that anything will change in the short term, but article 50 is the first step in a process that should take two years but could well take longer. For the next at-least-two years there will be no legal change for those manufacturers trading with the U.K. and the E.U. Article 50 is just serving notice on the U.K.’s intent to leave. Once Article 50 is invoked, the U.K. will have a minimum of two years’ negotiations during which, of course, there will be considerable volatility to exchange rates as arguments and accusations are hurled backward and forward, and firms will start making contingency plans in case the U.K. does not manage to secure a free trade deal with the E.U, at the end of the process.

The two-year period laid down in the article 50 agreement could get stretched with an “interim agreement” or “adjustment period” to three or four or possibly even five years, although that degree of uncertainty would be damaging for both the U.K. and the European Union.

Two years from now this government will be coming to the end of its term in office and will need to prove it has taken control of uncontrolled immigration, the imposition of E.U. law and has an end in sight for budget payments, so an indefinite postponement to finalize the terms of a new deal is unlikely. The next general election in the U.K. is scheduled to be held on May 7, 2020, unless it is called earlier, so the government will want to show it has delivered on its promises in the run up to the election.

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In such a pre-election atmosphere, economic interests are likely to be sacrificed on the altar of political expediency. The timeframe is further constricted by elections this year in France, which means Brexit negotiations will not start in earnest until later this year, after the new French government is in office. A French government that might want to push its own exit… depending on how the election goes, of course.

So, one hurdle overcome in what will feel more like a marathon than a sprint; buckle up and enjoy the ride!

However much we may focus on supply and demand fundamentals, metal prices and economic stability will be influenced more in 2017 by trade policy than just about any other issue.

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The new Trump Administration in Washington has already shaken up the status quo for NAFTA with threats to renegotiate the terms of that 20-year-old agreement in a manner that would have been inconceivable just six months ago.

Now, Peter Navarro, who heads the new National Trade Council, described the euro this week as an “implicit Deutsche Mark” that gives Germany a competitive advantage over its trade partners and accused Germany’s structural imbalance in trade with the rest of the E.U. and the U.S.A. as the result of a deliberately engineered-to-be-undervalued currency. Navarro accused Germany of engineering a grossly undervalued euro to exploit the terms of trade with its principal trading partners and called it illegal. Read more

On the campaign trail, Donald Trump’s supporters seemed to be of two positions when it came to trade policy: there were those that took every word and fervently believed the candidate when he said Buy American would Make America Great Again… and then there were those among the supporters who saw the risk of taking that policy too far, but still felt comfortable in the belief that come the day the candidate reached the Oval Office a more conciliatory, if still robustly pro-U.S., line would be pursued.

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Well, if further clarification was needed it was made clear in the new president’s inauguration pledge to buy American and hire American, followed by one of his first executive orders to strike-out the Trans-Pacific Partnership after seven years of painstaking negotiation.

In itself, the pledge to buy American and hire American is admirable, commendable and logical. The risk comes when it is enforced by the application of arbitrarily applied tariff barriers. History is littered with examples of previous leaders who have sought to protect domestic jobs and industries by putting up tariff barriers. As recently as 2002, George W. Bush slapped tariffs on steel imports instigating a wave of World Trade Organization complaints and, a year late,r a ruling from the WTO that the steel tariffs were illegal.

Whither the WTO?

Eventually Bush backed down and order was restored, but only because all sides accepted the legitimacy of working within a rules-based system such as the WTO. As a recent article in the Telegraph observed, the international community built the current system after the devastation of World War II and the Great Depression precisely hoping the we could avoid the self-inflicted wounds resulting from tit-for-tat trade disputes.

The US was central in that process and helped craft the rules in its own image of fair and open terms of trade. The fact is that other countries don’t stand still if a trading partner arbitrarily applies a tariff, quota or import tax. The idea of rules-based system such as the WTO is that these disputes can be resolved within a framework that, however tortuous, is accepted by all parties as balanced, but we should take note of the new President’s statements. He generally means what he says.

So, when Trump vowed to “renegotiate” America’s relationship with the WTO if it tries to block his protectionist policies, adding “we’re going to renegotiate or we’re going to pull out,” (something he said last year), declaring “these trade deals are a disaster. The WTO is a disaster,” he is clearly signalling he has no intention of letting the internationally accepted WTO system get in the way of his ideas for putting up barriers to imports.

What Has NAFTA Brought the US?

The consequences of such action should not be underestimated. Over the last 20 years the creation of NAFTA and the consequences of lower transport costs and better communications has meant U.S. corporations large and small have become more integrated with suppliers overseas, both with their own operations and third parties.

Source: Telegraph Newspaper

Many U.S. corporations are extensively integrated with the Mexican manufacturing sector and, therefore, exposed to any changes.

Source: Telegraph Newspaper

A radical shakeup of the tariff system would have a profound impact on the price of just about every industrial and consumer good sold in the U.S. U.S. Foreign direct investment in China, for example, stands at $65.8 billion, whereas China’s in the U.S. is only $9.5 billion, meaning the U.S. is far more reliant on open access to China than the other way around. The Telegraph points out China could easily buy Airbus over Boeing. Or Brazilian soy over U.S. soy. Or put the squeeze on Apple’s supply chain in China. Sure, iPhones could, in time, be made wholly in the U.S.A. but consumers are going to have to pay a lot more for them.

If the intention is to boost domestic jobs by putting up barriers, then the risk is if companies like Apple move to reshore production they would seek to automate in order to avoid the higher U.S. labor cost. Automation is already a growing challenge to job creation in mature markets, forcing firms to relocate would also force the pace of automation.

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Tariff barriers are like using a hammer to crack a nut. However attractive the grand gesture of slapping up barriers may seem, a more subtle approach to encouraging firms to buy American and, where possible, to relocate production would be much more beneficial for the U.S. economy. President Trump’s other idea of re-writing the U.S. tax system would be a good place to start.