Author Archives: Stuart Burns

It may be Britain that is holding a referendum and sounds like the awkward squad of Europe, but actually a recent poll of opinions by the Pew Research Center reported in the Financial Times shows Britain is not the most disenchanted member.

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That award, not surprisingly, goes to Greece, and who can blame the Greeks? 71% of respondents had a negative view of the European Union. As this charts shows, the standout sullen member with the biggest slide in support though is, of all countries, France. Long the core of the EU ideal, along with Germany, it would appear the recent migration crisis has driven a huge swing in opinion aided, no doubt, by persistently high double-digit unemployment and stagnant growth.

Source: Financial Times

Source: Financial Times

Views range, the FT reports, on how the EU has handled the migration situation ranging from poor (Netherlands and Germany) to catastrophic (Sweden and Greece). If the migration crisis was set against a backdrop of robust growth in living standards, it may not be creating as much negative sentiment although politicians on the far right such as Marine Le Pen would still use it to fan the flames of nationalism and support for right wing parties.

Slow Growth Fuels Anger

But Europe’s growth has been low since the financial crisis and, by many measures, is collectively still not back to 2007 levels. Worse growth has been lopsided with Germany in particular doing rather well out of a relatively weak Euro running a massive trade deficit while other parts of Europe, particularly France and the southern states, have not.

Collectively, the net approval rating is poor with only two countries showing a positive rating, not surprisingly maybe the two that are probably doing the best out of it, Poland with significant net aid opportunities for its workers to secure unemployment overseas and high-net inward investment.

Source: Financial Times

Source: Financial Times

One trend that is consistent across Europe is intergenerational differences. Older voters are less positive than younger ones across all countries, again with France’s sentiment at the bottom.

Source: Financial Times

Source: Financial Times

Is this wisdom or pragmatism, you may ask? Young votes tend to be more ideological and may be less likely to own a house or be settled into careers with limited growth prospects.

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All things are possible for 20-somethings, as workers age they look to the political and social structures around them and question the efficacy of the system. The French clearly feel their prospects leave a lot to be desired.

Drilling in the North Sea started in the ’60s but really took off after the 1971 oil crisis as higher oil prices supported massive investment in deep offshore drilling technologies and infrastructure required to exploit what was, at the time, one of the most challenging environments in the world for extracting oil and natural gas.

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The city of Aberdeen flourished as the beachhead for this campaign and for 50 yeas it has grown and matured as a world class center of excellence in support services and facilities developing technologies and competencies that have been applied in deep-water offshore environments like the Gulf of Mexico, the South Atlantic and in the Arctic ever since.

But the collapse of the oil price, high taxation and dwindling reserves have hastened the end of a region whose days were always numbered by the finite nature of the resource.

Source Financial Times

Source: Financial Times

Yet as oil majors ponder the timing of closing and decommissioning offshore oil rigs, the challenges are yet again driving innovation and technologies that will be of benefit in decades to come around the world for those companies active in the work. Read more

The emerging markets of Southeast Asia differ markedly from other parts of the world in more ways than the admirable fact all the countries in the region exhibit robustly dynamic economies.

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Unlike the Middle East, Africa and large parts of the former Soviet Union, many parts of Southeast Asia enjoy a relatively free press, at least outside China. Interestingly, there is a range of political models from fully fledged democracies such as India to single communist party systems such as China but broadly speaking they all exhibit social stability, relative religious tolerance and, to varying degrees, respect for property rights and the law.

Emerging Economies

The Arab Spring left huge Muslim populations in Asia largely untouched even as it set the Middle East alight. Taken as a whole, these are hugely positive events and no doubt have contributed and will continue to contribute to above average growth, the creation of a growing middle class and domestic stability.

Maybe because of this stability, we worry little about the wider picture and mostly focus on GDP figures, PMI numbers and consumption data. The reality is, though, we could also be overanalyzing such issues. China is not going to have a recession, nor are the other economies of Southeast Asia. Large, and in most cases still growing, populations coupled with the above advantages will see to that. So what else should concern us?

When those more obvious qualities are stripped away, underneath is a region still riven with nationalism of a much more aggressive kind than found in more developed parts of the world and more akin to other less successful emerging markets.

Like Southeast Asia Europe suffered terribly from two world wars, yet both its population and its politicians hold a much more conciliatory and forgiving view of their old adversaries. Indeed, the European Union was founded in large part on a universal desire to avoid ever having such conflict again and nation states have sacrificed a lot in terms of independence and, arguably, prosperity to achieve the current state of mutual respect.

The rise of minority nationalist parties in Europe suggests that strains still exist and politicians ignore them at their peril but they are highly unlikely to result in another European war like WWII. But, in Southeast Asia, the same length of time has passed yet nationalist sentiments exist much closer to the surface and are actively fanned by politicians from time to time if they deem it suits them.

There is little or no admission of past guilt, no sense of contrition or forgiveness for the events of WWII in the region. Distrust is, therefore, rife and angers flair other territorial and trade issues that are frequently seen through the lens of that historical perspective.

Supply Chain Dependence

One has to hope that the integrated nature of Southeast Asia’s economies and interdependence of supply chains, finance and cross-border trade would act as a restraint in the event of flashpoints over issues like the Senkaku/Diaoyu islands in the East China sea — China’s extension of its territory by concreting over coral atolls in order to create new Chinese islands — instability in North Korea’s totalitarian regime and maybe the longest running issue, China’s claims on Taiwan.

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Particularly as after Iraq, Afghanistan and Libya it would seem Donald Trump does speak for a majority of U.S. society who would sooner countries sorted out their own problems, rather than rely on Uncle Sam’s protection. In a near future where the U.S. is less willing to speak quietly and carry a big stick, flashpoints have more potential to escalate than before.

We can see how Saudi Arabia has stepped into Yemen when they could see the U.S. would not, expect more of that in the years to come, regional players taking on the role that would historically have been fulfilled by the U.S. In Asia, the balance of risk is still on the side of common sense, shared interests and mutual gain trumping nationalistic pride, but then they said exactly the same about Europe before World War I.

Steel, aluminum, cement, what will China flood the world with next?

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Oh yes, refined petroleum products, or to be more exact diesel fuel is the prime culprit at the moment. According to the Financial Times, China has in the region of 100 million metric tons of excess refining capacity and is adding more. Read more

It’s not an unreasonable question. Certainly in Europe, few if any steelmakers are making any money.

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Capacity utilization is woefully low forcing steelmakers to fight for sales and depriving them of any price-setting opportunities. Steelmakers and much of the media lay the blame on China’s doorstep. Although over half of China’s major producers made losses in 2015, exports soared by 20% to 112 million metric tons last year, more than the total output of the world’s second-largest producer, Japan.

Source: Financial Times

Source: Financial Times

Meanwhile, Europe’s steel demand is 25% lower than before the 2008 financial crisis according to the Financial Times and, although there has been some rationalization, it has been limited. Read more

Johnson Matthey’s full year figures illustrate what a challenging market it has been not just for the refiner and manufacturer of precious metal products, but for the range industries in which it plays.

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We tend to associate JM with simply refining platinum and being highly dependent on the European automobile market through their product’s exposure to emissions control technologies. The year-end figures are a good illustration of how far off the mark that impression is and how diverse the range of industries the firm is involved in.

The Year in Emissions Control

Emissions control equipment actually had a good year, up 15% in spite of the Volkswagen AG emissions scandal. Demand for diesel vehicles has not been badly dented and although the trend is expected to fall from about 50/50 today to 60/40 in favor of gasoline engines in Europe by 2025, the proportion of platinum needed has continued to rise following the introduction of stricter standard last year. Read more

Tata Steel has completed the sale of its long products business to Greybull Capital, in a deal that will preserve 4,400 UK jobs and revive the British Steel name, the Guardian reports this week. Well, that’s part of Tata U.K. that will survive, at least for a while.

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Greybull repeatedly states that it’s a financial firm that makes long-term investments in private companies and has variously been described as a turnaround specialist and a private equity house. In reality, Greybull has a checkered history. Read more

I don’t know if any of you have been following the Sky Atlantic series “Billions” — it may be screened here in the U.K. later than the U.S. and is already history stateside — but after the first two episodes it is following an intriguing if well-worn path of the demon hedge fund manager pitted against the flawed but public-serving attorney general. Echoes of the big short and other films demonizing hedge funds come to mind, but it’s well done all the same.

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This is not all Hollywood, or wherever Sky films its TV series, though. In the real world, we are seeing the impact of unbridled and largely unregulated hedge funds manipulating the market and our purchase costs, our cash flow, and, ultimately, our profitability every day. Read more

An interesting article in the Financial Times recently reviewed the acquisition by China Molybdenum of the Tenke copper-cobalt mine in the Democratic Republic of Congo from Freeport-McMoRan.

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As the FT points out the purchase at a price of $2.65 billion is the largest single private investment in the DRC’s history and will be the largest purchase of copper assets since China’s purchase of Glencore’s Las Bambas mine in Peru for $6 billion in 2014.

Cobalt Control

The article examines the risks not to the copper market but to the co-product produced at Tenke, cobalt. The article focuses on risks to the cobalt supply chain of China gaining a dominant position in the global chain for this increasingly critical metal. Read more

An interesting article in Reuters this week examines the Chinese aluminum market and asks, well, what the hell is going on?

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It points out that the statistics coming out of China are even more unreliable than normal showing rises and falls of millions of metric tons from month to month. Specifically, Chinese output supposedly slumped by an annualized 6.6 million mt in the December-February period only to surge back by 5.2 mmt in March and April, almost certainly not the case when you consider the time it takes to idle and restart smelters.

Shanghai Futures Up

Taken over a longer time frame, though, run rates actually appear to have fallen slightly from Q4 to Q1 which would make sense when you look at the low Shanghai Futures Exchange (ShFE) price during that period. It fell below 10,000 yuan per metric ton ($1,525). But the worry is the 16% rise in the ShFE Aluminum ingot price will almost certainly encourage capacity to come back onstream, how much remains to be seen, but a rise like this, well in excess of the more modest 6% London Metal Exchange rise, will encourage re-starts.

Source: Thomason Reuters

Source: Thomson Reuters

According to Reuters. the most active aluminum contract on the ShFE is currently trading around 12,400 yuan per mt ($1,891), back in profitable territory for many of China’s smelters. Read more