Author Archives: Stuart Burns

Apparently, when the government is a shareholder in your business. Questions are being raised as to why the French government has gone soft on Renault‘s emissions probe, omitting crucial details a Financial Times article states.

Two-Month Trial: Metal Buying Outlook

The government report, published last month, concluded that some Renault models emitted nitrogen oxide at nine to 11 times higher than European Union limits, the article states. But three of the 17 members of the commission said that the published report did not include the full details of their findings, including the fact that a NOx “trap” in the Renault Captur went into overdrive when the sport-utility vehicle was prepared for emissions testing but not during normal driving conditions.

It was similar software that induced changes in behavior that tipped off U.S. authorities investigating Volkswagen “defeat devices” last year.

Apparently, Renault was not the only manufacturer to fare badly in the probe, which covered some 86 vehicles from a dozen automakers; yet the report did not find any cases of intentional attempts to cheat emissions, admitting that the government tries to give a positive brand image to firms it was invested in and hoped to push manufacturers in the right direction rather than seek prosecution.

One wonders what their attitude would be if it were Toyota or General Motors found to be posting erroneous data? The same article said the Fiat 500x registered NOx emissions almost 17 times European Union limits.

In Renault’s case, the Captur’s NOx trap purged five times in rapid succession at the end of scripted test preparations, allowing the car to produce much lower emissions than on the road the article explained, suggesting the car’s software could have detected that a test was being performed.

“Everything in a car is controlled by software now,” one commission member said, many of whom asked to remain anonymous. “We can’t be sure that Renault’s software detected the test like Volkswagen’s, but it seems that Renault has optimized the NOx filter to target this very specific set of conditions.”

Free Download: The August 2016 MMI Report

It would seem it may well have benefited Renault to have both the judge and jury in the dock with you, but does it benefit the wider community the government was elected to represent? This story, no doubt, has further to run.

As a counterbalance to our article this week about proposed tariff changes intended to counter the flow of unwrought metal out of China, China Hongqiao, the world’s largest aluminum producer, is reported in the South China Morning Post rejecting concerns the Chinese aluminum industry has a major overcapacity problem.

Two-Month Trial: Metal Buying Outlook

In fact, in the words of Chief Executive Officer Zhang Bo, China’s high demand for aluminum and improving “self-discipline” in production and capacity expansion has already resulted in a much healthier state than some analysts’ believe. As in steel — and several other commodities — China’s position in the global aluminum market cannot be overstated, but unlike steel an export regime is supposed to keep excess production from being exported onto the world market.

China’s Aluminum Demand and Supply

Broadly speaking, up to a couple of years ago that held good. China accounts for some 53% of global demand of 30 million metric tons in the first half of this year and is self sufficient in primary aluminum although it does import bauxite and alumina, intermediate products.

How are Chinese smelters making money? Source: Adobe Stock/Pavel Losevsky

How much excess aluminum is being produced by Chinese Smelters? Source: Adobe Stock/Pavel Losevsky.

Zhang Bo says given that the industry’s (in China) overall plant utilization exceeds 80%, and over 80% of the smelters are profitable, “nobody should have the idea that the industry is in major overcapacity.”

He also noted mainland China’s 8.6% year-on-year first-half aluminum demand growth has far outstripped output growth of just 1% with robust demand from the transportation, electronic and electrical markets this year. To be fair, China Hongqiao figures appear — on the face of it — to support his position. On Friday the group posted a 20.7% year-on-year rise in net profit for the first half to $510 million (3.28 billion CNY) as a 9% fall in selling prices was more than offset by a 25% growth in sales volume the article stated.

Nor is China Hongqiao an exception. The industry’s daily output volume has surged from a low of around 75,000 mt early this year to 90,000 mt now, not far short of last year’s highest levels, ANZ Senior Commodity Strategist Daniel Hynes is quoted as saying.

Earlier promises of smelter closures when prices were around $1,599/mt (10,600 CNY per mt) are now a distant memory, as prices have surged to $1,885.95/mt (12,500 CNY) today gradually idled capacity is being brought back into production. Nearly 200,000 mt of annual capacity having resumed in the second quarter and another 300,000 mt is due to come back in the third quarter, according to the SCMP.

Smelting Capacity Expands

Earlier targets to cut 4.5 million mt of outdated aluminum capacity, even if implemented, will be rapidly replaced by some 3.7 mmt-a-year of new capacity scheduled to come onstream in the second half of this year alone. China Hongqiao expanded its annual aluminum smelting capacity by 29.8% to 5.89 mmt in the 12 months to June 30, and Zhang expects it to reach 6.5 mmt by year-end.

Free Download: The August 2016 MMI Report

China Hongqiao will, of course, talk up the market and downplay suggestions of excess production. The company’s share price has done well on a resurgent aluminum price and rising profits, the last thing Zhang Bo wants is talk of overcapacity.

China’s aluminum semis exports have reduced a little this year, suggesting domestic demand is robust and mills do not have such a pressing need to dump metal abroad as they did last year. Still, with such a dominant position in the global aluminum market a sneeze at home could easily result in a cold for smelters in the rest of the world.

At least according to a European Union official familiar with the Union’s steel sector plans, says Reuters.

Two-Month Trial: Metal Buying Outlook

The E.U. is certainly ramping up the pressure. This year, alone, the European Commission has 37 anti-dumping and anti-subsidy measures in place for steel products, 15 of them concerning China, slapping anti-dumping duties on products such as rebar, cold-rolled carbon steel and cold-rolled stainless steel, ranging between 18.4 and 25.3% for imports from China.

Everybody Gets on the Tariff Bandwagon

The E.U. is scheduled to rule on plate and hot-rolled coil from China in November and while rates haven’t been at the same level as the U.S. where up to 520% duties are have been applied, they are estimated by the industry to need to be in the 30-40% range in order to be effective.

Steel mills Molten iron smelting furnace production line

Can China’s zombie steel mills be shut down? Beijing is trying a new tactic. Source: Adobe Stock/ZJK.

Yet despite the unprecedented level of action, carbon steel imports in the year to May rose 21% with China now representing 27% of total E.U. imports, while stainless steel imports rose 17% over the period, E.U. data shows, even though demand remained almost flat. Read more

I think it’s called the law of unintended consequences and it goes something like this: Government can take action or make a rule for the best possible reason but, sometimes as a result, there are unintended consequences that make the original decision seem stupid.

Two-Month Trial: Metal Buying Outlook

So is the case with China’s export rebate scheme, the original rebate of tax on export of value-added products had a certain logic to it. China is not a low-cost producer of power and to support all exports of energy-intensive metals such as aluminum was a senseless act, while supporting exports of higher value alloys and forms had a certain logic for a country looking to develop its indigenous technology and capability to supply a rapidly growing domestic and regional market.

Subsidizing Exports

Supporting exports of unwrought metal, it was deemed, was tantamount to subsidizing the export of energy as a third of the cost of unwrought aluminum is made up simply of electricity costs, so exports of unwrought metal incur a 15% export duty whereas exports of value-added categories attract up to a 13% rebate of VAT costs. So, China split its subsidies scheme based on the harmonized tariff system supporting products falling in the value-added categories but not the basic 76.01 Unwrought Aluminum category of material suitable only for re-melting. Read more

The commodities sector is suffering from lackluster prices, weak demand and, in many cases, overproduction but one sector is on the up, and that’s precious metals. Particularly gold and silver prices.

Two-Month Trial: Metal Buying Outlook

According to the Financial Times, gold and silver have been among the best performing metals during 2016, powering a sharp rally in stock prices and helping miners ease concerns over their finances.

Gold Prices Take Off

Since the start of the year, gold has risen 27% while silver is up 46% giving more scope to the sector to return to dividend payments.

Source: Financial Times

Source: Financial Times

Many miners cut dividends after the price of gold, which peaked at about $1,900 in 2011, started to fall sharply in 2013. Although gold miners were not alone, they did take action early. Read more

Renewable energy technology has been split into two camps since it became a reality around the turn of the century.

Two-Month Trial: Metal Buying Outlook

On the one hand there are the passionate environmental believers for whom the inflated subsidies were an irrelevance in the face of saving our planet, and on the other were naysayers for whom the arguments about global warming were a plot by the far left to raise taxes or run some kind of tree-hugging environmental agenda at the expense of business and consumers.

Neither polarized position was fair, of course, and the quiet majority in the middle have watched the technologies become progressively more efficient and costs fall dramatically while the extremes of global warming horror stories have been discredited, but the hard science of gradually rising carbon levels has been widely accepted.

Who Cares Why The Temperature is Rising?

In the process, a wider acceptance has gained ground that global temperatures really are rising and whether it is part of a natural cycle or man-made is not a risk we can afford to take. Ultimately, action to reduce carbon emissions will be cheaper than many possible downside scenarios if left unchecked and most people would accept we are making a mess of our environment and really should behave more responsibly.

Meanwhile, politicians have been plowing our taxpayer money into supporting wind, solar and a number of other “renewable” technologies, with some degree of success. Costs for the major energy sources — solar and wind — have fallen, partly as a result of technology improvements and partly due to economies of scale, to the point now where private firms are signing up to invest in major wind projects for a tariff of just $100 per MegWatt/Hour (€90 per mw/h). Indeed, in Europe all the extra power capacity added since the mid ’90s has been renewable.

Source: Telegraph Newspaper

Source: Telegraph Newspaper

The biggest hurdle renewables now have to overcome is not the cost of production, but the curse of intermittency. Where does the power come from when the wind doesn’t blow or the sun doesn’t shine? Read more

When it comes to metals, demand has been heavily influenced by China for most of this century, but for copper, China has more than heavily influenced the market, it has dominated the demand landscape.

Two-Month Trial: Metal Buying Outlook

According to Reuters, China has accounted for most of the demand growth since the commodities super cycle started in 2002, while over the same period consumption in the other parts of the world has stagnated or fallen as economic growth slowed. So, after a solid run this year for the copper price, the London Metal Exchange has risen from a six-and-a-half year low of $4,318 a ton in January to between $4,500 and $5,000 now. It should come as no surprise that warning bells are being rung in the face of weakening Chinese demand.

Imports Down… Supply Up?

China’s copper imports were down an annual 14.3% in July at 360,000 metric tons, Reuters reports, as the stimulus measures announced last year and early this year begin to lose their earlier impact. Much of the demand strength, such as it is, is currently attributed to speculative activity rather than real market demand. Shanghai stocks are rising suggesting metal being imported isn’t being consumed.

Free Download: The August 2016 MMI Report

Unlike steel, copper demand is not as heavily tied to the housing market in China. Demand comes from a variety of sectors, most of which benefited earlier this year from a surge of investment but which are now weakening as that stimulus wanes. Investment in the state grid and power industry accounts for about one-third of China’s copper demand, according to Reuters but demand is already said to be slowing, as is that in property and construction, which account for a smaller 20% of copper consumption.

CRU is quoted as saying “In the consumer sectors, demand from the auto sector is steady. Exports helped demand for air conditioners, but domestic sales were sluggish and that isn’t going to change much in the second half.”

Second Half Forecast

Not surprisingly, many are seeing falling prices in the second half, Goldman Sachs forecasts copper prices at $4,200 in six months and $4,000 in 12 months as a wall of supply — forecast by the bank to hit 4.2% growth this year — hits a stagnant demand market. Predictions of supply and demand balance vary considerably underlying the level of uncertainty but HSBC is predicting surplus as this graph from its recent Quarterly Metals & Mining Report shows.

Screen Shot 2016-08-11 at 14.01.59

Source: HSBC.

This prediction is made with a 5% disruption allowance built in, but according to Bloomberg 2016 has been the year for which mine supply has been the least disrupted since 2004. Contributing to the surplus supply position, this has impacted prices and Bloomberg says after a rise of 3% this year prices have already fallen back 1.9% this month, maybe forewarning of more to come.

After a gap of 30 years, the London Metal Exchange is, in collaboration with the World Gold Council, getting back into precious metals. Not just because it sees an opportunity, but because the industry is in desperate need of an efficient and professional marketplace following the departure of principal banks from London’s Gold Fix in the wake of the Libor scandal and suggestions the Gold Fix could be manipulated.

Free Download: The July 2016 MMI Report

The LME announced this week it will launch centrally cleared gold and silver contracts on a platform called LMEprecious in the first half of next year, followed by platinum and palladium.

Gold bars

Gold will trade on the basis of London good-delivery 99.5% bars in 100 ounce lots. Source: Adobe Stock/misunseo.

According to Bloomberg, the new contracts are designed to complement London’s $5 trillion over-the-counter gold and silver market and will include contracts for spot, daily and monthly futures, options and calendar spread contracts, according to the statement.

Who’s Got the LME’s Back?

Trading house OSTC and banks Goldman Sachs Group Inc., ICBC Standard Bank Plc, Morgan Stanley, Natixis SA and Societe Generale SA will co-own the LMEprecious platform and will act as liquidity providers and some 30 firms have expressed a desire to be engaged from the initial offering. Read more

The battle has intensified between the European Union and low-cost steel suppliers to the region. Specifically, the E.U. is taking action against China and Russia by imposing more anti-dumping duties on steel products from those regions, and for the first time applied them retroactively, according to the Financial Times.

Duties on Foreign Steel

The FT said the duties on cold-rolled steel range up to 22.1% for Chinese imports and up to 36.1% for Russian imports. The rates are a little higher than the provisional penalties in place since February.

Two-Month Trial: Metal Buying Outlook

Using a different calculation method, the U.S. imposed tariffs in excess of 500% on similar cold-rolled steel materials from China earlier this year and the E.U. Commission is said to be planning further measures that would allow it to impose U.S.-style tariffs against steel that is believed to be dumped at particularly low prices or is subsidized. Read more

A recent series of data points suggests the U.K.’s decision to leave the European Union, while a step in the dark, may at least have the benefit of serendipitous timing.

Two-Month Trial: Metal Buying Outlook

After seven years of recession and then stagnant growth, the runes are aligning to suggest global growth may not be as fragile as many fear. In a recent Telegraph article mention is made of a number of measures that, on the whole, point toward a global economy that is picking up on multiple fronts.

Some regions will see a stronger pickup than others, but, broadly, all are pointing in the right direction. A monthly measure of global activity assembled by Fulcrum Asset Management suggests stimulus and fiscal measures adopted partly in response to the risks of Brexit — but more widely due to ongoing slow growth — have combined to create an increase in momentum over recent weeks. The numbers suggest we could see robust world growth of 4% annualized over the second half of the year, even if there is a hiccup in the U.K. This is up from 3.4% in the last quarter and 2.4% in late 2015. Read more