Author Archives: Stuart Burns

As if there hasn’t been enough fall out from the U.K.’s decision last month to leave the European Union, a Financial Times article reveals that European Commission president Jean-Claude Juncker is set to ditch fast-tracking the European Union’s trade deal with Canada, officially known as The Canada and European Union Comprehensive Economic and Trade Agreement (CETA), a deal that has already taken five years to negotiate.

Two-Month Trial: Metal Buying Outlook

In a move criticized as undemocratic, Juncker had sought to push approval through on the nod of trade ministers and ministers of the European Parliament, giving no recourse to the 38 parliaments (some of them are regional, only 28 are national members of the E.U.) if they don’t agree to it.

France, Germany Block Fast-Track

Apparently, Berlin and Paris put a stop to the Commission’s move, seen by some as yet another example of the Commission’s undemocratic behavior put into the spotlight by Britain’s objections to rising control from Brussels. Read more

Before anyone with shares in nickel mines goes out and orders their new Maserati, a word or two of caution is in order.

Two-Month Trial: Metal Buying Outlook

Yes, by some accounts nickel swung into deficit this year after five years of surpluses as global demand rose by some 4% and supply has been constrained by a lack of new investment, Indonesia’s export ban on nickel ore exports and, more recently, a fall in exports from challenger Chinese supplier, the Philippines where low prices have reduced output.

Investors Are Cashing In

The euphoria among investors is not simply due to a change in outlook. Nickel prices have surged this year by some 13% according to the Financial Times with the latest boost coming from the Philippines’ new environmentalist mining minister Gina Lopez, who has announced plans to audit domestic mines for compliance with environmental standards, the expectation is up to 70% could fail resulting in them potentially having their licenses revoked. Two have already lost their licenses. Read more

If the European steel industry wasn’t beset with problems of poor profitability and overcapacity before Brexit, it now has a sharply increased element of uncertainty to add into the mix.

Two-Month Trial: Metal Buying Outlook

Steel mills across Europe have been criticized for not addressing overcapacity since the financial crisis but if you think closing steel mills in the U.S. is a problem, with states lobbying mills to maintain operations, it is nothing compared to the 28 nation states of the European Union, for whom the continued existence of a national steel industry — each country generally has only one or two champions — is a matter of political survival for many governments.

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

Port Talbot in South Wales, U.K., could close if Tata Steel can’t strike a deal and Brexit could make it harder to get one done. Source: Adobe Stock/Petert2

So, for transnational steel producers to moot the possible rationalization of a mill in one country is to invite howls of protest and a political storm. Plus, governments sometimes offer financial support, although, technically, that is against E.U. rules, but ways are often found.

Steel Deals Now in Peril

Tata Steel’s proposed closure or sale of it’s U.K. operations has stuttered along this year with long products being successfully sold to various parties and the major blast furnaces and flat-rolled operations at Port Talbot, South Wales, being circled by a couple of bidders. Read more

You wouldn’t expect the ripples to have spread quite this far, but Britain’s Brexit from the E.U. is lapping on the shores of the South China Sea and has forced the People’s Bank of China (PBOC) to intervene to “stabilize” the yuan in the face of a slump in the pound and euro and a surge in the U.S. dollar.

Two-Month Trial: Metal Buying Outlook

Chinese policymakers have guided the yuan to a 5.6% decline against an index of its trading partners this year as exports fell every month apart from March. The 13-currency gauge fell to a 20-month low last week as the PBOC continued its policy of “stability” while maintaining responsiveness to market forces — plainly such a policy can be contradictory at times, especially in times of volatility as we are now facing.

Source: Bloomberg

Source: Bloomberg

The PBOC, after years of gradual appreciation, has presided over a period of depreciation again in an attempt to help exporters, but an unexpected downward adjustment last August spooked markets and caused shares to fall causing an estimated $1 trillion capital outflow from the country as investors panicked, fearing the prospect of their assets falling in dollar values. Read more

The European Union is to meet this week — all 27 of them without their 28th member, the rebellious U.K. — to discuss the implications of its voters’ momentous decision to leave the political and economic pact in a national referendum last week.

Two-Month Trial: Metal Buying Outlook

Most say the decision to leave will hurt the U.K. economy. The Bank of England said before the vote the economic hit on the country will be considerable, with permanent loss of economic growth, higher unemployment and lower tax receipts.

Banks Gird for Policy Battle

The New York Times quoted sources that said British economic growth could be zero or negative in the short and medium term, with a secondary impact over time as London’s financial services sector, which makes up about 12% of the economy — which is more than manufacturing — begins to move staff members and headquarters to Frankfurt, Paris or Dublin.

The web of international banking could be disrupted if there are tighter restrictions on U.K. labor. Image: Adobe Stock/Sergey Givens.

The web of international banking could be disrupted if there are tighter restrictions on U.K. labor. Image: Adobe Stock/Sergey Givens.

London’s banks have lost no time in applying for banking licenses in the above cities and identifying staff they could move to overseas branches if negotiations do not look like they will guarantee continued open access. Read more

So, as we discussed above, if the new, post-Brexit U.K. allows open access to workers from the European Union — and not allowing open borders and easy employment for other Europeans was the central plank and sticking point of the entire Leave campaign — it might be easier to make a deal with those former partner nations in the E.U. That would also raise the question, “what was all of this for?”

Free Download: The June 2016 MMI Report

If discarding the objective of banning open access proves too much of a barrier, the U.K. may opt to fall back on World Trade Organization rules which will mean tariffs and possibly other bureaucratic barriers such as quotas will be established between the U.K. and Europe. That will encourage firms to locate future investment inside the single market rather than in the U.K.

What Might A Future Deal Look Like?

In the meantime, and a final solution could be two years away, the U.K. benefits from a lower pound which will boost exports to the single market and rest of the world. There are a number of models the U.K. could agree with Europe on, long-term, to establish trade rules and coexist in the future.

Germany exports the third-most of its goods to Great Britain behind only the U.S. and France. Negotiators are already trying to solve the puzzle of how to let the U.K. leave the E.U. without Germany leaving all of that business on the Brexit table. Source: Adobe Stock/Luzetania.

The Remain camp’s favorite is the Norwegian model that gives tariff-free access to the single market in return for free movement of labor, acceptance of many of the E.U.’s laws and payment into the E.U. budget, although no say whatsoever, into how that money is spent. The movement clause is likely a dealbreaker for Leave hardliners. Read more

Whatever you may think of the merits of Britain’s decision to leave the European Union, and you’d be hard pressed to find any of those merits, one early casualty is likely to be the British Steel industry, of which the most high profile example is Tata Steel’s Port Talbot steel mill.

Two-Month Trial: Metal Buying Outlook

It has been the subject of huge speculation and media attention since the Indian owners mooted closure or sale in the Spring of this year.

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

Has the Brexit doomed any sale of Tata Steel’s Port Talbot facility? Source: Adobe Stock/Petert2

After initially inviting bids to buy the massive steel works and associated facilities, Tata had begun to enter serious talks with the British government about keeping the plant when it became clear millions of pounds of financial aid, lower power costs and a 25% government stake in the business may be in the cards.

Is a Port Talbot Sale Viable?

That has now been thrown into doubt, in fact scuppered is probably more accurate as Tata assesses the viability of keeping a steel production plant in Britain if Britain is probably no longer part of the European single market. Read more

Almost no one seems to think this is a good idea, but the British people have gone and Brexited the European Union anyway.

Free Download: The June 2016 MMI Report

Britain has voted by a narrow majority 51.8/48.2 to leave the EU. What happens now is anyone’s guess. We are in uncharted territory, even those leading the charge for a Leave vote seem somewhat perplexed by the outcome and have been busy backtracking on promises and commitments made during the campaign about what they could deliver.

New Leadership

David Cameron, Britain’s prime minister, has announced he will step down before the conference season in October to make way for a new leader of the party’s choosing. The automatic assumption is this will be Boris Johnson with Michael Gove as Chancellor, but the party is deeply divided and a lot could happen between now and the Fall.

Screen Shot 2016-06-24 at 10.42.36

Source: BBC

In the meantime, the markets have taken the decision badly. The FTSE 250 — which is considered a close barometer of the UK economy — fell by 12.3% before paring losses back to 7.1%, while the pound tumbled to $1.30, before recovering slightly to $1.36 against the dollar. Read more

In a surprise move, Andrew Harding, the head of iron ore at commodities miner Rio Tinto Group has been passed over as CEO to replace outgoing Sam Walsh on July 2 by relative newcomer to the group, Jean-Sebastien Jacques who only joined in 2011 and has headed up Rio’s copper and coal divisions, the Sydney Morning Herald reports.

Two-Month Trial: Metal Buying Outlook

Harding has been with Rio for 25 years and had been expected to replace departing Walsh in part due to his experience in iron ore which is central to Rio’s existence. The miner generates about half its revenues and around 90% of its earnings from iron ore sales, just 9% from aluminum and copper and the balance from diamonds and other minerals.

Rio Tinto’s Future

The move is seen as part of future plans for Rio to reduce reliance on iron ore and to divest itself of coal assets. Although the firm would argue otherwise — its cost of production for iron ore is a fraction of what it was five years ago — the firm’s expansion into an already oversupplied market is seen by many as a dead end.

Rio Tinto increased iron ore production by 11% last year to 327.6 million metric tons, and that should rise another 7% to 350 mmt by the end of this year, the Telegraph’s Questor column reports. The miner is not alone as rivals BHP Billiton and Fortescue also ramp up production to offset falling prices.

Source Telegraph

Source: Telegraph

This year, the policy appears to have paid dividends as Chinese demand has risen on the back of a short-term boost from a huge government backed loan splurge at the start of the year, but there are signs the economy there is slowing again. Read more

A recent Reuters article draws an interesting comparison between the Chinese aluminum and steel industries and then goes on to draw some not-so-encouraging conclusions for aluminum. Excess aluminum production there is damaging the prospects of aluminum producers in the rest of the world, purely because of the size of China’s massive aluminum industry.

Two-Month Trial: Metal Buying Outlook

Both metals face excess production at home due to rampant overinvestment and slowing domestic demand. Reuters lists a number of similarities between the two industries: China is the world’s largest producer in both markets, accounting for 51.5% of global steel output and 54.4% of global primary aluminum output in April.

Chinese Steel vs. Chinese Aluminum

In both industries, China has been exporting excess production of steel and aluminum in the form of semi-manufactured products, with steel product exports last year totaling 112.4 million metric tons, representing around 14% of the rest of the world’s output and aluminum product exports of 4.2 mmt representing 17% of the rest of the world’s output. In both cases, exports have damaged prospects for producers elsewhere, forcing closures, losses and delaying investments.

Source Reuters

Source: Reuters

In the case of steel, though, the threat of a delay to China’s application for market economy status by the World Trade Organization has forced a more conciliatory response by Beijing in recent discussions, and the promise of large-scale closure of older capacity in China.

Aluminum Overproduction Unabated

How effective this will be remains to be seen but, even so, it is in marked contrast to the position aluminum is in, where Beijing seems unable or unwilling to curtail new investment. As prices on the Shanghai Futures Exchange have risen this year, idled smelters have restarted and new capacity has continued to come on-stream.

Annualized run rates increased by almost 650,000 mt over the course of April and May, Reuters reports, with May’s average daily output of 86,290 mt the highest since November 2015 before prices fell below $1,518 (10,000 yuan).

The other factor apparently effecting Beijing’s attitude is the rapid rise in capacity is coming from new state of the art low cost aluminum smelters in China’s northwestern provinces. Aluminum is not seen as an old-fashioned, state-dominated industry operating polluting plants close to urban areas.

Free Download: The June 2016 MMI Report

China’s new aluminum capacity is cutting-edge, world-class technology and — at current prices at least — is making money. As a result, Reuters concludes capacity is unlikely to be trimmed anytime soon, at least by government intervention. For aluminum producers outside of China, that is not good news, and although recent rises in price to $1,600/mt are better than the $1,450-1,500/mt levels of late last year, it doesn’t offer much upside in the short- to medium-term if China keeps flooding the market with excess semi-finished products.