Author Archives: Stuart Burns

The Telegraph newspaper, while widely respected, has a tendency to shout doom and gloom at the first signs of potential trouble, but that doesn’t mean it is always wrong.

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The paper, and particularly those articles of International Business Editor Ambrose Evans-Pritchard, have at times been quite prescient. So dire is his latest offering it should, maybe, not be dismissed as scaremongering for headlines sake. The article makes the point that dollar Libor rates are tightening across large parts of the global economy and will, if they continue, cause significant stress in credit markets and ultimately stock markets. Read more

As anyone watching and, worse, listening to the U.S. presidential election will attest, global trade is not in favor at present.

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Nor is this trend just in the U.S. Europe very nearly failed to ratify a free trade deal with unthreatening Canada last month. A deal that had been seven years in the making scraped through after considerable arm wrestling with the minor regional government of Wallonia (a German-speaking region of Belgium) which had been holding it up.

Free Trade’s Have Nots

Voters in developed nations increasingly view themselves as the victims of trade with the developing world and the reaction is to embrace more isolationist policies. Read more

China would probably argue that it gets bad press when it comes to environmental issues.

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Not surprisingly. China is said to be the world’s largest emitter of greenhouse gases, having overtaken the U.S. in 2007, and was responsible for 27% of global emissions in 2014. It’s right that it gets a lot of attention.

Largely due to the consumption of about half the world’s coal, China is the world’s largest source of carbon emissions, and the air quality of many of its major cities fails miserably to meet international health standards. Life expectancy north of the Huai River is said by the Council on Foreign Relations (CFR) to be 5.5 years lower than in the south due to air pollution, while water and soil pollution are equally severe.

China Cracks Down

Yet for all that, or maybe because of it, China is taking considerable strides to address its problems. A recent article in the South China Morning Post reports on the tough stance environmental protection bodies in China are taking with large industrial groups. Read more

Reuters reports 1.8 million metric tons of previously mothballed Chinese aluminum production capacity has now been restarted this year following a massive slump last year as prices plummeted.

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While another 2.5 mmt of new capacity, much of it ultra-low-cost, is also expected to be added by the end of the year, a process of both restarts and greenfield additions that is expected to continue into the year end. Factor in new supply from Bahrain and India, and global supply is outstripping real demand.

Distortions in the Market

The aluminum market may be distorted more than most, but copper is not far behind and steel is plagued by overcapacity running into the hundreds of millions of metric tons.

Zinc has had a strong run this year with prices rising on the back of strong (construction-supported) galvanized steel demand and a constrained supply view. But 2017 will see the return of Glencore’s 500,000 mt/year operation, previously mothballed due to low prices, significantly increasing supply.

Even the nickel market, although said to be in deficit because of Indonesia’s absence from the market and cut backs in the Philippines, has seen prices rise on the back of rising (Chinese) stainless production.

How Far Can This Stimulus Go?

Prices and production are both supported and supporting each other on the basis of strong demand and production in China across a range of metals. How much longer has China’s housing market got to run?

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How much more debt is Beijing willing to acquiesce to being added in support of maintaining an adherence to a dogmatic GDP growth target? Take your guess, but 2017 could see an easing in support and many of these markets might lose the support they have enjoyed this year. That doesn’t mean a crash, but it will mean a cap to further price increases and the possibility of prices falling back for those commodities most vulnerable to speculative support and oversupply.

Back pedal 12 months and the commodities landscape looked rather different.

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Prices had been falling since 2011 and the trend carried through into early 2016. Many worried that the declines were set to continue through this year. 10 months in, the picture looks brighter: Chinese demand for metals has picked up and cost-cutting by producers has boosted profitability.

Commodities Are Up… But Why?

The S&P GSCI Commodities Index has risen from a low of 271.8 in late January to 372.4 today, a rise of 37%, aided by a doubling in oil prices during the period. Mining stocks are among the better-performing asset classes of 2016 and were doing well even before Brexit boosted the fortunes of London-listed stocks. There is a sense of cautious optimism about a recovery in commodities much of which has to do with improved sentiment toward China. Read more

The fact that X2, the mining vehicle set up by Sir Mick Davis in 2013, is releasing its financial backers from their commitments says quite a lot about the state of the global mining Industry.

X2 was set up by Sir Mick after he successfully merged  —or shall we say sold — the $50 billion mining giant Xstrata to Glencore International in May 2013. His plan was to create a new mining and metals group by acquiring assets that he believed would be sold at knockdown prices as the commodities bust unwound from 2011 onward.

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Even though commodity prices plummeted in late 2011, the expected distress sale of mining companies’ assets did not come to be. Somehow, miners found ways to lower costs and reduce debts without massive divestments or fire sales. Over the last three years, X2 has purchased a grand total of zero assets.

Not that he hasn’t tried, according to a FT the purchase of Rio Tinto’s coal assets valued at some $2 billion, fell foul of North American pension investors dismayed at the prospects for carbon based resources.

Why Can’t X2 Make a Deal?

Assets have been sold by mining firms, sure. Sir Mick’s previous partners Glencore International successfully sold various assets and paid pay down debt as a result, but for whatever reason the valuations didn’t attract X2’s interest. Meanwhile, BHP Billiton demerged its aluminum business South 32 but did so via taking the business to market which would then have forced X2 to pay a premium if they wanted to acquire the assets.

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X2 didn’t exactly have the $5.6 billion sitting in the bank. Its fund is made up as a number of pledges, six of which were said to be of $500 million each. Noble Group, the commodities trading house, and U.S. private equity firm TPG this summer indicated they will not renew their commitments for next year. This was said to be what prompted Sir Mick’s reassessment of near-term opportunities.

The fund’s other contributors included Abu Dhabi Investment Council, and three Canadian pension funds — PSP Investments, Ontario Teachers’ Pension Plan, and Caisse de Depot et Placement du Quebec —as well as a number of smaller investors, according to the WSJ. One of the problems seems to have been not just a lack of suitable targets, but that investors have the right to veto deals on a case-by-case basis, rather tying X2’s hands.

Sit Down, You’ll Rock the Boat

The lack of fire sale opportunities may also suggest that commodities as a class have not fallen completely out-of-favor. Lenders have remained supportive of the sector and the WSJ says fewer than the expected firms have gone bust as they rode out the downturn by stripping back operations and cutting costs.

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Indeed, X2’s decision to release their backers from commitments may mark recognition the commodities market has bottomed. Commodities like Iron ore, coal, gold, nickel and tin have all picked up from recent lows this year, reflected in a 22% rise in the S&P global natural resources index. X2 may have missed the boat, at least for now

While there may be much eye-rolling and tutting, observers of Europe’s prevarications over ratification of the CETA, the European and Canadian Comprehensive Economic and Trade Agreement, the reality is the E.U.’s deep divide over the merits of this agreement are but the tip of a much larger iceberg.

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Within any free trade agreement there are always winners and losers. When the government to government FTAs are negotiated and agreed, a balanced judgement is made as to whether the agreement has overall benefits for each party. But, when the right to pick agreements apart and focus on the detail is given to interest groups down to a granular level of interested parties, there are bound to be those that find one or two issues unacceptable.

How One Region is Killing an EU-Wide Deal

In the case of CETA, Wallonia (a German-speaking region of Belgium) has taken exception to the rights of major corporations to take legal action against governments in the event of subsequent legislation which goes against the terms of the agreement.

They also dislike some of the changes to agricultural trade. Both the E.U. and Canada are making last-ditch attempts to secure agreement prior to the intended signing on Thursday, but after all these years of negotiation even if matters cannot be resolved this week no doubt both sides will continue to try and find solutions.

The problem, though, is not really one of minor vested interests, rather it is a rise in anti-globalization among mature economies who see their standard of living, their manufacturing base and their very future threatened by the rise of global competition.

The Implications for TPP and TTIP

Where CETA leads TTIP — the Transatlantic Trade and Investment Partnership — follows. If Europe does not ratify CETA, TTIP is almost certainly dead in the water. Maybe more significance for U.S. foreign policy is the fortune of TPP, the Trans-Pacific Partnership.

Andrew Hammond an Associate at the Centre for International Affairs, Diplomacy and Strategy at the London School of Economics, writing in the Telegraph, says that TPP represents a major plank of U.S. policy to pivot towards Asia and is said to contain elements to counter the economic threat of a rising China not playing by the same rules.

The Obama administration was seeking, with TPP, to set standards of trade for the 21st century. And not just of trade but investment, data flows and intellectual property. TPP has an important rules-setting component, Hammond said, perhaps more so than any other previous trade deal.

The agreement sets rules to limit subsidies to state-owned companies which could become very important should China eventually join TPP. With the bill languishing in the U.S. Congress and a rising tide of populist sentiment against globalization, championed by both Republican and Democratic candidates, serious questions are being asked about whether TPP will see the light of day.

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Other parties such as Canada, Australia, Japan, and New Zealand, including Southeast Asian members would collectively account about 40% of world GDP.  Yes, there would be winners and losers on both sides, that is the nature of free trade agreements, the job of government is to judge whether any agreement is on balance in their country’s best interests. The US conceived of and largely set the agenda for TPP. It is not in agreement that is being forced on the US by some foreign power, quite the contrary.  Failure to enact the agreement will have repercussions for US foreign economic policy for decades to come and the failure of CETA, TTIP and TPP would set the tone for a more introverted, protectionist and isolationist World to come.

Chinese GDP is on a roll this year. After turning out less steel in 2015 than the year before, the first time in more than three decades that steel production declined, 2016 is back on the rise.

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According to Bloomberg, crude steel output totaled 603.78 million metric tons in the first nine months of this year, up 0.4% from a year ago. Demand has been boosted by stimulus measures encouraging investment in the real estate and infrastructure sectors. The September output of 68.17 mmt implies that Chinese apparent steel consumption jumped 9% from a year earlier, RBC capital markets is quoted as saying.

Surging in September

This makes September the strongest month so far in 2016 and October will probably stay high as consumption typically rises in the Fall. Steel mills are being encouraged by a return to profitability and, in spite of protectionist moves from overseas, markets around the world say China’s exports in the first nine months rose 2.4% on a year earlier at 85.1 mmt, the highest ever Bloomberg says.

Nor is this stimulus and debt-fueled binge restricted to steel. Global daily average aluminum production rose to 164,600 mt from 159,800 mt in August, led by a rise in China’s output for the month to 2.75 mmt, the highest in 15 months.

A rally in Shanghai aluminum prices and demand from housing and infrastructure encouraged Chinese smelters to bring back some 1.8 mmt of capacity this year in addition to adding some 2.9 mmt of new capacity. Chinese output is expected to continue to rise, Reuters mentioned in a recent note, and suggested that prices could soften to $1,550 per mt by the end of the year as a result of excess supply. While total global primary aluminum production increased to 4.937 mmt, up 1.2% from the same month last year,  growth continued to be at the expense of western smelters with North American output falling 11%  to 325,000 mt last month.

Markets React to Stimuli

As we have seen in the past, China’s stimulus measures are rather like the sugar rush that comes and goes. Chinese GDP has been boosted or at least stabilized at 6.7% this year on the back of measures introduced by Beijing towards the end of last year.

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But, like previous stimulus measures, the result is increased debt progressively at lower rates of return and ultimately adding to more of a global overproduction problem. In the short term then, demand for iron ore, coking coal, bauxite and alumina looks set to remain firm at least until the winter slow down begins to bite. Depending on how marked that is we will either see a drop in raw material demand, and hence prices, or a drop in finished steel and aluminum output. Neither scenario being particularly positive for prices.

China reported last week that its economy grew at 6.7% in the third quarter compared with a year ago.

Free Download: The October 2016 MMI Report

That’s bang on the money where most analysts had expected it to be and was identical to the GDP figures posted in the first and second quarters of the year. The consistent numbers have caused some to question the accuracy. A New York Times article suggests that a lending binge in China this year has helped to sustain growth and create some uplift for the property market. Read more

After more than seven years of negotiations, a trade agreement between the E.U. and Canada known as the Canadian-European Trade Agreement (CETA) was supposed to have passed into law this month and — on the original schedule — would’ve been ratified by now.

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No one now expects ratification this year and many are questioning whether the free trade agreement ever has any hope of being accepted by Europe’s 27 member states. Opposition has been widespread says an article in the Telegraph explains.

Particular mention is made of the regional government of Wallonia (a German-speaking region of Belgium) but, in practice, opposition has been widespread, even resulting in street demonstrations in Germany and an announcement by the Austrian government that they intend to veto acceptance. Read more