Articles in Category: Global Trade

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

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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

This week in metals, aluminum prices hit a one-month high, even as surplus material in China looked like it would increase as smelters there went back online.

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Even when metals prices were rising across the board in the first quarter, aluminum was the laggard as oversupply still kept investors from buying it and construction demand remained tepid. Thanks to Chinese stimulus that construction demand has shot up and aluminum prices with it.

Aluminum: Smelt All You Want!

Reuters’ Andy Home and our own Stuart Burns both noted that while Beijing is doing everything it can to clean up overproduction in its steel sector — and the resultant pollution that comes with it — there’s no such commitment from the top when it comes to aluminum, mostly because of the state-of-the-art smelters Chinese companies have invested in.

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

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

So, to recap, steel overproduction and pollution is bad but aluminum overproduction and, relatively, smog-free production? China is a-okay with that. What could possibly go wrong?

Rio Repositions

Meanwhile, things have gone significantly awry at Rio Tinto Group. The Anglo-Australian multinational miner shook up its organizational structure this week and head of iron ore commodities Andrew Harding was passed over for the CEO job by copper and coal division leader Jean-Sebastian Jacques. Jacques, a native of France, has only been there since 2011. Harding has been with Rio for 25 years and had been expected to replace departing CEO Sam Walsh this month. Read more

The British pound slumped to its lowest level since 1985 early this morning as results of the U.K.’s vote on European Union membership came in with the leave campaign winning the vote by close to a 2% margin.

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The currency tumbled to as low as $1.3460 on Friday, which was its lowest level in 31 years.

It fell about 10% from the 2016 high of $1.50, which it hit just hours earlier when most polls suggested the remain campaign had a slight polling lead. That was before polls closed.

As of this writing, Dow Jones Industrial Average futures are down 600 points, nearly 3%, hours before U.S. markets open. Japan’s Nikkei Average, which was open and trading as the votes were counted, dropped 8% while the U.S. dollar briefly fell below 100 yen to a dollar.

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Investors fled to safe havens as gold climbed 5% and briefly hit $1,330 an ounce. We will update this post in the morning as this story develops.

Vietnam and Thailand placed tariffs on Chinese steel exports. China’s Southeast Asian neighbors are joining an international effort to limit its massive steel industry’s influence on world prices led by Europe and the U.S.

Low oil prices forced OPEC’s accounts to dip into deficit for the first time since 1998.

China’s Neighbors Are Sick of Steel Dumping, Too

Countries such as Vietnam, Indonesia and Thailand are challenging a flood of imports from China. They are retooling their steelmaking technology and imposing tariffs as a construction boom spurs steel demand across Southeast Asia

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Steel from China is expected to dominate the market for many years, but swelling demand is driving efforts in countries such as Vietnam and Indonesia to build more modern plants, impose tariffs and better compete with China’s vast mills.

Vietnam imposed temporary anti-dumping tariffs ranging from 14% to 23% on steel imports from China and elsewhere in March. It recently slapped additional import duties of up to 25% on more Chinese steel products that will last until October 2019.

Thailand’s commerce ministry is working on the final draft of an anti-dumping law. The government there expects to propose the draft for approval by end-2016, according to a spokeswoman.

OPEC Accounts Fall into Deficit, First Time Since 1998

OPEC’s 2015 oil export revenues slumped 46% to a 10-year low, the group said in a report published on Wednesday, underlining the impact on producers’ income from a collapse in prices.

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Oil prices are at about $50 a barrel, half their mid-2014 level after being pressured by oversupply. OPEC’s decision in November 2014 to not cut supply, hoping a drop in prices would curb supply from competitors, deepened that decline.

The fallout from the U.K.’s vote to leave the European Union is still being felt as lawyers and politicians begin to try to untangle the regulatory mess the eventual move will make and steel imports into the U.S. are up.

Brexit Creates Legal Chaos

Lawyers and lawmakers braced on Friday for uncertainty following the U.K.’s vote to exit the European Union, leaving London to redefine and rewrite its trade and legal ties with the EU, with the U.S. and the rest of the world.

Steel Imports Up in May

Based on preliminary Census Bureau data, the American Iron and Steel Institute (AISI) reported that the U.S. imported a total of 2,786,000 net tons of steel in May 2016, including 2,077,000 nt of finished steel (up 12.2% and 1.8%, respectively, vs. April final data).

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On the year-to-date through five months of 2016 total and finished steel imports are 12,795,000 and 10,544,000 nt, both down 31% vs. the same period in 2015.

Annualized total and finished steel imports in 2016 are 30.7 and 25.3 million nt, down 21% and 20% respectively vs. 2015. Finished steel import market share was an estimated 23% in May and is estimated at 24% on the year-to-date.

Aluminum price increases this year have been minimal compared to what we’ve seen in steel prices. However, the metal is rising slowly but steadily as investors see an opportunity to buy aluminum when prices fall short-term.

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That’s exactly what happened this month, after prices sold off in May, investors are again jumping on the metal.

Aluminum hits 1-month high. Source: MetalMiner analysis of fastmarkets data

Aluminum hits a one-month high. Source: MetalMiner analysis of Fastmarkets.com data.

Demand Improves

A recovery in demand is a key factor supporting aluminum prices this year. China unleashed a renewed government stimulus in the form of credit expansion and infrastructure building in December, which has — at least momentarily — improved the demand side of the equation for industrial metals.

Trade figures this year showed China’s relatively strong appetite for aluminum. Higher demand means exporting less as Chinese companies are consuming more aluminum domestically. China’s exports of unwrought aluminum and aluminum semis were 420,000 metric tons in May. From January to May, exports are down 7.9% compared to the same period last year.

Overcapacity Still an Issue

China has committed to stop the expansion of steel capacity and to actively and appropriately wind down “zombie enterprises” through a range of efforts, including restructuring and bankruptcy. That’s not the case when it comes China’s equally giant aluminum sector. Read more

The Commerce Department has placed preliminary countervailing duties on imports of biaxial integral geogrid products from China. Geogrids are used in road construction for ground stabilization but also in buildings foundations for the same reason.

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They usually consist of a grid made from an extruded polymer, usually polypropylene or high density polyethylene that’s filled with aggregate to stabilize a road or foundation surface. Commerce preliminarily determined that many producers/exporters in China received countervailable subsidies ranging from 16.60% to a huge 128.27%.

Tensar_biaxial_550_062016

Biaxial geogrid product being used in road construction. Credit: Tensar.

This is the second-time this year that geogrids from China have been tariffed. Georgia-based Tensar International Corp. filed petitions last year over imports of Chinese biaxial integral geogrid products, asserting that the Chinese grids are receiving illegal government subsidies and being unfairly dumped on the U.S. market. The ITC made a preliminary injury finding in January that marked the clearance of the first procedural hurdle in the case. Now that both the ITC and Commerce have made affirmative initial dumping rulings, final determinations should be expected soon.

How to Protect Intellectual Property?

Although geogrid products are a relatively obscure construction input, the financial stakes of the case are considerable, as Commerce has said that U.S. imports of Chinese biaxial integral geogrid products tallied $1.5 billion in 2014. It’s an example of the difficulty U.S. manufacturers face, including those of metals, in developing products —Tensar invented the biaxial geogrid that’s now been used in millions of construction projects worldwide — and then defending their products from mass production by Chinese producers.

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“The volume, price effect and impact of the subject imports have been both significant and harmful,” Tensar said in its filing. “Accordingly, the commission should find that subject imports have caused material injury to the domestic industry.”

This week, the ugly issue of metals sitting around in a warehouse and warranted owners possibly losing out on profits from their metals due to long load-out queues returned.

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U.S. investors swung and missed with a lawsuit over aluminum wait times against several banks who also trade metals, but now they’ve seemingly hit paydirt with a similar lawsuit over zinc storage. Glencore‘s Pacorini warehouse operations business will have to defend the suit as there are seemingly falsified documents at the center of the gripes from customers.

Unlike our previous coverage of warehouse shenanigans, the Pacorini lawsuit has little to do with premiums. In fact, premiums have been acting remarkably normal this year. My colleague, Stuart Burns, explained how London Metal Exchange policies and simply better performance has reduced the queues almost everywhere.

Nope, the zinc lawsuit deals with falsified orders designed to conceal when and where metal entered the warehouse complex.

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While premiums are, mercifully, now acting more normally, some unexplainable market weirdness continues. The LME warehouse in Vlissingen, Netherlands, is behaving as oddly as ever. After dropping to “just” 116 days in February it has since ballooned out again to 336 days following the cancellation from warrant of 656,000 mt in late March and April.

Perhaps, warehouse shenanigans are here to stay.

OPEC oil export revenue is down and if Hong Kong Exchanges and Clearing Ltd. can’t bring China to the London Metal Exchange, it’ll bring the LME to China.

OPEC Export Revenues Down Again

OPEC’s full-year 2016 oil export revenues will probably fall 15%, down for the third straight year and possibly the lowest in more than a decade before rising in 2017, the U.S. Energy Information Administration (EIA) said on Wednesday.

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Members of Organization of the Petroleum Exporting Countries (OPEC), including Iran, will likely earn about $341 billion in 2016, about 15% below 2015 levels, based on projections of global oil prices and the group’s production levels, the U.S. government’s EIA said in a report.

HKEx Tries Bringing the LME to China

Some four years after shelling out a top-of-the-market $2.2 billion for the London Metal Exchange, it appears owners Hong Kong Exchanges and Clearing Ltd. (HKEx) are still battling to make the venerable old Western institution work with China, the new and dominant center for metal demand.

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HKEx Chief Executive Charles Li used the LME Week Asia seminar today to tout the latest plan, which involves bringing the LME’s expertise in physical metals markets to China, where financial instruments dominate trade.

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.