Global Trade

After the market tumult of last week, many expected things to calm down and that China’s stock market would finally calibrate to the new, devalued yuan/renminbi while equity markets elsewhere would bounce back from Friday’s big sell. Heck, maybe even the beleaguered commodity markets might recover some of their losses, right?

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Wrong. Oil reentered a bear market on Tuesday extending the previous day’s losses, when Brent crude — the international benchmark — recorded its biggest one-day sell-off since February. After dropping more than 6% on Monday, Brent fell a further 2% in the next trading session to $55.40 a barrel. It is down more than a fifth from its year-high of $69.63 a barrel reached during intraday trading in May.

Not the Oil That Made Jed Clampett Rich

Not such a good time for oil companies but, at the very least, gas prices are down here in the US and costs for everything from construction to automobile production is down, too, right, so we must be on to step three, profit, right? Oh no, not even close. Construction material prices are down, but new construction spending isn’t exactly picking up, either. Not here and not in China, where lack of demand has led lead and zinc to five-year lows.


Jed Clampett made $9.5 billion in oil and gas. That likely would not have happened with today’s prices.

Incidentally, Forbes estimated Jed’s net worth at $9.5 billion, 4th on its “Fictional 15″ list. That’s more than weapons tycoon Tony Stark (#6). Not bad for wealth based entirely on oil and gas discovered while hunting possums.

A Rebound in Stocks… Of Sorts

The Dow Jones Industrial Average has been back in positive territory, though, saving our collective retirements and paring the losses we saw last week. The Dow gained 369 points yesterday, alone, curbing the big losses from Friday and Monday. It’ll surely last, right? Ummm, no promises. While our own Stuart Burns acknowledged the rebound in western markets, he also cautioned that aftershocks from China’s economic crisis could be forthcoming.

“With (Chinese) GDP growth widely believed to be lower than the official government number of 7% it is hard to see how domestic consumption can pick up as households lick their wounds,” Burns wrote.

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So, in short, expect more volatility as China spares the rod of economic depression while spoiling the child with purposely devalued currency.

What Does This Mean for US Buyers?

Expect to pay less for Chinese steel. We know, it’s already dirt cheap as foreign imports were up 5% in July. The job of policing foreign dumping into the US market just got tougher.



Two major materials handling companies merged as equals and the last US rare earths mine has shut down.

Konecranes, Terex Agree To Merge

Konecranes and Terex Corp. have announced a merger of equals.

The combined company, to be called Konecranes Terex Plc. Both companies are global lifting and material handling solutions companies. They have estimated combined 2014 revenues $10.0 billion and EBITDA of $845 million. The combined company will maintain headquarters in Hyvinkää, Finland as well as Westport, Conn.

Molycorp Shuts Down Mountain Pass

Molycorp, Inc. announced today that it will transition its Mountain Pass Rare Earth Facility to a “care and maintenance” mode while it plans to continue serving its rare earth oxide customers via its production facilities in Estonia and China. Customers of the company’s rare earth magnetic materials, as well as its rare earth-based water treatment products, will not be impacted.

Rare earth production at the Mountain Pass facility will be suspended no later than October 20, 2015, and the site, including idled machinery and equipment, will be maintained to ensure it remains in safe and stable condition, and that government regulatory commitments can be met.

Rare earth pricing, which has declined dramatically over the past four years, was a key factor in the decision to suspend rare earth production at Mountain Pass, company officials said.


Existing home sales are up and a major iron ore producer reported plunging profits and cut its steel outlook.

US Existing Home Sales Surge

US Home resales rose to a near 8-1/2-year high in July, Reuters reported.

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While other data on Thursday showed a slight increase in the number of Americans filing new applications for unemployment benefits last week, the trend remained consistent with strong labor market momentum.

The National Association of Realtors said existing home sales increased 2% to an annual rate of 5.59 million units last month, the highest pace since February 2007.

Demand for housing is being boosted by a strengthening labor market. But supply remains tight, pushing up home prices and sidelining first-time buyers, who are a key part of a strong housing market. The share of first-time buyers fell to a six-month low of 28% last month.

BHP Billiton Reports Profit Plunge, Cuts Outlook

BHP Billiton Ltd. reported full-year profit plunged 52% on tumbling commodity prices and cut its long-term forecasts for steel output in China, its largest customer.

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Underlying profit was $6.4 billion in the year ended June 30 from $13.3 billion a year earlier, the world’s biggest mining company said Tuesday in a statement. BHP will increase its dividend by 2.5 percent to $1.24 a share.


The answer as you can imagine is not a simple one, it will impact prices in a number of ways and different commodities will be impacted in different ways.

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So far, it has been seen as a bearish development mostly for macro reasons – that Beijing felt the need to allow the currency, the yuan/renminbi, to fall to bolster export industries, particularly manufacturing. It is certainly true that real GDP growth is slowing and is probably already under 7%.


Oversupply of aluminum could get worse with a devalued renminbi.

Worse, most of the sub-indexes in China’s General Manufacturing Purchasing Managers’ Index have weakened this month, with output, new orders, new export orders and employment all deteriorating. Up to now, the employment prospects for China’s 10 million new entrants each year had held up well, but some indicators show the job market is weakening according to the Financial Times.

Woeful PMI Numbers

The paper reported the Caixin China General Manufacturing PMI, dropped to 47.1 in the first three weeks of August, down from 47.8 in July, sending domestic stock markets plunging by as much as 5.6% in the course of the day. Nor is it just indexes falling. Growth in investment and manufacturing has slowed to its weakest level in more than a decade, while there are growing signs that consumption is struggling to pick up the slack.

This year sales of smartphones in China have started to fall for the first time, the FT reports. Meanwhile, car sales fell 3.4% in June against the year before, the first decline since early 2013, in addition retail sales grew by close to their slowest pace in a decade last month, leading some to hope Beijing will announce some form of stimulus soon.

Seen against this backdrop the decision to weaken the renminbi and help those exporters makes good sense from Beijing’s perspective and you may think an uptick in China’s manufacturing sector would be good for metals prices, but that may not be the case.

Production Vs. Consumption

China may be the world’s largest consumer of many metals, but for some metals it is also the world’s biggest producer. A weaker currency raises the cost of imported raw materials, making domestically produced resources more attractive. For China, it could mean a boost for coal, iron ore and aluminum production. Unfortunately, these are all commodities in which the world is already in oversupply.

More competitive exports of these items will only drive down global prices further. According to another FT report, China accounts for more than half of the world’s production of aluminum and steel and over 70% of thermal and metallurgical coal.

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As the FT observes, aluminum prices hit their lowest level in six years this week, while coal futures are at a 12-year low. A weaker currency effect, therefore, could temporarily send prices even lower as supply keeps growing. Even where China is a net importer, a weaker currency, as the falling renminbi is, will boost substitution of imported commodities to the benefit of domestic producers further increasing global supplies.

So contrary to a weaker renminbi being a boost for export-dependent manufacturers, and hence metals demand, it is entirely possible oversupply in many metals will be exacerbated rather than reduced.


China’s currency, the yuan/renminbi, fell further this week after the International Monetary Fund dealt a setback to the currency’s role on the global stage.

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The IMF pushed back the date that the yuan would be added to the IMF’s basket of reserve currencies, known as the Special Drawing Right currencies. Originally scheduled to become a reserve currency at the end of December, the yuan will now have to wait until at least September 30, 2016.


Yuan to dollars over the last four years. Graph: Marketwatch.

The IMF said in a release that the postponement would allow “the continued smooth functioning of SDR-related operations and responds to feedback from SDR users on the desirability of avoiding changes in the basket at the end of the calendar year.”

Could it be possible that the IMF is having its own reservations about using the yuan/renminbi as a reserve currency after the big government devaluation last week? The international banking institution would certainly have good reason.

Banks Trading Dollars for Yuan

On Thursday, China’s central bank, defying market sentiment, set the daily reference rate for the yuan, or “fix,” stronger than in previous days at 6.3915 per US dollar. That’s 0.08% stronger than the level set a day earlier.

In early trade the currency fell. Traders cited large, state-owned banks selling US dollars, which sent the yuan sharply stronger midday and 30 minutes before it closed.

US dollar vs. RMB

Cheaper Chinese imports dragging down inflation could mean a stronger dollar.

“It is hard to have a high degree of conviction in anticipating the increasingly fitful reactions of the Chinese policy makers, and by extension the near-term direction of the [yuan],” analysts from Goldman Sachs wrote in a note earlier this week.

IMF Fires Still Burning

I’ll say.

Being recognized as a reserve currency would have been a symbolic win for China’s currency and for the central bank’s policy makers on the global stage, but with the currency now purposely devalued to its lowest point in three years and construction demand for metals and other commodities in China still falling, perhaps the last two weeks have been a wake up call to the IMF.

Or Not.

Maybe they really did plan this all along. The IMF has other problems, after all, with Greek Prime Minister Alexis Tsipras stepping down and calling for new elections there, a situation that could bring Greece’s debt woes back onto the IMF’s front burner.

Adjusting to a Possible Reserve Yuan

In its release, the IMF stated that “the extension (to naming another currency to SDR status) would also allow users sufficient lead time to adjust in the event that a decision were to be taken to add a new currency to the SDR basket.”

This adjustment period might be as good for users of the yuan as it is for the IMF, as the Chinese economy will have more than a year to recover by the time it’s eligible to join the SDR basket.

It is certainly riskier today to invest in yuan/renminbi assets than it was just last week. Still, the lower costs of these investments will, no doubt, open up investment opportunities in bonds and, if the economy gets back on track, Chinese construction.

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Here in the US, the Federal Reserve is still taking a cautious approach to raising interest rates and a weaker yuan/renminbi will mean even cheaper Chinese goods flowing into US ports creating another reason for the Fed to hold off on raising rates in the short-term. Beijing’s move could actually slow US inflation.

The yuan’s loss, could be the dollar’s gain.


A major bank cut its last time with commodity trading and global stocks are still falling due to the situation in China.

Deutsche Bank Leaves the Commodity Business

Deutsche Bank will sever its last link with commodity trading by resigning as a clearing member of the London gold and silver over-the-counter business, two industry sources close to the matter told Reuters on Thursday.

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The move leaves five banks: Barclays, HSBC, Bank of Nova Scotia, JP Morgan and UBS to settle daily bullion transactions between dealers, amounting to more than $5 trillion worth of metal each year.

Stocks Still Falling

Signs of a sharp slowdown in the world’s second-largest economy, China, have unnerved investors since Beijing surprised markets last week by devaluing its currency. Shares in the US, Asia and Europe have tumbled along with commodity prices as investors worry about waning Chinese demand.

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Chinese stock shares plunged in June, raising worries of a slowdown in the world’s largest commodity user. Shares bounced back after the sharp decline, but that bounce didn’t last long.

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Investors’ sentiment haven’t turned positive yet, sending Chinese stocks to fresh lows.

FXI China ishares since 2014

FXI China ishares since 2014. Graph: MetalMiner analysis of data.

Policy makers in China are trying everything to boost the economy. Last week China unexpectedly devalued its currency. Ever since then, though, the currency has kept on depreciating against the dollar, the exchange rate is now at ~6.4 $/¥, the highest rate since 2011.

Yuan per dollar since 2011

Yuan per dollar since 2011. Graph: MetalMiner analyis of Yahoo Finance Data.

But it seems like those concerns about China’s economy have just been bolstered by the currency devaluation. It’s clear that investors are very nervous about what’s happening in China and they are taking all these measures to boost the economy as desperate attempts to stop a negative tide.

What This Means For Metal Buyers

These developments are just exacerbating the bearish commodity market and, even more significantly, industrial metals, which are suffering serious declines lately.



Just when iron ore miners thought sentiment couldn’t get much worse, Goldman Sachs Group comes out with a report predicting iron ore prices will tumble by 30% over the next 18 months according to a Bloomberg article this week.

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The bank is saying the rebound seen over the last five weeks is merely a blip and that normal business will shortly resume.

Source: FT

Source: Financial Times

Supply growth is set to continue, the report states, but, and this is crucial, China has reached peak steel and from now on steel production will only contract in China.

More Inventory Than Necessary

As shipments pick up from Australia, Brazil and India, the seaborne market will become awash with inventory and prices will be further driven down. Iron ore is seen by Goldman as averaging $49 a ton this quarter, and $48 in the final three months of 2015. Before falling further next year to $46 in the first quarter and $44 the following quarter. With little or no market discipline, the bank suggests 2016 will see average prices around $44 per ton. In the words of the report’s authors “the summer of 2015 is the calm before the storm.”

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Steel consumers can, therefore, expect mills’ raw material prices to continue to weaken as seaborne prices gradually knock on to contract prices elsewhere. With demand lackluster and too much finished steel chasing too few orders, even as markets like North America and Europe show encouraging signs of GDP growth, steel prices will have little to support them this year and next. Good news for consumers, tough times for producers working with low-capacity utilization and stronger domestic currencies sucking in imports.


The US Court of Appeals for the District of Columbia Circuit in April 2014 upheld the bulk of the Security and Exchange Commission’s then-new Conflict Minerals Rule, but ruled a key disclosure requirement violated the First Amendment because it forced a company to “confess blood on its hands.”

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The same federal appeals court ruled against the disclosure requirement a second time Tuesday, saying an investigation requirement is fine, but disclosing that material remains untracked does not require an admission tantamount to guilt, when it comes to receiving raw materials from war-torn areas.

Disclosure of Unknown Origin

The Dodd-Frank Wall Street Reform and Consumer Protection Act required companies to disclose whether any tin, tantalum, tungsten or gold (commonly known as 3TG), in their supply chains is connected to violent militia groups in Africa.

An SEC spokesman said the commission is reviewing Tuesday’s decision.

The three-judge appeals panel split 2-1, effectively siding with business groups in ruling that forcing companies to designate which products “could not be found to be ‘DRC conflict free’” is tantamount to requiring firms to criticize their own products.

Two judges appointed by Republican presidents voted in the majority and a recent appointee of President Barack Obama dissented.

Conflict Minerals Rule Still Intact

The court’s rulings did not overturn the entire Conflict Minerals Rule, it actually upheld requirements such as having companies investigate whether their products include the minerals and a requirement to file public reports on their investigations, a process that began last year.

One situation where a respondent could not confirm that all of its raw materials were DRC conflict free, was party supply retailer Party City, a company that filled out a conflict minerals compliance form and asked their suppliers where, exactly, all of the materials for their mylar balloons and other party supplies came from. Party City reported it received little response from its supply chain.

That was one of many cases that highlighted the difficulty of actually vetting and confirming supply chain compliance for the wide range of businesses that the Conflict Minerals Rule covers.

What Does This Mean For Conflict Minerals Compliance?

In a statement after the initial ruling against the SEC last April, the regulator indicated that companies are not required to identify products as “DRC conflict free,” having “not been found to be ‘DRC conflict free’” or “DRC conflict undeterminable.” The SEC also indicated that, pending further action, an independent private sector audit (“IPSA”) will not be required unless a company voluntarily elects to describe its own product as “DRC conflict free” in its Conflict Minerals Report. That statement is likely to remain in effect pending the outcome of further litigation. It also looks unlikely that the private sector audits will be required this year and, barring a legal settlement, likely most of next year.

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The SEC can petition the entire DC Circuit Appeals Court to hear the case en banc, a request that the court can decide whether or not to grant. The SEC can also appeal to the US Supreme Court no matter what the outcome is at the circuit court level. The business groups that challenged the Conflict Minerals Rule can ask the court to stay the entire law, as they did after the April decision, but it’s not likely that the court would grant such a request as a stay was not allowed after the initial decision.

Most larger companies — in a variety of industries — intend to continue implementing their 3TG traceability and responsible sourcing initiatives no matter what the outcome of the case concerning the DRC measure.


The US is taking its first tentative steps toward exporting oil.

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No, Congress has not approved large-scale oil exports, it is not about to repeal the 1975 export ban brought in after the early ’70s OPEC inspired oil crisis. Congress is split with republicans broadly supporting a lifting of the ban but democrats against it, keen to limit further fracking on environmental grounds, according to the Financial Times. The Obama administration has, instead, given the okay to limited exports to Mexico.

Why No Blanket Repeal of the Oil Export Ban?

More to the point, neither party wants to be accused down the line, as oil prices inevitably recover, of being responsible for reduced domestic supply as the cause of higher prices. Most economists, though, suggest increased exports would lower global prices and, as a result, would mean lower domestic prices, but of course no one knows until a large-scale lifting of the ban is agreed to.

Meanwhile,the US can legally export to Canada, the only country to whom export rules do not apply. The US already shares hockey, Seth Rogen and country/western music with Canada, after all, so why not oil?

The US exported a record 586,000 barrels of crude a day in April to Canada according to Bloomberg. This was light grades needed by Canadian refineries to blend with high-viscosity heavy tar sands or for locations where US supplies are closer to a Canadian refinery than Canada’s own reserves.

Why Mexico?

Nor should exports to Mexico be seen in the light of falling Mexican production, although production has been in decline for a decade there, Pemex still exported 803,000 barrels a day of mostly heavy oil to the US last year. Here’s the issue: Mexico imports about half its gasoline as it struggles to produce gasoline from its heavy crude. Pemex mostly makes fuel oil, which is a polluting low-value product and is forced to import lighter products such as gasoline. By Mixing US shale oil light crude with its own heavier oil, Pemex says it will be able to produce more gasoline.

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The export of US crude requires an equivalent quantity of heavy Mexican crude to be imported, but US refineries are capable of handling this product. Some, such as BP’s Whiting Refinery in Indiana which recently closed for emergency repairs, have been upgraded at a cost of millions to handle Canadian Tar Sand crude.

The Great American Blending Pot

The Mexican deal allows up to 100,000 barrels a day of light oil and condensate to be exchanged for heavy Mexican crude. For the shale industry, it is a start and could set the stage for further exports via strategic deals rather than a wholesale lifting of the ban, seen as unlikely in the medium term. The amount involved is too small to lift prices, which have fallen heavily this year as this graph from the FT shows.

Source Thomson Reuters and the FT

Source: Thomson Reuters and the Financial Times.

But if further deals were to follow, economists’ expectation that it would lead to lower global, and therefore lower US prices, could be put to the test. It may be that politicians’ only greater desire, to protect their own record from criticism, will prevent US consumers from every finding out if they are right.