Global Trade

Metals, especially copper, experienced plummeting prices Monday as the world reacted to Greece’s no vote on whether or not to accept more austerity measures from the European Union. The Organization for Economic Cooperation and Development (OECD) also came no closer to phasing out coal subsidies for member nations.

Greek Debt Crisis Hurts Metals, Other Commodities

Most commodity prices suffered on Monday after Greece rejected terms for a bailout and top consumer China unleashed emergency measures over the weekend to prevent a full-blown stock market crash.

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“The thing to watch is the Euro/Dollar exchange rate. If the dollar starts going up as a result of what happened, that would exacerbate an already bearish commodities and metals markets,” said MetalMiner Executive Editor and Co-Founder Lisa Reisman.

Brent crude fell below $60 per barrel on Monday, to levels last seen in April. Chinese steel prices are now at their lowest since the peak of the global financial crisis in 2009, with futures down 70% to around 2,000 CNY per metric ton.

“A lot of bad news out of China will be very bearish as well and we don’t yet know how much of that crisis has been factored into the current market,” Reisman added.

Three-month copper on the London Metal Exchange hit its weakest since mid-March at $5,640 a mt, down by 2%.

“The longer term question of Greece is also one that goes unanswered – what is the long term health of the European Union? That could have a long term impact but not a short term one,” Resisman said.

OECD No Closer to Ending Coal Subsidies

A decision on phasing out a form of coal subsidy is unlikely to come soon but discussions among members of the Organization for Economic Cooperation and Development continue ahead of UN climate talks, the OECD’s secretary-general said on Friday.The OECD has been trying for a year to get an agreement from its 34 member nations on ending export credits for technology used to produce coal, the most polluting of the fossil fuels.

This September: SMU Steel Summit 2015

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The World Bank released a damning report on China’s banking sector this week entitled “China Economic Update.”

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In unusually forthright language, the bank said Beijing urgently needs to overhaul the government-run banking system that subsidizes state industry at the expense of savers and provides little support for entrepreneurs and emerging industries encouraging an unregulated shadow banking sector that, in turn, creates risks.

Government as Both Bank Owner and Regulator

According to US News & World Report, quoting sections of the bank report, Beijing needs to separate its roles as owner of China’s banks, regulator and strategic planner and to construct a system that channels more lending to productive industries and manages risks better. The Chinese state has formal ownership of 65% of commercial bank assets and de facto control of 95% of assets, according to the report. It said that while some other countries have state-owned banks, by comparison using the same calculation that figure is 74% in India and 40% or so in Russia neither of which a paradigms of free enterprise, China’s entire financial system is government-dominated.

china-ship-and-buildings

For China to truly prosper, the World Bank says Beijing must stop being both regulator and owner of its banks.

“Instead of promoting the foundations for sound financial development, the state has interfered extensively and directly in allocating resources,” the World Bank said, adding reducing the “unique and distorted role of the state” in banking and the wider financial sector was crucial, according to a further report on the World Bank report in the UK BusinessInsider.

How the China’s Banking System Creates More Debt

The article accused China of, “Wasteful investment, over-indebtedness, and a weakly regulated shadow-banking system.”

In some cases, it added, authorities were simultaneously owners, regulators and customers of banks.

The bank says further growth is at risk if these distortions in the banking system are not addressed and after raising the same concerns in their 2012 report said risks to the system had actually increased in the interim. China itself has set a target of about 7.0% growth in GDP for this year, a figure the bank broadly accepts saying it should be similar next year before slowing further in 2017 to about 6.9%.

This September: SMU Steel Summit 2015

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A recent study by SNL Metals & Mining reported that delays in the US mine permitting process diminish the value of minerals and mining projects – underscoring a need for a streamlined permitting process.

This September: SMU Steel Summit 2015

The study, “Permitting, Economic Value and Mining in the United States,” commissioned by the National Mining Association, found that duplicative permitting processes can delay mining projects a decade or longer and those processes, both federal and state, are hindering US mining industry’s ability to meet a rising demand for minerals.

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It can take three to five times as long to receive a mining permit in the US than in Canada or Australia. Source: NMA/Minerals Make Life.

Some mining projects lost as much as half of their value while awaiting state or federal approval. Three domestic mines in Arizona, Alaska and Minnesota served as case studies for the research. In one example, SNL found that after eight years of delay the value of Arizona’s Rosemont mine dropped by $3 billion. Alaska’s Kensington mine suffered 20 years of mining delays, while the capital cost of building the mine increased by 49%.

Where Have Exploration Dollars Gone?

“Why aren’t we attracting the exploration dollars we should be? Back in the mid-’90s we attracted about 20% of the worldwide exploration budget for mining. Now, it’s only about 7% and I do think it’s this delay on the return on investment that makes a big difference,” said Katie Sweeney, senior vice president, legal affairs, and general counsel at the NMA. “Are you going to put your money in Australia where you can get a permit in a couple of years or here where it’s 7 to 10? The process is definitely broken.”

The study details a veritable alphabet soup of permitting processes in all three states as well as the federal process. It quantifies incremental, production and additional risk. There is a comparison with the processes in Australia and nearby Canada in the report as well, one that’s not favorable to the US as both clock in with an average permit time of two years compared to seven or more for US projects.

The timeline for the government to respond is more clearly outlined in those countries, the permitting agency leading the process is identified from the outset and responsibility for preparing a well-structured environmental review is given to the mining company, not the government. In the US not only is a primary permitting agency not defined, but several groups with competing interests could be lining up for review.

New Legislation

There are bills pending in both the US House and Senate to streamline federal processes.

“On the House side we should see the bill move through. It’s passed the lower chamber the last two congresses so I would anticipate it will get through this congress as well,” Caswell said. “On the Senate side we think there is more opportunity than in previous congresses. Senator Lisa Murkowski (R. Alaska) is a champion of this bill and with her in position as Chairman of the Energy and Resources Committee, she has more opportunity to promote moving this bill forward. When she held the last hearing on this bill there seemed to be wide support among the committee members present. We are hopeful of making progress in the Senate this time.”

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A growing number of industries, including fabricated metals companies, are bringing manufacturing back to the US. According to the Reshoring Initiative, leaders include Master Lock, Quick Fitting (pipe fittings) and Windstream Technologies, a manufacturer of wind turbines.

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Source: Reshoring Initiative Library, Dec. 2014.

Source: Reshoring Initiative Library, Dec. 2014.

Wage growth in China is the main cause of many of these jobs moving back to the US.

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This September: SMU Steel Summit 2015

 

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President Obama just signed two significant trade initiatives – Trade Promotion Authority (TPA), and the extension of the Africa Growth and Opportunity Act and other trade preference programs, which includes renewal of Trade Adjustment Assistance (TAA) and trade remedy improvements. For the full story on how both got passed check out our recap of the last week in steel.

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TPA or “fast track” will ensure an up or down vote on future trade pacts, such as the Trans-Pacific Partnership, before the Senate can add amendments to them. TAA is a bill that will fund retraining programs and other support initiatives for workers displaced by future trade pacts. TAA also will improve enforcement of dumping actions against foreign manufacturers.

container-ship-night-MMslider

Free trade gained some steam today as President Obama signed Trade Promotion Authority and Trade Adjustment Assistance.

The steel industry applauded today’s action, particularly enactment of the trade remedy measures for which the industry strongly advocated:

“Today’s bill signing is the culmination of dedication and hard work by many members of the steel industry, partner industries and numerous steel champions in the House and Senate who worked tirelessly to ensure the trade remedy provisions were included in the trade package,” Said Thomas Gibson, CEO and president of the American Iron and Steel Institute. “We thank the Administration for recognizing the critical role of the steel industry by supporting these initiatives to improve the effectiveness of our anti-dumping and countervailing duty laws.”

Gibson said the steel industry “greatly appreciate having these improved tools at our disposal in our continuing efforts to combat unfair trade, given the trade laws have not been updated by Congress in over 20 years. The surge in foreign steel imports continues at record high levels, leaving us with a great deal more work to do to mitigate the job loss and negative impact on our industry. We urge quick action by Congress to adopt the Senate version of the ENFORCE Act during the House-Senate conference on the customs bill, which will better enable companies and workers to combat the evasion of anti-dumping and countervailing duty orders. We hope to soon see the president signing that bill also,” Gibson concluded.

ENFORCE stands for Enforcing Orders and Reducing Customs Evasion. The tougher customs enforcement bill must still go through a House-Senate conference committee.

“I would not be signing these bills if I was not absolutely convinced that these pieces of legislation are ultimately good for American workers,” President Obama said at the ceremony.

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Today, the Greek debt crisis touched all markets, including commodities, and a bipartisan group of US Senators unveiled the long-term highway bill that the construction industry has long clamored for.

Greek Debt Crisis Roils Markets

Commodities could not escape the market turmoil caused by Greece’s capital controls and a hefty drop in Chinese equities, with the stronger dollar and risk aversion hitting raw materials led by oil and metals.

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On the London Metal Exchange, amid a sea of red for industrial metals prices, nickel plumbed a six-year low. The metal, an ingredient for stainless steel, fell 4.6% to $11,855 a metric ton, while aluminum was off 1.5%, copper fell 0.5% and tin dropped 2.5%.

Senators Unveil Long-Term Highway Bill

A bipartisan coalition of senators on Tuesday introduced a six-year bill that would boost overall spending on US roads and bridges.

Working against a July 31 deadline, the senators acknowledged that it will be an uphill effort to corral their Senate colleagues and the House to pass a bill.

The six-year bill would increase highway spending by almost 13% over the current level, bumping it up by more than $2 billion each year. It includes a new program to spread more than $2 billion a year among states to invest in improvements for freight facilities that move goods and products.

It further streamlines project approval, cutting federal red tape that state officials say has slowed projects down. It holds flat at $819 million the money for pedestrian and cycling improvements and for roadway landscaping. Senator Barbara Boxer (D.-Calif.) joined Sen. James Inhofe (R-Okla.), the committee’s chairman, and Sens. David Vitter (R-La.) and Thomas R. Carper (D-Del.) in writing the bill. The cost of the bill is estimated to be about $350 billion and would require new funding if it is passed.

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Platinum prices fell to their lowest levels since 2009. Despite most analysts predicting a deficit, this precious metal has done nothing but falling during the past few years. As we pointed out previously, the technicals looked nothing but bearish.

Platinum spot price since 2012

LME platinum spot price since 2012.

A bearish factor could be that European car sales were rising at the slowest pace in six months in May due to buyers’ concerns about unemployment and the Greek debt crisis.

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On the other hand, European car registrations, a proxy for sales, rose 6.9% in April to 1.17 million units, the best April sales volume since 2009 and the US car market is the strongest since 2001. Therefore, it’s tricky to blame the car market for platinum’s continuous price decline.

Another factor putting the market under pressure is South African production of platinum, which accounts for more than 70% of the world’s supply and has returned to levels ahead of the five-month strike in 2014.

We believe that the real driver has been a stronger dollar which puts pressure on commodities and gives South Africa’s miners an incentive to keep producing due to the South African Rand’s sharp depreciation against the US dollar.

Moreover, it’s been awhile since investors started taking their money out of precious metals and this trend will not help prices recover.

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PriceWaterhouseCoopers‘ Mine 2015 Report was good news for India, but cast a troubling picture of the overall global mining industry.

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Dry-fuel miner Coal India Ltd. (CIL) moved up from the 8th to the 6th slot on the list of the largest mining companies in the world in terms of market capital.

A second state-owned company, which was also the country’s top iron ore miner, National Mineral Development Corporation (NMDC), also improved its ranking by coming in 21st, up three spots over the previous year.

What is Mine 2015?

Mine 2015 analyzed the financial performance of the world’s top 40 mining companies by market capitalization. The report said market values continue to fall, overall, in spite of improvements reported in the financial results of all top 40 companies.

Depending on which way you read it, in 2014, a collective $156 billion was eroded (about 16%) of the top 40 companies’ combined market value, but then again, that was only half of the 2013 slide. The collective market capitalization came in at $791 billion in 2014, which was the range miners held a decade ago.

The report said the world’s largest miners had reduced spending but stepped up production. The industry was also helped by lower input costs and currency devaluation. PwC did note, however, that weak commodity prices due to low demand hammered down revenues.

The Iron Ore Drag

The report said the downturn was largely driven by iron ore miners, particularly diversified companies with large exposure to shifts in commodity prices.

Last year, iron ore was the hardest hit, with prices dropping by half because of a supply glut and a negative short-term demand outlook, the report said.

On the coal front, coal miners in the BRICS countries (Brazil, Russia, India, China, South Africa) saw their values increase 19% over the period, regaining almost half of the value they lost in 2013.

In Asia, more industry consolidation was expected between key resource players from India and China in order to stem production overcapacity, the report said.

Chinese Production Still Surging

The coal companies of China made significant gains in the ranking of the top 40 mining companies, with three appearing in the this year’s top twenty.

China Shenhua Energy Co. Ltd (Shenhua) topped the list, becoming the third most valuable mining company (based on market capitalization) after BHP Billiton and Rio Tinto Group. Shenhua moved up from fifth in 2013’s rankings.

Another company, China Coal Energy Co. climbed to 14th rank from 23rd in 2013, with a 30% increase in valuation, while Inner Mongolia Yitai Coal Co. jumped to 18th from 25th. Yanzhou Coal Mining Co. came in at 26th – up from 34th in 2013. Yanzhou also recorded a more than 30% increase in value over 2014.

US Miners Can’t Keep Pace

On the other hand, not many US coal-mining companies charted in Mine 2015. Consol Energy found itself at number 28. No other companies charted despite noted concern from US manufacturing execs about local resource supply.

Of the 40 companies, 15 miners saw their share values appreciate, while 25 witnessed a decline.

The average return on capital employed was largely below the minimum hurdle investment rate of 15 to 20% set by the companies themselves. Only 6 of the 40 passed the 15% benchmark: CIL (coal), OAO Norilsk Nickel (nickel), NMDC (iron ore), Randgold (gold), Shandong Gold (gold), and Newcrest (gold), according to the report.

Copper Still Stagnating

On the copper front, Mine 2015 noted that global copper production had gone up by only 2.8% last year, which was way below the 8.1% of 2013. PwC noted that the world’s largest copper producer, Chile, had faced problems increasing its production due to falling grades.

PwC’s general outlook for the global metals and mining market though remains dreary due to the continuance of a slower rate of economic growth, particularly in emerging markets, especially due to the cooling off of China’s growth rate.

In 2014, iron ore, coal and copper prices had fallen by 50%, 26% and 11%, respectively, according to the report.

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President Obama and congressional republicans won a battle for trade authority in congress and a major rare earths restructured and sought bankruptcy protection.

Trade Promotion Authority Passes Senate

The US Senate voted Wednesday to give President Barack Obama “fast track” authority to negotiate trade deals—one of the final steps in a long political battle that pitted the White House against House Democrats in a battle over trade authority for the president. Fast track means deals such as the Trans-Pacific Partnership, which will be debated later this year, must be given an up or down vote by the Senate.

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The bill—which passed 60-38 in the Senate—will be sent to the president’s desk. Separate bills to provide assistance to American workers displaced by trade deals, known as Trade Adjustment Assistance, and to provide tougher anti-dumping enforcement protections from US Customs and Border Protection, particularly for the steel industry, are expected to follow and possibly be signed by the president simultaneously.

Molycorp Files for Chapter 11

Molycorp, Inc. filed for chapter 11 bankruptcy protection today.

The only US miner and producer of rare-earth elements—15 elements used in magnets, batteries, catalytic converters and other high-tech products—said it had secured an agreement with creditors to restructure its $1.7 billion in debt. The deal also provides $225 million in new financing to continue operations.

Molycorp and 20 subsidiaries filed chapter 11 petitions in the U.S. Bankruptcy Court in Wilmington, Del. The company said it expects to exit chapter 11 before the end of 2015. The restructuring support agreement is with creditors that hold over 70% of the aggregate principal amount of the company’s 10% senior secured notes.

The Company’s operations outside of North America, with the exception of non-operating companies in Luxembourg and Barbados, are excluded from the filings. Molycorp Rare Metals (Oklahoma), LLC, with operations in Quapaw, Oklahoma, also is excluded from the filings as it is not 100% owned by the Company.

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Usually, Iron ore and coking coal move in lock step. The two raw materials for steel production are driven by the same demand factor, – at least for seaborne trade consumption – by the Chinese, Japanese and Korean steel industries.

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Often production comes from the same or similar multinational suppliers – Rio Tinto Group, BHP Billiton, Glencore PLC.

China’s domestic producers, like its iron ore mines and steel producers are state owned. Both raw materials have experienced massive investment surges this decade as high prices encouraged producers to boost production and both have suffered aggressive price falls as supply has hit a weakening demand market.

The Iron Ore Mini-Rally

Recently, though, prices have diverged. Iron ore as we wrote last week, has gone through something of a mini-rally driven in part by dwindling Chinese port stocks prompting the impression supply is more limited than originally thought and by announcements of mine closures among smaller producers in places such as Iran and Mozambique.

As Iron ore falls reversed and the price rose 30% since the start of April, coking coal could only look on from the sidelines, continuing its fall from over $300 per metric ton four years ago to below $90 now. The latest quarterly metallurgical coal prices have been concluded at the lowest level in more than a decade as quarterly contract prices follow spot prices downward.

Coking Coal: What Are We? Chopped Liver?

Unfortunately for coking or metallurgical coal, even the token supplier rationalization we have seen in iron ore has not been mirrored for coal. Chinese producers, many state owned have actually increased production last year and, according to the Financial Times, China has become a net exporter of coking coal and its derivatives. China’s coking coal imports fell 24.2% in the first four months of 2015 over the same period last year, no doubt aiding the statistics as marginal suppliers were squeezed out the market.

North American Supply Displaced

Australia still supplies some 50% of imports but Mongolia is becoming increasingly important at the expense of Canadian and Russian supplies. To the extent that the US can no longer competitively supply China. Canadian material may also be displaced as prices in North America will be correspondingly depressed further in the second half of the year as suppliers chase the local market.

The most recent statistics from China quoted by Reuters suggest domestic coking coal may finally be plateauing. May’s number was down 4.2% compared to a year ago and that suggests even domestic suppliers are struggling. There is little on the horizon to offer coal suppliers much optimism but steel mills and steel consumers will welcome the reduction in raw material costs for the rest of this year.

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