Articles in Category: Global Trade

That stock markets have tanked globally is no surprise. How the Federal Reserve will react is unknown.

Most would accept that the Shanghai market was overvalued and vulnerable to a correction, particularly in view of the weakening domestic economy.

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Stock markets in the surrounding region have understandably followed China — their biggest export market and the economy to which they are, for better or worse, tied umbilically. In the Middle East, likewise, a self-induced collapse of the oil price has severely damaged the budgets of oil producers and the entry of Iran into that mix has initiated a further rout of the Middle East stock markets this week.

But the falls in the US, while not as bad as the rest of the world, are on the face of it not as easy to justify when you consider the excellent results many firms are posting. A short video blog by the ever watchable John Auther of the Financial Times explains that, in part, this is an expression of the market fighting the Federal Reserve over perceptions of the future direction of the economy and interest rates.

Other Signs

Falling share prices are only one sign of distress in the markets, the US dollar has reacted to the long-running debate about when and how much the Fed will raise rates by gradually appreciating.

More importantly than the dollar rise against a global basket of currencies, is the rise against its nearest and largest trading partners. In the last few months the US dollar has risen by 20% against the Mexican peso and the Canadian dollar, changing the terms of trade in the region.

This will have a profound effect on the economies of the region in 2016 as Mexican and Canadian products become significantly more competitive in the US market compared to domestic producers and US exporters find it profoundly harder to compete in their neighbors’ markets.

Source: FT

Source: Financial Times.

What is the Federal Reserve’s Plan?

Part of the Fed’s drive to raise rates is the belief that it is better to act early and more gradually to combat a rise in inflation down the line that will be the inevitable result of years of near zero interest rates since the financial crisis.

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Freeport McMoRan is selling part of a major Indonesian asset to generate cash as iron ore prices keep falling. The International Energy Agency said oil prices will fall even lower this year.

Selling Part of its Crown Jewel

Freeport McMoRan‘s Indonesian unit has submitted a divestment price to the Indonesian government for an additional stake in one of the world’s biggest copper mines, an energy ministry official said last week.

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Freeport Indonesia must sell the Indonesian government a 10.64% stake of the huge Grasberg copper and gold complex in remote Papua as part of the process to extend its right to operate beyond 2021.

Freeport valued its Indonesian asset at $16.2 billion, Bambang Gatot, the ministry’s director general of coal and minerals told Reuters and other reporters, adding that the divestment offered to the government was worth $1.7 billion.

IEA: Yes, Oil Could Go Lower

The oil price is set to fall further this year as supply vastly exceeds demand, with major oil exporter Iran’s return to the market offsetting any production cuts from other countries, the International Energy Agency told Agence France-Presse on Tuesday.

“Can it go any lower?” the IEA asked in its monthly oil market report.

“Unless something changes, the oil market could drown in over-supply. So the answer to our question is an emphatic yes. It could go lower.”

By next week, Iran is likely to declare its “Implementation Day.”

With so much else grabbing the headlines, it could pass largely unnoticed but that would be a mistake. The day is meant to signify when Iran is deemed to have complied with all its obligations in dismantling those parts of its nuclear program intended to produce a nuclear bomb. As The Economist explains, all nuclear-related sanctions, including the freezing of $100 billion of Iranian assets, will be lifted, assuming full ratification by the Iranian parliament of safeguard agreements given to the International Atomic Energy Agency.

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One obvious benefit will be the release of Iranian oil exports, expected to gradually ramp up from current levels of about 1.1 million barrels per day by an additional 500,000 bpd within months. But the wider economy, particularly the metals and mining sector could be a major beneficiary in the medium term.

Economic Potential

As the Economist reminds us, the prospects in a post-deal Iran are vast. It is the world’s 18th-largest economy. The population of 80 million is well-educated. The country’s oil and gas reserves are huge. The Tehran stock exchange is the second-biggest in the Middle East — with a capitalization of about $150 billion — but at the end of 2014 foreigners owned only 0.1% of listed companies’ shares, compared with 50% on Turkey’s main exchange in Istanbul.

red-hot molten steel in a iron and steel enterprise production scene

Iran could be a major steel exporter once sanctions are removed. Source: Adobe Stock/Inzyx.

In the metals sector, the state owns 90% of all mines and related large industries but the country desperately needs foreign investment and know how. Iran is already a relatively large producer of iron ore, but a combination of rising domestic demand and low global iron ore prices have severely curtailed exports.

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Oil dominated the headlines this morning as the lifting of sanctions on Iran brought unease to the markets and a major Chinese refiner made its first order of now exportable US oil.

Brent Crude Goes Below $28/Barrel

Brent crude, used as an international benchmark, fell as low as $27.67 a barrel, its lowest since 2003, before recovering to trade at $28.86.

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Investors fear the lifting of Western sanctions on Iran could worsen the existing oversupply problem.

Chinese Refiner Orders US Oil

Reuters reported that China’s state-run oil refiner Sinopec Corp. has purchased its first ever batch of US crude oil for export, a landmark transaction after the ending of a four-decade ban on domestic exports.

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The cargo, due to be loaded from a Gulf Coast port in March, may mark the start of a sustained flow of US oil to China, the world’s second-largest buyer, which is eager to diversify its energy sources. As the world’s second-biggest oil refiner, Sinopec buys more crude oil than almost any other company, and has worked to improve its supply security by seeking out diverse sources.

More ominous economic news greets you this morning in MetalCrawler. Stock markets continued to fall, globally, while US unemployment unexpectedly jumped.

Growth Slowing Worldwide

Economic growth is losing momentum across emerging and developed economies as is inflation. China’s slowing economy is now the biggest worry for 2016, according to the overwhelming majority of hundreds of economists polled by Reuters around the world.

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That comes despite several trillion dollars’ worth of stimulus and ultra-easy monetary policy from major central banks over the last half decade, and coincides with a growing sense of fear that is gripping world financial markets.

The benchmark S&P 500 US stock index closed below 1,900 for the first time since September on Wednesday, crude oil prices have fallen over 70% since mid-2014 to below $30 a barrel and US 10-year Treasury bond yields are back to two-month lows.

US Jobless Claims Rise

The number of applications for unemployment benefits unexpectedly increased last week, a sign labor market momentum may be starting to cool.

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Initial jobless claims rose by 7,000 to 284,000 in the week ended Jan. 9, the second-highest level since July, a report from the Labor Department showed on Thursday. The median forecast in a Bloomberg survey of economists called for a decline to 275,000.

Oil prices traded yesterday near $30 per barrel, the lowest level since 2003.

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The slump in oil prices is a result of China’s slowdown and the fact that drillers don’t stop pumping despite the oil glut. Also, a strong US dollar is not helping matters. Falling oil prices are a bearish driver for metal prices since it’s an asset closely followed by commodity investors. In addition, oil is the main benchmark for energy prices. Lower oil prices mean lower production costs, which improves the margins of metal producers, delaying the very much needed production cuts to help support metal prices.

Oil prices near $30 per barrel

Oil prices near $30 per barrel. Source: @StockCharts.com.

Together, US oil producers are losing around $8 billion per month at current prices. Energy companies took on huge debts to finance their work and now all they can do is keep pumping oil to generate cash to pay interest on their debts while hoping for demand to come back and lift prices.

Breaking Point?

At these levels, it is estimated that a third of US oil and gas producers could go bankrupt within the next year or two. Many are going to have huge problems and the longer it takes producers to throw in the towel, the longer oversupply stays and the more companies will need to eventually shut down.

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So what country will be the one bright spot in the global steel market this year?

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It’s no secret that for the last four years the global steel sector has been floundering and it’s been tough for producers to find any silver lining. Now, with 2016 upon us, the one question that’s been asked by everybody, even as prices plunge and the Chinese economy shows no signs of a recovery, is, what now? The unanimous response from around the globe is India.

Can Indian steel demand buoy the sector this year? Source: Adobe Stock/Jovanning.

Can Indian steel demand buoy the sector this year? Source: Adobe Stock/Jovanning.

There’s a lot riding on India, both domestically as well as internationally. Ironic, since both China and India are the world’s top two emerging economies, and with the collapse of China, the world turns to its neighbor India, in these times of stress.

India to the Rescue?

Edwin Basson, Director-general of the World Steel Association (WSA) echoes these voices in this article in The Gulf News where he was quoted as saying that there was really only one location that had the long-term potential to pull the global steel market out of its current slump, and that was India.

The over $100 billion Indian steel industry is placing bets on rising domestic demand in 2016, even as local players try to combat cheap imports. Last year saw a deflation of global commodity prices, including steel and other industrial metals. This affected the Indian market, like all of the others, leading to severe pressure on the operating margins of steel plants.

Ravi Uppal, Managing Director and Group CEO, JSPL, believes that the Indian steel industry would be able to recover and show growth in 2016. He told the Economic Times that even if the industry could grow at 6% to 7%, that would translate into additional demand of 4 to 5 million metric tons of steel, which is good news for Indian steel. However, this will only be possible if adequate precautions are taken against reckless dumping by the foreign producers.

Can Indian Steel Demand Deliver?

Spoiler alert! Even if there’s unanimity on India being in the sweet spot this year, one big question remains: When will the world’s largest democracy deliver? Yes, it has a huge unfilled demand and an even bigger economy, but when will the benefits start accruing? We have long heard of the potential of mass industrialization in India.

In 2015, India became the third-largest steel producer globally, bypassing the US, with demand between April and November going up by 5.3%, and production by 2.4% in the same period. India is now positioned just after China and Japan as a steel producer.

Yet, prices of some steel products in India hit a 10-year low in 2015, no thanks to the cheap exports from China, Japan and South Korea.

Financial Pressure Via Dumping

This has also jeopardized billions of dollars in loans raised by domestic steel producers for capacity expansion. Already, the steel sector is a leading contributor to the bad loan woes of Indian banks, and some sector experts fear that this would come in the way of capacity addition.

Global ratings agency Moody’s expects profitability of Indian steel firms to be lower this year as compared to the previous years, but the country would be better placed than its peers in Asia.

The government still seems confident that India will, indeed, overcome many of these hurdles. Recently, Steel Minister Narendra Singh Tomar told news agency Press Trust of India that the steel industry was “tense” not just in India, but in the world over. In his opinion, India is better placed this year compared to other countries since both production and demand are likely to go up.

Increased Production… and Increased Tariffs

India’s top three steel producers — state-run Steel Authority of India Ltd. (SAIL), and private players Tata Steel and JSW Steel — are expected to ramp up production capacity in the next two years to capture domestic demand growth propelled by demand in the automotive, consumer durable goods and construction sectors.

Of late, the Indian government has taken steps to protect the domestic steel industry, including raising import duties on long and flat products.

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If it’s as clear that 2016 will the year of India vis-à-vis steel, as some predict, will the country live up to global expectations and deliver or will it be a case of wasted opportunity?

Despite the market price gyrations of the M3 spot GOES market, the index rose by ten points in December, five trends underpin much of the dynamic impacting global GOES markets.

GOES_Chart_January_2016_FNL

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Those trends appear as follows:

  1. Continued market tightness for non-commodity grades such as MOH or HI-B materials: These materials, not currently produced in the US remain in high demand both in Europe as well as the US due to more stringent transformer efficiency standards. With no domestic production of such materials, global transformer and power equipment producers will continue with their strategies of working and securing long-term agreements (LTA’s) with key overseas suppliers, particularly in Japan. In addition, they will continue to evaluate near-country sourcing options (Canada and Mexico) to bring in stacked cores where NAFTA sources can also easily access the non-commodity grades. In addition, because the [primarily] Japanese mills need to run thinner gauges to meet customer demand, their annual production quantities will necessarily decline, creating additional tightness.
  2. Standard grades, on the other hand, will see flat to falling prices until “fundamentals” take over. In other words, until/unless the Chinese, as did ATI, reduce capacity — too much supply is chasing too little demand. More capacity will need to come offline to better match demand. The impact of ATI’s recent announcement that it has idled production of GOES, may help set a floor for US domestic pricing.
  3. We expect to see continued industry consolidation among power transformer equipment manufacturers. The acquisition this past month of Kentucky Association by ERMCO will continue to help shore up buying power. In Europe we expect the Alstom/GE tie-up to provide substantial “leveraged” purchasing power.
  4. International trade issues will continue to dominate the global GOES marketplace. Not only will this market continue to see the ramifications of anti-dumping initiatives and decisions around the globe, but China’s ascendancy to the World Trade Organization as a full-fledged market economy participant (if approved by WTO member countries) will have profound ramifications on GOES cases, in particular, and many other metals including: steel (flat-rolled and pipe and tube), aluminum, and copper. In short, China perceives it will obtain full-fledged market economy status beginning in December of this year. By obtaining that status, countries arguing anti-dumping against China will not be able to compare China’s price with a similar or like country’s export price, but instead will have to determine if the export price of a product is below the domestic price. And as we can attest, based on our careful watch of Chinese metal prices, the domestic price is nearly always lower than the export price. In other words, it will be difficult for countries bringing anti-dumping claims against China to prove anti-dumping against this standard. One additional point on this issue: each trading block (and/or country) needs to decide the question of China being a full-fledged market economy independently. We could see some very divergent responses to the question of China’s ascendancy by country.
  5. Health of the global economy: Though GOES markets appear somewhat protected from the booms and busts of the economic cycle, energy initiatives are subject to federal projects and expenditures, new home and commercial construction etc. China’s slowdown and the health of the overall global economy will continue to impact all metals markets though to a lesser extent, GOES markets.

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The Department of Commerce announced affirmative preliminary determinations in the countervailing duty (CVD) investigation of imports of hot-rolled steel flat products from Brazil yesterday. It also announced negative preliminary determinations in the investigations of imports of hot-rolled steel flat products from the South Korea, and Turkey.

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Countervailable subsidies are financial assistance from foreign governments that benefit the production of goods from foreign companies.

In the Brazil investigation, Commerce preliminarily determined that mandatory respondents Companhia Nacional Siderurgica (CSN) and Usinas Siderurgicas de Minas Gerais SA (Usiminas) both received a subsidy rate of 7.42%. All other producers/exporters in Brazil were assigned a preliminary subsidy rate of 7.42%.

The subsidy rates in the South Korea and Turkey investigations were all found to be less 1% or “de minimis” meaning that no import duties will be due and no cash deposits will be necessary.

As a result of the preliminary affirmative determination for Brazil, Commerce will instruct US Customs and Border Protection to require cash deposits based on the preliminary rates, 7.42%, established for producers and exporters of hot-rolled steel flat products from Brazil.

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The petitioners for these investigations are AK Steel Corporation, ArcelorMittal USA, Nucor Corporation, SSAB Enterprises, Steel Dynamics, Inc., and United States Steel Corporation.

BP is cutting oil exploration and production jobs and Alcoa, Inc., has posted a loss for the last quarter of 2015, mostly due to its smelter closures.

BP Cuts Jobs Due to Low Oil Prices

BP is cutting some 4,000 jobs in exploration and production over the next two years amid sharp drops in the price of crude.

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The cuts in BP’s upstream business globally will include the loss of some 600 jobs in the North Sea.

The cost-cutting announced Tuesday comes as the price of oil dropped to a 12 year-low near $31 a barrel. Part of the decline is due to concern over a drop in demand in China, which is depressing commodity prices worldwide.

Alcoa Takes a Loss

Metals company Alcoa, Inc., on Monday reported a quarterly net loss after charges related to shuttering parts of its traditional smelting business.

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The New York-based company has been curtailing smelting capacity as the industry endures tumbling prices amid rising trade tensions with China. Alcoa said last week it would close a plant in Evansville, Indiana, which would bring US aluminum output to its lowest level in more than 65 years.