Articles in Category: Global 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.

Steel, aluminum, cement, what will China flood the world with next?

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Oh yes, refined petroleum products, or to be more exact diesel fuel is the prime culprit at the moment. According to the Financial Times, China has in the region of 100 million metric tons of excess refining capacity and is adding more. Read more

Steel shipments from the U.S. were largely unchanged from March to April and Brazilian police have alleged negligence was responsible for the Samarco disaster.

AISI Reports April Steel Shipments

The American Iron and Steel Institute (AISI) reported today that for the month of April, U.S. steel mills shipped 7,379,330 net tons, a very small increase of 0.03% from the 7,377,392 nt shipped in March, and a 4.1% increase from the 7,087,864 nt shipped in April 2015. Shipments on the year-to-date are 28,847,471 nt, a 0.7% decrease vs. 2015 shipments of 29,046,995 nt for four months.

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A comparison of April shipments to March’s shows the following changes: hot-rolled sheets, up 2%, cold-rolled sheets, up 2% and hot-dipped galvanized sheets and strip, down 2%.

Brazilian Police: Samarco Dam Was a Disaster Waiting to Happen

Brazil’s federal police, on Thursday, accuse mining company Samarco, a joint venture between Vale SA and BHP Billiton, of willful misconduct in relation to a deadly dam burst last November, saying the company had ignored clear signs the dam was at risk of collapsing.

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Police said Samarco had skimmed on safety spending, focusing instead on increasing production despite obvious indications, such as cracks, that the dam was in danger of a breach.

The MetalMiner monthly domestic GOES MMI reading continued its slide moving from 195 to 191 in its third consecutive month of declines against smaller import volumes, despite a higher domestic surcharge.

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Unlike U.S. steel pricing, the various global trade cases on grain-oriented electrical steel have had somewhat of a limited impact on global prices.

GOES_Chart_June_2016_FNL

The demand for certain types of steels has created shortages for some materials and surpluses for others and may help explain why the M3 price has drifted lower as opposed to moving higher (we’d expect to see rising U.S. prices in particular as a result of the closure of the Allegheny Technologies, Inc. GOES line).

Tex Reports suggests that prices have begun to rise in China because of the anti-dumping cases placing a squeeze on products coming from overseas mills, and, therefore, diverting them to other markets in the Middle East and India, with no price increases.

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The dynamics between the high-grade products and the standard/lower grade products have kept domestic spot M3 prices in check. Last month we reported that market participants thought M3 prices would flatten during the summer and then start slipping toward the end of the year. Indeed this appears to be happening but perhaps sooner than anticipated.

Datamyne_GOES_Chart_432_060816

Source: Datamyne

Meanwhile, the volume of imports of transformer parts has risen since a dip back in February of this year. This suggests to us that demand has held reasonably steady.

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A new $20-million U.S.-India Clean Energy Finance (USICEF) initiative will invest up to $400 million to provide clean and renewable electricity to up to 1 million households by 2020, the White House said this week during a visit by Indian Prime Minister Narendra Modi.

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Another $40-million U.S.-India Catalytic Solar Finance Program will provide financing for small-scale renewable energy investment. Modi’s visit is one of the last opportunities the Obama administration will have to pledge tax dollars to its green energy goals and the opportunity for solar development in India is, indeed, a ripe one.

Renewables_Chart_June-2016_FNL

Cumulative solar installations in India crossed the 7.5 gigawatt mark in May 2016. About 2.2 gw of new capacity has been installed so far this year and it is more than total solar capacity installed in 2015. India’s solar project pipeline has now surpassed 22 gw with 13 gw under construction and 9 gw in the request for proposal process.

India’s Solar Mission

This is all part of Modi’s long-term plan to have 100 gw of solar capacity powering India by 2022. The investments by the Obama administration are also a goodwill gesture that’s designed to get U.S.-based solar panel companies and multinationals with a large presence in the U.S. specified as providers in India’s massive solar park projects. Both governments have been trying to iron out differences that earlier came to a head with the U.S. winning a WTO dispute panel.

The Renewables MMI fell 1.8% this month to 54 from 55 in May. It was one of many slight movements in a tight range for the sub-index that’s not shown much prince movement since September of 2015. The steel metals in the sub-index were also affected by the wild swings between U.S. and foreign steel prices, too.

It doesn’t seem like the pattern of a slow price decline interrupted only sporadically by small periods if increase will change much in the rest of year. Just like it didn’t in the previous three.

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As such, investments such as those being made in India will still take years to come to fruition and the markets for solar silicon, neodymium and pretty much everything but the steel components of wind turbines and solar panels will remain niche markets for the foreseeable future.

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Stockpiling of rare earths by China’s six largest producers has pushed up prices over the past two months.

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Following the completion of the first stage of a national inventory-filling effort in mid-April, China’s rare earths prices have seen increases almost across the board. This stockpiling comes as China prepares to finalize consolidation of its industry under six large state-owned firms — Chinalco, Northern Rare Earth, Xiamen Tungsten, China Minmetals, Southern Rare Earth and Guangdong Rare Earth — by the end of this month.

Rare-Earths_Chart_June-2016_FNL

It’s a time of both stockpiling and tightening in the People’s Republic, the world’s largest producer, as a nation, of the metals used in batteries, magnets and high-tech is trying to reform both how it mines and how it sells rare earths. As we previously reported, much of the expected consolidation in China was slowed in the first two quarters by the weak market and stimulus measures that gave producers new reasons to overproduce. Now, the Chinese industry is scrambling to consolidate and force the closure of smaller producers.

Tax Reform in China

After July 1, China will expand its reform of resource taxes across the board and base this tax on prices instead of quantity. Authorities believe that a price-based tax would reduce tax burdens on unprofitable resource sectors (such as rare earths) and boost taxes on the more profitable sectors. The expectation is that taxes will then follow the resource-cycle.

Our Rare Earths MMI was up 11% this month, but it was only a 2 point increase, belying how low the level that rare earths have traded in for the last year really is. The price boost can be attributed, almost entirely, to the aforementioned stockpiling.

China’s second quarter commercial stockpiling supposedly ended on May 31. The initiative helped boost prices, but that’s really just a temporary market effect ahead of the expected consolidation. In the long term, the market is still oversupplied and forcing out smaller producers in China really won’t have much of a practical effect.

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Companies such as Mitsubishi are also touting new methods they are researching for rare earth magnet and battery recycling, processes that would be a further threat to primary mining. We advise buyers to approach rare earths with caution as this is one market whose supply still exceeds considerable demand.

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The Global Precious MMI joined most of the other sub-indexes this month in experiencing a 6% loss as a broad metals correction hit most markets.

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Unlike the base metals, however, our precious metals are not facing bifurcated markets where U.S. tariffs are keeping domestic prices high. As almost always with precious, this month’s fall was a global phenomenon.

Global-Precious-Metals_Chart_June-2016_FNL

Johnson Matthey is weathering the storm as best as it can this year as platinum group metals prices are starting to lose the momentum the first half of the year promised.

Production Surplus Stubbornly Lingers

According to Thomson Reuters‘ “GFMS Platinum Group Metals Survey,” a rebound in mine production last year pushed the platinum market back into a marginal physical surplus, despite improved demand.

Macroeconomics have continued gold’s roller coaster ride this month. Before Federal Reserve Chairwoman Janet Yellen dialed back expectations of an interest rate hike this week — after a bad jobs report — a strengthening U.S. dollar dragged gold prices down for much of May. Now, though, with a dovish Fed, gold is strengthening again. Silver has taken a similar ride.

Perfect Storm

The investment and industrial metals, globally, saw prices fall this month as a storm of both bad economic data for the investment metals and oversupply for the industrial metals came together. Yet, even as I write this gold and silver are strengthening again as the dollar weakens in light of that horrid jobs report. But it might just be that neither industrial demand nor monetary policy will be the story of the last six months of 2016 in precious metals.

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Jessica Fung, a metals strategist at BMO Capital Markets, said in the Wall Street Journal that slowing global growth should help push gold higher and likely bring silver with it.

“We believe focusing on the Fed alone is simplistic and only drives very near-term sentiment and volatility,” Ms. Fung wrote in a note. “The potential impact of sluggish global growth on the U.S. economy should not be ignored.”

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“The World Silver Survey 2016,” an annual report published by The Silver Institute, said Asia’s silver mine output went up last year by 1% to 165.1 million ounces, following a 3% drop in 2014. A major part of the decrease originated from lead and zinc production sources with a lesser drop from primary silver mines. The bulk of the loss could be traced to mines in China and Kazakhstan.

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For India, silver production showed a “notable rise” last year, of over two-fifths, or by 3.6 million ounces, to reach a record production total for the country of 12.0 million ounces.

Indian Silver Production

Higher ore volumes and grades from the country’s Sindesar Khurd mine in the second half of the year were behind much of the gain, amid a period of otherwise lower output as the company’s flagship Rampura Agucha moved from open pit to underground mining.

Total physical demand in 2015 saw a 3% increase in 2015, driven by higher retail investment, jewelry and silverware fabrication and solar and ethylene oxide catalyst demand.

Also, last year, silver retail investment and jewelry fabrication hit a record high. Jewelry fabrication, for example, increased for the third consecutive year and hit a fresh record high of 226.5 millions ounces. Again, strong growth in Indian and North American fabrication offset a near one-third drop in Chinese fabrication.

The silver market, according to the report, realized an annual physical deficit for the third consecutive year in 2015. The market’s deficit of 129.8 million ounces was more than 60% larger than the previous year’s deficit of 78.6 million ounces and the third largest on record, the survey recorded. Silver prices averaged $15.68/oz, down 17.8% from 2014, the fourth consecutive annual drop. Prices were pushed lower by investor expectations for an interest rate hike in the United States and a weakening Chinese economy.

Silver bullion trade in 2015 continued to be dominated by flows to India, where total imports reached an all-time high of 256.0 million ounces, rising by 16% from the 2014 level.

In India, scrap supply declined for a third consecutive year falling by 14% from 2014 to 2.5 million ounces, the lowest in more than 15 years. This decline was largely attributed to three consecutive years of falls in annual average prices, which last year had dropped by 14%.

Physical Bar Demand

Compared to the previous year, global physical bar investment rose to a record 158.2 million ounces in 2015, a 24% surge. The declining silver price drove bargain buying higher, particularly in India and the U.S., where bar consumption rose 31% and 25%, respectively, said the survey. What also gave a boost to silver bar demand was a strong demand for official coins and the corresponding shortfalls of coin supply, as investors sought an alternative to satiate investment demand.

Last year, physical bar investments in India increased by 31% to 82.5 million ounces, the highest since 2008. In India, a large part of this form of investment comes from short term hoarding to benefit from lower prices or to profit from a differential in the spot and futures market. This type of build-up of positions eventually returns to the market as disinvestment when the price rallies.

Such disinvestment during price rallies resulted in local premiums (the price at which the metal is sold by a domestic trader after buying from importing agency) falling to a low of 2 cents and at times being forced to sell at discount, as against a lower threshold of 3 cents observed in 2014.

Turnover on the Multi-Commodity Exchange of India (MCX) more than halved in 2014 as a result of the commodities transaction tax, which was introduced in July 2013. The marginal 1% year-on-year decrease in 2015, to a nominal 7,705 million ounces, might indicate that investors have gradually adjusted to the change.

Outlook

The survey said in the first quarter of 2016, although safe haven demand was the primary driver, the relatively stronger market fundamentals acted as a spring board for silver prices, given the continued higher demand for coins and concern around mine supply reduction.

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The report predicted that silver mine production would continue to suffer losses in 2016 as a consequence of supply cuts in lead and zinc production, in combination with lower forecast output from both the primary silver and gold industries.

Similar to copper, nickel is not metal investors’ favorite child right now. While oversupply is still and issue, only a weaker dollar and further Chinese stimulus could lift prices. However, that wasn’t the case during the month of May, driving prices down. Our Stainless MMI was no exception, falling 4%.

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For the past six months, every time three-month London Metal Exchange primary nickel approached $9,500 per metric ton, prices fell short. It happened in March and again in May.

Stainless_Chart_June-2016_FNL

Recently, Russia’s Norilsk Nickel, the world’s largest nickel miner, said that in order for a sustained recovery to happen, more cuts will have to materialize. That’s a very unusual statement for a metal producer as they tend to talk up the market. According to the company, over 20% of the global nickel supply needs to be cut if we want to see a sustained recovery in prices.

If Norilsk has it right, it will take some time until we see a significant recovery in prices since, so far this year, there hasn’t been any supply cut announcements. The latest significant production cut was announced late in 2015. Despite its non-optimistic outlook, the company is moving ahead with the development of new projects. Norilsk Nickel is still profitable, aided and abetted by co-mined minerals and the depreciation of the Russian Ruble.

U.S. Prices Buck Global Trend

Not only Norilsk but producers that are loss-making at current prices seem redundant to shut down capacity. Glencore and fellow Australian miner BHP Billiton have recently said no more than they “may” close capacity at Murrin Murrin and Nickel West, respectively.

Here in the U.S., however, anti-dumping actions are having an effect and stainless, cold-rolled prices have been steadily rising this year. The three base price increases for 2016 have been firmly implemented on spot business. Although contractual business may have been protected from immediate base price increases, the next contract periods will definitely reflect the higher base prices.

U.S. mills have been trying all year to recoup unrealistically low base prices from 2015. The anti-dumping and countervailing duty actions filed by U.S. stainless mills against China have solidified the base price increases as well as disrupted the supply of several niche products.

All 200, 300 and 400 series alloys have been impacted by the 2016 base price increases. The three stainless base price increases for 2016 have cumulatively impacted 304 stainless base prices by at least $0.10 per pound on base gauge and almost $0.13 on 22 gauge. 430 stainless has risen by close to $0.08 per pound. 409 has risen by $0.06 per pound. Several sources speculate that there could be another round of increases on the horizon because U.S. cold-rolled stainless supply is tight.

U.S. Supplies Tighten

Mill lead times remain extended with North American Stainless (NAS) maintaining a controlled-order-entry mechanism. Some service centers also report that the light gauge stainless is limited and available only for customers who also place base gauge volumes.

Buyers of metal need to have well-established supply chains for all of their cold-rolled stainless products. NAS and Outokumpu Coil Americas remain the core suppliers of austenitic commodity products.

Two Producers Inherit Commodity Stainless Market

AK Steel is not focused on nickel-bearing commodity stainless grades. Allegheny Technologies’ Flat-Rolled Products segment continues to seek higher-value stainless and has limited its exposure to commodity stainless.

In theory, Allegheny and AK Steel could relieve some of the long lead times metal buyers are experiencing, but their mill capacity is focused on supplying other products or has been idled. The anti-dumping and countervailing lawsuits against China have impacted the Asian supply of cold rolled stainless. For instance, Taiwanese rerollers using Chinese hot band for bright annealed have limited new offers.

POSCO, which has South Korean and Vietnamese stainless mills, is being cautious with offers into the U.S. market. Bright annealed and light-gauge, cold-rolled stainless remain the product categories most impacted by the trade cases.

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Stainless flat-rolled pricing remains poised for further base price increases. Stainless demand is expected to remain around the same volume in the U.S. The trade cases against China are proceeding in a multitude of steel products, not just stainless. Although domestic mills are capable of producing more stainless volume, the appetite for AK Steel and Allegheny does not appear to be there yet. Until then, NAS and Outokumpu will be the core commodity stainless producers. Metal buyers will need to look to alternative sources for niche products and perhaps should look to European mills such as Aperam or ThyssenKrupp AST as Asian importers are spooked by the trade cases against China.

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The Federal Reserve is taking a bad jobs report to heart and dialing back expectations of an interest rate hike. The London Metal Exchange is seeing some volume for its scrap and rebar contracts.

Fed Puts the Breaks on Rate Hike Talk

Federal Reserve Chairwoman Janet Yellen affirmed Monday that the central bank won’t be raising short-term interest rates until new uncertainties about the economic outlook are resolved.

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Her comments, delivered at the World Affairs Council of Philadelphia, echoed conclusions investors drew Friday after the release of disappointing job market data. Yellen and other officials still believe they will be gradually lifting rates because they expect the economy to improve. However, a rate increase at the Fed’s policy meeting next week is now effectively off the table.

LME Reaches Scrap, Rebar Milestones

In May, the London Metal Exchange‘s ferrous contracts saw new trading records, both in total and on individual days.

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An all-time high of 990 lots of LME Steel Scrap traded on May 19th, while the rise in voice-brokered trades contributed to the record 456 lots traded in LME Steel Rebar on May 26th.