Articles in Category: Macroeconomics

This week, our metals, along with the rest of the commodities, fought a bear market and the bear won. Commodities are getting beaten up by a strong dollar and falling demand. This bear has paws like dinner plates.

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How did commodities fight back? Other than not very well? Details emerged this week from China about how, exactly, Beijing will attempt to stimulate its sputtering economy.


The battle between the bears and the bulls has been lopsided lately.

China will spend at least 2 trillion yuan ($315 billion) to improve its power grid infrastructure over the 2015-2020 Five Year Plan period, according to another Reuters article that cites government sources. Read more

The monthly Stainless MMI® registered a value of 59 in October, flat from last month.

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Most base metal prices stabilized this month and nickel was exception. The metal is finding support just above its 2008 lows. Nickel is the metal closest to its recession level. This level could act as a psychological support level for traders, helping support prices in the coming months. However, we suspect this won’t be enough to hold prices longer-term if bad news keeps coming out of China.

China is still producing more than it can absorb. Weak Chinese demand and the fear that the worst has yet to come remains the overriding theme for nickel. Price-related closures in the nickel industry have been frequent over the past few months. However, as we’ve been pointing out, it’s hard to determine how many more mine closures we will need to see before prices find that elusive floor.

Stainless_Chart_October-2015_FNLBesides weak demand, investors remain worried about the high level of visible inventories. Not that inventory levels are a good price indicator but, for what it’s worth, inventories today are way higher than what they were when nickel bottomed out after the recession. Today’s LME nickel inventory levels appear closer to 450,000 metric tons, still near their all-time high of last June, while in 2008 nickel stocks fell below 60,000 mt.

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The inventory picture looks similar in the stainless market. Domestic and import mill inventories remain high, with domestic mill lead times remaining short. With inventory well-stocked and the end of the year approaching, service centers will keep trying to reduce inventories, hesitant to order more than what’s absolutely necessary.

What This Means For Metal Buyers

We’ll have to wait and see if prices are able to bounce off their record lows. So far, we only see a lack of upside momentum. Nickel prices might need more than that before making a significant rally.

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Another major financial institution cut its global growth forecast yesterday and US construction unemployment reached a new milestone.

IMF Cuts Growth Forecast

The International Monetary Fund cut its global growth forecasts for a second time this year on Tuesday, citing weak commodity prices and a slowdown in China and warned that policies aimed at increasing demand were needed.

The IMF, whose annual meeting started in Peru this week, forecast that the world economy would grow at 3.1% this year and by 3.6% in 2016.

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Both new forecasts are 0.2 percentage point below its July forecast and are 0.4 percentage point and 0.2 percentage point below its April outlook, respectively.

AGC: Construction Unemployment Lowest in 15 Years

The number of unemployed workers with construction experience dropped to the lowest total for September since 2000, as hiring continued to slow despite robust demand for construction, according to an analysis by the Associated General Contractors of America.

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Association officials cautioned that the hiring slowdown most likely reflects a lack of available workers that could lead to project delays unless more students and workers join the construction sector.

The Automotive MMI fell again in October, inching down 1.4% from its previous all-time low of 73.

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It’s more of the same for an automotive metals market that, while strong on both the supply and demand sides here in the US, is being dragged down by falling demand in other large markets. Automotive specialty metals have been cited as the savior and the future demand driver for many a steel or aluminum company in this bear market.

Automotive_Chart_October-2015_FNLGerdau is practically staking its entire Indian business on it. Aerospace and automotive are also regularly cited as the growth markets for stainless and aluminum overseas, too. The aluminum-bodied Ford F-150 continues to be the darling of the US automotive market with its lighter corporate average fuel economy (CAFE) load and its Denis Leary commercials about “military-grade” aluminum. Even the Super Duty is getting in on aluminum. The emerging markets were on the aluminum train before Ford was, too, and that trend is only growing.

US, European Auto Sales

So, what gives?

In September, US vehicle sales topped a SAAR (seasonally adjusted annual rate) of 18 million vehicles. Leading automakers reported the healthy year-over-year increase in sales number thanks, in part, to big gains over the Labor Day holiday weekend.

It wasn’t just us yanks buying cars constructed cold from specialty metals, either. The Czech Republic will report its highest car sales ever this year. The Volkswagen scandal might be hurting platinum prices but it’s clearly not denting overall vehicle sales, even in Europe where the scandal hits close to home with more diesel cars on the road.

VW has a market share of around 48% in the Czech Republic, a country of roughly 10.5 million people, with the company’s domestic maker Skoda Auto the top seller.

Chinese Demand Collapses

The fly in the automotive metals ointment is demand in China. Like steel, aluminum and other markets, the economic collapse in China has eroded what was once healthy automotive – and automotive metal – demand there.

The urbanization that economists counted on to fuel more Chinese car purchases went away with housing demand there, as well as the un-manipulated renminbi. Beijing is looking entirely to exports now (hence the purposeful devaluation) to pull its economy out of the doldrums, and isn’t even trying to goose those domestic markets much.

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Sad to say, but no matter how strong the US or European automotive markets are, they can’t make up for the loss of Chinese demand, which numbers sales (and people) in the neighborhood of a billion. That’s one of the reasons so many steel companies are looking to India, with its large population, to make up for that demand. The problem there is India’s urbanization isn’t as far along as China’s was. Still, automakers and steel companies such as Gerdau are digging in there for the long haul. Here’s to hoping it’s not as long as some predict.

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A weak jobs report had far-reaching effects for commodities and metals this morning.

Fed Still Wants to Increase Interest Rates

Eric Rosengren still expects the Federal Reserve to raise interest rates this year despite what the head of the Boston Federal Reserve Bank called a “weak” September jobs report, which could signal a more significant economic slowdown that delays the policy tightening.

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In a Reuters interview, Rosengren said the slowdown in hiring last month effectively heightens his sensitivity to the economy’s performance the rest of the year.

Precious Metals, Stocks Jump

Gold rose on Monday as the dollar weakened after a disappointing US jobs report.

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Spot gold, was up 0.2% at $1,139.81 an ounce by 1333 GMT, having been lower earlier.

The metal had gained 2.2% on Friday, its biggest one-day rise since Jan. 15, after data showed US employers slammed the brakes on hiring over the last two months. Non-farm payrolls rose by only 142,000 last month, below economists’ expectations of 203,000.

Once in awhile, it is interesting to take a different view. To step back from the day to day and look at situations from a wider or longer-term perspective. This is as true of commodity markets as it is of life, so a recent Financial Times Short View report on commodity prices makes for particularly thought-provoking reading whether you agree with its conclusions or not.

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The report is presented, as most of the FT’s excellent Short View reports, in video format aided for clarity with charts that unfortunately we cannot exactly replicate here but with the assistance of Index Mundi we can provide some good examples.

Prices Through the Centuries

The report is not based on the FT’s own research, but rather on that of BCA Research who have compared a basket of commodities prices against consumer prices since 1680, and found that over time the 2 do not fundamentally diverge. Although demand for commodities do, for a variety or reasons, surge from time to time, the resulting spike in prices stimulates the market to respond in a number of ways such as investing in more mines, driving technological developments to extract metals more efficiently or more cheaply and, of course, to find alternative materials that reduce the original demand. Read more

It doesn’t seem to matter which Emerging Market grouping you belong to and, honestly, all of them should be taken with a pinch of salt, your currency is likely to be taking a pasting at the moment. And that’s before the Federal Reserve has even raised rates, next year could be worse.

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If the Fed’s twice postponed move to raise rates goes ahead in December, the dollar is likely to strengthen further next year causing a flight from weaker EM currencies to the dollar or dollar assets.

Emerging Acronyms

Jim O’Neill’s original BRICS (Brazil, Russia, India, China and later South Africa) have not been performing of late, not as energetically as they promised in 2001 when O’Neill came up with the acronym. Indeed, Brazil, Russia and South Africa are in economic crisis, China is growing at the slowest pace in a generation and India’s growth will soon slow if it doesn’t grasp the nettle and start introducing long overdue reforms.

So, what about the CIVET(s) that came along afterwards comprising Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa again? Well that grouping, too, has fallen somewhat out of favor as the differences became more apparent than the similarities.

Can A New Group Make a MINT?

So will the latest gang do any better? The MINTs certainly sounds cool and tasty. Sorry, I couldn’t resist that. Mexico, Indonesia, Nigeria and Turkey do have some characteristics in common. They all have relatively large populations, have until recently enjoyed rapid growth, are developing a rising middle class and, according to an FT article, display entrepreneurial cultures.

So, to what extent does grouping these countries together make sense? In some ways they are very similar, at least three of them – Nigeria, Indonesia and Mexico are significant commodity exporters and therefore caught in the crossfire of the end of the super-cycle and slowing global trade growth.

Turkey may be a net importer of energy and so benefit from the falling oil price, but it has benefited greatly from globalization as well and its steel, jewellery and automotive industries have driven export-led growth.

Of the others, Mexico has cleverly hedged much of its current oil production and hence avoided the worst of the pain felt by Nigeria for whom oil and oil products make up a significant proportion of its balance of payments. Likewise Indonesia, a net oil and commodity exporter, has suffered from the falling oil price, falling coal prices, failing commodity prices and the slowdown in China.

Political instability has been an issue for some of the MINTs in the past and remains an issue for several. Mexico’s current president is polled as the least-popular in 40 years and although Nigeria managed its first successful transition of government in 55 years since independence following this year’s presidential election, it is fighting a civil war with extremist insurgency Boko Haram that is draining lives, money and political attention.

The Next Big Thing?

All 4 countries suffer from inflation, a current account deficit and falling currencies making them vulnerable to instability when the Fed raises rates. A flexible exchange rate does allow countries to adjust to external shocks and maintain competitiveness, but its also makes emerging markets such as the MINTs exposed to spiraling debts if, as they all are, they are heavily indebted in foreign currencies.

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So rather than the next big thing for investors, the MINTs will be under the scrutiny of foreign lenders concerned that weakening exchange rates put their repayments at risk or place undue strain on corporate or national balance sheets.

Much is made of so-called reshoring, the trend of manufacturing activity returning to the US from Asia, Eastern Europe and South America where it went in the ’90’s and 2000’s in search of low wages and what was seen as the Holy Grail of globalization.


The big winner in Japan’s attempt to reshore jobs? Robots.

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In the process, hundreds of thousands of jobs were lost, particularly in the manufacturing sector but also in services with call centers and support functions moving to places such as India, Malaysia and even Singapore.

Why Are Jobs Returning To Japan?

The reason some manufacturers have selectively decided to return to the US are many and varied. Certainly, quality has been one. Speed to the domestic market has been another. Manufacturing costs in the US have come down as wages have stagnated since the financial crisis but risen in places such as China. Read more

If anyone in the US should ever accuse the steel industry of overreacting to the threat of imports and excessive domestic costs, they need only take a look at the UK.

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In the face of struggling domestic demand, the UK has gradually ramped up domestic costs for electricity to large industrial users like steel producers, piled environmental restrictions on plants and allowed cheap imports from places such as China to come largely unhindered into the market.

Declining Domestic Production

The result is most, if not all, of the UK steel industry is losing money and has done so for a number of years. According to a Telegraph article losses at Tata’s UK operations – the largest in the country – doubled last year to a staggering £768 million ($1.2 billion), while revenue and production fell.

Tata Steel has been struggling ever since it became the UK’s largest steel producer in 2007 with its $13 billion takeover of Anglo Dutch producer Corus, a deal that it must now deeply regret. In an effort to stay afloat, the company has continually slashed jobs and scaled back operations, reducing its European workforce from 25,000 to 17,000 in the process.

Tata has announced a further 700 job losses in Yorkshire and plans to mothball a plant in South Wales which will account for several hundred more job cuts. But even more dire is the state of Europe’s second-largest blast furnace at Redcar in Yorkshire. Sahaviriya Steel Industries, the Thai company that purchased Redcar in 2012 has reportedly already lost $1 billion of its own money propping the operation up and racked up debts of a further billion.

More Job Losses Coming

Now it looks like closure is just a matter of days away with the loss of some 2,000 direct jobs and a further 1,000 contractors as slab prices have plummeted from $500 to $300 per metric ton in the last year.

The UK steel industry has been in decline for decades, much like the rest of Europe’s steelmakers as the market has matured and lower-cost producers have sprung up around the world. But in recent years, the pressure has become acute due to a number of factors. First, electricity and power costs in the form of natural gas have risen sharply

Source UK Steel

Source: UK Steel

Electricity costs in particular are as much a result of the UK government’s switch to renewables with subsidy costs pushed onto consumers, as it is due to world energy prices. Read more

Possibly, if you listen to Indian politicians and senior business leaders. In a recent FT article Arun Jaitley, India’s finance minister, said in an interview with the BBC: “An economy which can grow at 8 to 9% like India certainly has viable shoulders to provide support to the global economy.”

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Officially, Chinese economic growth will be 7% this year, but with industrial growth weak and consumer demand held back by stock market falls, it could quickly head towards 5% or below in the second half. India, meanwhile, is expected to expand at 7.7% according to the country’s official measure. A separate Financial Times article reported that New Delhi comments that India’s economy in the June quarter grew 7%, year-on-year, exactly the same as in China.

Low Oil Prices Advantageous to India

That, the article suggested, means that India is overtaking China in terms of growth and is poised to become the world’s fastest expanding large economy. Certainly it’s true that as the world’s third-largest oil importer India has benefited from the collapse in oil prices, both in terms of improving its balance of payments and reducing inflation.

Nor is India a big exporter of manufactured goods, not normally an advantage except in times of weak global demand when the greater reliance of the economy on internal consumption insulates it from weak external demand. 57% Of Indian’s GDP comes from household consumption.

Comparison of GDP growth China vs India Source FT

Comparison of GDP growth, China vs India. Source: FT

However, before we get too drawn in by the hype both articles also point out the headwinds Narendra Modi’s India faces. His government has failed to implement much-needed economic reforms, in spite of hope when he came to power that he would sweep away the creaking political machine that has held India back for so many decades. Read more