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.


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%.

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So the Greek tragedy rolls on; expect considerable volatility this week, certainly on European markets and for the Euro currency following the Greek government’s decision to announce a bank holiday for more than a week.

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The country’s stock-market was suspended and automated teller machine withdrawals across Greece were capped at €60 (US $66) as banks began to run out of money. Many Greeks have already begun resorting to the barter system as they are simply unable to obtain more cash.

Greece faces a debt default within 48 hours after the government made clear it will not, indeed cannot, repay a €1.5 billion loan to the International Monetary Fund that expires today.

What Syriza Hath Wrought

In a sense, the tragedy here is the success of the leftist Syriza party in being elected to office in the first place, supposedly on a mandate to end austerity just as the Greek economy, by many measures, was turning the corner.

At the end of 2014, Alexis Tsipras’ new government took over one of the fastest growing economies in the Eurozone, with an expected budget surplus this year and then drove it directly into a brick wall. Tax receipts collapsed, the surplus turned into a budget deficit within weeks and now the country is on the verge of default.

Not that non-payment of IMF loans automatically puts a country into default, but failure to pay next month’s much larger European Central Bank re-payments will. In addition, Greece’s banks are teetering on the edge of collapse due to a lack of liquidity.

According to the Telegraph Greeks have pulled €30 billion from the financial system since Syriza was elected five months ago, with many hoarding cash in their homes or sending it overseas. Syriza is playing a dangerous game of chicken with their fellow European partners and the IMF, yet both the US and France are desperate for Greece to remain within the Eurozone and for a compromise to be found.

A Referendum on What, Exactly?

The latest move from Athens is to announce a referendum for the Greek people to decide, but at the moment the two sides — the EU and Syria — can’t even agree what the proposal is. What Syriza intends to put up to the vote is unclear. In such an emotionally charged atmosphere even a clear set of proposals should be debated for weeks before being put to a vote, yet the government is saying it will go to the people as early as this coming weekend.

However poorly the Greek government is playing it’s cards our expectation is still that a last minute fudge will be found but it is looking increasingly finely balanced and we should not under estimate the strength of feeling that is running in Athens in spite of the consequences if their game of brinkmanship fails.


Home sales surged in May and major producer Australia cut its iron ore forecast further.

US Home Sales Hit 9-Year High

Contracts to buy existing homes in the US rose in May to their highest level in over nine years, boosting the housing market and the broader economic outlook.

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The National Association of Realtors said on Monday that its pending home sales index, based on contracts signed last month, increased 0.9% to 112.6, the highest level since April 2006. Contracts have now increased for five straight months.

Australia Cuts Iron Ore Price Forecast

Australia, on Tuesday, cut its price forecast for iron ore in 2015 by 10% to $54.40 a metric ton, citing a weak outlook for the commodity’s main market, China’s steel sector. The forecast by the Department of Industry and Science is a sharp decrease from the $60.40 per mt predicted three months ago and is way off the $94 a mt touted in January.

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Long term forecasting is, in many people’s view, about as accurate as putting your finger in the air and taking a guess.

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Nevertheless, it is far from a fruitless exercise. If nothing else it makes us step back from the everyday pressures of business and look at the bigger picture, try to assess long-term trends and fundamental changes that are taking place that can largely pass us by on a day-to-day basis.

It also encourages us to look at our business and make judgements as to how well our current model would fit in a variety of future global scenarios. So reviewing the Economist Intelligence Unit’s latest report looking at the long-term forecast up to 2050 has much to commend it.

Emerging Markets Emerge

The report is available on download free from the EIU here and merely requires a registration. The report opens with an attention grabbing comparison of the top ten economies at market exchange rates by 2050 as predicted by the EIU.

Source: The Economist Intelligence Unit

Source: The Economist Intelligence Unit

Crucially faster growing emerging markets move up into the first , thrid and fourth slots as the old order, relatively speaking, falls back on slower growth. Demographics, of course, plays a part with aging populations in Europe and Japan limiting growth potential and the reverse in places such as India, Indonesia and Mexico driving growth in gross domestic product if challenging the ability of those countries to rapidly improve GDP per capita.

Asia Tops Growth

Regionally, Asia will rise to a little over 50% of global GDP, a trend that started in the last century with Japan and South Korea and has accelerated with China, India and Indonesia among others expansion in this.

Source: The Economist Intelligence Unit

Source: The Economist Intelligence Unit

This graph illustrates the rise of Asia as the focus of global growth that is so often mentioned in the media, but so challenging for small and medium enterprise western firms to re-position themselves to exploit.

Source: The Economist Intelligence Unit

Source: The Economist Intelligence Unit

On the topic of global influence, by 2050 China and India will, relatively speaking, both be larger than the next five economies below them. We can expect both countries to play a much greater role in global affairs both economically and on issues such as climate change and maybe even security – an area neither have shown more than limited regional interest in to date.

Source: The Economist Intelligence Unit

Source: The Economist Intelligence Unit

The EIU makes some profound observations on population growth, saying much of the global growth in recent decades has been driven by population growth. Long-term population estimates, however, reveal that growth in the global population is expected to see a dramatic decline from an average of 1.3% in the 1980-2014 period to 0.5% across the 2015-50 period.

Law of Large Numbers

The slowdown in the growth rate of the global working-age population will be even starker, with a drop to 0.3% in the 2015-50 period, compared with an average growth rate of 1.7% in the 1980-2014 period. For those countries, particularly in the Middle East and Africa, with still-rapidly rising populations there should be better growth prospects but this also represents a source of political instability if these regions cannot create employment and prosperity. Much will depend on the continuation of globalization and on the policies pursued by the specific countries concerned.

The Advantage of Being Advanced

For those countries with an already declining labor force the challenge will be to achieve growth by other means and to maintain social stability as the burden of taxation falls on a progressively smaller section of societies.

Source: The Economist Intelligence Unit

Source: The Economist Intelligence Unit

Advanced economies will, however, continue to represent very significant markets, with their residents continuing to enjoy some of the highest per capita incomes in the world even if, nationally, the country falls in the GDP rankings. Governments, and the populations that elect them, will be forced to reevaluate their place in the world and what role they should seek, indeed be able to, maintain. Arguably, it would be better to forge a more inclusive world order now then to have a change of roles forced on us by events over the coming decades.

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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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The oil price may be up, but oil companies are desperately shelving projects, slashing capital expenditures and laying off workers, and not just in US shale deposits.

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One area where oil production is set to rise for years to come is, ironically, one of the highest cost: the Canadian tar sands oil. Oil sands companies that have already sunk money into mines and steam injection wells in Alberta have no incentive to stop operating or building out projects that are already well underway.

Tar Sands Investments

Such capital intensive projects are on the opposite end of the price sensitivity scale from shale, where dozens of rigs have been idled over recent months. Oil sands are operated more like a factory, fleet of trucks or a pipeline, run at maximum capacity to reduce the unit cost as much as possible and service startup debt according to the FT.

The paper reports the Canadian Association of Petroleum Producers last week forecast that western Canada’s output will keep increasing by about 156,000 barrels per day each year until 2020. Growth continues after that but slows to 85,000 b/d a year until 2030. Capital spending by Canada’s oil and natural gas industry will total Canadian $45 billion (US $37 billion) in 2015, 40% lower than 2014 and solely focused on building out existing projects that are too expensive to abandon.

New on the drawing board projects, on the other hand, have stayed there. New projects are projected to need an average Brent crude price of more than $100 per barrel to break even and no one, absolutely no one, is taking a bet on that anytime soon.

Compare that to an average break-even price of $29 per barrel for reserves onshore in the Middle East, $57 per barrel in ultra-deep water and $62 per barrel in North American shale, according to Rystad Energy quoted in a Reuters Commodity Note.

Climate Change Legislation Looms

The industry faces more challenges than just the price of oil. This year the leftist New Democratic Party was elected to govern the province of Alberta after pledging to raise corporate taxes and review oil royalties. Maybe even more of a threat is legislation as a result of fears of climate change.

The Oil-Climate Index shows that medium, sweet synthetic crude from Canada’s Athabasca oil sands generates 767 kilograms of CO2 per barrel, compared with 559 kg for Brent crude from the North Sea – itself hardly a low-carbon product due to the challenging deep water nature of UK’s North Sea oil fields.

The industry is trying to reduce costs and to reduce the carbon footprint of oil sands extraction technology, and if the innovative and entrepreneurial drive shown by US shale firms is any indication, it will undoubtedly make strides in both of those objectives. Even so, climate change legislation could be the killer just as oil prices begin to recover. A study by University College London found that 85% of Canada’s bitumen reserves should remain un-burnt if the world is to avoid the 2 degrees Celsius average temperature rise seen by many politicians as the tipping point number.

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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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Top Market Drivers

1. Dollar to Euro exchange rate.
2. Global production.
3. Global capacity utilization.
4. Automotive production Europe/NA/China.
5. Chinese lead prices.

Market Commentary

Not surprisingly, lead has also fallen this past month on the back of a stronger dollar. In fact, lead fell below MetalMiner’s May short-term support level of $2,000/metric ton. Market sentiment also appears weak.
According to Shanghai Metals Market, of 10 secondary Chinese lead smelters surveyed on or about May 29, only one producer forecasted rising prices, three forecasted declining prices and the balance came in neutral.
And though Q1 2015 global lead mine output dropped 0.9% from the same quarter in 2014, world usage declined by 2.7%, according to the International Lead and Zinc Study Group. Moreover, the supply/demand balance appears largely in harmony. In other words, the world could see a small deficit of 17,000 metric tons, but provisional data from ILZSG
suggests that supply outpaced demand.
The fundamentals do not support or suggest any imminent lead shortage to give prices
a boost.

The Outlook

Three-month lead closed the month of May at $1,952/mt, down about 8% from last month. We warned readers last month of a short-term pullback that did indeed materialize. And though lead had a strong price rally in April, the dollar’s ascent in May pushed lead prices lower. As with the other base metals, price risk remains to the downside.


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Greece seems to be teetering on the edge yet again.
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We wrote last year, and this year, as the Greek crisis waned and the international media assumed the problems had been solved that Greece had the potential to come back and make a re-appearance and it certainly has.

ECB, IMF, World Bank Troika

If the troika of the European Central Bank, the International Monetary Fund and World Bank don’t agree on a way forward to release further funds, Greece will default on it’s €1.5 billion repayment due to the IMF at the end of June and the €3.5 billion due to the ECB on July 20.

These are sizable sums of money for a government with no reserves and struggling to meet monthly wage bills, let alone pay suppliers for goods and services, an obligation it has foregone for some months now.

A last minute reprieve may be on the table with proposals the leftist Syriza government coalition has put forward this week. Finally these include proposals to address at least one of two key sticking points. First is raising the pension age to 67, the sticking point is the time frame, both when to start and when the process should conclude.

What Syriza Wants

Athens wants it to be phased in up to 2025 but the troika want it faster. Still, it is at least being discussed now and shows potential. Greek pensions are probably un-payable in the long run as this graph below underlines. Ultimately, a state pension has to fall somewhere in relation to the country’s ability to pay and Greece can’t afford for workers to retire in their early 60’s or sooner and then receive anymore than a subsistence pension; the reality is the country can’t afford it.

In their defense, it should be said, according to the Greek government, 45% of pensioners receive monthly payments below the poverty line of €665. The pensions aren’t generous in overall terms, only in relation to the country’s ability to fund them and the relatively early age that they start.

Screen Shot 2015-06-23 at 08.36.23

Source: Financial Times

The other sticking point is Greece’s value-added tax and raising taxes, in general. The troika want 23% VAT rates to be applied on pretty much everything except food and medicines which would be taxed at a lower rate, but Athens is proposing a number of other sectors be included in the lower rate including energy. But Syriza is also proposing to squeeze businesses further by increasing corporation tax with a one-off 12% tax on corporate profits above €500 million.

The VAT Question

The FT estimates it would raise an additional €945 million this year and another €405 million next year, but would eventually be phased out. The sticking point on the VAT is energy according to a Market Watch report with Athens adamant the VAT should not be more than 13% as this impacts the poorest in society disproportionately but the irony is no one is paying their energy bills, anyway. Last week, the Greek electric power authority reported that its unpaid bills reached €1.9 billion in 2015, more than enough to meet the IMF’s end of month payment on its own.

A more lasting proposal from the government is to raise overall corporate taxes from 26% to 29%, bringing in an additional €410 million next year – assuming companies pay it, of course. Tax revenue is one of the fundamental problems in Greece, whether corporate or private, tax receipts have collapsed particularly among individual taxpayers as people have simply failed to fill in tax forms while they wait to see what happens.

Meanwhile, defaults on bank loans are widespread, around 70% of restructured mortgages aren’t being paid and the banking system is freezing up. Government tax revenues for May were €1 billion short of the budget target exacerbating the state’s problems in trying to meet even day-to-day payments.

In the medium- to longer-term, Greece will need debt relief. To suggest the country can pay off its debts over the next 10-15 years is to consign Greek society to long-term austerity and, as we have seen with the election of the Syriza government, they won’t accept that.

For now, Europe will, for the sake of the Euro and appearances, muddle through with yet another 11th hour fudge. But Athens’ proposals will not be met in full. Pension payments will be higher, tax receipts will be lower and until Germany faces up to debt relief this problem will not go away.

Not that Greece couldn’t leave the Euro. It could and both Europe and Greece would survive but, politically, Euro block politicians do not want to admit the model is flawed and will continue to seek ways of keeping the shambles together. We don’t see a Grexit at this stage. It could come down the road, although northern European politicians are clearly getting more than exasperated with the situation, they are likely to find a way to make it work. Or at least keep the show on the road and continue to advance good money after bad in the hope something will turn up or it won’t blow up until they are out of office.

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Architecture billings increased in May, while Morgan Stanley changed its forecast for nickel prices to a more bearish outlook.

ABI Back in Positive Territory

Led by growing demand for new schools, hospitals, cultural facilities and municipal buildings, the Architecture Billings Index (ABI) increased in May following its second monthly drop this year. As an economic indicator of construction activity, the ABI reflects an approximate nine to 12 month lead time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the May ABI score was 51.9, up from a mark of 48.8 in April. This score reflects an increase in design services (any score above 50 indicates an increase in billings).

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“As has been the case for the past several years, while the design and construction industry has been in a recovery phase, we continue to receive mixed signals on business conditions in the marketplace,” said AIA Chief Economist Kermit Baker, Hon. AIA, PhD. “Generally, the business climate is favorable, but there are still construction sectors and regions of the country that are struggling, producing the occasional backslide in the midst of what seems to be growing momentum for the entire industry.”

Morgan Stanley Bearish on Nickel

Morgan Stanley slashed its nickel price forecasts for the second half of the year Tuesday as demand from stainless steel producers continues to be undermined by a deteriorating outlook for global growth. The bank cut its third quarter 2015 nickel price forecast by 12% to $13,228 a metric ton; and its fourth quarter outlook by 10% to $13,448 a metric ton.

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