Macroeconomics

After a flurry of interest in the price of oil as levels bounced back up to $65/barrel from below $50 at the turn of the year, most of us have been quietly content to fill up for less at the gas pumps and patiently wait for the heralded but still unseen benefit to the economy of lower oil and natural gas prices.

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Political events may be about to change that cozy situation as Iran nears its crucial end of June deadline to reach a binding agreement on its nuclear program, the Telegraph reports.

Removal of the US- and EU-led sanctions against Iran could pave the way for an immediate relaxation of sales restrictions and opening of the country’s massive oil and gas reserves to development by International Oil and Gas Companies (IOCs). Iran is reported to be scoping a new contract termed the Iranian Petroleum Contract designed to allow major international oil companies a revenue-sharing deal in return for financial and technological investment in the country’s oil and gas sector. Iran holds the world’s fourth-largest oil reserves and the second-largest natural gas reserves. Production of both has fallen sharply since sanctions as this graph shows.

Source: Telegraph.com

Source: Telegraph.com

But this could be reversed over time with western expertise and technology. According to Energy Information Administration data quoted by the Telegraph, Iran could achieve an additional 1 million barrels per day of production in short order, rising over time as investment re-opened old fields and increased flow rates from existing fields.

According to the Telegraph “Iran’s exports of crude oil and condensate dropped from 2.6 million BPD in 2011 to almost 1.3 million BPD in 2013 as a result of sanctions and only marginally recovered by nearly 150,000 BPD to 1.4 million in 2014 as the political situation thawed.

Source: Telegraph.com

Source: Telegraph.com

At its peak before the Islamic revolution in the 1970s, Iran was producing anywhere between 5 million BPD and 6 million BPD of oil and has the potential to return to this level with sufficient investment. Iran’s oil minister is suggesting they could reach output of 4 million BPD next year if an agreement is achieved next week.

That would have a dramatic effect on an already oversupplied oil market and may provoke Saudi Arabia to yet again open the taps and further flood the market to maintain its market share. Most major OPEC producers are hurting at the current oil price, not because their cost of production is above $65 per barrel but because oil revenues make up the vast majority of their export revenues.

Budgets were set at a price of around $100/B and depressed prices leave them running at a deficit. Those with large reserves, like Saudi Arabia’s $700 billion one, can weather such a storm for some time to come. Others, such as Bahrain, are already going cap in hand to fellow Persian Gulf states asking for support.

Ironically, the worst off is probably Venezuela, although it is sitting on the world’s largest proven reserves, production has collapsed due to mismanagement and, with it, government revenues have fallen. Further falls could put the economy in a perilous state. A substantial increase in Iranian oil output would potentially put the Middle East’s two political heavyweights, Iran and Saudi Arabia, at loggerheads economically as well as politically in the second half of the decade.

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The Wall Street Journal reported yesterday that Senate Republicans are offering a new incentive to support legislation giving the president expanded trade-negotiating power: help for the beleaguered US steel industry.

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As we reported last week, a companion measure to the Trade Promotion Authority bill has passed both the House and Senate and it would strengthen the enforcement of countervailing and anti-dumping duties by US Customs and Border Protection.

New Aid Package

The bills must go to a conference committee now to reconcile their differences, chief of which is that the House version does not have the robust trade remedies that the Senate version features, so the customs bill will not be voted on in the near future. Instead, Majority Leader Mitch McConnell (R. Ky.) is instead offering new language broadening the ways steel companies could win trade complaints. The customs enforcement provision will still likely find its way to the President’s desk, but not until much later.

Packaging Aid With Easier Trade Complaints

The legislative strategy, though, is complex. A number of Senate Democrats would have to cast a procedural vote today on a bill to give Obama and the next president fast-track trade promotion authority. After the fast-track bill passes the Senate, the chamber would then vote on a bill that would renew an expiring program to aid workers who suffer from production shifts overseas or import competition. McConnell’s new addition is that looser rules for making trade complaints for steel companies would be paired with the worker-aid bill. This bill is known as trade adjustment assistance (TAA).

Packaging the bills together is designed to keep the votes of republican senators, who have favored TAA and TPA since the Bush Administration championed them in 2003, even though they generally would not vote for continuing a large government worker aid package. McConnell is attempting to simultaneously bring in the votes of 11 democrat senators who favor the aid package for displaced workers, but have been skeptical of TPA and TAA, and free trade in general, so far.

The TAA vote is scheduled for today. If both TAA and the customs bill eventually pass, the US steel industry would likely enjoy protections not seen since 2003 when tariffs of 30% on most foreign steel imports lapsed.

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Steel production fell worldwide last month as Russia’s top oil producer, Rosneft, expanded exploration to Venezuela and ArcelorMittal USA has lost nearly $300 million since it was created via a merger in 2006.

WSA: Steel Production Fell Last Month

Global crude steel production fell 2.1% in May from the same month a year ago, as output declined in most major producer regions including China, figures from the World Steel Association (Worldsteel) showed on Monday.

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Global crude steel output fell to 139 million metric tons in the month while output in China, which produces half the world’s steel, fell 1.7% to 70 million mt.

Russia’s Rosneft Signs Exploration Deal With Venezuela

Venezuelan state oil company PDVSA said this week it has signed investment agreements with top Russian oil producer Rosneft, including a plan to create a joint venture to produce natural gas in the South American country.The venture would include the fields of Mejillones, Patao and Rio Caribe – all part of the large offshore Mariscal Sucre gas project.

ArcelorMittal USA Lost $1.5 Billion

ArcelorMittal – forged through an international merger of steel companies in 2006 – has pumped a huge amount of money into its US operations, but hasn’t seen a profit from it, ArcelorMital USA Flat Carbon President and CEO Andrew Harshaw told the Times of Northwest Indiana.

“Our USA business is not getting a return on its investment,” he wrote in a blog post. “Since 2010, the company has invested an average $1.5 billion per year into our USA facilities in both capital investment and the long-term maintenance of our assets. During those same five years, our USA business lost nearly $1.5 billion dollars, an average loss of $293.8 million per year.”

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Metal prices are falling across the board, more concerning is this fall is happening while the dollar has weakened this month. Recent data shows that US consumer price inflation rose less than expected in May.

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A weaker dollar usually helps push metal prices up but this month that doesn’t seem to be the case. For the month to date, most industrial metals are down on the London Metal Exchange:

Aluminum: -2.9%. The light metal was trading this week below $1,700 per metric ton and near record lows.

Copper: -3.3%. The metal rallied from January through May (in a dead cat bounce) but the rally stopped last month and prices seem to be heading back to the lows recorded in January.

Nickel: Flat. The metal is holding its value in June but as with any other metal, it seems to lack upside momentum.

Lead: -7.2%. Lead made a very suspicious rally in April, it fell sharply in May and the fall continues in June. The metal is now nearing a 5-year low.

Zinc:-5%. Like lead, zinc rallied in April but didn’t succeed. The metal is proving incapable of making significant upside moves while commodities are bearish.

Tin: -3.8%. The metal keeps falling, as if that was the only thing it can do since 2014.

MM-IndX_TRENDS_Chart_June-2015_FNL

What This Means For Metal Buyers

Weakness in metal prices can be seen across the board. Industrial buyers might be tempted to buy a lot of metal as prices look cheap. Contrary, we recommend to wait for signals that the market is turning up. In bear markets, what looks cheap can become cheaper…

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Indian steel, aluminum and copper companies are pinning their hopes on India’s defense sector to help increase sales.

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The government’s “Make in India” campaign, a broad sweep enveloping the entire manufacturing sector, and, as a result, the metals and mining sectors, is expected to boost local raw materials used in defense applications.

The government raised the threshold for foreign direct investment in defense to 49% and has done away with licensing requirements for most items. Several Indian companies such as Tata Steel, Reliance Industries, Mahindra, Larsen & Toubro and others have started identifying areas of defense production their products fit in. They have also started scouting around for foreign partnerships and technology transfers.

International Joint-Venture Partners

One such international player that has in the past shown active interest in this sector is Germany’s ThyssenKrupp AG. The company is reportedly pursuing two interests in the defense field – naval weapons, specifically submarines, and aerospace.

In a recent interview with the Business Standard, Michael Thiemann, CEO of the company’s India region revealed that ThyssenKrupp India Pvt. Ltd was looking to expand its business in not only these segments but was also interested in investing in “smart” cities.

Thiemann said his company was already in discussion with public sector and private shipyards on the submarine front. The CEO let on that his company was open to tying up with private Indian companies such as Larsen and Toubro Ltd. for defense projects.

Project 75

“Project 75,” a plan for the construction of six submarines for the Indian Navy has been in the pipeline for several years now, but with the Make In India campaign it has caught a second wind.

Going by media reports here, the Indian government is likely to shortlist shipyards for the project in about two months. Thiemann said Thyssenkrupp has the technology and expertise and is willing to collaborate with Indian companies, by offering design, engineering and implementation know how.

Thyssenkrupp’s Edge

ThyssenKrupp already makes mining equipment and cement in India. But specifically, where the defense sector is concerned, ThyssenKrupp, say analysts, may have an edge because one of its group companies, ThyssenKrupp Marine Systems (TKMS) has been a partnering with the Indian Navy for more than two decades. Some of the Indian Navy’s previous submarines were made in India under a technology-transfer agreement in which TKMS was involved.

ThyssenKrupp has already invested in a service center at Bengaluru in South India for material processing of aluminum and titanium used in the manufacture of aircraft. The current revenue size of India’s aerospace business is nothing to write home about, but it is expected to grow because of the decisions made by the government.

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The American Iron and Steel Institute said in a telephone press conference that the House of Representatives’ passage last Friday of a customs bill, which includes new trade remedy provisions for collecting tariffs on imports determined to have been illegally subsidized or “dumped” by their origin nations, was a major win for the US steel industry.

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The House voted in favor, Friday, of trade promotion authority (TPA), a major free trade power desired by President Obama, but the House also rejected Trade Adjustment Assistance (TAA) in a separate vote. In order for TPA to advance to the President for his signature, the House had to pass both TPA and TAA. So, TPA was pronounced not to have passed yet, either.

What Now For Trade Authority?

Speaker of the House John Boehner (R. Ohio) has already moved to reconsider the vote on TAA and the House rules committee will extend the time for a second vote to occur sometime between now and July 3oth. While it was certainly a setback for the President in getting fast approval of TPA, there was a separate vote on a customs bill that includes trade remedy provisions that passed.

“We specifically advocated for provisions to provide for more effective remedies against imports that are dumped or subsidized,” said Thomas Gibson, president and CEO of AISIS. “As regulars on this call know, steel imports have reached historic levels in the past few years due, in large part, to unfair trade practices.”

New Customs Enforcement Passes

Finished steel imports in 2014 increased 36% compared to 2013. Total steel imports over the same time frame were up 38%. Last year, imports captured 28% of the market surpassing the prior record of 26% and this year the finished import steel market share has continued to thrive and is already at 32% on the year-to-date. Not surprisingly, year-to-date raw steel production is down 7.3% and shipments through April were down 9.5%.

Approval of the House customs bill was NOT dependent on the passage of the TPA/TAA package in the House, either. So, both the senate and house have passed customs bills. The Senate passed its ENFORCE (Enforcing Orders and Reducing Customs Evasion) bill in April

The two bills now go to conference committee to resolve their differences. One difference between the House and Senate bills is the so-called “enforcement act” provisions which would create a new procedure for industries to petition for action to address trans-shipment and evasion of already-determined customs duties. The ENFORCE Act creates procedures for a federal agency or interested party to make good faith allegations of a company’s evasion of anti-dumping and countervailing duty orders to US Customs and Border Protection.

Senate ENFORCE Act Better for US Producers

“AISI has long-supported the senate version of the bill and will continue to push for adoption of its approach in the conference committee,” Gibson said, “but the bottom line is the steel industry is one major step closer to getting trade remedy provisions signed into law after last Friday and that’s a good thing.”

Gibson also said the infrastructure bill authorization runs out again at the end of July and the House ways and means committee and the senate finance committee are holding hearings this week to find a long-term solution for funding the Highway Trust Fund for upkeep of federal roads, bridges and other infrastructure.

No Reason to Tie Highway Funding to TAA

“It affects us in two ways: use of the infrastructure for a competitive economy and the public construction market is beholden to its infrastructure for transportation,” Gibson said. “AISI supports a user fee approach, something like a gas tax to provide a long-term funding solution. We think it can be solved this year.”

Gibson stopped short of supporting a solution that combines both a highway bill and TAA as House Minority Leader Nancy Pelosi (D. Calif.) advocated last week after speaking against the TAA bill on the House floor.

“We don’t believe it can get done at the same time at this point,” Gibson said. “We believe those comments were more of an explanation by former Speaker Pelosi of why she was against the bill (TAA) she had said she was for the week before.”

Anti-Dumping Enforcement

Gibson said as soon as the conference committee sends a final customs bill to the President and he signs it, the new language would apply and a petitioner to Customs and Border Protection could take advantage of the new trade law remedy provisions for enforcing existing anti-dumping countervailing duties.

The remedy provisions would not drastically change the standards by which injury is determined and how they are adjudicated. The ENFORCE ACT and the House’s customs deal mainly with the enforcement, addressing evasion, trans-shipments and other ways importers avoid duties at US customs.

“As opposed to bringing cases to the International Trade Commission and Dept. of Commerce, which is the trade remedy provisions, these deal with enforcement,” Gibson said. “That’s exactly why we think the senate version (ENFORCE) is superior to the version that passed the House because it has enforceable deadlines and, if an agency ignored its obligations, you’d be able to go to a court to tell the agency to obey its mandate.”

Trade adjustment assistance expires at the end of September if it’s not reauthorized before then. Gibson said that would be a big loss for proponents of free trade such as the President and congress’ republican majority who have both supported TAA in its current form. He also said the next “pressure point” was Congress’ July 4th recess which actually starts June 30th and AISI expected action on TAA before that.

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If we had to name 2015, we would go with “the trendless year.”

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We are halfway into the year and markets have barely made any moves. There has been a lot of hesitation among investors since the start of the year. Sometimes markets need a pause before they either continue with their previous moves or change directions. Interestingly, we are witnessing the same behavior in commodities, stocks and currencies.

CRB (in red) vs Dow Jones Industrial Average (in Black) since 2014

CRB Commodity index (in red) vs Dow Jones Industrial Average (in Black) since 2014. Source: MetalMiner.

Equity markets are pretty much flat this year. Investors had an easy time making good returns over the past few years but they are now probably having a hard time dealing with the sluggish behavior of stocks and many are wondering if we are at the end of the bull market.

In the same manner, commodities are pretty much flat this year as investors vacillation rises. After four years of a bearish market many investors might be wondering if we are finally at the bottom. With the falling commodity market, materials and energy were the two worst sectors in the stock market as growth-minded investors looked for other alternatives. On the other hand, many value investors might be looking at these two sectors, trying to spot some bargains.

Adding Value?

Value investors are good at holding stocks through market turbulence, but not good at timing their buys. Industrial buyers on the other hand can’t afford to “hold” in their forward buys while prices keep falling. For this reason, we always recommend not to be a “value buyer” when doing your job and instead wait for real evidence that the trend has changed.

Finally, currency markets are also trendless this year. After the huge appreciation of the dollar against other currencies, the dollar is now trading sideways.

No one knows how much longer this trendless period will last, but sooner or later we will see significant movement in these markets. Whether these markets will continue with their previous move or make a turnaround is something that we can’t answer yet…

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China is planning to remove its business tax on services and replace it with a value-added tax that applies to both goods and services.

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What does this mean for companies that purchase metals abroad? A lot. A projection has shown that removing the business tax and replacing it with what many believe the new VAT will be will cost the government 1 trillion CNY ($161.2 billion) in tax revenues, but Beijing is aiming to stimulate its economy and increase growth long-term, so the government is willing to take a hit in tax revenue in the short term.

What the New VAT Means to Purchasers

A metals purchaser who works with suppliers in China confidentially told MetalMiner that, under China’s new VAT plan, metals such as cold-rolled steel would receive an import tax of 3-6% depending on the thickness. The VAT on these goods would be 17% of which 9% gets refunded when it is exported, creating a net VAT of 8% and a net total tax of 11-14%.

Purchasers are currently analyzing several scenarios of what metals producers in China, Taiwan, South Korea and other markets that would be affected by the new VAT will do to keep their products competitive when it goes into effect.

New VATs in October

A similar VAT program was tried in Shanghai as a pilot project as a replacement for the business tax. An announcement on both the property VAT and a separate VAT for financial transactions is expected in July but both new VATs are not expected to go into effect until October.

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China is planning to replace business taxes with a revamped value-added tax that may expand three crucial sectors next month, according to a report Thursday from the state-run Economic Information Daily.

container-ship-night-MMslider

A revamped VAT in China will affect imports and exports.

The program is an extension of a pilot project in Shanghai.

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The Ministry of Finance laid out a reform plan involving real-estate, finance and consumer services that it expects to put into effect in July, the report said. Under the blueprint, an 11% tax will be levied on property and construction companies, while a 6% rate will be imposed on financial and consumer-service industries. China started a trial run of VAT reform in 2012, aiming to reduce double taxation on companies and reduce their overall tax burdens. If fully implemented in the entire country, the VAT reform could lower taxes as a whole by 900 billion CNY ($144 billion). The Ministry is under pressure to increase consumer spending and increase growth.

A VAT taxes the difference between the sale price charged to a customer, minus the cost of materials and other taxable inputs. It is collected at the point of sale, making it, theoretically, easier to collect than individual and corporate taxes.

The Ministry of Finance already recently slashed tariffs by 50% for 14 categories of products including cosmetics, shoes and diapers. The reduction in taxation was intended to get Chinese consumers to spend more and give them access to more international brands and products.

One industry that would not welcome the new structure is China’s financial sector. Scrapping the old VAT and replacing it with the new 11% and 6% rates of taxation would likely raise the net tax burden of Chinese financial firms. There is currently a 5% corporate tax on the sector. A new VAT would also affect firms in the US taking delivery of exported Chinese goods, such as steel. China removed export tax rebates on boron-containing steels to dissuade producers from simply shifting excess production onto export markets back in January, but removing the rebate didn’t really make much of a dent in Chinese exports. It’s still unclear how the new rates would effect exports.

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Today in Metalcrawler, a major construction project in Washington will eventually require 33,000 tons of steel and a powerful lawmaker wants to tie the Highway Trust Fund to a trade bill.

Boeing 777X Plant Requires Giant Steel Trusses

About 33,000 tons of steel are needed to build the $1 billion Boeing 777X wing plant in Washington state. The building is 1,200 feet long and has two open spans of 420 feet wide and 460 feet wide.

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To support those spans, 45-foot-deep steel girders are being used. At any moment 50 trucks are on the road bringing steel to the site from Oklahoma, Arkansas and Colorado.

The $1 billion, 1.3-million-square-foot building will be where Boeing fabricates carbon composite spars and skins for the 777X wings.

Pelosi Wants to Link Trade, Highway Bills

House Minority Leader Nancy Pelosi (D-Calif.) said Democrats would be more likely to support the controversial trade bill that was defeated on Friday if Republicans would support a long-term transportation funding package.

Pelosi helped sink President Obama’s trade package in a Friday vote by announcing her opposition, but she also signaled she wants Republicans to consider a deal involving highway funding in a letter to her conference. The Highway Trust Fund was extended through the end of July recently but both parties have said they desire a long-term deal that will fund federal highway maintenance through at least the next five years.

Congress has been grappling with a shortfall in transportation spending that is estimated to be about $16 billion per year, and they have not passed an infrastructure package that lasts longer than two years since 2005.

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