Articles in Category: Macroeconomics

It is something of an unholy alliance, but Russia and Saudi Arabia are becoming ever closer allies in a graphic example of realpolitik.

The two would probably be implacable enemies if their contrarian positions in Syria were any gauge – Russia closely aligned with Iran in their support of Bashar al Assad, yet Iran is Saudi Arabia’s public enemy number one and only major rival in the Middle East.

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But economics trumps almost all, and the two’s interests are certainly aligned in trying to reverse the damage done by Saudi Arabia’s failed bid to squeeze U.S. shale drillers out of the market and the corresponding glut of supply forcing prices to painfully low levels – painful at least for oil producers.

As the FT observed in quoting RBC Capital Markets as saying, “Saudi Arabia and Russia are essentially now co-pilots of this operation (of restricting output to boost prices) and they’ve made it clear there will be no going back to chasing market share.” The article goes on to quote: “It’s a huge change from two years ago when Russia would not co-operate with OPEC and even questioned its relevance in the age of shale.”

The two agreed last week to not only extend but deepen production cuts for a further nine months into 2018.

But not all agree with the International Energy Agency’s prediction that the cuts will be enough to balance supply and demand later this year.

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Liquid steel.

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European steelmakers are coming together to fight a common enemy: EU carbon reforms.

According to a recent report from Reuters, steelmakers across the continent are writing EU leaders, emphasizing they not burden the industry with what they feel are superfluous carbon emission regulation costs. Such costs, they argue, would put them at a competitive disadvantage with their global peers as well as increase the risk of job cuts and plant closures.

“You can avoid burdening the sector with high costs that will constrict investment, or that will increase the risk of job losses and plant closures in the EU,” the CEOs say in an open letter, obtained by Reuters, dated May 28, to EU heads of state and government.

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Nickel, along with zinc, could see a boost on the heels of the Chinese government cracking down on the steel industry.

According to a recent report from Reuters, nickel and zinc prices reached their highest point in more than two weeks with China cutting down on production of both metals.

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“The Chinese government is becoming quite aggressive in targeting environmental problems,” Oxford Economics commodities analyst Dan Smith told Reuters.

With supply in China in question, industrial demand for nickel continues to gain momentum, pushing prices for the metal up, along with prices of aluminum and zinc, according to a recent report from the Economic Times.

On the Multi Commodity Exchange, nickel for delivery in May rose by 0.6%, the Economic Times report stated.

Nickel Price Forecast for 2017

Nickel prices at future trade are also being supported by a boost in demand from alloy producers in the spot market, according to the news source.

How will nickel and base metals fare in 2017? You can find a more in-depth copper price forecast and outlook in our brand new Monthly Metal Buying Outlook report. For a short- and long-term buying strategy with specific price thresholds:

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The International Lead and Zinc Study Group released its Spring 2017 meetings/forecasts report, which found global demand for refined zinc metal is expected to increase 2.6% to 14.30 million tons this year.

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The ILZSG report stated: “There has been little change in European zinc demand over the past five years and further stability is anticipated in 2017 with increases in Belgium, Italy and the Russian Federation being partially offset by a decline in France resulting in an overall rise for the region of a modest 0.7%.”

Furthermore, the ILZSG report found that a significant decrease in apparent demand in the United States last year was most likely influenced “by a drawdown in unreported stocks,” and it’s expected that apparent usage will recover this year to a level similar to what was seen in 2015.

Zinc Supply to Increase with Demand

After experiencing a decline of 5.5% last year, worldwide zinc mine production is expected to grow 6.7% to 13.70 million tons this year. Read more

“Moody’s downgrades China,” proclaims many a recent headline, while the accompanying article warns that a credit explosion will continue even as growth slows. Sounds serious, doesn’t it? Should we be concerned?

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Ratings agency downgrades are nothing new. The U.S. had a downgrade earlier in this decade, as had the U.K. and many other countries. Life goes on, and even for countries with large external borrowings, costs rarely rise by much — if at all.

There are exceptions, of course. Just think of Greece and many of the Southern European states whose borrowing costs rocketed. But the cause was not only downgrades. In the case of those countries, there had been a profound and sudden loss of market confidence in their ability to service their debt. And therein lies one of the issues for China.

Although China’s economy-wide debt is already 256% of GDP and rising, much of it is funded internally. It is not reliant on overseas investors, and as such is easier for the Bank of China to manage. According to a report in The Telegraph, China’s government debt-to-GDP ratio is expected to rise only gradually to 45% by the end of the decade, which is in line with similar countries rated at an “A” investment grade.

The downgrade has so far been confined to Moody’s, which dropped China’s rating by one notch from Aa3 to A1, keeping it apparently within investment grade territory. Moody’s pressed Beijing to accelerate supply-side reforms as the country faces challenges in the years ahead of an aging population, slowing productivity growth and the legacy of excessive state led investment.

Growth is predicted to slow to 5% from current 6.7% levels by the end of this decade. But while that is “poor” for China, it is still exceptional for any other country of comparable size. Read more

“Where next for oil prices?” Stuart Burns had asked on Monday. In the short term, that would be downwards.

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Yesterday the Organization of the Petroleum Exporting Countries (OPEC) met in Vienna and decided to extend supply cuts for another nine months, until March 2018. That is what was expected, but oil prices responded by dropping quite a bit, Reuters reported, by roughly 5%.

The price of oil has indications beyond, well, oil. “Oil prices are a proxy for energy prices, and a rising oil price can be supportive for energy intensive metals like aluminum,” Burns wrote. “A rising oil price is also taken as a proxy for rising industrial demand – a bullish indicator that global growth is strong. A falling price, on the other hand, should be good for consumer spending as it keeps more money in drivers’ pockets and lowers the cost of goods sold for companies far and wide.”

Where Next for the U.S. Dollar?

Another driver of metal prices is the dollar. This past week, Raul de Frutos looked at the movement of the U.S. dollar, which recently hit a seven-month low. What is the reason for this drop?

“First, the dollar had steadily risen for three consecutive months,” de Frutos wrote. “It’s not uncommon to see profit-taking after such an increase. But there are also some fundamental reasons behind this sell-off.” Read more

What with news of the terrorist massacre in Manchester reverberating around the world, while President Donald Trump first snuggles up to the Saudis and then to the Israelis — it is hardly surprising that news of yet a fourth Greek bailout has failed to make much headway in the headlines.

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News that the International Monetary Fund (IMF) is working on a compromise with Greece’s creditors that would smooth the way for a €7 billion ($7.8 billion) disbursement of rescue cash all sounds rather calming and reassuring. But rest assured Greece is in danger of yet another default this summer as it seeks to get its hands on the latest tranche of an €86 billion rescue package to meet debt obligations this July.

According to an article in The Telegraph, Greece’s debt currently stands at nearly 180% of gross domestic product. The Greek economy fell back into recession in the first quarter of 2017, and it is an economy that is still some 27% smaller than in 2008, crushed under the EU-IMF austerity program.

According to the Associated Press, the IMF has argued that the Eurozone forecasts underpinning the Greek bailout are too rosy and that the country as a result should get substantial debt relief so it can start growing on a sustainable basis. The Greek economy has spent more time in recession than growth since the financial crisis.

The Eurozone, on the other hand, has so far ruled out any debt write-off, saying it would rather extend Greece’s repayment periods or reduce the interest rates on its loans after the bailout next year. Germany and the Netherlands are keen to avoid debt relief, probably because they do not want to set a precedent that others such as Italy could turn to later to solve their own problems. Read more

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It’s a story of two democratic countries and the policies they pursue vis-à-vis energy.

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So while the U.S. under President Donald Trump is kind of trying to revive its coal industry, far away India is doing the opposite – embracing clean energy with a vengeance and relying on it for much of its energy needs.

That’s one of the many reasons why India has also managed to beat the U.S. to the number two position in the renewable energy investment index released recently by UK-based accountancy firm Ernst & Young. China has continued to remain on top of this list, while the U.S. is now third. This is an annual ranking of the top 40 renewable energy markets in the world.

Those who prepared the report said that industry-friendly policies laid down by the Indian government, along with increasingly attractive economics, had changed the entire climate of the renewable energy sector of India.

Under Trump, the U.S. is seeing a shift in its energy policy. The president has issued orders to roll back many of the previous administration’s climate change policies, revive the U.S. coal industry and review the Clean Power Plan. Compare this to India’s neighbor China, which has announced that it would be spending $363 billion on developing renewable power capacity by 2020. Read more

The U.S. dollar got a boost after the presidential election as markets were encouraged by prospects of lower taxes, fiscal stimulus and deregulation that would accelerate growth of the American economy.

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But this month, the dollar has fallen sharply, hitting a seven-month low. A weaker dollar gave some relief to depressing commodity markets.

Commodity index (in black) rises as Dollar index (in green) falls. Source: MetalMiner analysis of stockcharts.com

Why then is the dollar losing its luster now?

First, the dollar had steadily risen for three consecutive months. It’s not uncommon to see profit-taking after such an increase. But there are also some fundamental reasons behind this sell-off.

Selling intensified after the recent political turmoil around President Donald Trump as investors worry over political stability in the U.S. Investors also worry that under these political turbulences, the Trump administration will struggle to implement the pro-growth initiatives that markets had taken for granted. Finally, the euro appreciated against the dollar as political risks in Europe eased following the French elections.

Can This Decline Be Reversed?

US Dollar Index could bounce back up soon. Source: MetalMiner analysis of stockcharts.com data

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Last month, China announced plans to build a new megacity from scratch. Since the city will be twice the size of New York City, analysts expect the project to require huge amounts of steel and other industrial metals such as aluminum and copper.

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According to Citi Research analysts, 12-14 million tons of extra steel will be required annually to build this new development. Since the country’s current domestic demand is about 700 million tons, that would lift Chinese steel demand by 2% per year over the next 10 years.

But are the analysts correct? Should we expect a steel demand boost over the next 10-15 years?

Although building this city from scratch will indeed require a lot of steel, analysts are making the mistake of missing the forest for the trees. The key driver for steel demand in China is the net migration from the countryside to cities. It doesn’t really matter whether China builds a new megacity or it expands its city limits. The key measure is the rate of urbanization in the country at a national level.

Urban and rural population in China. Source: China’s Economy book by Arthur R.Kroeber

China’s urban share has grown quickly over the past two decades since its rural population peaked in 1995. Last year, China’s urban population share reached 57.9%. The share, however, is still small given the country’s income level. Read more