Articles in Category: Macroeconomics

Screen Shot 2016-04-06 at 9.37.41 AMSteel prices continue to dominate metals news, and, for those readers who are looking to make long-term purchases in this commodities market, the Q2 update to our Annual Metals Outlook offers commentary and data to help you make those decisions. We provide the price points for the metals you source that will help guide your behavior. When a metal breaches long-term resistance levels or comes close (as we see in the present steel market) you’ll need to rethink your long-term strategy in the process. That is where this report comes in.

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Well, we thought the world’s major oil producers would at least manage to agree an oil production freeze — that shouldn’t have been so very hard and was always a paper tiger anyway — the world is pumping far more oil than we need so a freeze effectively meant nothing in the short term.

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The prospect of some kind of agreement, even one with no teeth like a freeze, has been supporting oil for the last few weeks in a rally that brought it to it’s year high last week. Following Sunday’s failure at the Organization of Petroleum Exporting Countries‘ sponsored meeting in Doha, Qatar yesterday prices have now gone into freefall again, falling over 7% in early trading this morning before marginally recovering.

Source: Financial Times

Source: Financial Times.

Once again, it was Saudi Arabia that took the hard line, after initially courting Russia and appearing to support the prospects of an output freeze it changed tack after the first draft of an agreement had been drawn up, apparently at the insistence of the 30-year-old Saudi Defense Minister Mohammed bin Salman, the desert kingdom’s deputy crown prince and second-in-line to the throne.

He is reported to have told Bloomberg that the kingdom would not sign up without Tehran, suggesting he had decided against giving any leeway to a fierce regional rival according to the Financial Times today.

Saudis Won’t Sign Up

Iran, who did not even bother to send a representative to the talks, had maintained all along that they would not be a party to an output freeze until their production had recovered to pre-sanction levels. The International Energy Agency estimates exports of Iranian crude oil rose to 1.6 million barrels per day in March — up around 100,000 bpd from February. Before sanctions were tightened in mid-2012, Iran was selling roughly 2.2m bpd of crude on world markets.

Other oil producers such as Iraq, Venezuela and Nigeria were bitterly disappointed, with budgets ravaged by low oil prices they had been hoping and expecting Saudi Arabia would rubber stamp a deal and the price could find a floor, if not climb higher. Now the question is how far will it fall. With only a strike among Kuwaiti oil workers that started yesterday likely to effect the downside oil, energy stocks and commodity-linked currencies have all dropped sharply this morning.

Lower Prices Will Stay

The news will be a mixed blessing in the U.S., shale oil and gas producers had hoped for a rebound in prices as many face potential bankruptcy this year as hedges expire and debt obligations become increasingly tough to meet, but consumers will welcome a halt to the rise in pump prices that a reversal would bring and energy-consuming industries will be viewing 2016 with a little more confidence.

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The chances of OPEC pulling together the wider oil-producing community in a repeat of this weekend’s meeting before the end of 2016 are slim. OPEC, itself, is set to meet in June but the twelve-member organization lacks the influence it once had and needs the participation of Russia, Mexico and lesser producers to have a chance of moving market sentiment. So, somewhat to our surprise it looks like we are in for more of the same: lower for longer is the order of the day for oil.

The World Steel Association painted a gloomy picture of future global demand this week saying finished steel consumption this year is likely to reach just 1,487 million tons, a fall of 0.5% from last year… which, in turn, was 3% lower than 2014.

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Just last October the association was predicting an uptick in demand saying consumption this year would be 1,523 million tons, so the reversal has sent tremors through and already depressed global steel market.

Source: Platts

Source: Platts

The countries that led the supercycle up 10 years ago are largely the same that are now leading it down. China, Russia and Brazil are all showing down, only India, of the old BRICS acronym, is boasting growth, the world’s third-largest steel consumer is still bucking the trend and on a roll. Indian demand is expected to rise by 5.4% both this year and next reaching 88 million tons in 2017. Read more

Tin cansPerak, one of 13 Malaysian states, recently announced plans to jumpstart its tin mining industry in order to boost its income.

According to a recent report from The Malay Mail, Perak’s local government granted the industry approval for tin ore exploration in the region and, once identified, license to mine the metal-rich areas.

Want a short- and medium-term buying outlook for aluminum, copper, tin, lead, zinc, nickel and several forms of steel? Sign up for your free trial to our monthly buying outlook reports!

Political opposition to this recent announcement centers around allegations the state government intends to devote significant parcels of land to the tin mining effort. However, government officials denied this claim, stating that often mining companies request far more land than where they actually find tin deposits.

Tin Prices Rally

Just this week, our own Raul de Frutos wrote that tin and zinc are not leading the recent metals rally.

De Frutos wrote: “To believe this bear market is over, we would need to see these metals making significant upside moves. So far we are not seeing that.”

You can find a more in-depth tin price forecast and outlook in our brand new Monthly Metal Buying Outlook report. Check it out to receive short- and long-term buying strategies with specific price thresholds.

 

The oil price is doing rather well this week isn’t it?

Or you would think so, if you were an oil producer or resident in a net-oil-exporting country. For the rest of us, it’s a bit of pain pulling up at the gas pump only to find prices have crept up a few pence or cents since the last time we filled up.

The Organization of Petroleum Exporting Countries would have us experience a lot more of that pain if they had their way. The group of 13 oil-producing countries is meeting this Sunday in Doha Qatar to try to hammer out a deal to support prices.

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Various major oil exporters have voiced support for the idea of freezing output to support prices and, among a number of other factors, this rhetoric has had the desired effect. From a low of about $27 a barrel in January the oil price — both Brent Crude and West Texas Intermediate — have risen to 2016 highs. Brent to over $43 a barrel and WTI to over $40 a barrel. Russia and the Saudis have supposedly already agreed to freeze, at least, their output.

What’s OPEC Up To?

Not that the price rises have been solely down to OPEC talking up the market, the move higher has been mostly speculative and influenced by a number of factors such as rising automotive production in China where vehicle sales were up 8% in March.

The types of wells that built domestic driller Chesapeake Energy. Source: Adobe Stock/ W.Scott

West Texas Intermediate is up, as is Brent Crude. Source: Adobe Stock/ W.Scott

The threat of strike action by thousands of oil and gas workers in Kuwait next week and gradually falling U.S. shale oil production have added to a sense of slowing demand, plus a weaker U.S. dollar has had the impact of supporting any dollar-priced commodities. Read more

Source: Adobe Stock/ epitavi

Source: Adobe Stock/ epitavi

Copper prices rallied this week as a weaker dollar influenced the London Metal Exchange and futures for the metal surged to a three-day high on Tuesday.

According to a report from The Wall Street Journal, three-month copper on the LME was up 0.8% in yesterday’s European trade. Copper prices increased 7% from the start of 2016 to mid-March due in part to seasonal demand, but have since died down over economic concern in top consumer China. Before this week, we were back where we were in early January as it relates to copper prices.

Want a short- and medium-term buying outlook for aluminum, copper, tin, lead, zinc, nickel and several forms of steel? Sign up for your free trial to our monthly buying outlook reports!

“On balance, we would not be surprised to see prices edge lower in the short term, but we would expect good dip buying to provide support and eventually lead prices higher,” William Adams, head of research at Fastmarkets, told the WSJ.

Rising oil prices also contributed to this week’s rally in copper prices. It’s important to note that copper and oil are often grouped together as part of commodities in a fund, so significant increases in oil value usually correlate to the same for copper.

“Copper prices got some relief after a continued rally in crude oil,” confirmed ANZ Research, to the WSJ.

Previously Suffering Copper

This latest development in copper prices mid-week comes on the heels of recent analysis from our own Raul de Frutos that found the gains made in Q1 have already begun to dwindle under a new “bear attack.”

“To believe this bear market is over, we would need to see these metals making significant upside moves,” de Frutos said. “So far we are not seeing that. The latest decline in copper prices supports this view.”

You can find a more in-depth copper price forecast and outlook in our brand new Monthly Metal Buying Outlook report. Check it out to receive short- and long-term buying strategies with specific price thresholds.

 

In a recent market review webinar for our subscribers, we talked at some length about the impact the oil price has had on metal prices and it made me think that, in many ways, the drop in the oil price has been a bit of a disappointment.

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Not that lower gas prices aren’t welcome, of course they are, but the expectation was that lower oil prices would be a major boost for the global economy. Not so long ago, the the International Monetary Fund calculated that every $20 per barrel fall in the oil price would increase global gross domestic product by 0.5%, rising to 1.2% if there were associated improvements in confidence.

Economists had widely predicted two effects from cheap oil. First, there would be a huge transfer of resources from oil producers to consumers, both within and between countries. And at the same time, the gains from lower oil prices would outweigh any losses from lower investment and activity in oil producing regions.

The theory went that, with their massive cash buffers, oil producers would continue social spending and infrastructure investment in spite of lower oil revenues. But maybe the extent of the fall, down almost 70% since 2014, coupled with continued anxiety about the future path of global growth has spoiled oil’s party.

Low Oil and Lower Growth

As a result of this turn of events, predictions of global growth — in large part predicated on lower oil prices — have been reduced from 3.5% to 2.5%, only marginally above the level of 2%. Anything below that and global growth is considered to be on the threshold of a recession.

Certainly, the deflationary environment in many net oil-importing countries (aided and abetted by the collapse in oil prices) has encouraged consumers to save their money rather than go out and spend the windfall.

In the US, personal savings rates rose to 5.4% in February, while spending growth was a modest half of that figure. It’s true to say consumers have responded to lower fuel costs by buying more SUVs and by driving further, a record 17.5 million vehicles in 2015 in the U.S. and 3.2 trillion miles, but it would seem that has limited impact in a country of approaching 250 million adult consumers.

Source: Financial Times

Source: Financial Times

Cheap oil is estimated to have lifted GDP by just 0.2% in the US and has probably had no more effect in Europe. Indeed, Europe has seen a deflationary environment as a result of lower oil prices actually encouraging consumers to hold off buying in the expectation prices would be lower a month later. The same effect is probably dragging on consumer spending in China, exacerbated by slowing growth and excess capacity encouraging manufacturers to slash prices as they fight for market share. Read more

Just about two weeks ago, we pointed out that something was rotten in the  Q1 base metals rally: The most-liquid and the most-used industrial metals were not leading the market rally.

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In a powerful turn around situation, we would like to see Dr. Copper and his esteemed colleagues aluminum and nickel showing strength. Instead, we are witnessing tin and zinc leading this rally.

Copper Erases Gains for the Year

3M LME copper coming under renewed bear attack

Three-month LME copper coming under renewed bear attack. Source: MetalMiner analysis of Fastmarkets.com data.

Last week we saw copper prices coming under renewed bear attack. The gains made in Q1 have already begun to shrink. Read more

You could be forgiven for asking what all the whining is about in the U.K. over the imminent closure of the last major steel production facility at Port Talbot, South Wales.

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Politicians and the media are busy blaming the Chinese for dumping steel at uneconomic levels and depressing the market price to the point where firms like Tata Steel cannot compete at any point other than high technology aerospace, automotive and oil extraction and refining grades of steel.

What Dumping Hath Wrought

Certainly the Chinese have played their part, with demand of less than 800,000 tons but capacity north of 1.1 million, the country can and does produce far more steel than it can consume putting pressure on mills to produce and export just to maintain capacity utilization. But the U.K. (and the rest of Europe) has also played its part in creating this sorry state of affairs.

The British government, in its frenzy to meet foreign aid budget promises, has lavished money on those very steel producers that are now dumping steel back into the market. One report outlines how the government via it’s Department for International Development (DFID) paid £21 million ($30 million) to fund a project aimed at turning around a number of loss-making state-owned businesses in Liaoning and Sichuan between 1999 and 2004. Liaoning is a major producer of pig iron and steel, while Sichuan is one of China’s largest producers of coal, energy, iron and steel.

Government Policy

In another report, the British government is criticized for having contributed to soft loans made by the European Investment Bank worth some £80 million ($115 million) as part of its policy to help Chinese firms lower their emissions and their power costs.

The figure includes a loan of £40million ($65 million) to one of the world’s worst “steel dumping” culprits, the Wuhan Iron & Steel Corporation, the article says. State owned Wuhan, the world’s eighth-largest steel producer is such a prolific steel dumper that it has now been especially targeted by the European Commission, which wants to slap it with 36.6% tariffs.

Just five years ago, however, EU bankers decided to lend it €50 million (£40 million or $56.9 million ) to put towards a €207million (£167million, $237.8 million ) Euro-Combined Cycle Plant, yet Tata’s Port Talbot and other plants like it in the UK are saddled with the highest power costs in Europe.

U.K. Tax Money Benefits Chinese Producers

State aid is expressly prohibited in the EU, yet another Chinese beneficiary of British tax pounds was the Shaogang Songshan plant in Guangdong which, in 2008, received €35 million ($43 million) in EIB funding in the interests of “improving energy efficiency,” all in the interests of “climate policy.”

Not surprisingly, U.S. Steel is pretty scathing in its assessment of what it sees across the pond with Mario Longhi, the head of the Pittsburgh-based steelmaker accusing the EU and U.K. of being “negligent” in their approach to the dumping of cheap steel on world markets by China, arguing in a recent Financial Times article that the crisis facing the British industry is the result of misguided policies.

One can have some sympathy with U.S. Steel’s argument. They are in a very similar position to Tata’s European operations. U.S. Steel, which lost $1.5 billion last year, has been forced to shut down plants and lay off thousands of workers as a result of the slide in global steel prices. It has also been hit hard by the oil price collapse and disappearing demand from what was once a domestic oil production boom. U.S. Steel’s production is said to be down 40% from a year ago, he said, with some plants now operating at just 20% of their capacity.

Last Week For The The March 2016 MMI Report

It looks like Tata’s Port Talbot, while not the first, may not be the last major plant to close before prospects begin to improve for western steel producers. It could be a long haul.

While watching Donald Trump on the campaign trail makes amusing viewing, at least outside the U.S., inside I expect voters are worried by what they hear.

Last Week For The March 2016 MMI Report

I think few of us would make our investment decisions based on potential President Trump’s advice. Nevertheless, his assertion that the US was headed for a “massive recession” in an interview with The Washington Post reported by CNBC have stirred up a whirlwind of comment, opinion and argument — as was no doubt his intent.

Trump’s claims appear based largely on his belief that the U.S. stock market is a bubble waiting for some form of shock to collapse and that the underlying economy is in a much poorer state largely because employment is worse than official figures suggest. Before we accept or dismiss his claims let’s take a look if they hold any water.

Are Stocks Overvalued?

First, the stock market, it is true to say it has been on a roll since the financial crisis. CNN Money says it’s the third-longest stock market upswing in U.S. history. But, they also warn that dark clouds hover as the S&P 500 has nearly tripled (up 194% to be exact) since its low point on March 9, 2009.

The bull run is already showing signs of becoming overdone and fears of a global slowdown, mostly brought on by China, caused severe jitters earlier this year. The stock market’s run has undoubtedly been aided and abetted by cheap money, but that flow of funds will at some stage dry up as interest rates rise. That was meant to happen this year but — as we said back in December — last year’s one rise was likely to be the only for a while. There is talk from the Fed of another rise later this year but we doubt the economy will be ready much before 2017.

All the same, the days of cheap money are nearing an end and that will have consequences for all asset classes, including shares.

Real Unemployment

What about his claims on employment? Headline figures have been impressive, from over 10% in 2009 according to government statistics, unemployment has fallen to 5% now, but many of those jobs have been part time meaning wages have not risen as strongly as the unemployment figures suggest. But, Trump’s claim that the “real” figure is more like 20% have been widely disputed by everyone.

According to Reuters, a  broader measure of unemployment that includes people who want to work but have given up searching and those working part-time because they cannot find full-time employment is at 9.8%, double the headline statistic and higher than the headline number than at anytime in the past as the economy generates more part-time than full-time roles.

There are, of course, some out there that firmly believe the U.S. economy is on the verge of Armageddon. Albert Edwards, a bearish but respected analyst at the French bank Societe Generale, released a note this week highlighting that his “failsafe recession indicator” had stopped flashing amber and had turned to red, according to CNBC.

In Edwards’ opinion, corporate profits, as measured for the whole economy in terms of profits before tax and with a focus on non-financial domestic companies, are a key driver of the economic cycle. In his opinion, we do not have to wait for Fed tightening, he believes that the deep corporate profits downturn is sufficient, in itself, to push the U.S. economy overboard.

He adds that the economy will “surely be swept away by a tidal wave of corporate default.” To be fair, Edwards has been warning of the same since 2012, and it hasn’t happened yet; but any watchers of the “The Big Short” will recall a perceptive few warned of (and shorted) the market long before 2008 and were eventually proved right. Timing is everything.

The wobbles in the stock market both in the US and elsewhere last year and early this were sparked in large part by fears China would devalue its currency and the knock-on effects should that happen. Beijing has since managed to calm fears although many observers feel the currency is still seriously overvalued and an adjustment at some stage is likely. But another fear around China is debt. The rating agency Fitch is reported in the Telegraph this week as saying a “remarkable build-up in leverage across China’s economy” since the 2008 financial crisis means Beijing’s ability to meet ambitious annual growth targets of 6.5 to 7% between 2016 and 2020 looked “extremely challenging.”

The paper went on to say that while China’s public debt ratio stood at 55% of gross domestic product (GDP) at the end of last year, total credit in the world’s second-largest economy, excluding equity raising, climbed to almost 200% of GDP in 2015, from 115% in 2008, and that is based on official estimates.

Fitch said the “true figure” was likely to be closer to 250%. It expects this to climb to 260% of GDP by the end of this year as total debt continues to grow faster than the Chinese economy. A hard landing in China is still considered unlikely and Beijing has tools at its disposal to maintain positive growth, but the extent to which it will be able to engineer 6-7% growth remains to be seen, and the potential for volatility elsewhere should those numbers drop lower is considerable.

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So, we are not about to short the market or convert our assets into cash to stash under the mattress. Trump’s headline-grabbing announcements served to dilute focus on his comments about abortion and may have struck a cord with some of his less fortunate supporters but, on the whole, the chances of a U.S. recession this year or next are considered low. Growth could weaken and significant challenges remain, but an outright recession, we hope, is no more than campaign trail bluster.