Macroeconomics

There is a close linkage between emerging markets and commodity prices. This connection becomes stronger for net commodity exporters. The two most notable examples are Russia and Brazil, both of which are commodity and energy exporters. These two countries have been two of the hardest hit among emerging markets.

Russia market vectors (Black). Brazil iShares (Orange)

Russian market vectors (Black). Brazilian iShares (Orange) since 2012. MetalMiner analysis with data from Stockcharts.com.

These markets have historically moved with commodity prices. When commodities fall, exporters of commodities make less money which is bad for their economy. In many cases, the movement of these markets helps to give clues to future moves in commodities.

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As we can see in the chart above, Russian (in black) and Brazilian (in orange) stock markets have been in bearish mode since 2011. Both, however, rallied this year but we can see that the rally is falling short of their previous peaks. The recent drop also coincided with falling commodity prices worldwide since April.

What This Mean For Metal Buyers

Weakness in emerging markets validates weakness in commodity prices. The dollar is still strong while commodities and emerging markets fall. It’s hard to become bullish on commodities until we start seeing some divergences.

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A major exchange picked a partner for its new steel product contracts and CEO expectations for US economic growth are weakening.

LME Picks Platts

The London Metal Exchange said recently that it will partner with McGraw Hill Financial Inc. to license the reference index prices for its new cash-settled ferrous scrap and rebar contracts.

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The selected index prices are for scrap are TSI Turkish Imports, CFR Iskenderun Port; and for rebar: Platts Rebar, FOB Turkey Port. The new LME Steel Rebar and LME Steel Scrap contracts will debut November 23.

The cash-settled futures are designed to complement the LME’s existing ferrous contract – LME Steel Billet – and to meet the needs of the metal community for new risk management tools.

The LME said its new cash-settled contracts were developed in response to market demand and in close consultation with steel producers and consumers. The LME writes that the new contracts complete the production value chain for long steel – from inputs (LME Steel Scrap), through semi-finished stages (LME Steel Billet) to finished products (LME Steel Rebar).

CEO Expectations for Economic Growth Dwindle

US chief executive officers have become a bit more pessimistic in their outlook for the American economy in 2015 and fewer of them expect to increase sales, investment and hiring this year, a quarterly business group survey said on Monday.

The Business Roundtable’s second-quarter survey, conducted before US gross domestic product for the first quarter was revised down last month to show an annualized 0.7% contraction, found that CEOs expect 2.5% GDP growth this year.

That is down from the 2.8% growth expected in the last quarterly survey and 2.4% at the end of last year.

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We have already written this year on the risk to the fossil fuel industry posed by potential carbon taxes. Consensus that such taxes are coming seems to be building surprisingly quickly, helped, it must be said, by a historic agreement between the USA and China to work together to agree on emission targets and add momentum for an agreement to emerge from the COPS21 conference planned in December in Paris.

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The most noise is, not surprisingly, coming from fear that trillions of investments in fossil fuels, principally coal but also oil and even natural gas, could become uneconomic if some form of carbon tax is agreed upon. Probably more because of this worry than any more altruistic notion major investors are already beginning to turn their backs on coal in particular. The latest is the world’s largest sovereign wealth fund, Norway’s $916 billion fund has decided this week to pull any investments from companies whose business relies more than 30% on coal according to the FT.

Divesting ANY Business

The crucial point here is “any business,” so not just mining companies but power generators will be hit. The fund says it is trying to alter behavior in these firms, but if you are a major European power generator you have billions invested in coal-fired power production. That is some super-tanker to turn around quickly.

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Occasionally it is interesting to step back and look at global trends over a longer term than one month to another or one quarter to the previous, and sometimes it is downright scary.

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Today, we are all a little disappointed by a poor Q1 in the US. Europe is feeling a little better about a slight upturn and Japan, well Japan is struggling to gain traction in spite of repeated attempts to kick start its economy.

Several emerging markets are in outright recession, according to the Telegraph, namely Russia, Brazil, Argentina, and Venezuela are all contracting sharply. So is this a temporary setback or are these aspects of a deeper malaise?

Growth Crawling

Global growth is slowing, and not just on a month-by-month or quarter-by-quarter basis. The UN has cut its global growth forecast for this year to 2.8%. That’s still growth, of course, but this pace is only slightly above the 2.5% rate that used to be regarded as a recession for the international system as a whole, the paper says.

It would be easy to blame China but China, actually, is only part of the problem. All economies seem stuck in a global malaise of slow growth and falling productivity rates. An FT article illustrates the problem of productivity. As emerging markets are reaching the limits of easy growth based on catch-up technology, advanced economies are concentrating on services, which tend to have less scope for rapid efficiency gains.

New technology has centered on consumer products, which have made people better off and able to do more than in the past, but have not necessarily improved the quantity or efficiency of their work.

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That China uses overseas investment as a tool for political as well as economic advancement is no surprise to anyone.

Why Manufacturers Need to Ditch Purchase Price Variance

Beijing has come under criticism in the past for investing in places like Zimbabwe and Sudan regardless of the human rights flavor of the regime in power, but such criticism is like water off a ducks back. China is in it for China’s gain and cares little for what others may say.

It will be intriguing looking back 10 years from now to see what some of these emerging markets have given away to China in return for much-needed investment. Beijing is not stupid and exacts a price for it’s infrastructure and development investments in in the form of ownership of mines and agricultural assets useful for their industry and food supplies.

A Tale of Two Centuries

Many would argue this is no different from western nations’ exploitation of African and South American countries in the last century, but you would certainly hope the recipients had learned from such experiences. One advantage China wrings from such deals is often the supply of materials and equipment in addition to expertise and finance.

In many cases even the workforce is supplied, too, in the construction of infrastructure projects. In the face of growing global alarm at rising Chinese steel and aluminum exports, recipients of direct investments can hardly complain about the provider supplying materials, so major road, rail and power projects provide an opportunity for substantial Chinese exports.

China in Brazil

This appears to be one of the major attractions in investment decisions made this month in Brazil following Premier Li Keqiang’s visit to Brazil, Columbia, Peru and Chile. Li announced billions of dollars of investments while there last week, potentially up to some $50 billion to Brazil alone according to Reuters, on top of a similar amount in other South American countries.

In return, Brazil has gained not just desperately needed finance and investment but concessions for exports such as a lifting of the 2012 beef ban following an outbreak of mad cow among Brazil’s herds. According to the Guardian newspaper, trade between China and Latin America as a whole exploded from barely $10 billion in 2000 to $255.5 billion in 2012, while Chinese-Brazilian trade mushroomed from $6.5 billion in 2003 to $83.3 billion in 2012.

Although China is just the 12th-largest investor in Brazil, it is Brazil’s largest export market, mostly of raw materials, a situation Brazil would dearly like to change if it were only competitive when it comes to manufactured goods. One area of expertise is aircraft, part of the recent deal is a $1.3 billion sale of 22 Brazilian Embraer commercial jets to China’s Tianjin Airlines.

Anyone familiar with the trials Vale SA has been going through gaining agreement to use its fleet of new Valemax super ore carriers docking at Chinese ports, will not be surprised to hear the iron ore producer has finally caved in and sold four of the vessels to China Merchants Energy Shipping Co. Ltd. for an undisclosed sum. It was only ever about China having a role in that trade.

Construction has started on a 2,800-kilometer transmission line by China’s State Grid Corp., the world’s largest utility to link the Belo Monte hydroelectric dam under construction in the Amazon to the industrial state of Sao Paulo whilst much talk is being made of a possible railway from the southeastern Brazilian port of Santos more than 3,500 km (2,200 miles) to the Peruvian Pacific port of Ilo.

For Brazil, it offers the chance to avoid the Panama Canal and, for China, lower-cost access to Brazil’s markets via the Pacific in addition to the steel, rolling stock and associated equipment that would no doubt be part of the deal.

China has become adept at, as the Japanese before them, combining finance, expertise and material supply in their overseas investments. State driven and financed, they can afford to play the long game and maximize political and well as commercial aims. In that regard, cash-strapped but economically more developed South America has much more potential than Africa did. Expect more of the same in the years ahead as China seeks to both spread its influence and put those massive reserves to use abroad.

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As we pointed out last month, the US dollar is showing some weakness for the first time in almost a year. That dollar weakness has helped metal prices during the second quarter. However, the recent price movements aren’t reason enough to suddenly become bearish in the dollar.

Why Manufacturers Need to Ditch Purchase Price Variance

The dollar increased in value very quickly in 2014, so it’s not weird to see the dollar taking a breath before it continues on its way up. Technically, this is called a “correction within an uptrend.”The question now is whether the dollar has weakened enough already or if it’s due for further declines.

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Today in metals, two steel majors joined forces in India and predictions differed for the US economic recovery.

ArcelorMittal and SAIL Team Up for Auto Plant

ArcelorMittal, and the Steel Authority of India Limited (SAIL), India’s leading steel company, signed a memorandum of understanding to set up an automotive steel manufacturing facility under a joint venture arrangement in India.

Why Manufacturers Need to Ditch Purchase Price Variance

The MoU was signed in London Lakshmi Mittal, Chairman and CEO of ArcelorMittal, and C.S. Verma, Chairman of SAIL. Rakesh Singh, Secretary to the Government of India, Ministry of Steel and Aditya Mittal, ArcelorMittal CFO and CEO ArcelorMittal Europe, were also present.

The MoU is the first step of a process to establish a JV between the two companies. The proposed JV will construct a state-of-the-art cold rolling mill and other downstream finishing facilities in India that will offer technologically advanced steel products to India’s growing automotive sector.

MarketWatch: US Recovery Murky

It’s a mystery if the US economy will fire back up and grow at a significant rate this summer.

Not long ago, economists thought US growth could reach nearly 4% in the second quarter after a tepid 0.2% gain in the first three months of the year, a period marked by unusually harsh weather. That would be a carbon copy of the feast-or-famine growth pattern that occurred in 2014.

Many are so sure after an uneven batch of economic reports midway through the second quarter. A poll of analysts compiled by MarketWatch predicts the US will expand at a 3.2% annual rate from April through June — and some have chopped their forecasts to below 3%.

A cluster of fresh reports this week probably won’t give much inkling.

Orders for durable goods such as TVs and trucks that are meant to last a long time are expected to fall again in April. Business spending and investment have softened considerably since last fall.

Sales of new homes nationwide, meanwhile, might creep higher in April, but closings are still historically weak.

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Minutes were recently released of the Federal Reserve Board’s most recent meeting and another rosy forecast for the US construction market was released.

Construction Starts About to Surge?

Construction starts for residential and nonresidential construction in the second quarter should improve after weak numbers in the first quarter, according to a forecast by consultancy CMD.

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However, construction starts overall in the US could rise 9.2% this year, even though both residential and nonresidential starts have been downgraded, CMD said. The CMD forecast is derived by combining proprietary data with macroeconomic factors.

No June Rate Hike

Federal Reserve officials believed it would be premature to hike interest rates in June even though most felt the US economy was set to rebound from a dismal start to the year, according to minutes from their April policy meeting released on Wednesday.

The central bank debated whether a slew of disappointing data, including weak consumer spending, signaled a temporary slump or evidence of a longer-lasting slowdown, with most participants agreeing economic growth would climb to a healthier pace and the labor market would strengthen.

The US economy grew an anemic 0.1% in the first quarter, according to the most recent government data.

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ast week UGI Energy Services announced plans to build a liquefied natural gas production facility in Wyoming County, Pennsylvania.

Why Manufacturers Need to Ditch Purchase Price Variance

The facility will draw Marcellus Shale gas from UGI’s Auburn gathering system, then chill it to produce up to 120,000 gallons per day in liquid form. While we have regularly reported the slowdown in both new shale oil and LNG projects in the US this year — and the subsequent cutbacks in oil country tubular goods production — investments are still being made, in the US and overseas, in drilling.

Plants, Projects Planned

Bloomberg Business reported this week that Anadarko Petroleum Corp. selected a group of developers including Chicago Bridge & Iron Co. for a potential $15 billion LNG project in Mozambique.

CBI’s joint venture with Japan-based Chiyoda Corp. and Saipem SpA, based in Italy, will work on the onshore project that includes two LNG units with 6 million metric tons of capacity each, Anadarko said Monday. Construction plans also include two LNG storage tanks, each with a capacity of 180,000 cubic meters, condensate storage, a multi-berth marine jetty and associated utilities and infrastructure, according to Texas-based Anadarko, which says it will make a final investment decision by the end of the year.

Last week, the Department of Energy gave Cheniere Energy Inc. final approval for the nation’s fifth major export terminal at Corpus Christi in Texas, which will ship the fuel from 2018.

What’s Driving Infrastructure Investment?

While oil prices have bounced back from lows seen earlier this year, it’s certainly not the market that’s driving these investments. While high-cost projects, such as those in Canada’s oil sands, have been canceled by oil exploration companies, relatively inexpensive projects with a quicker path to payback, such as these LNG projects, are still being funded.

The payback is diverse and not confined to domestic home heating. LNG has been priced at a fraction of diesel prices for the last four years. Domestic trucking (18-wheelers and other heavy consumers of diesel) have yet to make a large-scale commitment to LNG, and most places where fuel is dispensed have yet to put in expensive infrastructure to handle the product, but there has been enough success for UGI to justify committing resources to its adoption.

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An interesting post in the FT by a leading economist examines the growing concern that seven years after the financial crisis and the use of unprecedented stimulus measures and extended near-zero interest rates,the world may be stuck in a long-term trend of low growth.

Pool 4 Tool’s Automotive SRM Summit

The author, Gavin Davis, is not to be dismissed as just another academic, he was head of the global economics department at Goldman Sachs from 1987-2001, and served as an economic policy adviser to the British government in addition to being an external adviser to the British Treasury.

Chinese, Japanese Growth Down

Global growth is unquestionably slowing.

The three largest independent economies are all struggling to achieve strong growth. Chinese activity dipped sharply last month, and the estimated rate of growth is now 5.3%, well below the government’s 7% target for the 2015 calendar year leading many to hope yet another stimulus is on the way, but so far we have not seen much more than a relaxation in lending and reductions in interest rates.

Japanese growth remains weak in spite of Abenomics. Remarkably, after recessions in parts of the Eurozone the only major economy showing some resilience is the EU where overall growth could be approaching 1.8% in spite of excessive austerity measures.

Davis cites a colleague’s research that tracks two measures of US activity used to summarize the “state of the economic cycle.”

The Slow Normal

According to his models, the probability that the economy is now in a state of strong expansion has dropped from 70% in December 2014 to under 40% now. Over the same period, the probability that the economy is in recession has risen from zero to 14% – still low he admits, but not entirely negligible.

The expectation is that US growth will rebound in Q2 but will not be enough to raise 2015 growth as a whole and could well result in a downgrade for the year as a whole. It’s hard to see China, the engine of growth for the last ten years or more, suddenly creating the level of demand that will significantly lift global GDP in the next few years.

US Growth Nearly Halted

In the US, the official GDP growth rate in Q1 was only 0.2%, while Davis’ model of underlying activity is showing 1.8%. This may, as in some previous years, be more down to a weak first quarter due to weather but the real worry is that the rate of productivity growth is slowing and with it the potential for a long-term rise in living standards and, hence, growth. The long-term growth rate of the US economy has fallen from 3.3% in 2003 to 2.3% now.

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