Articles in Category: Macroeconomics

Indonesia’s coal mines are closing and few have the resources to clean up their messes before they leave. In China, two state-owned steel enterprises may be asked to merge.

Indonesian Coal Mines Closing

Thousands of mines are closing in Indonesia’s tropical coal belt as prices languish and seams run dry. But almost none of the companies have paid their share of billions of dollars owed to repair the badly scarred landscape they have left behind.

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Abandoned mine pits dot the bare, treeless hillsides in Samarinda, the capital of East Kalimantan province on Indonesia’s part of Borneo island.

China Considers Merging Baosteel, Wuhan Iron & Steel

A proposed tie-up between Baoshan Iron & Steel and Wuhan Iron & Steel — Baosteel and Wisco — will certainly create a force to be reckoned with, writes Bloomberg’s David Fickling. With about 61 million metric  tons of output last year combined, it would likely to be the world’s biggest steelmaker after ArcelorMittal.

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However, Wisco’s revenue over the past 12 months was about a third of Baosteel’s 157 billion yuan, but its 41 billion yuan in net debt is almost three-quarters of Baosteel’s 56 billion yuan.

The European Union is to meet this week — all 27 of them without their 28th member, the rebellious U.K. — to discuss the implications of its voters’ momentous decision to leave the political and economic pact in a national referendum last week.

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Most say the decision to leave will hurt the U.K. economy. The Bank of England said before the vote the economic hit on the country will be considerable, with permanent loss of economic growth, higher unemployment and lower tax receipts.

Banks Gird for Policy Battle

The New York Times quoted sources that said British economic growth could be zero or negative in the short and medium term, with a secondary impact over time as London’s financial services sector, which makes up about 12% of the economy — which is more than manufacturing — begins to move staff members and headquarters to Frankfurt, Paris or Dublin.

The web of international banking could be disrupted if there are tighter restrictions on U.K. labor. Image: Adobe Stock/Sergey Givens.

The web of international banking could be disrupted if there are tighter restrictions on U.K. labor. Image: Adobe Stock/Sergey Givens.

London’s banks have lost no time in applying for banking licenses in the above cities and identifying staff they could move to overseas branches if negotiations do not look like they will guarantee continued open access. Read more

So, as we discussed above, if the new, post-Brexit U.K. allows open access to workers from the European Union — and not allowing open borders and easy employment for other Europeans was the central plank and sticking point of the entire Leave campaign — it might be easier to make a deal with those former partner nations in the E.U. That would also raise the question, “what was all of this for?”

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If discarding the objective of banning open access proves too much of a barrier, the U.K. may opt to fall back on World Trade Organization rules which will mean tariffs and possibly other bureaucratic barriers such as quotas will be established between the U.K. and Europe. That will encourage firms to locate future investment inside the single market rather than in the U.K.

What Might A Future Deal Look Like?

In the meantime, and a final solution could be two years away, the U.K. benefits from a lower pound which will boost exports to the single market and rest of the world. There are a number of models the U.K. could agree with Europe on, long-term, to establish trade rules and coexist in the future.

Germany exports the third-most of its goods to Great Britain behind only the U.S. and France. Negotiators are already trying to solve the puzzle of how to let the U.K. leave the E.U. without Germany leaving all of that business on the Brexit table. Source: Adobe Stock/Luzetania.

The Remain camp’s favorite is the Norwegian model that gives tariff-free access to the single market in return for free movement of labor, acceptance of many of the E.U.’s laws and payment into the E.U. budget, although no say whatsoever, into how that money is spent. The movement clause is likely a dealbreaker for Leave hardliners. Read more

Falling global demand for commodities has led to steep declines in their prices, but savings are being offset by higher demand and wages for a dwindling pool of skilled construction laborers in the U.S.

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Worker shortages have continued to drive up labor costs for the construction industry, according to new research from real-estate brokerage firm CBRE, Inc.

Commodity Prices Drop, Labor Costs Rise

The Wall Street Journal reports that prices for asphalt have dropped more than 42% and iron and steel products have fallen by nearly 15% over the past year, but average construction costs increased by 1.8%, the report found. That is because average hourly wages for construction workers have continued to climb as more projects come online throughout the recovery and the supply of skilled workers isn’t keeping pace.

Even though some markets saw increases in construction employment, most lost jobs in the last 20 years. Source: WSJ.

Source: WSJ

The article states that workers in the domestic construction industry are aging, a trend we have been documenting for some time. The share of people aged 19-24 entering the industry in 2012 and 2013 was 13%, down from 18% in 2006, according to U.S. Census Bureau data.

Changes in immigration patterns are contributing to the shortage, too. The U.S. had 570,000 fewer construction workers born in Mexico in 2014 than in 2007, according to research from Chris Porter at John Burns Real Estate Consulting, as immigration has sharply declined during that period.

Technology Replaces Some Jobs

The article also notes that risk-averse construction companies are increasing off-site prefabrication and other processes that eliminate on-site work. Industry giant Turner Construction, has been relying on 3D modeling and other process technologies to control risk and costs over the last 20 years as well.

Another report, this one from the Associated General Contractors of America reported that only 19 states saw month-over-month construction employment growth between April and May, a loss of 15,000 jobs.

AGC CEO Stephen Sandherr said in a press release that “it is only a matter of time” before the skilled worker shortage affects the general economy.

Democracy can be a great system, but it also has some risky aspects.

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One of them is the referendum, especially when it’s done in a period of instability. When people are unhappy, they look for what they think is a short-term solution to their problem, overlooking what’s really best for the country. The Brexit is a perfect example of this. The British people are unhappy because their economy isn’t doing so well, blaming foreigners that cross its borders as part of the European Union and the regulations imposed on member states by Brussels. Read more

Almost no one seems to think this is a good idea, but the British people have gone and Brexited the European Union anyway.

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Britain has voted by a narrow majority 51.8/48.2 to leave the EU. What happens now is anyone’s guess. We are in uncharted territory, even those leading the charge for a Leave vote seem somewhat perplexed by the outcome and have been busy backtracking on promises and commitments made during the campaign about what they could deliver.

New Leadership

David Cameron, Britain’s prime minister, has announced he will step down before the conference season in October to make way for a new leader of the party’s choosing. The automatic assumption is this will be Boris Johnson with Michael Gove as Chancellor, but the party is deeply divided and a lot could happen between now and the Fall.

Screen Shot 2016-06-24 at 10.42.36

Source: BBC

In the meantime, the markets have taken the decision badly. The FTSE 250 — which is considered a close barometer of the UK economy — fell by 12.3% before paring losses back to 7.1%, while the pound tumbled to $1.30, before recovering slightly to $1.36 against the dollar. Read more

This week in metals, aluminum prices hit a one-month high, even as surplus material in China looked like it would increase as smelters there went back online.

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Even when metals prices were rising across the board in the first quarter, aluminum was the laggard as oversupply still kept investors from buying it and construction demand remained tepid. Thanks to Chinese stimulus that construction demand has shot up and aluminum prices with it.

Aluminum: Smelt All You Want!

Reuters’ Andy Home and our own Stuart Burns both noted that while Beijing is doing everything it can to clean up overproduction in its steel sector — and the resultant pollution that comes with it — there’s no such commitment from the top when it comes to aluminum, mostly because of the state-of-the-art smelters Chinese companies have invested in.

How are Chinese smelters making money? Source: Adobe Stock/Pavel Losevsky

How are Chinese smelters making money? Source: Adobe Stock/Pavel Losevsky.

So, to recap, steel overproduction and pollution is bad but aluminum overproduction and, relatively, smog-free smelting? China is a-okay with that. What could possibly go wrong?

Rio Repositions

Meanwhile, things have gone significantly awry at Rio Tinto Group. The Anglo-Australian multinational miner shook up its organizational structure this week and head of iron ore commodities Andrew Harding was passed over for the CEO job by copper and coal division leader Jean-Sebastian Jacques. Jacques, a native of France, has only been there since 2011. Harding has been with Rio for 25 years and had been expected to replace departing CEO Sam Walsh this month. Read more

stainless-nickel-L1Nickel ore shipments from the Philippines could be in trouble after a new president’s appointment of an anti-mining presence that could spell disaster for Chinese buyers.

According to a recent report from Bloomberg, President-elect Rodrigo Duterte is prioritizing the nation’s stance on mining by appointing a new head for its environment department. This maneuver has the potential to disrupt supplies to buyers in China.

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The London Metal Exchange echoed those concerns as nickel closed up nearly half a percent this week, indicating this new government will limit nickel ore exports.

“We might see an imminent crackdown on the Philippines’ small mines,” said Sam Xia, an analyst at China Merchants Futures Ltd. “This will reduce its nickel ore exports, including to China.”

The Philippines is now a key supplier of nickel ore to Asia’s leading economy after Indonesia stopped shipments in January 2014. Meanwhile, China’s nickel ore imports from the Philippines increased to 3 million metric tons this May, its highest point in seven months. That figure accounted for 97% of its total purchases.

Nickel Hits Six-Week High This Week

Our own Raul de Frutos recently highlighted that nickel prices hit a six-week high following a notable recovery from May’s price sell-off.

de Frutos wrote: “The metal benefited from a positive swing in investor sentiment toward commodities in June, stemming from a weaker dollar and the ongoing recovery in oil prices. Nickel has climbed steadily after hitting multiyear lows in February, but the move isn’t big enough to impress the market yet.”

You can find a more in-depth nickel 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 British pound slumped to its lowest level since 1985 early this morning as results of the U.K.’s vote on European Union membership came in with the leave campaign winning the vote by close to a 2% margin.

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The currency tumbled to as low as $1.3460 on Friday, which was its lowest level in 31 years.

It fell about 10% from the 2016 high of $1.50, which it hit just hours earlier when most polls suggested the remain campaign had a slight polling lead. That was before polls closed.

As of this writing, Dow Jones Industrial Average futures are down 600 points, nearly 3%, hours before U.S. markets open. Japan’s Nikkei Average, which was open and trading as the votes were counted, dropped 8% while the U.S. dollar briefly fell below 100 yen to a dollar.

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Investors fled to safe havens as gold climbed 5% and briefly hit $1,330 an ounce. We will update this post in the morning as this story develops.

Adobe Stock/ Björn Wylezich

Adobe Stock/ Björn Wylezich

The International Lead and Zinc Study Group has released preliminary data on the global market for refined zinc, and found a notable surplus from January to April 2016 with total reported inventories increasing during that time.

The ILZSG also found that an 8.1% reduction in global zinc mine production was mostly due to decreases in India, Australia, Ireland, Peru and the U.S.

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Meanwhile, refined zinc metal production increases in Namibia and the Republic of Korea were offset by reductions in Japan, India and, once again, the U.S., leading to an overall global reduction of 3.4%.

The ILZSG states: “Global refined metal usage over the first four months of 2016 was at the same level as the corresponding period in 2015 with rises in China and Europe being offset by decreases in Japan, Taiwan (China) and the United States.”

The group concluded that Chinese zinc imports contained in zinc concentrates fell by 20% while refined metal net imports grew by 163%.

Zinc Storage Under Fire

Recently, our own Jeff Yoders covered the lawsuit over zinc storage in his Week-in-Review. Yoders wrote: “Glencore‘s Pacorini warehouse operations business will have to defend the suit as they seemingly falsified documents at the center of the gripes from customers.”

The lawsuit by U.S.-based investors deals with falsified orders and are specifically designed to conceal when and where metal entered Pacorini’s New Orleans warehouse complex.

You can find a more in-depth zinc 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.