Macroeconomics

It should come as little surprise that India was among the first nations to welcome the historic agreement reached between the US and Iran recently on the latter’s nuclear program.

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India’s external affairs ministry responded to the development by releasing a statement Friday, saying it (India) welcomed the understanding announced in Lausanne between Iran and the E3+3 on Iran’s nuclear ambitions.

“A significant step seems to have been taken with agreement on the parameters of a comprehensive settlement to be negotiated by June 30,” the statement said.

Secretly, Indian government officials must have let loose a sigh of relief over the agreement, since two of their most important, modern-day allies could now be seen by the world to be on the same side of the “Us versus Them” debate. One wherein the definitions of “Us” and “Them” have changed dramatically in the past year, accounting for the new twists and turns in geopolitics.

US vs. Them Scenario

India is not new to the “Us versus Them” scenario where Iran and the US are concerned. Twice earlier, it had voted with the US in the UN on Iran’s nuclear program, a move that was seen as an “abandonment” of Iran, its traditional ally. For example, in February 2006, India, with 26 other nations, had decided to refer Iran to the UN Security Council, much to the consternation of not only the then-Iranian government, but also to the alarm of many in India’s political circles.

It would not be wrong to say that India has been a reluctant client in joining the Western powers in their crusade against Iran.

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With Iran and the US coming to terms over the Islamic Republic’s nuclear program, India finds itself in an enviable position where all the players in the game have aligned on the same side – one big “Us,” Israeli protests not withstanding.

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Moving forward, India will be more than willing to sign on the dotted line on several deals in the pipeline with Iran, especially in the steel sector. In March, Iran’s Deputy Industry Minister, Mehdi Karbasian, was quoted by Azer News saying Iran was ready to accept Indian investment in the steel sector, and “planned to start activity in the country.”

Along with India, a large number of other foreign mining companies including some from Kazakhstan had already visited Iran in the past year, looking for similar investment opportunities.

New SAIL Facility

At the start of 2015, India’s state-run Steel Authority of India (SAIL) had announced a proposal for a multimillion dollar, nearly 2 million-metric-ton integrated steel plant in Iran.

SAIL has already asked the Iranians to provide 500 hectares of land near the country’s Bandar Abbas port and another 500 hectares of contiguous land for future expansions.

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US Construction spending fell in February, pulled down by a drop in single-family home building. Private spending on construction of single-family homes declined 1.4%.

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Seasonally adjusted construction spending fell 0.1% after a revised 1.7% drop in January, the Commerce Department reported on Wednesday.

The annual rate of spending fell to $967.2 billion, Commerce said. January’s outlays were also revised downward to show a 1.7% decline instead of the previously reported 1.1% drop. The numbers are seasonally adjusted so it can’t be the oft-blamed winter weather that’s dragging down construction spending.

These losses, rather, are more likely the result of restricted spending in the energy sector as the plunge in crude oil prices is affecting future shale oil, natural gas and other drilling projects. Major companies slashing expansion budgets in the US and abroad include ConocoPhillips, Chevron, Hess and BP. The US Energy Information Administration recently said it expects global oil inventory to build to an average of 1.3 million barrels per day in the first half of 2015. EIA believes these builds will moderate in the second half of the year as non-OPEC supply, particularly in the US, slows due to low prices and increasing demand.

What Does this Mean for Construction Spending?

Commerce breaks construction spending down via its statistics agency, the US Census Bureau. The “power” category of the census bureau figures — which include oil and gas facilities — is down by 17.2% year-on- year and 4.5% for the month. That sector of the construction industry is going to have to wait until energy prices rise again.

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As we struggled through a week of bearish forecasts and weak growth, bears just started popping up everywhere, too. No matter how much you tried to not think about it, the bearish outlook for our metal markets was omnipresent.

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One of them was staring at us from our Q2/Q3 forecast webinar. Vladimir Putin was riding one in toy form. Even the beloved, cuddly ones like Winnie the Pooh and his new movie made us think of poorly performing markets and surplus stocks. That’s when we thought, is this bear market really that big and bad?

Respect the Bear

Should we really fear bear markets? Sure, everyone WANTS bull markets, but bears serve a valuable purpose by creating supply and demand equilibrium and separating visitors to national parks from their pick-a-nick baskets. Bull markets can’t even exist without the occasional bear putting things right.

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When will the fall in copper prices come to an end? Even the investment market can’t seem to decide with the Chinese shorting the metal and some western investors still long.

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Certainly those following the trend line downward have done handsomely in the last six months – at least as far as January.

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Precious metals keep falling. We pointed out in October that the outlook for the precious basket of metals was bearish and that palladium was the only one holding its value. Today, the picture looks even more bearish.

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Gold and silver are near their lowest levels, platinum recently made a 5-year low and palladium, the only metal that was showing some hope is now falling and marking a 1-year low.

Although last year we were bullish on Palladium, the picture is starting to look like a downward trend. The precious metal is now breaking a key support level after hitting deeper lows. This indicates that selling pressure is increasing as the metal declines, and its lower high points are a sign that there is diminishing buying pressure during those upward bounces.

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We may all think we are headed into the sunny uplands of growth and prosperity, but this year could see more volatility than we bargained for.

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One area of concern is governments’ monetary policies and the impact they have on foreign exchange rates. Low energy costs, low inflation and cheap imports on the back of slowing emerging market growth and the strong dollar have made us feel as if things are finally going our way. Not to pour cold water on a number of encouraging trends, but that strong dollar is already causing problems and those problems will get worse.

It’s not just exporters such as Caterpillar and Boeing that can be hurt by a stronger dollar, domestic firms also face increased competition from overseas suppliers buoyed by a lower currency. The steel industry is a case in point. Broadly speaking, for the economy as a whole there is likely to be more winners than losers but it will be highly selective and firms exposed to foreign exchange affected costs will face the biggest challenges.

Most economies will face gradual monetary tightening before the end of the decade, but the US could lead the rest of the world by at least a year. Many economists predict that as the Federal Reserve starts to raise rates in the second half of this year. Even other strongly growing economies such as the UK are not likely to join in raising central bank rates for at least a further 12 months. That will exacerbate the US dollar’s strength, particularly against economic regions like the European Union, which is embarking on quantitative easing to the tune of €60 billion per month up to a current limit of €1 trillion, but some are already predicting could reach twice that amount.

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Some countries in Europe already have negative interest rates, Denmark and Switzerland’s are at -0.5% and -0.75% respectively, charging clients for the pleasure of holding their money, in an effort to stave of safe-haven status vs the euro.

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Royal Bank of Scotland Research is not predicting base rates in euro-land or Japan to rise from 0.1% in 2015 or 2016, and in the UK they are predicted to only rise from 0.5 to 1.0% next year. That is a reflection of an almost deflationary environment and such weak growth that the risks to inflation are non-existent.

Chinese rates are predicted to fall from 6% last year to 5.6% this year and 5.3% in 2016. Likewise, India, which could fall to 7% this year from 7.8% last year, will likely only rise to 7.3% in 2016. Far from just being faced with the risk of a Greek exit, the European Union is facing exceedingly weak growth in France and Italy, the currency bloc’s second- and third-biggest economies.

Weak Growth Throughout

These are situations that would be more readily addressed by a significant loosening of policy in Germany to boost demand rather than Europe-wide quantitative easing, but that’s another matter. The risk is as much political, both Spain and Portugal have elections this year with aggressive minority parties keenly watching developments in Greece, as economic.

The EU can’t afford to allow Greece to default on its debts because it will immediately fuel demands from other quarters for the same treatment. Even France is being sanctioned by the EU for repeatedly exceeding its 3% of GDP budget deficit limits. France, too, would love to be let out of the German-led fiscal straitjacket constricting some European markets.

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Last week, the Federal Reserve scaled back on its plans to hike interest rates this year. The potential for a delay has taken steam out of the dollar’s rally and contributed to a bounce in commodity markets.

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Higher US interest rates usually help boost demand for the dollar, which helps the dollar to appreciate against other currencies. The dollar gained significantly last Summer. This dollar’s strength makes it harder for US companies to sell goods overseas and to compete against imports, as Fed Chairwoman Janet Yellen pointed out in the last meeting. For this reason, the Fed might not want to raise rates until the dollar cools down.

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MetalCrawler crawls the web for the latest metal news.

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Today we have nickel news from Russia, Nucor has cut its own forecast and Turkey has been found to be illegally dumping steel for oil line pipe in the US.

Russia’s OAO Norilsk Nickel, the world’s second-largest nickel and largest palladium producer, is considering a buy back of its shares to support its stock, Interfax news agency quoted Vladimir Potanin, its chief executive, as saying on Thursday. No decision has been made yet, said Potanin, Norilsk’s co-owner and Russia’s richest man.

Nucor Cuts Forecast Due to Cheap Imports

Nucor Corp., the top US-based steelmaker, cut its profit forecast for the first quarter, saying higher imports were hurting steel prices. Nucor expects imports to slow down in the second quarter, but remain at “excessively high levels”, the company said on Thursday. The company’s shares fell as much as 6% in morning trading.

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