Articles in Category: Public Policy

This is part 2 of a post on what the International Monetary Fund‘s recent global growth forecast means for purchasers in major and developing economies. Here’s part 1 if you missed it

Overall the world economy is now expected to expand by 3.1% in 2015, the London Telegraph reports down from an earlier forecast of 3.3% in July. This represents the slowest expansion since 2009, when global growth ground to a halt.

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Growth in 2016 is expected to pick up to 3.6%, itself downgraded from a previous forecast of 3.8% and not much above the 3.1% considered stall speed for the global economy as a whole.

So what are the risks? Well to the pattern of a gradually slowing global economy should be overlaid the risk of an outright recession in South America’s big 5 of Brazil, Chile, Colombia, Mexico and Peru, while Russia’s recession is expected to extend on into 2016 as oil prices are not predicted to average above $55 a barrel through 2017.

Source Telegraph

Source: London Telegraph

The risk of recession in mature economies is rising, although still believed to be unlikely at the moment.

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Gold prices surged today as commodities seemed to gain traction against a weakening US dollar.

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The 6th Circuit Court of Appeals has stayed the Environmental Protection Agency‘s new water rules in all 50 states, giving a reprieve to manufacturers until the full court hears arguments over the legality of the new rules.

Gold Climbs, Dollar Falls

Gold jumped to a 3-month high today bolstered by a weaker dollar and expectations the Federal Reserve will not hike interest rates this year. The dollar hovered near a 3-week low versus a basket of major currencies, anchored by doubts that the Fed will raise interest rates by the year’s end.

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Spot gold reached a peak of $1,169 an ounce and was up 0.6% at $1,163.96 an ounce at 1401 GMT, although it has retreated a bit since. US gold futures for December delivery were up $8.40 an ounce at $1,164.50.

Appeals Court Stays New EPA Water Rules

A federal appeals court on Friday temporarily blocked an Environmental Protection Agency regulation that would bring more waterways and wetlands under federal protection, in a sign the effort could face an uphill legal battle.

The order, issued on a 2-1 vote from the Cincinnati-based 6th US Circuit Court of Appeals, was a preliminary boost for a group of 18 states that challenged the EPA regulation. The rule seeks to bring smaller bodies of water at the outer edges of watersheds under the Clean Water Act and was issued jointly with the US Army Corps of Engineers.

“A stay temporarily silences the whirlwind of confusion that springs from uncertainty about the requirements of the new rule and whether they will survive legal testing,” wrote the majority of the 3-judge appeals court panel.

The court said the challengers had demonstrated “a substantial possibility of success” in winning the case. Manufacturers, who would be subject to more stringent regulations under the plan, applauded the decision.


The IMF’s report on the global economy last week was like the Curate’s Egg, good only in parts.

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Depending largely on where you live in the world, the fund’s opinion varies on performance this year and next, but broadly the news isn’t great. A deep slowdown in China and other emerging economies is overpowering a strengthening recovery in richer countries, notably the USA, UK and some parts of Europe, the FT reports.

Although advanced economies will post their best performance since 2010 the paper says 2015 will mark the fifth consecutive year that average growth in emerging economies has declined. The IMF predicts in its twice-yearly world economic outlook.

The China Situation

We are accustomed in the metals market to seeing the blame heaped on China for the slowdown, but although the fund does single out China’s rapid transition from an investment-led, export-orientated manufacturing economy to a services-led internal consumption economy as part of the reason for a marked slowdown in the world’s second-largest market, other factors are also singled out.

Economies reliant on the export of commodities and raw materials — such as oil, natural gas and metals or ore — have seen incomes drastically cut and, as a result, have experienced a marked drop in government expenditure.

This has pushed some, such as Russia and Brazil into recession, and severely strained the budgets of many Middle East economies. But the paper also lists other reasons the fund has identified including lower productivity growth, high public and private debt levels, aging populations and a hangover from post-crisis investment booms in many emerging economies.

Source Telegraph

Source:  London Telegraph

On the plus side the IMF still expects growth of 6.8% this year in China moderating further to 6.3% next year, many believe that is a little optimistic but much will depend on what level of stimulus Beijing decides to implement later this year or early next.

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There appear to be 2 bright spots on the copper market landscape on which producers and analysts are focusing.

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The first is the possibility miners will cut back production sufficiently enough that raw material supply will become restricted and, as a result, prices will stabilize and then rise next year.

Glencore has announced the temporary closure of 300,000 mt of production capacity in the Democratic Republic of the Congo and Zambia and there has been talk about output cuts in Chile.

Reuters reported the country’s second-largest copper mine, Collahuasi, owned by Anglo American and Glencore, planned to cut output by 30,000 mt. But, in truth, we are unlikely to see a massive curtailment in supply, not like the 700,000 mt we saw back in the late ’90s and early 2000s, simply because the supply market is so fragmented now, making it tougher to orchestrate wide-scale cutbacks.

According to Goldman Sachs, the top 5 producers control only 35% of global production, compared to iron ore, where the top 4 producers control more than 60%. At the same time that cutbacks appear here, increases appear somewhere else. Copper output in Peru, the world’s third-largest producer, rose 30% in August, according to the paper.

Wither Demand

Meanwhile, demand is softening further. Data last week showed activity in China’s factory sector shrank again in September as demand softened at home and abroad. Goldman Sachs forecasts no copper demand growth in the country this year. Nor are other emerging markets likely to provide the boost China’s cooling demand has lost, China consumes 45% of the world’s copper compared, say, to India that consumes just 2%.

So if supply cuts hold out only limited scope for supporting the copper price what else could make a difference? Well, back to China and the long-anticipated stimulus that commodity producers have hoped Beijing would instigate looks like it may be much more targeted than previous programs.

China’s Power Plan

Copper producers are pining their hopes on power transmission as the next big thing for the copper market, saying China will spend at least 2 trillion yuan ($315 billion) to improve its power grid infrastructure over the 2015-2020 Five Year Plan period, according to another Reuters article that cites government sources.

Apparently, despite falling power consumption growth, China is working to upgrade its cross-country power transmission capacity in order to reduce coal consumption along the smog-hit eastern coast and provide markets for energy producers in the resource-rich far west, where local electricity demand is considerably weaker.

The paper says China has already built long-distance ultra-high voltage power lines connecting giant thermal power and hydroelectric stations in the west to eastern coastal regions like Shanghai, but now needs to extend them even further. The 2015-2020 investment, it is hoped, will provide a boost for copper consumption.

Demand from the power sector accounted for nearly half of China’s estimated 8.7 million metric tons of refined copper consumption last year, Reuters says, with more than 1 mmt of it used in power transmission alone. So far this year, investment in the sector is very slightly down compared to last year but the State Grid is said by the Financial Times to have issued new tenders in anticipation of greater investment in the next five year plan.

Copper or Aluminum?

The fly in the ointment for copper producers, though, is the switch to much cheaper aluminum, both for power transmission and factory and city distribution networks. Switching to aluminum alloy could potentially replace up to 2 mmt of copper demand annually, or two-thirds of the roughly 3 mmt of copper currently consumed by cable manufacturers, according to the FT reporting International Copper Association data.

It is roughly half as expensive to wire up factories with aluminum alloy as it is copper, making the switch attractive for cost-conscious Chinese manufacturers. Even though the FT reports the shift will be expensive in the long term, since aluminum alloy deteriorates faster than copper.

Not surprisingly, there is furious lobbying going on in China between copper and aluminum producers. Apparently both industries are appealing to nationalism. Domestic aluminum smelters point out that China is a net importer of refined copper so substitution can help bolster Chinese industry and reduce imports.

In addition, China has plenty of excess aluminium capacity, although 1 mmt of additional aluminum demand will not put much of a dent in up to 8 mmt of excess aluminum-smelting capacity – depending on whose figures you accept.

The copper industry counters that investments by Chinese miners overseas mean that, globally, Chinese corporations control more reserves of copper ore than of bauxite, the FT says. To be fair 1 mmt of copper demand would have a much more profound impact on the copper market than the additional aluminum demand on the aluminum market – if that is Beijing’s desire. You have to ask, though, why would Beijing want to push up prices for cables? It will simply make the infrastructure projects more expensive.

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Simple economics is likely to win and with aluminum so much cheaper on a per-project basis. Both the National Grid and local municipalities and factories are likely to favor aluminum. Still, any increase in copper demand due to the power industry would no doubt be welcome, particularly if the disparate copper miners can achieve some level of coordination and actually deliver meaningful cuts rather than the simple closure of high-cost production we have seen so far.

“This rally doesn’t look convincing, making us suspect that the fall in US equities and commodities might not be over.”

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That was us just a few weeks ago when US stocks were trying to come off new lows established in August. During the last few days, sellers were back in control of the stock market, sending shares, once again, to their lowest levels of the year.

S&P 500 one year out

S&P 500 1 year out. Graph:

The Federal Reserve‘s decision to wait to raise interest rates helped the market. Based on how stocks reacted, it looks like the decision left most investors convinced that the Fed lacks confidence in the US and global economy. Not even a stronger-than-expected Q2 GDP number helped the market.

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China’s slowdown is the overriding theme for US stocks right now. China’s stock market is the best benchmark of its economy. We don’t expect China’s economic situation to start improving until we see its stock market bottom out. So far, Chinese shares are still at their lowest levels and pointing downward.

FXI China ishares 1 year out

FXI China ishares 1 year out. Graph:

What This Means For Metal Buyers

We are not only talking about stock markets just because your 401K is suffering. The decline in US equities highlights the continued bearish sentiment about China, which will continue to impact commodity prices. We see no sign that the worst, for both stocks and commodities, is over yet.


United States Steel Corporation’s CEO Mario Longhi made the media rounds recently, evangelizing U.S. Steel’s – and most of the domestic industry’s – key plank in their policy platform: creating a globally fair playing field when it comes to international trade.

He showed up on Maria Bartiromo’s show, denouncing unfair subsidies in foreign economies and tariffs on certain US imports into countries such as China.

mario longhi us steel

Screenshot from video of Maria Bartiromo’s interview with Mario Longhi. Source: Fox Business.

He also spoke to Politico about the granting of “market economy” status to China next year, which would change how the Commerce Department determines anti-dumping duties on Chinese goods, including steel.

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As you may know, China is pushing a bunch of steel beyond its borders. As my colleague Stuart Burns reports, while China’s steel production may have dropped, its exports have risen. In the first 8 months of this year, product exports reached 71.87 million metric tons, up 26.5% compared to the same period of 2014.

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In fact, the China Iron and Steel Association’s vice chairman is quoted as saying that this year, the country will export more than 100 mmt of steel – that’s equivalent to more than the entire production of North America. Or nearly as much, purely in exports, as the next largest producer, Japan, produces both for domestic and export combined, according to Burns.

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A recent article in the Wall Street Journal explores how exports and imports of goods are lagging far behind their pace of past expansions, threatening future productivity and living standards.

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For decades, during periods of economic expansion, the growth of total imports and exports usually outpaced world GDP growth. However, during the past 3 years, the rate of growth in global trade can’t even match GDP growth.

Trade volume growth vs GDP growth. Source WSJ

Trade volume growth vs GDP growth. Source: WSJ

During the first decade of the new millennium, the world saw a burst of globalization, thanks to the huge expansion of emerging economies including China. A lot of production capacity was built during this period in order to meet the huge appetite of these growing economies. Read more

Possibly, if you listen to Indian politicians and senior business leaders. In a recent FT article Arun Jaitley, India’s finance minister, said in an interview with the BBC: “An economy which can grow at 8 to 9% like India certainly has viable shoulders to provide support to the global economy.”

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Officially, Chinese economic growth will be 7% this year, but with industrial growth weak and consumer demand held back by stock market falls, it could quickly head towards 5% or below in the second half. India, meanwhile, is expected to expand at 7.7% according to the country’s official measure. A separate Financial Times article reported that New Delhi comments that India’s economy in the June quarter grew 7%, year-on-year, exactly the same as in China.

Low Oil Prices Advantageous to India

That, the article suggested, means that India is overtaking China in terms of growth and is poised to become the world’s fastest expanding large economy. Certainly it’s true that as the world’s third-largest oil importer India has benefited from the collapse in oil prices, both in terms of improving its balance of payments and reducing inflation.

Nor is India a big exporter of manufactured goods, not normally an advantage except in times of weak global demand when the greater reliance of the economy on internal consumption insulates it from weak external demand. 57% Of Indian’s GDP comes from household consumption.

Comparison of GDP growth China vs India Source FT

Comparison of GDP growth, China vs India. Source: FT

However, before we get too drawn in by the hype both articles also point out the headwinds Narendra Modi’s India faces. His government has failed to implement much-needed economic reforms, in spite of hope when he came to power that he would sweep away the creaking political machine that has held India back for so many decades. Read more

The Aluminum Association, which represents producers and suppliers to the North American aluminum industry, expressed strong concern today about a recent call for the removal of a long-standing 15% tax on primary aluminum exported from China.

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The call came from the Chinese Non-Ferrous Metals Industry Association and “appealed to all relevant national authorities to eliminate as soon as possible the provisional export tariff on aluminum to achieve integration of domestic and international aluminum markets.”

The Chinese government, which relies heavily on imported bauxite, has long applied export taxes on primary aluminum as part of a broader strategy to discourage exports of energy-intensive products and emphasize sustainable, quality growth. The unilateral removal of these taxes could have unforeseen impacts on the balance of trade and the global aluminum market.

In the US, domestic primary aluminum production is an essential element to American manufacturing. According to an economic analysis by John Dunham & Associates, this segment of the industry is responsible for a minimum of 10,600 jobs and $6 billion in economic output. The domestic aluminum industry could come under additional pressure should China remove the export taxes on primary aluminum.

“We strongly encourage the Chinese government to consider both the impact on the global aluminum market as well as the impact on their country’s own sustainability goals before heeding any call to remove export taxes on primary aluminum,” said Aluminum Association President & CEO Heidi Brock. “During a time when China is making global commitments to reduce greenhouse gas emissions, it would be a serious mistake to change course on this long-standing policy.”

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According to Aluminum Association data, from 2012 through 2014, US imports of semi-fabricated aluminum products (semis) from China increased 115%, growing China’s share from roughly 14% to nearly 28% over that period. Imports of Chinese semis totaled 675 million pounds year-to-date, an increase of 75% over the same period in 2014.

Sitting in road work, we all grumble about repairs and the corresponding delays they create, but the fact is there is far too little care and maintenance of our crumbling infrastructure going on.


We may not like roadwork on long trips, but it keeps the country and the economy humming. Source: Inland Asphalt Paving

Major infrastructure spending has been the preserve of emerging markets for the last few decades. According to an Economist article mature economies are rather resting on the laurels of past investment are sitting on a time bomb of crumbling and decrepit roads, bridges, dams, railways and levies that is costing these established economies dearly.

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According to the paper, in America the average bridge is 42 years old and the average dam 52. The American Society of Civil Engineers rates around 14,000 of the country’s dams as “high hazard” and 151,238 of its bridges as “deficient.” Nor is the US alone in its neglect. Half of London’s sewers are over a hundred years old as are a third of Germany’s bridges.

The Cost of Lousy Roads and Bridges

This crumbling infrastructure is both dangerous and expensive: traffic jams on urban highways cost America over $100 billion in wasted time and fuel each year; congestion at airports costs $22 billion and another $150 billion is lost to power outages. Much was made of the post-financial crash benefits of infrastructure spending but in reality little was done in mature economies like the USA.


Source: St. Louis Federal Reserve Bank.

The spending was short-lived and limited in scope, and, in the paper’s opinio,n a hugely wasted opportunity. At a time when construction costs had fallen by some 20% from the pre-crash level and the economy in 2009-2010 desperately needed a boost, the US instead embarked on a bank-saving quantitative easing program.

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Rating agency Standard & Poor’s reckons that the activity spurred by increasing government spending on infrastructure by 1% of GDP would leave the economy 1.7% bigger after three years in America, 2.5% bigger in Britain and 1.4% in the euro zone, while the legacy of that investment would go on for decades. Further, such investment would support manufacturing and industry rather than the financial sector which appears to have bounced back remarkably well from financial near-meltdown in 2008.

Not all infrastructure spending has to be bricks and mortar to create value, but to spread the benefits among home-grown manufacturing that’s often the best kind. America’s roads, bridges, dams and other hard assets will continue to serve only as long as they are kept in good order. Surely now is the time, as the economy recovers and tax coffers improve, to divert some of those funds to much-needed investment in the country’s infrastructure?