Articles in Category: Public Policy

After more than seven years of negotiations, a trade agreement between the E.U. and Canada known as the Canadian-European Trade Agreement (CETA) was supposed to have passed into law this month and — on the original schedule — would’ve been ratified by now.

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No one now expects ratification this year and many are questioning whether the free trade agreement ever has any hope of being accepted by Europe’s 27 member states. Opposition has been widespread says an article in the Telegraph explains.

Particular mention is made of the regional government of Wallonia (a German-speaking region of Belgium) but, in practice, opposition has been widespread, even resulting in street demonstrations in Germany and an announcement by the Austrian government that they intend to veto acceptance. Read more

The fact is Europe is deeply worried that giving the U.K. anything like access to the single market without acceptance of the “Four Freedoms” would be the beginning of the end for European federalism. That Europe would unravel as everyone saw the benefits without the pain.

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The irony is French President Francois Hollande is the most unpopular French politician ever. Not in the last decade. Not in this century. Ever, assuming we don’t count King Louis XVI who brought the French Revolution upon himself, and who wasn’t even an elected head of state anyway.

Remainers Dig In

Even Hollande’s own countrymen don’t listen to a word he says, so why the markets would have taken any notice is a mystery. Maybe because he isn’t alone. Even previously conciliatory German Chancellor Angela Merkel has this week been lecturing her own business leaders not to lobby for a soft exit in the interests of their trade with the U.K. According to the Guardian, she appealed to German firms to show a united front with E.U. governments in negotiations over the U.K.’s departure from the bloc, urging them to support the principle of “full access to the single market only in exchange for signing up to the four freedoms.”

Most Remainers would have said, prior to the referendum, that this was always going to be Europe’s position. The markets appear to have been hoping for some kind of softer exit deal, some kind of compromise that both sides could live with. But in the last week or two it has become progressively clearer that for whatever reasons, mostly short-term political survival in the case of the U.K. government, compromise is not something anyone is talking about.

Right or wrong, the exit looks like it will be a hard one and, as a result, firms should expect more volatility in the months ahead as positions harden and the markets take announcements as a shock.

Was the Pound Always Overvalued?

Some, such as Liam Halligan in the Telegraph, would argue that the pound has been overvalued for some time and an adjustment has been in the cards for months if not a year or more. He cites an International Monetary Fund report last year which judged that, based on the U.K.’s trade and productivity, the pound was overvalued by 20%. I suspect they were hoping for a more gradual readjustment than we have seen since June but, nevertheless, the IMF at least may argue the pound is closer now to where it should be… even if driven there for the wrong reasons.

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HSBC’s economist David Bloom is predicting parity for the British pound to the Euro and 1.20 against the U.S. dollar over the coming months. Those with exposure should consider positioning themselves for such a possibility. Politicians are not much interested in the effect their words are have on the exchange rate or on companies struggling to cope with the volatility.

There were dire warnings in the run up to the June 23 referendum on Britain and overall U.K.’s future in the European Union (E.U.) and there have been dire warnings since.

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Prior to Brexit, the leaders around the world, including Barack Obama, lined up to issue warnings and even veiled threats of the consequences of an exit vote. The International Monetary Fund and World Bank warned of the risk of a stock market crash and sharp recession if the U.K. decided to leave.

Even the U.K.’s own Treasury issued a report and numerous briefing notes to warn of the same dire outcome. Well, for better or worse, the British people went ahead and voted to leave anyway, and guess what? The stock market soared and growth has continued.

The Forecast… Wasn’t Armageddon

This week, the IMF predicted 1.8% growth this year for the U.K. and 1.1% next against a softening global growth background. According to the BBC, Economists for Brexit, a group of eight influential economists which supported the Leave campaign ahead of the E.U. referendum, criticized even this relatively optimistic forecast from the IMF arguing that pre-Brexit forecasts had already been proven wrong. Read more

We at MetalMiner are no champions of the financial system. Compared to steel mills, aluminum producers and many others in the industrial sector, the banks have often benefited from a rationale among policymakers that they are too important to fail and that to try to influence bad behavior by government regulation will somehow damage their entrepreneurship.

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However, the way the Department of Justice is going about its prosecution of the banks over miss-selling has the whiff of politics about it. After taking out the low-hanging fruit going after U.S. banks in recent years, the DoJ has collected more than $40 billion from six U.S. groups: Bank of America, JPMorgan Chase, Citigroup, Morgan Stanley, Goldman Sachs and credit rating agency S&P Global Ratings, according to the Financial Times. Not content, the activist DoJ has now started on foreign banks over the same allegation of miss-selling of residential mortgage-backed securities in the run-up to the 2008 financial crisis.

This most recent action, initially against Deutsche Bank (DB) of Germany and latterly including British bank Barclays and Swiss bank Credit Suisse is causing some panic in Europe. Interestingly, action against the U.S. banks, although cumulatively for an eye-watering sum, barely seemed to have any effect on their share price or bonus schemes. But now, the papers are all about the possible collapse of Deutsche Bank, so what’s different in this case, and how much of an issue is it?

Why is Europe Different?

Well, as a worst case scenario it is potentially a Lehman moment. DB shares have plummeted to the lowest level in 33 years and talk of a German government bailout is in the cards, although Berlin vehemently denies that. In 2007 its shares were at $109.87 (€98 is the number that matters for our considerations here across the pond), last year they were over €22, now they are €11, roughly $12.33 to you yanks.

Source Telegraph Newspaper

Source: Telegraph Newspaper.

It’s unlikely it will come to the bank folding. DB has considerable liquid reserves, but the International Monetary Fund said in June that the bank is the greatest contributor to systemic risk among the world’s biggest lenders. Read more

Britain’s exit from the European Union, colloquially known as Brexit, looks like a train crash in slow motion.

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As each week goes by and neither side shows the slightest inclination to compromise, the prospect of a hard Brexit appears to be mounting. This is worrying business leaders much more than politicians who are rather enjoying the grandstanding, and that alone is cause for concern.

Hell Hath No Fury Like a Currency Bloc Scorned

On the one hand, we appear to have an inflexible European Commission that wants the United Kingdom out as quickly as possible. On the other, hardliners in the British cabinet making the argument for a clean break with the false promise that all will be well if the U.K. does so.

As Peter Mandelson, a former E.U. trade commissioner and U.K. cabinet minister writes in the Financial Times, both sides are in danger of damaging the negotiations before they even start. Few are focused on creating a framework in which the closest and most cooperative relationship can be achieved.

We told you it could happen. Source: Adobe Stock/Stephen Finn.

Time for both sides to make a deal. Source: Adobe Stock/Stephen Finn.

Such a relationship should cover trade in goods and services, security cooperation, and many other aspects of Britain’s 40-year partnership with Europe, but it can only be achieved by Britain and the EU working together. In the meantime, major firms are either putting investment decisions on hold or, worse, actively exploring mainland European options. Read more

Welcome back to the MetalMiner week-in-review. This week, the aluminum world got together in Washington to discuss the threat of overcapacity and the particular problem of Chinese overproduction.

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The U.S. International Trade Commission is involved now. Read our investigation of Chinese overproduction and how it affects aluminum companies around the world while the ITC deliberates.

Source: Thomson Reuters Datastream/China Customs 8/9/2016

We’ve seen Chinese steel exports consistently climb. Source: Thomson Reuters Datastream/China Customs 8/9/2016.

Oil Overproduction

Speaking of overproduction, the Organization of Petroleum Exporting Countries has finally agreed to its first production cuts since 2008. Read more

The International Trade Commission is preparing new rules for tariff cuts and Alcoa’s board has approved the plan to split the company in two.

ITC Adopts New Rules for Tariff Cuts

The U.S. International Trade Commission said Thursday that it is adopting interim rules to create a way for companies to submit items for potential tariff cuts under the new miscellaneous tariff bill process, forgoing the normal rulemaking process to meet a mid-October deadline.

Alcoa Board Approves Split

Aluminum producer Alcoa Inc. said on Thursday its split into two publicly traded companies is expected to be effective Nov. 1, after the company’s board approved the separation.

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Alcoa said last year it would break itself in two, separating a faster growing aerospace and automotive parts business from the traditional aluminum smelting and refining operations, as shareholders sought higher returns amid a commodity slump.

OPEC has agreed to its first deal to curb production since 2008. Some are saying that Deutsche Bank may collapse without a bailout from the German government.

OPEC Agrees to Cut Output

The Organization of Petroleum Exporting Countries‘ member-states agreed on Wednesday to modest oil output cuts in the first such deal since 2008, with the group’s leader, Saudi Arabia, softening its stance on arch-rival Iran amid mounting pressure from low oil prices.

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“OPEC made an exceptional decision today … After two and a half years, OPEC reached consensus to manage the market,” said Iranian Oil Minister Bijan Zanganeh, who had repeatedly clashed with Saudi Arabia during previous meetings.

He and other ministers said OPEC would reduce output to a range of 32.5-33 million barrels per day. OPEC estimates its current output at 33.24 million bpd.

Deutsche Bank Bailout?

Only a substantial intervention by the German government can stop the collapse of the country’s largest lender, Deutsche Bank, according to Stefan Müller, the CEO of Frankfurt-based boutique research company DGAW.

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“Deutsche Bank doesn’t realize that something serious needs to happen,” he told CNBC Thursday morning. “(CEO John) Cryan clearly showed that he has no idea how to survive.”

Much is being made of a mega merger between the publicly traded arm of Shanghai Baosteel Group Corp., the second-biggest Chinese steel mill by output, and the listed unit of Wuhan Iron & Steel Group Corp., its No. 6 steelmaker.

Profitable Baosteel will issue new shares to swap with the loss-making smaller firm. The Chinese press is full of the deal, saying it will rival ArcelorMittal in size and hailing it as an example of Beijing’s drive to consolidate the steel industry and tackle overcapacity.

Why the Urge to Merge?

ArcelorMittal, produced 97 million metric tons of steel last year and has a market value of $17.2 billion. Baoshan and Wuhan were worth $16.3 billion combined as of the June 24 close and produced about 60 mmt last year. Baoshan is a profitable enterprise and generally acknowledged to be well run. Wuhan, on the other hand, is loss making, carries too much debt and, probably in the newly combined group, ripe for plant closures and rationalization.

With 1.2 billion mt of crude steelmaking capacity but 803 mmt of steel production, China clearly has a massive overhang of unproductive capacity, causing some firms to be heavy loss makers. Estimates put combined losses for the industry at $10 billion last year.

But, for Beijing, it is as much a desire to clear up these loss-making companies before the market pulls them down into bankruptcy than it is to cut excess steel capacity. There is little doubt it has taken Beijing’s arm-twisting on profitable firms like Baoshan to take over loss makers like Wuhan that they would probably otherwise steer well clear of.

Beijing wants to avoid a domino collapse of lesser steel firms, like Dongbei Special Steel Group, owned by the Liaoning state government that finally filed for bankruptcy this month after eight, yes eight, defaults.

“If they can merge with others, they merge,”  Li Hongmei, an analyst at S&P Global Platts is quoted in the Financial Times as saying. “If not, they will ask the banks if they can change debt for equity. If that fails, then they will choose the last resort — that will be bankruptcy.”

But bankruptcy is bad for publicity, bad for workers, bad for the banks left holding the debt. Better, in a state-directed world, to have a profitable firm swallow them up and quietly rationalize the loss-making operations.

What’s China’s Real Plan for Loss-Making Steel?

The Economist reports on the wider trend, saying China aims to establish two major steel groups, one in the north and one in the south. The northern union of Hebei Iron & Steel Group with Shougang Group would be the nation’s biggest producer, with output of 76 mmt last year for a share of national production at 10%, topping Baosteel-Wuhan’s 8% share in the south, according to 2015 figures.

Meanwhile, there are rumors Ansteel Group Corp., the country’s fourth-biggest producer, could merge with regional peer Benxi Steel Group Corp. but, apparently, the firms are not confirming discussions are ongoing.

What About Those Steel Closures?

The aim is to close 150 mmt of capacity by 2025 but that will hardly put a dent in the 400 mmt of excess capacity in the country, more importantly for Beijing it may take the worst of the basket cases out of the public eye swallowed up by larger, state-directed groups.

The FT, though, offers a cautionary note: The drive to preserve and promote high-end, coastal steel production capacity while cutting off low-end, inland capacity is present throughout the restructuring plans, including the headline Bao-Wu merger.

“Coastal capacity is growing, and that’s the main trend of the next two years,” the FT reports. “Baosteel has a plant in Guangdong. Wisco has one in Guangxi, and they are ramping up to just under 10 mmt of capacity a year each by the end of 2017. What international steel producers really should be asking is what’s happening with the extra 50 mmt of capacity being commissioned on the Chinese coast in the next two years.”

That new capacity is better placed to service export markets than the plants being closed inland, how much of this drive is really to address overcapacity and how much is it to improve profitability and avoid the trauma of bankruptcies.

We’ve seen a lot of numbers being thrown around over the past year when it comes to trade actions and enforcement.

From the steel industry’s Section 337, to a Section 201 being thrown down, right up to the 332 investigation about to get underway, there are a lot of digits but sometimes a bit less clarity on what it all means.

We thought we’d share a tiny primer on the 332 investigation of the U.S. aluminum industry’s competitiveness about to get underway before the International Trade Commission.

Here’s a quick rundown, courtesy of the Aluminum Association:


The Aluminum Association’s VP of Policy, Charles Johnson, shared some more details with us on how exactly the 332 investigation came about in a recent interview:

A number of AA’s member companies, including AA President Heidi Brock, are planning to testify before the ITC this Thursday morning.

A Special MetalMiner Project: Learn why China getting market economy status may just be the biggest trade issue of our time – and how it impacts the U.S. aluminum industry – in “China vs. the World.

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