Articles in Category: Public Policy

The US stock market is demonstrating resilience against economic worries such as the Greek Crisis, falling oil prices, weakness in emerging markets and the recent Chinese market sell-off.

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Some argue that the bull market has already run for too long, and that concerns outside the US are putting enough pressure to make the stock market tumble. However, the opposite might be true.

The Tenacity of the US Stock Market

The unwillingness of domestic stocks to fall is a sign of strength and we could see stocks rise even further, especially if things start to calm down globally.

Dow Jones Industrial Average Index 1 year out

Dow Jones Industrial Average Index, one year out. Graph: MetalMiner.

Major market indexes like the Dow Jones Industrial Average, S&P 500 and the New York Stock Exchange remain range-bound since February. We recently pointed out that this trendless period was causing investors to  hesitate. It was hard to tell whether the market is going to roll over or continue on its way up. Some new clues are pointing to the latter.

Nasdaq Composite Index 1 year out

NASDAQ Composite Index, one year out. Graph: MetalMiner.

The fact that US stocks held their values well as Chinese markets plunged proves that Chinese financial news can only affect US stocks in the short term. In the longer term, China does not lead the US and its recent troubles do not appear to affect markets here that much.

What This Means for Metal Buyers

Moreover, the NASDAQ (a technology-focused index) recently hit an all-time high. The fact that technology stocks are leading the market is a positive sign. Lower oil and commodity prices are hurting the shares of energy and commodity producers, which helps explain why the other indexes are still range-bound. But, good earnings reports from leading tech companies are increasing the appetite of funds to buy stocks.

In conclusion, the US market is not immune to what happens outside the US. Further bearish news from outside could weigh on US shares, but, so far, things are looking good for US stocks in the second half of the year.

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Old Chinese proverb: when a giant in a race with another falters, the other, without a doubt, wins.

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Actually, I made that up. Ignore it. Still, when China’s economy started showing signs of a meltdown, some in India “predicted,” in a knee jerk reaction, that it was a “welcome development” for neighbor India.

No need to reiterate here how the two nations, with the largest populations and the largest economic growth rates, were in competition with each other in almost every sector.

A few days later, after the fog cleared, warning bells were rung by analysts and ratings agencies that if China was to lose the race, it would be tough for India, too. Even a tiny spill, such as the one China’s stock market felt last week, was bad enough. There would really be no winners in the race.

China’s economic troubles could have a significant impact on India, particularly in sectors like IT and steel, according to India’s trade and industry body, The Associated Chambers of Commerce and Industry of India (Assocham).

The adverse economic developments may have a directionally negative impact on the Indian metals industry as well as on sectors with an export focus, claimed another agency, India Ratings and Research (Ind-Ra) in a statement.

News reports, quoting metal analysts, claimed that while it was true that a drop in commodity prices linked to China’s slow demand was a positive for India, it was not really “good news” for a host of metal and iron ore producers such as Steel Authority of India, Tata Steel, and upstream oil producers.

The fall in ore, steel and copper prices hit Indian manufacturers as hard as any other company in the world, so what’s there to cheer about?

A paper prepared by Assocham said that in today’s global economy, where India’s economy — like any other — is plugged into the rest of the world’s, the China downturn was bound to impact India. China, incidentally, was the number one merchandise trader in the world with over $4.16 trillion worth of trade, followed by the US with $3.9 trillion, as claimed by Assocham.

But the more pertinent point made by Assocham was that the kind of cost competitiveness which the Chinese companies provided to manufacturing semi-process industries — such as electronics, electrical and telecom equipment — would disappear from the global supply chain. This is without even mentioning the inability of India to fill any of those spaces vacated by the Chinese companies.

Another news report quoted Hitesh M. Avachat, Deputy Manager at CARE Ratings, as saying that China accounted for more than 30% of the overall consumption of metals globally. For Indian metal producers, the price collapse meant their landed price in India would go down further, thereby pressuring companies to reduce prices. Because of the likely Chinese dump of its surplus goods, India’s export demand may also fall, he added.

Jayant Acharya, Director, Commercial and Marketing, JSW Steel Ltd., quoted in the same report, said if prices kept falling, margins would get impacted.

The Indian arm of global credit rating agency Fitch said with soft demand in China, base metals prices had gone down in the range of 2-21% in the first six months of 2015. On a year-to-date basis, Chinese domestic hot-rolled coiled steel prices had declined by 21%, London Metal Exchange nickel prices by about 12%, LME copper metal prices by 9% and China alumina prices by about 10%. In the last month, alone, iron ore prices dropped by 20%, Shanghai steel prices by 16.4%, and zinc prices by 7%.

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The author, Sohrab Darabshaw, contributes an Indian perspective on industrial metals markets to MetalMiner.

Price volatility hit metals markets hard last week and now some are calling for new rules to regulate the London Metal Exchange. In India, South Korean steelmaker POSCO may pull out of a planned plant because of a new law that would increase the price of its raw material, iron ore.

New LME Rules?

The LME may have to introduce new rules to rein in extreme price volatility to conform with other exchanges and regulatory regimes, industry sources told Reuters.

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Prices of industrial metals have fallen fast in recent months on worries about demand growth in top consumer China, with concerns reinforced last week as China’s stock market plunge pulled copper down to a six-year low of $5,240 a metric ton.

POSCO May Scrap India Steel Project

South Korean steelmaker POSCO might scrap plans for a $12 billion project it agreed to set up in India a decade ago, after a new law made it costlier to source iron ore for the plant, a company spokesman told Reuters. The US-listed shares of POSCO fell as much as 3.3% to their lowest in more than six and a half years after the report.

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MM-IndX_TRENDS_Chart_July-2015_FNL

There’s no reprieve from the bearish metals environment in this month’s MMI Report.

More Analysis: The July Metal Price Forecast

With the exception of the very specialized grain-oriented electrical steel (GOES) market and the Renewables MMI®, all of our indexes lost ground in June and could not gain traction amid falling commodity prices and a strong US dollar.

The one index that was steady from last month, which tracks raw material inputs of the renewable energy sector, has been stagnant for two years and, until trends show otherwise, its steadiness is more a measure of a lack of market activity than anything close to a turnaround or a new trend toward increasing prices.

The Stainless MMI is flirting with two-year lows and our Raw Steels index is up against lows not seen in years as well. Weakness in the Chinese stock market has put additional pressure on metals that were already reeling from the effect of the strong dollar. This is bad news for steelmakers, miners, refiners and smelters by itself, but coupled with increased supply in most of the metals we track, it’s become a real deterrent to profitability.

Moreover, both Europe and the US have higher-than-normal inventories of semi-finished products at service centers. Mill lead times remain short suggesting weak demand. Weak demand will continue to place downward pressure on prices.















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The stock and finance trade is investing in Japanese aluminum again and republicans in the US House unveiled an $8.1 billion infrastructure bill.

Big Banks Investing in Aluminum Again

Aluminum stocks at major Japanese ports fell for the first month in more than a year in June as western banks started snapping up metal in Asia after spot premiums fell to two-year lows.

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Aluminum stocks held at three major Japanese ports fell 0.5% to 499,900 metric tons at the end of June from a month earlier, trading house Marubeni Corp. said on Wednesday.

It was the first decline since March last year.

Prior to June’s fall, stocks had risen to record levels over several months due to rising exports from China and lackluster Asian demand.

Republicans Unveil Infrastructure Bill

Republicans in the US House of Representatives on Monday unveiled an $8.1 billion plan to fund highway and rail transit projects through the end of 2015, paid for by extending an airport security fee increase and tax rule changes.

Congress faces a July 31 deadline to renew federal transportation spending authority and avoid a major slowdown in road construction projects nationwide.

The five-month funding extension would replenish the Highway Trust Fund for five months. It was introduced by House Ways and Means Committee Chairman Paul Ryan (R.-Wis.)  and House Transportation Committee Chairman Bill Shuster (R.-Pa.).

Forecast Companion: The Latest Metal Price Trends in the July MMI Report

Both Republicans and Democrats have said they would prefer a longer, six-year transportation bill, but lawmakers have not been able to agree on a funding mechanism for the nearly half-trillion dollar cost.

Just one month ago we talked about the close relationship between emerging markets and commodity prices and how their stock markets were heading into trouble, which could potentially hurt commodity prices.

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Weakness in emerging markets continued to spread out and Chinese stock shares plunged in June.

FXI China ishares since 2014

FXI China ishares since 2014. Graph: MetalMiner.

China’s stock market rallied in the first quarter. Then, Beijing suspended initial public offerings to tighten the supply of available stocks while the Chinese central bank helped to promote brokerages’ margin finance operations, allowing investors to borrow cash to buy stocks. Those actions helped boost stock shares in the short-term, but they have proven not to be sustainable in the long-term. Read more

A historic deal on nuclear and atomic energy between Iran and several nations is causing havoc with oil markets this morning. Alcoa’s CEO claims China will crack down on the semi-finished aluminum trade.

Iran Deal Reached

Crude oil prices initially fell by as much as 2.3% to $50.98 a barrel as investors reacted to the freshly-inked deal between Iran and six world powers which would open Iranian oil up to new markets. However, oil bounced off those levels as investors weigh the details of the agreement and whether or not it will overcome deep skepticism in Congress. Oil was recently trading unchanged at $52.20 a barrel.

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Experts have warned that the deal could lead to a flood of new oil supply from Iran – the Islamic Republic has 30 million of barrels of crude in storage and ready for sale, according to FACTS Global Energy, an industry consultancy.

End of China’s Untaxed Aluminum Semi Industry?

Alcoa CEO Klaus Kleinfeld said it was his “strong assumption” that the Chinese authorities will soon try to shut down China’s untaxed semi-finished aluminum exporting industry.

“I’ve last been in China four weeks ago or so, and had a lot of conversations also with high level folks. They are very clear that this is not in line with their policy, and that they are deeply looking into this,” Keinfeld told Reuters’ Andy Home.

This would make sense because not only do semis skirt China’s aluminum 15% primary metal export tax but they also qualify for a rebate of China’s value-added tax.

This September: SMU Steel Summit 2015

Contrary to the belief that Indian steelmakers are well off as compared to those in other economies, it’s just not the case.

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For the last three years, Indian steel companies, including market leaders such as Tata Steel Ltd., have been hammered from all sides. Low consumption, dropping prices, a weak economy and cheap imports have all combined to push many of them into debt. The plunge continues, and some financial analysts have now forecast that even an expected rate of economic growth in India of 7-8% may not be enough to bring the spiral to a halt.

According to one report, the total borrowings by “stressed” steel companies was estimated to be $31 billion. Now the fear is that many of them will be unable to ever repay their loans, leaving banks that lend to steel companies exposed and facing financial ruin.

India’s central bank, the Reserve Bank of India (RBI) has said five of India’s top 10 private steel companies were under huge financial stress. Most are now taking steps to reduce their debt and a few have shown an an inclination to sell more assets in 2015-16.

To help out domestic steelmakers, the RBI recently announced a “5/25 scheme,” which, at heart, is essentially a debt restructuring option. It extends the tenure of loans to 25 years with an option to refinance in five years. At least two steelmakers, Bhushan Steel Ltd. and Essar Steel India Ltd., have opted for it. Companies have an option to refinance the loan every five years.

At this midpoint of the year, Essar Steel, backed by the billionaire Ruia brothers, is reported to be seeking to restructure part of its about $6 billion in debt.

Earlier this week, New Delhi-based Bhushan Steel finally received approval from its bankers to refinance its approximate $55 million debt under the RBI’s 5/25 scheme.

This September: SMU Steel Summit 2015

Silver came close to breaking a key low on Friday and an Iran deal could exacerbate the oil surplus.

Silver Close to $15/Ounce

US silver finished the day at $15.39 per ounce on Friday and it flirted with numbers close to $15 several times in the trading day.

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It is currently trading at $15.62/ounce.

Iran Deal Could Add to Oil Surplus

Any nuclear deal between Iran and six world powers loosening sanctions against Tehran has the potential to  flood an oversupplied oil market with more fuel. Other commodity sectors such as cement and steel would see a rise in demand as Iran works to revitalize its economy. Officials said on Sunday they were close to a deal that would bring sanctions relief in exchange for curbs to Tehran’s nuclear program.

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We have all heard about the Greek crisis by now.

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On Wednesday, Greece formally asked for a three-year bailout. The European Union’s leaders have given a Sunday deadline on whether formal negotiations on this bailout program make sense or not.

So, How Will a Resolution Impact Metal Prices?

First, let’s start with: Greece is not China. Greece is not a major producer or consumer of metals. Therefore, its economic situation doesn’t have that big of an impact in the supply and demand balance of any base metal.

Some argue that a Greek exit could worsen the European economy. That, in theory, could deteriorate global demand for metals, driving metal prices down. Nonetheless, others (including me) think that a Greek exit would be beneficial for both Greece and Europe.

Austerity measures have already proven to be painful for the country over the past few years, leading to its economy slowing further, making its deficit even worse. A Grexit, however, would leave Greece with the ability to print money, which would increase inflation but allow Greece to meet its national obligations in a potentially more viable way than raising taxes and reducing pensions.

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