Articles in Category: Public Policy

In a blatant case of posturing ahead of inevitable compensation negotiations, lawyers —acting on behalf of Brazil’s public prosecutors — are said to have lodged claims totaling $44 billion ($155 billion Brazilian Reais) against mining companies Vale SA and BHP Billiton for the collapse of a dam at their Samarco joint venture last year.

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Needless to say, shares in both companies promptly tanked about 6% even though the prosecutor’s office has a habit of claiming big and settling small. As a measure of just how absurd the figure is, the Financial Times states the 155 billion Reais claim is equivalent to twice Vale’s market value and, if enforced, would bankrupt the company leaving no one to clear up the environmental mess. You can bet the funds would disappear into government coffers, not for the clean-up.

Demands as Negotiation Starting Points

By comparison, the FT reports UBS analysts and others who pointed to the 2011 oil spill off the coast of Rio de Janeiro — that prompted prosecutors to claim $11 billion in damages from Chevron and its drilling partner Transocean — was eventually settled for only $42 million.

Indeed, if Brazil was to genuinely pursue the claim through to its logical settlement it would end up shooting itself in the foot. Samarco is a 50/50 joint venture and so would be the settlement costs but, where Vale is a wholly Brazilian company with 154,000 employees in the country, BHP is listed in London and Sydney with comparatively little else at risk in Brazil.

BHP has already written down its Brazilian asset from $1.2 billion to zero, meaning if it walked away it would lose nothing more, according to Reuters.

Samarco Disaster vs. BP Oil Spill

There is no disputing the dam burst was a disaster and there is widespread belief it could have been avoided. The torrent not only killed 19 people but also obliterated Bento Rodrigues, a town of 800, inundated another larger town with mud, and polluted almost 1,000 km (600 miles) of the Rio Doce.

According to Reuters, the disaster killed fish, contaminated water used for agriculture, and left at least 250,000 people without running water for weeks. It was always going to be expensive but BHP and Vale had already agreed to pay a government-estimated $5.6 billion (R20 billion Reais) over 15 years to cover and repair damages and the firms had thought that was an end to the claims process.

Comparisons have been made with claims against BP over their gulf oil spill naturally enough, but in reality there is little to link them. U.S. prosecutors had BP over a metaphorical barrel with its extensive investments in the U.S. market and could take them to the cleaners with impunity. Arguably, they would not have done the same to a U.S. company.

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Brazil would lose more in the long run doing the same to Vale than they would in ensuring the firm survives and, effectively, clears up the mess. So, while I don’t knowingly hold shares in either company I would be more likely to sell them over anxiety about the firm’s medium-term future in an oversupplied market than the damage overzealous prosecutors are likely to do their profits.

How do interest rates impact the value of a currency? Let’s review:

Higher rates mean higher borrowing costs, which usually make a currency more attractive to investors seeking higher yields than in other currencies. That’s exactly what happened to the U.S. dollar during 2014-2015 when we saw a dollar bull market built on expectations that the Federal Reserve would raise rates domestically while central banks around the globe would keep on lowering interest rates.

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However, the Fed is not hiking rates as fast as markets had expected. On top of that, there are many questions regarding the ability of banks in Europe and Japan to lower interest rates more from here. This caused the U.S. dollar to weaken this year, having a bullish effect on commodity markets and therefore, metal prices.

Japan Holds on Rates

Japanese Yen appreciates against the dollar

The Japanese yen appreciates against the U.S. dollar. Source: Yahoo! Finance.

The Bank of Japan kept interest rates unchanged last Thursday despite coming under pressure to take further action. The yen surged more than 3% against the U.S. dollar after the announcement, its biggest one-day gain since May 2010. Read more

In a complaint filed Tuesday with the U.S. International Trade Commission, U.S. Steel Corp. demanded penalties on Chinese steel imports which could include a total ban on imports into the country. U.S. Steel said that Chinese steelmakers conspired to fix prices, stole trade secrets and circumvented duties with false labeling in filing a section 337 petition.

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“We have said that we will use every tool available to fight for fair trade,” said Mr. Longhi. “With today’s filing, we continue the work we have pursued through countervailing and anti-dumping cases and pushing for increased enforcement of existing laws.”

How to Prove Unfair Competition?

But what, exactly, is a section 337 petition? What law is U.S. alleging Chinese producers Hebei Iron & Steel Group, Anshan Iron and Steel Group and Shandong Iron & Steel Group Co. violated? The ITC provides us with a handy frequently asked questions page. It reports that “most Section 337 investigations involve allegations of patent or registered trademark infringement. Other forms of unfair competition, such as misappropriation of trade secrets, trade dress infringement, passing off, false advertising, and violations of the antitrust laws, may also be asserted.”

Chinese black hat hacker steals password from computer screen concept

Chinese black hat hacker steals password. Source: Adobe Stock/beebright.

China has been implicated in stealing trade secrets before, and U.S. Steel was one of the victims. In 2014, a U.S. grand jury indicted five members of China’s People’s Liberation Army on charges they stole information from U.S. Steel and other American firms. Computer hacking, espionage and other charges were alleged in federal court in Western Pennsylvania (U.S. Steel is headquartered in Pittsburgh). Other victims of the alleged hacking included the U.S. arm of SolarWorld AG, Westinghouse Electric Co., Allegheny Technologies Inc. and Alcoa, Inc. Read more

Saudi Aramco released an IPO plan of sorts about how it plans to diversify from being the world’s largest energy company to being much more and the Federal Reserve, as expected, left rates unchanged.

Saudi Aramco’s New Plan

The world’s biggest energy company, Saudi Aramco, outlined financing plans on Wednesday that will support its expansion into new areas under a sweeping economic reform plan released in Riyadh this week. The reforms envisage Aramco transforming itself from an oil and gas firm into a “global industrial conglomerate” involved in many sectors and services, using its vast financial resources to create jobs and help diversify the Saudi economy beyond oil.

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The plans suggest Saudi Arabia’s state oil company, which Deputy Crown Prince Mohammed bin Salman estimated this week was worth over $2 trillion, aims to move rapidly into a new role offering diversified services such as shipbuilding and offshore rig services in the near term.

Fed, As Expected, Leaves Interest Rates Unchanged

Federal Reserve officials left interest rates unchanged and remained ambiguous about raising rates in June as mixed global economic signals and low inflation at home weighed on policy makers struggling to spark robust growth seven years after the recession’s end.

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In a statement Wednesday after a two-day meeting, the Fed stuck to its longstanding plan to move carefully on raising the benchmark federal-funds rate, which it has held between 0.25% and 0.50% since December, when it raised short-term rates after holding them near zero since 2008.

It would seem Iran is not the only major Middle East economy on the cusp of radical change. If the espoused wishes of deputy crown prince Mohammed bin Salman al-Saud (or MbS as the media have got into the habit of calling him) are realized, the desert kingdom is in for a period of change over the next decade that would be unprecedented in it’s recent history.

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Certainly, oil has transformed the kingdom since it was first commercially extracted in 1938 but the culture of Saudi society has been carefully nurtured, protected, even shielded — one might say — from the corrupting influence of the outside world.

Group of big fuel tanks. Ras Tanura oil terminal, Saudi Arabia

A group of fuel tanks in the Ras Tanura oil terminal in Saudi Arabia. If Prince Mohammad has his way, this will someday be a thing of the past in the kingdom. Source: AdobeStock/eugenesergeev.

Yet the days of a close compact between the House of Saud dynastic monarchy and the religious Wahhabi clerical establishment that, in exchange for control over education and the judiciary, has provided the rulers with legitimacy, may be seeing the beginning of its end.

The Prince’s Plan

The new King Salman’s son, Prince Mohammad, believes Saudi Arabia has been addicted to oil, an addiction that has cost it dearly in terms of economic development and progress. Trying to look into the future, he clearly feels Saudi Arabia needs to face up to the march of time before it is too late. Read more

The Environmental Protection Agency insisted it did follow its own rules in blocking the new toxic mercury role and heavy rain in Chile of affecting copper production.

The Environmental Protection Agency Friday issued an updated cost analysis, defending its issuance of the first-ever federal regulations requiring power plants to cut mercury emissions and other toxic air pollutants.

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The agency’s move was prompted by a Supreme Court ruling last year that said the agency hadn’t taken into account the costs to industry, as it was required to do, before deciding to adopt the rules.

The Supreme Court, in a 5-4 opinion last June, said the EPA must reconsider the mercury rules because of that omission. The rules, however, have remained in effect during that process.

The EPA initially adopted the mercury rules in 2012 and they took effect in April 2015. The agency initially concluded that costs weren’t a relevant consideration when it was deciding on the need for the mercury regulations.

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Later, as it was writing the rule, the agency estimated an annual cost to the utility sector of $9.6 billion, compared with public-health benefits of at least $37 billion. The Supreme Court, however, said the agency should have made that calculation earlier, as it was deciding whether to adopt the rules in the first place.

Chilean Rains Halt Copper Mining

Heavy rains in central Chile have prompted global miner Anglo American Plc. and state-owned producer Codelco to temporarily suspend operations at two major copper mines with combined annual capacity of 880,000 metric tons.

It would be easy to blame China, and certainly Chinese exports have had a severe impact on the economics of steel production in the U.K., specifically and Europe in general, but the story of Tata Steel exiting the U.K. market is much bigger.

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News last week that India’s Tata is going to close its giant Port Talbot steel plant if it cannot find a buyer would all but bring steelmaking in Britain to an end. Once supplier of 40% of the world’s steel, production in the U.K. has fallen both relative to global production and in absolute terms for a number of reasons, not just Chinese competition.

Why Buy Port Talbot in the First Place?

First, it must be said it was insanity for Tata to buy the old Corus steel assets in the first place, or if not insanity to buy them then insanity to pay the price they did. Tata paid $9.5 billion (£6.7 billion) back in 2007 for the merged British Steel of the U.K. and Hoogovens of the Netherlands company rebranded as Corus.

This steel plant at Port Talbot in South Wales, U.K., could close if Tata Steel can't find a buyer. Even as steel prices increased last week. Source: Adobe Stock/Petert2

This steel plant at Port Talbot in South Wales, U.K., could close if Tata Steel can’t find a buyer. Source: Adobe Stock/Petert2.

Tata will claim it couldn’t have foreseen the financial collapse of 2008 just around the corner but the company got into a bidding war with CSN of Brazil for Corus and ended up paying 50% more than it had started out with when it first mooted the deal.

Even at the time, most of us thought, “why buy aging assets in a mature market like Europe when you have an economy at home expanding three times as fast?” Read more

The National Association of Home Builders has asked Congress to consider reducing the regulatory burden that it claims can add as much as 25% to the cost of a new home.

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In testimony before the House Financial Services Subcommittee on Housing and Insurance, NAHB First Vice Chairman Granger MacDonald said that “costs associated with permitting, land development (and) construction codes,” have created a scarcity of both rental and for-purchase affordable housing.

“Government regulations account for 25% of the cost of a new single-family home,” MacDonald, a home builder from Texas, said. “Oftentimes, these regulations end up pushing the price of housing beyond the means of middle-class working American families.”

NAHB is actively opposing new regulations from the Occupational Safety and Health Administration (OSHA), the Environmental Protection Agency, the Federal Emergency Management Agency and other agencies that could drive up the cost of housing.

The Silica Rule

While NAHB is talking about the overall cost of a home, one skirmish that’s playing out between the construction industry, at large, and a veritable alphabet soup of federal agencies involves the ubiquitous construction dust known as silica. OSHA has proposed a new exposure standard for crystalline silica and wants a new Department of Labor joint employer rule to formalize it.

The proposed silica regulation, which would be a requirement for all new and existing construction, is the product of four decades of research, debate and legislative action. It literally took 45 years to finalize a regulation lowering the allowable exposure limit of silica, essentially ground up on construction sites. OSHA’s current silica exposure standard limits allowable exposure to the dust, but it’s not a formal regulation. It is a real health hazard, too. If inhaled, silica dust poses serious risk of silicosis, an incurable lung disease or lung cancer.

Industries vs. Agencies

OSHA calculates that its silica rule’s cost to all of industry will be $637-657 million. It also calculates monetary benefits from reduced mortality and disease as a net benefit of $2.8-4.6 billion.

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As the election looms, we’re likely to see more regulatory battles such as this one play out.

With cheap shale gas and falling power costs from renewables such as solar, nuclear power looks like yesterday’s technology but, for two reasons, it still matters greatly.

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Not just in the U.S. but in many other countries where the technology is already well established and where the search for less polluting alternatives to coal has been picking up.

Nuclear may be thought of as yesterday's technology, but its emission-less power generation makes it attractive. Source: Adobe Stock/mandritoiou.

Nuclear may be thought of as yesterday’s technology, but its emission-less power generation makes it attractive. Source: Adobe Stock/mandritoiou.

Nuclear power still generates 19% of the electricity consumed in the U.S. and is arguably the most reliable base-load provider, not just for day-to-day supply but for decade-to-decade. Emitting zero carbon emissions during power generation (green lobbies would claim considerable CO2 is released during construction, not least of which comes from the amount of concrete involved in containment structures) nuclear power plants have been operating for nearly 50 years. Read more

We previously reported that a World Trade Organization dispute settlement panel ruled that India’s requirement that companies that sell solar power to the government use only domestically-made parts and components for its massive Jawaharlal Nehru National Solar Mission unfairly discriminated against American manufacturers.

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Is that really a good thing? There are several states and municipal governments here in the U.S. that do exactly what India wanted to do: subsidize local renewable energy companies and, in some cases, require them to buy silicon solar photovoltaic panels from local manufacturers.

Solar photovoltaic panel array on a tiled house roof

To receive a local power generation credit, should you have to consider foreign suppliers to put solar panels on your house?

There are 44 programs in 23 states, and “China and India have already identified several of these programs as incompatible with WTO law,” according to a December 2015 paper by Vanderbilt University Law School Professor Timothy Meyer. Read more