Articles in Category: Public Policy

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:

332-investigation-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.

china shipping port title

At the presidential debate Monday night, Democratic Presidential Nominee Hillary Clinton, when asked how she would create jobs by moderator Lester Holt, said, “Here’s what we can do. We can deploy a half a billion more solar panels. We can have enough clean energy to power every home. We can build a new modern electric grid. That’s a lot of jobs; that’s a lot of new economic activity.”

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It has often been said that the truth is the first casualty in the world of politics and the democratic party’s long-term commitment to battling the very real scourge of climate change is more dogma than policy these days wherein its adherents are committed to stopping what President Obama called “the rise of the oceans,” no matter what the cost and no matter how effective the tools it currently has really are — in this specific case, solar silicon photovoltaic panels. That’s just how so many business ventures lose sight of the bottom line and fail.

Solar Ahead of Wind?

It was actually rare to hear Clinton specify solar as a technology to “create jobs” as the usual dogma is to tout “wind and solar” with little specifics about how either of these generation technologies — which don’t require raw materials to be dug out of the ground as with the fossil fuels that currently provide most of the country’s electricity. That would mean a lot of former miners and drillers either selling or installing the estimable sum of half a billion solar panels and, once that install base is set, where do those “new jobs” go from there?

gtm_research-SolarGrowth_092816_550

The growth in solar, in the last two decades, has been heavily dependent on the solar investment tax credit. Source: GTM Research.

If Clinton is really talking about jobs in production of crystalline silicon photovoltaic panels, she may be surprised to learn that the production end of solar has been a mature industry for decades now. There’s already a booming industry with plenty of skilled workers producing panels quickly and efficiently.

Booming Solar Production

According to GTM Research, nearly 209,000 Americans already work in solar today — more than double the number in 2010 — at more than 8,000 companies in every U.S. state. By 2020, that number is expected to double to more than 420,000 workers, but that’s a total of 211,000 jobs by the end of a potential first Clinton administration. That’s not that much job growth, all things considered. Modern factories are already able to churn out large volumes of panels quickly and efficiently. Read more

At the International Manufacturing Technology Show in Chicago, the Reshoring Initiative‘s Harry Moser laid out what he called the “reshoring roadmap” of what congress and the next president need to do to bring manufacturing jobs back to the U.S.

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Moser said that rapid job loss has been stemmed in the U.S. but more needs to be done to bring manufacturing jobs back to the U.S. The roadmap included corporate tax reform to make the U.S. more competitive with countries like Ireland, which boasts a 2% corporate tax rate. Republican presidential nominee Donald Trump has said he will lower the corporate tax rate of 39.1%. Democratic nominee Hillary Clinton has said she will raise taxes on “corporations and wealthy individuals.”

Don’t Drown in the VAT

Another part of Moser’s roadmap is a value-added tax in the U.S. A VAT is a type of general consumption tax that is collected incrementally, based on the “value added,” at each stage of production and is usually implemented as a destination-based tax, where the tax rate is based on the location of the customer. If I purchase something from the U.K, I would have to pay the vote to get it imported into the U.S.

16-RSI-0482-IndustryToday-FP.indd.pdf

Companies are reshoring jobs to the U.S. Source: The Reshoring Initiative.

Moser said the rest of the world has a VAT of about 15% whereas the U.S. has no VAT. 159 of the 193 countries in the world have a VAT.

There are two main methods of calculating VAT: the credit-invoice or invoice-based method and the subtraction or accounts-based method. Using the credit-invoice method, sales transactions are taxed, with the customer informed of the VAT on the transaction, and businesses may receive a credit for VAT paid on input materials and services. The credit-invoice method is the most widely employed method, used by all national VATs except for Japan. Using the subtraction method, at the end of a reporting period, a business calculates the value of all taxable sales then subtracts the sum of all taxable purchases and the VAT rate is applied to the difference. Read more

Let’s set aside Donald Trump’s one-track talk on China as a currency manipulator for just a sec, and focus on a slightly less understood, and arguably bigger, issue — the role of Chinese state subsidies and state-owned enterprises.

Using the steel industry as an example:

Top 10 Chinese Steel Companies in 2014

top 10 list china steel companies

With the exception of Shagang Group, China’s biggest steel companies are owned — therefore subsidized and otherwise supported — by Beijing. Courtesy of the American Iron and Steel Institute (AISI).

Because nine of the top 10 steel companies in China are SOEs, which get special support (read about it in our new project,China vs. the World,” here) — it ultimately spurs trends like these:

growth-china-steel-industry-vs-US-2000-2015

Almost immediately after China joined the WTO in 2001, the country’s steel industry began its exponential rise. Courtesy of AISI.

china-steel-exports-2005-to-2015

The Great Recession nipped Chinese exports a bit, but state-owned enterprises continued to be incentivized to produce by the Chinese government while domestic growth stagnated within the last few years, leading to a flood of Chinese steel being pushed outside the country’s borders. Courtesy of AISI.

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. steel industry – in “China vs. the World.

china shipping port title

Oil prices fell as Saudi Arabia poured cold water on a potential deal with other Organization of Petroleum Exporting Countries members and other countries such as Russia. China is threatening to place tariffs on sugar imports.

Crude Oil Selloff

Crude prices are selling off today, aided by Saudi comments that a decision will not be forthcoming from next week’s Organization of Petroleum Exporting Countries meeting in Algiers.

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Many had thought that OPEC was close to reaching a deal to curtail production for up to a year with its members and non-member producers such as Russia, but the Saudi announcement makes it highly unlikely that any deal will happen soon now.

Clipperdata_OPEC_Production_500_092416

Source: Clipperdata.

Saudi Arabia has made production by regional rival Iran an issue in any deal to constrain production. The Saudis say Iran must abide by any deal just like other member-states and Iran and its allies say Iran should be allowed to bring its capacity up to full production, as it just re-entered markets after decades of sanctions, before it starts to cut.

China Explores Sugar Tariffs

China has launched a probe into soaring sugar imports following complaints by its domestic industry, the government said on Thursday, the latest sign that trade tensions between major commodities producing nations is intensifying.

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The Ministry of Commerce said the probe will look at imports since 2011 and into possible protectionist measures provided by foreign countries for their producers. It will last six months, with an option to extend the deadline, it said.