Commentary

I could be committed for heresy for what I am about to write, but it isn’t a foregone conclusion that Britain will leave the European Union (EU).

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On the balance of probabilities, a break with the EU is more likely than not. In recent weeks, however, the realization of what leaving the single market will mean to voters’ pockets, not to mention the fiasco of the Conservative government in-fighting, has encouraged some to think a rethink may yet prevail. A second referendum is, while not likely, at least not impossible.

I say heresy because the debate is becoming increasingly acerbic.

Leave supporters, in particular, shout shrilly anytime the topic is raised that “we cannot thwart the will of the people” and to even suggest a rethink is “anti-democratic.” As Gideon Rachman wrote so eloquently in the Financial Times this week, this sounds rather like a third-world dictator, who having unexpectedly achieved a vote in his favour says — “one man, one vote, one time.”

In other words, once a decision has been taken by referendum, it cannot be revoked.

But as Rachman observes, this denies the fact that the electorate was, putting it politely, profoundly misled during the campaign.

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Despite U.S. oil stocks falling 7.6 million barrels, the biggest drop since September, a recent Financial Times article reports, quoting U.S. Energy Information Administration data, that the oil price is struggling to get back to $48 per barrel, let alone the heady heights above $50 it achieved in May.

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U.S. refineries are running flat out to meet summer demand, drawing down on U.S. stocks — but still, the price is not responding.

Meanwhile U.S. exports are booming. Rather than being constrained by OPEC cuts, global production is rising. Ironically, even Saudi Arabia is pumping above its target, reporting to the cartel that last month it raised output to 10.7 millions barrels per day, a 190,000 b/d increase on the previous month and 12,000 b/d above its own target.

The Kingdom claims it needed to increase output to meet peak electricity-generating demand experienced during the summer months, but the Saudi increase contributed to total OPEC overproduction of 393,500 b/d from last month, according to the Financial Times.

Source: Financial Times

Iraq, Nigeria and Libya are all pumping more oil than at any time this year and Iran is close to its own year’s highest output, too.

In addition, Canadian oil sands production is rising, Production is predicted to be higher still next year as new projects come on-stream (despite the low prices), making many projects marginal or even loss-making, debts must be repaid and oil sands producers are hanging in there hoping for firmer prices.

News south of the border is not encouraging, though. U.S. tight or shale oil production has continued to rise this year, although at a more gradual rate than seen over the last 12 months. Nevertheless, shale oil producers have become adept at squeezing profits out of production, even at sub-$50 per barrel prices, and show no signs of backing off at current levels.

Long-position holders are hoping OPEC may take further action to curb supplies, but members are sticking to their mantra that they expect stocks to decrease and, therefore, prices to rise, as the current restrictions bite.

But as the Financial Times notes, OPEC’s own monthly report indicates the group still faces an uphill struggle to balance output under the terms of its supply deal, what with cheating and non-OPEC production.

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A balanced oil market seems a distant dream for producers.

The jury may be out on whether the recently concluded Group of 20 (G20) summit’s protectionist slant will hurt India or not (though everybody is near-unanimous that where overproduction of steel was concerned, China’s had it coming for a long time).

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The G20 leaders at the July 7-8 summit in Hamburg, Germany, had agreed to address “growing overcapacity and rock-bottom prices in global steel markets.” This, after pressure was applied by the U.S. administration, which managed to get some strongly worded language inserted into the G20 communique, even setting deadlines for G20 members to address the issue of excess steel production.

The communique urged world leaders to seek the removal of “market-distorting subsidies and other types of support by governments and related entities,” according to a copy obtained by news agency Bloomberg.

The statement called on all G20 members to “fulfill their commitments on enhancing information sharing and cooperation by August 2017, and to rapidly develop concrete policy solutions that reduced steel excess capacity.” All the data and proposed policy solutions will also be compiled as a report and published by the OECD’s Global Forum on Steel Excess Capacity in November this year.

Some last-minute maneuvering by the Trump administration saw such strong language being inserted into the communique to fight protectionist measures and ensure reciprocity in trade and investment frameworks. Many saw this as a departure from attempts to include similar language at the G20 finance ministers’ meeting in March, barely a month before the U.S. had launched investigations to determine whether cheap steel imports posed a threat to U.S. national security, startling many sector experts.

Calls to lower overcapacity are largely aimed at China, producer of half of global crude steel output until May 2017. Even though China has insisted it had clamped down on polluting and unviable steel capacity, the impact on steel production has been negligible so far, experts say. (Stuart Burns wrote on the subject of capacity cuts last week.)

Even at the 2016 G20 summit, European and U.S. leaders asked China to accelerate capacity cuts, blaming its big exports on slumping prices and accusing it of dumping cheap metal in foreign markets.

Data for global crude steel output in 2017 through May showed output grew 4.7%, while U.S. output was up by only 2.2%. In comparison, steel output in the European Union (EU) rose by 4.1%. China’s output was up by 4.4%, although May saw output grow by 1.8%.

India’s steel industry has come to rely on exports since its domestic demand had not kept pace with the increase in capacity. While some in India say the country needs ready access to global steel markets, any such protectionist move could put pressure on growth.

On the other hand, other experts were of the view that the move could resolve a large part of the non-performing assets problem in the Indian banking sector. At the moment, a number of Indian steel companies were facing bankruptcy and their lenders were looking to sell their assets.

Any move by G20 companies to support the world steel prices would eventually help Indian companies’ realizations from exports.

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Defining the root cause of Britain’s predicament is not as simple as a sweeping “foreign competition” argument. But there’s no doubt that is part of the problem, as Britain’s steel industry has been decimated over the last 25 years.

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A House of Commons report last year said output from the UK steel industry was £2.2 billion in 1990, compared to £1.6 billion in 2015, a 30% fall (in 2013 prices).

Source: House of Commons Library Briefing Paper No. 07317, Oct. 28, 2016

The decline has left the U.K. producing just 11 million tons of steel, compared to 166 million tons for the EU as a whole and 804 million tons from China. A combination of global excess supply and lackluster government support has left the U.K. as the fifth-largest steel producer in the EU, after Germany, Italy, France and Spain.

In line with most European producers, surviving U.K. steelmakers have had to move up the value chain in order to remain profitable. Inevitably, however, the market for more value add, niche product areas is smaller than the bulk commodities end of the market.

The U.K., in turn, is a relatively small consumer of steel products, as medium to heavier industry has also declined over the years. As a result, the U.K. has lost the ability to make some of the grades or forms necessary for more demanding or critical applications.

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A readable and well-argued article in the Financial Times last week by Wolfgang Münchau explores the risk that we all face in the media and metal-buying communities in allowing our bias to influence our interpretation of data.

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Even as past and current practitioners, we at MetalMiner have to be constantly vigilant to the possibility that our own expectation of market trends is not influencing our interpretation of data. Münchau uses the recent announcement of an EU-Japan trade agreement — an announcement conveniently released on the eve of the G20 summit — to illustrate his point.

The other critical section of the EU-Japan trade story, he argues, is a good example of what psychologists refer to as confirmation bias, or the tendency to filter out everything that is not consistent with our beliefs. We believe in free trade, hence we want an EU and Japan deal to be true, therefore we accept the announcement as fact even though most of the detail has yet to be sorted out and the timing of the announcement is a shameful attempt at media manipulation by the G20.

By way of illustration, Münchau uses the debate about the future of the euro to show how opposing sides have fervently talked up developments that support their belief.

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China’s campaign to cut environmentally polluting steel, aluminum, power generating and similar industries, like cement plants, is understandably catching the headlines.

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For producing industries like steel and aluminum, the cutbacks have supported prices. The expectation is the closures made this year will accelerate during the November to March heating period, when there will be forced closures of plants, even some that have passed the environmental tests.

All this has supported the expectation that there will be supply shortages in the face of an economy that continues to grow strongly and where recent PMI data supports current growth levels persisting at least through to the end of the year.

Yet while the headline announcements are all about capacity cuts, a recent Reuters article illustrates they are only part of the story.

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Indians’ love of gold is a story with which many around the globe are familiar.

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Just how deep is this love? A recent research report by one of India’s well-known equities firms said India had consumed — hold your breath — around $300 billion worth of gold in just the last decade.

The analysis by Kotak Institutional Equities said gold prices had gone up by 300% between FY 2008 and FY 2017. But the love story has not been the same in the last five financial years (FY 2013-17), when only half the gold consumption of the past decade was recorded, not to mention virtually flat gold prices.

It’s no wonder that under the new Goods and Services Tax (GST) implemented as of July 1, gold, according to some, has been given special treatment. The tax has been kept at 3%, nowhere near the 18% suggested by some experts.

GST is a uniform tax across India, doing away with almost all other forms of taxes for businesses. So high is this precious metal on an average Indian’s shopping list that even the 3% tax, up from the current 1.2%, has raised the hackles of buyers. Some have even suggested that the “high” GST (in reality, just 1.8% more) would once again lead to the smuggling of gold into the country.

A report by news agency Reuters, for example, quoted named and unnamed gold traders and buyers as saying smaller gold shops could be more inclined to sell without receipts, potentially hitting sales.

Indians have been familiar with the “black” gold economy.

Except for certain periods, gold smuggling has always been a part and parcel of India. In 2013, for example, when the government raised import duties on the metal to 10%, smuggling went up. The World Gold Council (WGC) estimated that smuggling networks had imported up to 120 tons of gold into India last year.

The Kotak Institutional Equities report opined that it was “unhappy” with the special treatment given to gold vis-à-vis GST. India’s policy on inflation management achieved remarkable success, which should reduce gold’s function as a “store of value,” the report said.

Gold Demand on the Rise?

A WGC report in June highlighted the potential impact of the GST on India’s gold demand. It said the new tax could have a negative impact in the short term as the industry went through a period of adjustment, but the net impact in the long term was likely to be positive. The WGC expected India’s demand for gold to be 650–750 tons in 2017 and predicted it will rise to 850–950 tons by 2020.

According to another article in the Mint newspaper, analysis of household survey data seemed to suggest that one reason why regional governments in India may have lobbied for a low tax rate on gold was because gold purchases were not exclusive to the rich.

Even though the rich tend to buy more of it, possession of gold was a universal phenomenon across income classes, according to the Household Survey on India’s Citizen Environment & Consumer Economy (ICE 360° survey) conducted by the independent not-for-profit organization, People Research on India’s Consumer Economy, which was partly financed by the WGC.

The report found that one in every two households in India had purchased gold in the last five years. The survey also revealed of 61,000 households polled in 2016, 87% of households owned some amount of gold in the country.

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While we read presidential tweets, or worse, listen to megalomaniacs gloat about successful missile launches, a quiet shift has been going on in the financial markets.

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Political risks as a driver of exchange rates have either faded into the background or have already been fully priced into non-dollar currencies. Meanwhile, the driver in currency markets has shifted back to central bank actions and the macroeconomic factors that drive them.

You only have to see the sharp reaction in Europe to recent comments made by Mario Draghi, president of the European Central Bank, concerning “reflationary pressures” at work, causing an immediate 2% spike in the Euro, to see the market’s focus is firmly back on inflation-related indicators, with wage growth in the different currency areas taking on a particularly critical role.

The Associated Press reported last month that inflation across the 19-country Eurozone held up better than anticipated in the face of waning energy prices — a sign that the region’s economic recovery is reverberating across the single-currency bloc.

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In a recent interview, Rusal Deputy CEO Oleg Mukhamedshin reaffirmed his company’s commitment to the Paris climate-change accord and indicated that it will continue investing in the research and development of lightweight aluminum alloys, both to distance itself from the commodity end of the market and to provide improved materials for lightweighting.

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The interview with the South China Morning Post was reported by Aluminium Insider largely within the context of Rusal and Russia’s continued commitment to tackling climate change following President Donald Trump’s rejection of the process.

To what extent one takes any Russian company’s commitment to climate change is a debatable and personal point, but in one area Rusal’s stated commitment to meet 100% of its power needs from renewable power sources by 2020 has a much stronger economic argument than the simple angle of climate change.

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Reports of platinum’s demise have been much exaggerated — or so this month’s report from the World Platinum Investment Council (WPIC) would argue.

Sales of diesel vehicles in some parts of Europe have taken a beating in recent months over concerns that authorities will raise costs or otherwise make living with diesel engines a less attractive proposition for owners, due to negative sentiment post-Dieselgate. Total car sales have dropped in some European markets, including the U.K.. However, where sales have held up there’s been a definite swing to gasoline vehicles rather than diesel.

The markets have read this trend as meaning platinum demand will fall — but maybe not surprisingly, the WPIC is taking a more optimistic view.

Regardless of buyers’ short-term preferences, the WPIC says the auto industry has an overarching challenge in the years ahead that will support platinum demand. Automakers will face fines if they do not meet new EU CO2 targets by 2020, but the report lists the industry’s rather limited options.

First, the industry could boost sales of battery electric vehicles (BEV). However, with a consensus expectation of BEVs taking no more than 5% of the market by 2025 due to lack of charging infrastructure, it seems unlikely BEVs are the short-term solution.

Source: World Platinum Investment Council

Second, the industry could sell a higher percentage of hybrids. Recent trends, however, suggest demand for hybrids, despite Volkswagen’s Dieselgate, is still growing too slowly. Demand is certainly not growing fast enough to reach those emissions targets, which are just 2 ½ years away.

So, the third option — and to be fair to the WPIC, probably the most likely option — is for automakers to clean up diesel. The technology already exists to meet the most stringent nitrogen oxide (NOx) targets set for 2022, but the industry needs to do more than it has done in the past to prove to the buying public the performance figures they publish can be achieved in the real world.

The WPIC points to French automaker PSA, which has undertaken to publish independently certified, real-world CO2 test results for its vehicles. PSA also recently announced it will do the same for NOx results.

It is only by automakers voluntarily — or maybe by legislation — being forced to accept third-party verification of their emission figures that they will be able to rebuild consumer trust and deflect harsher government legislation on diesel engines in the future.

Not surprisingly, the attraction of the WPIC is significantly cleaner diesel engines will require increased platinum-group metal (PGM) loadings, even as the industry shifts from the current lean NOFX trap (LNT) system to the more effective selective catalytic reduction (SCR) technology. According to ExtremeTech, when announcing Ford’s switch to SCR, it reported that SCR is more costly, but it’s also generally considered more effective than LNT.

Of course, the platinum price has more drivers than just the demand for the catalysts in the automotive market. Investor demand in the form of ETFs, physical demands in the form of jewelry, and chemical and catalyst demand from the chemicals industry are all significant drivers on the demand side.

But much of recent negative sentiment toward platinum has been due to controversy over the diesel engine’s ability to meet emission targets.

And in that sense, platinum’s fortunes will in part ride on the coattails of the auto industry’s ability to re-establish the diesel engine as an environmentally acceptable propulsion unit.