Commentary

“Moody’s downgrades China,” proclaims many a recent headline, while the accompanying article warns that a credit explosion will continue even as growth slows. Sounds serious, doesn’t it? Should we be concerned?

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Ratings agency downgrades are nothing new. The U.S. had a downgrade earlier in this decade, as had the U.K. and many other countries. Life goes on, and even for countries with large external borrowings, costs rarely rise by much — if at all.

There are exceptions, of course. Just think of Greece and many of the Southern European states whose borrowing costs rocketed. But the cause was not only downgrades. In the case of those countries, there had been a profound and sudden loss of market confidence in their ability to service their debt. And therein lies one of the issues for China.

Although China’s economy-wide debt is already 256% of GDP and rising, much of it is funded internally. It is not reliant on overseas investors, and as such is easier for the Bank of China to manage. According to a report in The Telegraph, China’s government debt-to-GDP ratio is expected to rise only gradually to 45% by the end of the decade, which is in line with similar countries rated at an “A” investment grade.

The downgrade has so far been confined to Moody’s, which dropped China’s rating by one notch from Aa3 to A1, keeping it apparently within investment grade territory. Moody’s pressed Beijing to accelerate supply-side reforms as the country faces challenges in the years ahead of an aging population, slowing productivity growth and the legacy of excessive state led investment.

Growth is predicted to slow to 5% from current 6.7% levels by the end of this decade. But while that is “poor” for China, it is still exceptional for any other country of comparable size. Read more

On this Memorial Day 2017, we at MetalMiner would like to take the opportunity to look back at what matters, starting with the reason for the holiday itself.

We salute the brave men and women across all armed forces for their service and sacrifice, which is more important today than ever. In the wake of the Manchester bombing, it’s only right to take a moment and honor those who risk all to fight for freedom from fear.

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Memorial Day Roundup – The Year That’s Been So Far

What else matters on this Memorial Day?

The first five months of 2017 have been interesting ones, in which we’ve seen these three MetalMiner stories perform the best — spoiler alert, aluminum is the frontrunner for Metal of the Year so far:

We Launched MetalMiner Benchmark

Here’s the deal, folks.

Gamechanger, amirite?

ISM 2017 Happened

A contingent of our company, representing our sister site Spend Matters, descended upon the annual Institute for Supply Management (ISM) conference in Orlando, Fla., the premier event for purchasing/procurement and supply chain professionals.

Here’s a highlight, from our colleague-in-attendance Pierre Mitchell:

A “great session was the Q&A with ISM CEO Tom Derry, Hans Melotte (ex-Johnson & Johnson CPO who is now CPO at Starbucks) and Kris Pinnow (CPO at B/E Aerospace). I asked Tom about the ISM economic forecast showing slightly higher U.S. growth rates in manufacturing compared to non-manufacturing, and he said that it’s likely a combination of nearshoring, automation, foreign investment in the U.S. and manufacturing for exports. Here, Tom aptly said that ‘a company’s supply chain follows demand – and that’s [U.S. government] administration agnostic.'”

For more on the conference highlights, head over to Spend Matters.

We Bid Adieu to Jeffrey Yoders

jeff yoders chicago cubs 1060 project

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What with news of the terrorist massacre in Manchester reverberating around the world, while President Donald Trump first snuggles up to the Saudis and then to the Israelis — it is hardly surprising that news of yet a fourth Greek bailout has failed to make much headway in the headlines.

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News that the International Monetary Fund (IMF) is working on a compromise with Greece’s creditors that would smooth the way for a €7 billion ($7.8 billion) disbursement of rescue cash all sounds rather calming and reassuring. But rest assured Greece is in danger of yet another default this summer as it seeks to get its hands on the latest tranche of an €86 billion rescue package to meet debt obligations this July.

According to an article in The Telegraph, Greece’s debt currently stands at nearly 180% of gross domestic product. The Greek economy fell back into recession in the first quarter of 2017, and it is an economy that is still some 27% smaller than in 2008, crushed under the EU-IMF austerity program.

According to the Associated Press, the IMF has argued that the Eurozone forecasts underpinning the Greek bailout are too rosy and that the country as a result should get substantial debt relief so it can start growing on a sustainable basis. The Greek economy has spent more time in recession than growth since the financial crisis.

The Eurozone, on the other hand, has so far ruled out any debt write-off, saying it would rather extend Greece’s repayment periods or reduce the interest rates on its loans after the bailout next year. Germany and the Netherlands are keen to avoid debt relief, probably because they do not want to set a precedent that others such as Italy could turn to later to solve their own problems. Read more

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It’s a story of two democratic countries and the policies they pursue vis-à-vis energy.

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So while the U.S. under President Donald Trump is kind of trying to revive its coal industry, far away India is doing the opposite – embracing clean energy with a vengeance and relying on it for much of its energy needs.

That’s one of the many reasons why India has also managed to beat the U.S. to the number two position in the renewable energy investment index released recently by UK-based accountancy firm Ernst & Young. China has continued to remain on top of this list, while the U.S. is now third. This is an annual ranking of the top 40 renewable energy markets in the world.

Those who prepared the report said that industry-friendly policies laid down by the Indian government, along with increasingly attractive economics, had changed the entire climate of the renewable energy sector of India.

Under Trump, the U.S. is seeing a shift in its energy policy. The president has issued orders to roll back many of the previous administration’s climate change policies, revive the U.S. coal industry and review the Clean Power Plan. Compare this to India’s neighbor China, which has announced that it would be spending $363 billion on developing renewable power capacity by 2020. Read more

The U.S. dollar got a boost after the presidential election as markets were encouraged by prospects of lower taxes, fiscal stimulus and deregulation that would accelerate growth of the American economy.

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But this month, the dollar has fallen sharply, hitting a seven-month low. A weaker dollar gave some relief to depressing commodity markets.

Commodity index (in black) rises as Dollar index (in green) falls. Source: MetalMiner analysis of stockcharts.com

Why then is the dollar losing its luster now?

First, the dollar had steadily risen for three consecutive months. It’s not uncommon to see profit-taking after such an increase. But there are also some fundamental reasons behind this sell-off.

Selling intensified after the recent political turmoil around President Donald Trump as investors worry over political stability in the U.S. Investors also worry that under these political turbulences, the Trump administration will struggle to implement the pro-growth initiatives that markets had taken for granted. Finally, the euro appreciated against the dollar as political risks in Europe eased following the French elections.

Can This Decline Be Reversed?

US Dollar Index could bounce back up soon. Source: MetalMiner analysis of stockcharts.com data

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What happens when an illegal business practice becomes so common and virtually accepted that it ultimately gets difficult to break?

Many U.S. manufacturers would argue that we’re in a period of global trade that features one such practice: trade circumvention. The most slippery aspect of ferreting out circumvention is first defining which segment of industry gets harmed the most, before even knowing what to do about it. Is it the upstream sector, including primary steel, textiles or plastics production? Or the downstream sector, such as the residential washing machine business?

MetalMiner Executive Editor Lisa Reisman makes the case that the lines between upstream and downstream manufacturing have blurred in this new report, Rules-Based Trade Remains Critical to Manufacturing Health.

But first we must understand the basics. Here’s an excerpt from that paper defining the landscape of trade circumvention in a short primer.

What is Trade Circumvention?

According to the Organization for Economic Cooperation and Development, circumvention refers to “getting around commitments in the WTO such as commitments to limit agricultural export subsidies. It includes: avoiding quotas and other restrictions by altering the country of origin of a product; measures taken by exporters to evade anti-dumping or countervailing duties.”

Four steel producers filed a petition last September, charging China with circumventing anti-dumping and countervailing duty orders for corrosion-resistant carbon steel and cold-rolled carbon steel by sending substrate materials to Vietnam for processing and re-export. The claim appears to be supported by trade data (as shown by an spike in Vietnamese cold-rolled and CORE imports after November 2015 while the same Chinese imports drastically decreased after duties were imposed on the latter, for example). Read more

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Last month, China announced plans to build a new megacity from scratch. Since the city will be twice the size of New York City, analysts expect the project to require huge amounts of steel and other industrial metals such as aluminum and copper.

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According to Citi Research analysts, 12-14 million tons of extra steel will be required annually to build this new development. Since the country’s current domestic demand is about 700 million tons, that would lift Chinese steel demand by 2% per year over the next 10 years.

But are the analysts correct? Should we expect a steel demand boost over the next 10-15 years?

Although building this city from scratch will indeed require a lot of steel, analysts are making the mistake of missing the forest for the trees. The key driver for steel demand in China is the net migration from the countryside to cities. It doesn’t really matter whether China builds a new megacity or it expands its city limits. The key measure is the rate of urbanization in the country at a national level.

Urban and rural population in China. Source: China’s Economy book by Arthur R.Kroeber

China’s urban share has grown quickly over the past two decades since its rural population peaked in 1995. Last year, China’s urban population share reached 57.9%. The share, however, is still small given the country’s income level. Read more

One could say it’s slightly ironic that an industry championed in the U.K. as an area of expertise to be taken to the world is in practice dominated here by a Danish company, Dong Energy.

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The industry is offshore wind turbines — and I make the distinction between onshore and offshore because many countries have been early adopters of wind turbines. The U.S. invested $14.5 billion in wind power project installations in 2015, and China leads the world in onshore wind generating capacity. Offshore, however is only just taking off — no pun intended.

The principal driver in offshore’s growth is cost, according to an article from Wind Energy Update: “Danish company Vattenfall’s record low offshore wind price of 37.2 ore per kWh (49.9 euros/MWh; $53/MWh) for the 600 MW Kriegers Flak project last year showed how falling costs and new tenders are spurring intense price competition in the offshore wind market.”

Cost reductions are being driven in part by the development of ever larger turbines, more practical off shore than on shore, where aesthetic objections are more frequent with giant wind turbines accused of spoiling the landscape. Wind also blows more consistently off shore, increasing the utilisation rate of offshore turbines closer to that of conventional power sources. Read more

Looks like the tide has finally turned.

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Extending that metaphor is easier now than it’s ever been for us writing on this topic: the reshoring of American manufacturing from abroad — and specifically, the net gains in jobs that we’ve been seeing in 2016 and early 2017 as compared with the trends in the early 2000s.

(I envision the emigrating jobs huddled together for warmth on a seaworthy vessel, with Shanghai getting smaller in the distance as the Pacific waves toss the boat ever closer toward Long Beach… if only it were that poetic.)

Back to reality. The Reshoring Initiative has just released its 2016 Data Report, and the numbers seem to tell a rosy story. According to the report press release, “in comparison to 2000-2003, when the United States lost, net, about 220,000 manufacturing jobs per year to offshoring, 2016 achieved a net gain of 27,000.”

“The numbers demonstrate that reshoring and FDI are important contributing factors to the country’s rebounding manufacturing sector,” the release concluded.

But of course, it’s not that easy. Major policy changes will have to be made or improved to continue the reshoring trend (which is still in its early stages), according to Harry Moser, founder of the Reshoring Initiative.

In a way, the U.S. should aspire to host conditions like those in Germany, Moser told me, including a supportive government, VAT, low healthcare costs, and an appreciation of the benefit of local sourcing. Read more

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It isn’t an idle question. Oil prices are a proxy for energy prices, and a rising oil price can be supportive for energy intensive metals like aluminum.

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A rising oil price is also taken as a proxy for rising industrial demand – a bullish indicator that global growth is strong. A falling price, on the other hand, should be good for consumer spending as it keeps more money in drivers’ pockets and lowers the cost of goods sold for companies far and wide – but particularly for those in the transportation or more energy intensive sectors.

But despite rising last year following the agreement on the parts of OPEC and major non-OPEC oil producers to limit output, the price has since fallen back so consumers are not surprisingly wondering where it goes from here.

Just this month the two architects and key players in last year’s agreement, Saudi Arabia and Russia, announced they would continue with the agreement, set to shortly expire, until March 2018 and indeed will accelerate cuts to reduce near record inventories. It should be said the announcement still must be officially agreed at next week’s meeting of OPEC ministers in Vienna.

While initially slow to contribute, Russia has stepped up cut backs of late and combined non OPEC cuts are said to be some 255,000 b/d in April, but others such as Brazil and Canada are expected to increase output in Q2 and the USA has added substantially since last year. According to Oilprice.com, U.S. oil production has risen to approximately 9.3 million barrels a day and is projected by the EIA to reach 10 million barrels a day by 2018. Read more