Brazil

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Anxiety is rising among Europe’s steelmakers that a potential U.S. plan to levy steel tariffs, on national security grounds, could have a disastrous impact on the region’s sales into the market.

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Reuters reported that the European steel association Eurofer is worried that “….measures potentially stemming from the U.S. section 232 investigation may lead to a proliferation of disastrous global trade flow distortions.”

Eurofer is worried on two counts. First, it is worried that with China largely already cut out of the U.S. market by anti-dumping legislation, the axe will fall on imports from other regions, of which Europe is a major supplier. Many European countries are already experiencing steep declines in sales to the U.S. between 2015 and 2016 — in some cases of 50% — but the largest, Germany, remains the fifth-largest external supplier to the U.S. of flat-rolled products, according to International Trade Administration data.

The second worry is that should the investigation support bans or large duties, suppliers in the affected countries will look for alternative mature, high-value markets for their products, namely the EU. This would potentially flood an already overcrowded market with more low-priced material.

Having championed free trade in recent statements, Europe may have to eat its own words if it is forced to find ways to counter such a flood. Reuters reports that moves are already afoot, at the G20 summit in Germany last weekend, leaders from the world’s 20 leading economies set an August deadline for an OECD-led global forum to compile information about steel overcapacity. That also includes a report on potential solutions, due in November, which could result in the region acting of its own.

In reality, Europe may not be the primary target of the president’s 232 action. Supplies from Canada, Brazil, Mexico, South Korea, Japan and Russia dwarf those from Europe, but that will not necessarily stop the region from suffering considerable collateral damage.

The move would come at an unfortunate time for the European steel industry.

After prices rose nearly 50% last year, they have since fallen back some 10% this year, according to Reuters. Demand, however, is recovering with a 1.9% rise forecast for this year, according to Eurofer, suggesting prices could stabilize (although demand growth is expected to ease again next year, with only 1% growth forecast).

EU Strikes Back?

However, The Guardian reports Europe is also looking at retaliatory measures, should they suffer exclusion or tariffs because of the 232 action. The paper quotes the European Commission president, Jean-Claude Juncker, who is reported to have said that if the U.S. took measures against Germany and China’s steel industries, the EU would “react with counter-measures.”

The article says one industry in the Europeans’ crosshairs is Kentucky bourbon, worth $166 million to the state last year and directly employing some 17,500.

Kentucky was staunchly supportive of Trump during his campaign, with 62.5% of the electorate voting for him.

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“I am telling you this in the hope that all of this won’t be necessary,” Juncker said during the G20 summit. “But we are in an elevated battle mood.”

Bellicose talk, indeed.

Kagenmi/Adobe Stock

It was a busy week in the world. On Thursday alone there were elections in the U.K. (which resulted in a hung parliament) and former FBI Director James Comey testified before the Senate Intelligence Committee.

Before we head into the weekend, let’s look back at the top storylines in metals news on MetalMiner this week:

Climate of Corruption Tempers Comeback Optimism in Brazil

Speaking of politics, our Stuart Burns wrote about Brazil and its efforts to push its way out of the doldrums of a recession, while also struggling with the specter of corruption.

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One year after former President Dilma Rousseff was impeached, her successor, Michel Temer, is facing questions about corruption. The BBC reported Thursday Brazilian judges have chosen to delay voting on a case that could in fact send Temer packing (an outcome which would continue a period of presidential instability in Brazil).

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Amid political instability, Brazil is attempting to work its way out of its economic recession. readytogo/Adobe Stock

Brazil is struggling with corruption, particularly among the ranks of the elites, according to the Financial Times.

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Just a year after Brazil’s Congress impeached former President Dilma Rousseff, her replacement, 76-year-old Michel Temer, is hanging on to power by a thread following revelations last month that he had engaged in secret talks about bribes with Joesley Batista, the former chairman of meat packing firm JBS. Temer is the least popular president ever, according to a separate FT article, but business leaders and economic analysts say the Brazilian economy desperately needs his reforms if it is to pull itself out of a two-year recession (the worst on record).

Source: Financial Times

A meager bounce in the first quarter offered scant comfort, coming as it did on the back of a record soy bean harvest, up 13.4% and pushing the agricultural sector into positive territory.

Economy Stuck In Recession

The broader economy, however, remains mired in recession.

Interest rates are still at 10.4% to protect against runaway inflation last year. Imports and exports are down 21% in the first quarter of this year compared to the same quarter in 2015, the FT reports.

Although markets have recovered their shock following the exposure of Temer’s apparent acceptance of high-level bribery, Jimena Blanco, head of Latin America research at Verisk Maplecroft, a risk consultancy, is quoted by the FT as saying, “The government is hanging from a thin thread.”

Ripple effects of the Brazilian economy’s struggles

In a more isolationist America, some may ask: Should we care? Brazil’s problems are Brazil’s — it may be the largest economy in South America, but it is still a long way away, some might say.

Well, yes, we should care, despite all the U.S. talk about retrenchment. The U.S. economy is still highly reliant on global trade. Brazil is America’s 10th-largest export market, fitting between France and Taiwan in dollars earned.

Brazil is also an important geopolitical stabilizer for the South American region. While no one is talking of defaults, the prospect of the recession extending indefinitely raises debt servicing, currency and social stability issues.

Temer may not be the best prospect for open and honest government. At the moment, he may be the least bad option.

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Chinese mutual funds are turning to metals and other commodities to create wealth for investors and Brazil is the latest producer-nation to cut back steel production.

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Chinese Mutual Funds Bet on Commodities

China’s mutual fund industry is pushing to develop investment products linked to local commodity futures, betting that plans to fight chronic oversupply in the country’s mammoth resource sector will drive up prices for raw materials.

Brazil Will Cut Steel Production

Brazil will produce 32.9 million metric tons of raw steel in 2016, 1% less than last year, as the sector wrestles with a slump in demand amid the worst recession in a generation, the Brazil Steel Institute said on Monday.

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Steel sales for the year are expected to fall 4.1%, to 17.4 mmt BSI President Marco Polo de Mello Lopes told reporters at the industry association’s headquarters in Rio de Janeiro.

We are accustomed to blaming the world’s ills on China’s slowdown and the collapse in commodity prices but in the case of Brazil, once the darling of the investment community with Asian levels of growth and seemingly limitless potential, it is the seeds laid down in those good times just a few years ago that are the cause of so much concern now.

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True, the country has been rocked by a corruption probe of epic proportions, with past and present presidents deeply implicated in the process and political stasis gripping the ruling classes as a result. Brazil’s woes, though, go far beyond the Petrobras scandal, as bad as it is.

Brazil’s Economy Shrinks

The economy shrank by 3.8% last year and is on track to shrink a further 3+% this year in its worst recession since official records began. According to the Financial Times, “GDP in the fourth quarter suffered a contraction of 5.9% compared with the same period a year earlier,” Brazil’s statistics agency, the Instituto Brasileiro de Geografia e Estatística (IBGE), said. “All of the components of internal demand showed falls.”

Christ, symbol of Rio de Janeiro, standing on top of Corcovado Hill, overlooking Guanabara Bay and Sugarloaf, Rio de Janeiro, Brazil

The statue of Christ  overlooking Guanabara Bay and Sugarloaf, Rio de Janeiro, Brazil, is gazing upon a far smaller economy these days as Brazil deals with a massive corruption probe. Source: Adobe Stock/ReadytoGo.

Just five years ago, in 2010, Brazil’s economy was growing at 7.6%. The slowdown is not so much the drop in export earnings from commodities, although that has had a severe impact, but more the policies of President Dilma Rousseff’s left-leaning government and that of her predecessor Luiz Inácio Lula da Silva, who were both constantly interfering in industry, implementing price controls as part of their populist agenda and encouraging aggressive lending by state banks.

As the economy has slowed, confidence has collapsed and tax revenues have fallen as expenditures have continued to rise on the back of enormous federal salary and pension commitments. Although agriculture has held up moderately well, industry has collapsed, down 6.2% last year leading a peak to a trough fall in GDP of 7.2%, said to be the worst recession since the 1930’s.

Real Loses Real Value

Industry’s performance is all the more worrisome since the depreciation in the Real against the US dollar, down 30% in the last year, should have aided exports and shielded domestic producers from foreign competition. Meanwhile, government revenues are falling as tax income is falling, the budget deficit has ballooned to 10%, one of the world’s largest the FT says.

Not surprisingly, unemployment has increased dramatically, from about 4% in 2014 to 7.6% in January, while real wages have contracted, with the burden of job losses falling mostly on the young. Bruno Rovai, economist with Barclays in New York is quoted as predicting unemployment will reach double digits as the recession drags on. One example of the growing pain is bounced checks in Brazil have hit their highest level for the month of January since records began in 1991 at 2.41% of all cleared transactions, while inflation is back and is expected to breach the upper limit of the central bank’s target range of 6.5% this year.

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Brazilians had better make the most of their upcoming 2016 Olympics party because the good times are not expected to roll again until a lot of hard decisions, and even harder actions, are taken to dismantle the damaging policies current and recent governments have inflicted.

The London Metal Exchange‘s Hong Kong owners have seen revenues soar for the venerable metals exchange and Vale SA and BHP Billiton may have reached a deal with the Brazilian government over the deadly Samarco mine disaster.

LME Revenue Soars

The London Metal Exchange posted a 36% jump in revenue for 2015 to $223.15 million, as higher trading fees and tariffs helped it offset a drop in volumes, its owner — Hong Kong Exchanges and Clearing  Ltd.— said on Wednesday.

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The revenue gains at its London unit were a key contributor to HKEx record net profit last year, showing the payback has begun from its $2.2 billion buyout of the 139-year old metals exchange near the height of the commodities boom in 2012.

Samarco Owners Reach Deal With Brazil

Samarco Mineracao SA will pay at least $5 billion over 15 years as part of a deal reached with the Brazilian government to settle a lawsuit for damages caused by a deadly dam spill at a mine in November, a government source told Reuters on Tuesday.

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Samarco, a joint venture between Vale SA and BHP Billiton, will pay 4.4 billion Brazilian reais in the three years following the agreement that is expected to be signed today.

 

Brazil’s gross domestic product fell by a record 4.5% year-on-year in the third quarter, confirming expectations that Latin America’s largest economy is in for its worse recession since the 1930s.

Source: Financial Times

Source: Financial Times

Brazil’s left-leaning president, Dilma Rousseff, presided over an economy where unemployment rose to 7.9% in September, up from just 4.7% in October of last year, inflation is running at more than 10% for the first time since 2002 and Brazil’s government budget deficit is now at 9.5% of GDP according to the Financial Times.

What Happened to Brazil’s Economy?

Brazil has a rising middle class and, for a resource-rich emerging economy, it also has a substantial domestic consumer market but household consumption fell 1.5% in the third quarter, while services dropped 1%. Weak harvests for coffee, sugarcane, oranges, cotton, wheat., forestry and cattle husbandry contributed to an agriculture sector contracting by 2.4% compared with the previous three months and both industry down 1.3% and investment down 4%.

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The trade balance made a positive contribution to growth, the FT said, but this was mostly due to a crash in imports down 20% quarter-on-quarter rather than a large increase in exports, which grew only 1.1%, helped by the weaker real.

Source: Financial Times

Source: Financial Times

Keepin’ It Real

Not surprisingly, the Brazilian real has fallen more than 30% in a year, partly due to the deteriorating economy and partly due to the fall in commodity prices that has undermined all resource exporters.

The fall, though, is worrisome because interest rates are at 15% — usually an incentive for foreigners to buy the currency but with inflation at 9% the net rate is more like 6, still a fall of 30% while interest rates are at 15% — that doesn’t say much for investor confidence in Brazil.

Problems at the Top

Dilma Rousseff’s government seems paralyzed, on the one hand unable to bring themselves to enact the austerity measures needed to help balance the books, and on the other swept up in the country’s biggest corruption scandal in which the state-owned energy company Petrobras admitted to 6 billion real ($1.6 billionn) in losses… so far.

Neither the economy nor the currency is expected to recover anytime soon. Q4 of this year and much of next year could be little better than Q3. Rousseff could be ousted, or resign, making way for a more fiscally sound government to take charge but she could equally cling on to the next election in 2018 although her rating is said to be at an all time low of just 8%.

The only silver lining according to Lee Alston, Ostrom professor at Indiana University and a research associate at the National Bureau of Economic Research, writing in the FT, is that compared to previous crises, particularly corruption scandals, this time those in charge are holding the government to account, especially the judiciary, public attorneys, the TCU and the federal police.

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They have investigated, prosecuted and even imprisoned previously untouchable business leaders and politicians involved in corruption. While these changes are not likely to improve the economic situation in the short term they do hold out hope for the future and will instill confidence in foreign investors that the country is coming of age.

There is a close linkage between emerging markets and commodity prices. This connection becomes stronger for net commodity exporters. The two most notable examples are Russia and Brazil, both of which are commodity and energy exporters. These two countries have been two of the hardest hit among emerging markets.

Russia market vectors (Black). Brazil iShares (Orange)

Russian market vectors (Black). Brazilian iShares (Orange) since 2012. MetalMiner analysis with data from Stockcharts.com.

These markets have historically moved with commodity prices. When commodities fall, exporters of commodities make less money which is bad for their economy. In many cases, the movement of these markets helps to give clues to future moves in commodities.

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As we can see in the chart above, Russian (in black) and Brazilian (in orange) stock markets have been in bearish mode since 2011. Both, however, rallied this year but we can see that the rally is falling short of their previous peaks. The recent drop also coincided with falling commodity prices worldwide since April.

What This Mean For Metal Buyers

Weakness in emerging markets validates weakness in commodity prices. The dollar is still strong while commodities and emerging markets fall. It’s hard to become bullish on commodities until we start seeing some divergences.

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Along with steel, aluminum was once one of South America’s major growth products and the source of considerable pride for several Latin American countries.

Rapid Decline

But for a variety of reasons, the decline in aluminum output has been rapid and dramatic. A recent Reuters article states that according to International Aluminum Institute numbers, February’s regional run-rate was the equivalent to 1.33 million metric tons per year. A year ago it was 1.80 million. At its peak in 2008, it was 2.70 million tons. South America was once a major exporter of metal to world markets.

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In 1994 Brazil was the third-largest and Venezuela the fourth-largest source of aluminum imports into the United States. Now, both countries import. We recently wrote about the state of the Venezuelan aluminum sector. Chronic underinvestment due to the gradual bankrupting of the once-buoyant Venezuelan economy has left the country’s two smelters a shadow of their former selves.

Venalum had a nominal capacity of 430,000 mt per year but production last year declined to just 110,000 mt and the company has warned customers it can’t even meet internationally expected purity norms for standard P1020 grade. Alcasa, the other plant with a headline capacity of 170,000 mt, is only producing about 29,000 mt.

Woe is Brazil

Brazil’s decline is even more tragic.

Technically, the country’s smelters are perfectly capable of operating at capacity but high costs have seen the industry decimated in recent years. Alcoa curtailed two pot-lines at the 440,000-mt-per-year plant over the course of 2013 and 2014, according to Reuters, and now the third and last will also be mothballed. It’s the fifth, and largest, Brazilian smelter to be shuttered since 2009 following on the heels of the company’s Pocos de Caldas smelter, which had been operating since 1970, becoming fully shuttered in May of last year.

The Valesul smelter was closed in 2009, while Novelis closed its Aratu plant in 2010 and its Ouro Preto plant in 2014, the paper reports.

What’s Left

There are now only two primary smelters left operating in Brazil: Norsk Hydro‘s 460,000-mt-per-year Albras and CBA‘s 475,000- mt-per-year Sorocaba. National production has fallen from a peak of 1.67 million mt in 2007 to 962,000 mt in 2014, a figure that is now set to fall further with the closure of Alumar.

The reasons are two-fold: first, cost and second lack of power as the country has experienced a prolonged period of drought resulting in falling power output from the once-seemingly limitless hydro-electric facilities.

How bad is it? The power situation is so bad, Brazil will have to import power from Argentina and Uruguay this year. On the cost side, power and raw materials have become so expensive smelters cannot even compete with the benefit of the world’s largest physical delivery premium. According to Platts the Brazilian delivery premium is $590 per mt over the London Metal Exchange, way higher than Japan, Europe or the USA and  the premium is remaining stubbornly high as premiums elsewhere begin to ease.

On the back of rapidly rising domestic smelting capacity and a growing economy, Brazil invested in considerable downstream processing capacity that is now having to compete for imports of primary metal in order to keep functioning. Not surprisingly, those same processors are finding it nigh-impossible to compete in international markets, a dramatic and rather tragic turnaround from the last decade when South America’s aluminum industry held out so much promise.

Spring has sprung here at MetalCrawler and beleaguered commodity markets are hoping for a renewal themselves as steel production is predicted to fall in Japan, the once-mighty aluminum industry in Brazil faces another shutdown and new shipment rules could cause even more back-ups in transportation of North Dakota oil.

New Oil Shipment Rules

Following a spate of explosive accidents involving North Dakota crude oil, the state on Wednesday began requiring companies to remove certain liquids and gases from oil before it’s loaded onto rail cars, a move industry and state regulators believe will make for safer shipments.

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The rules, developed over the past year, require all crude from the oil patch to be treated by heat or by pressure to reduce its volatility before being loaded onto train cars. The new rules require North Dakota crude to have vapor pressure below 13.7 pounds per square inch, which is less than the 14.7 psi threshold national standard recognized as stable. Winter-blend gasoline that contains 10% ethanol is rated at 13.5 psi.Industry officials initially balked at the regulations, saying the state’s crude was being unfairly singled out and the new standards would slow production and increase costs.

Japanese Steel Production Falls to 6-Year Low

Japan’s crude steel output for April-June is forecast to drop 7.8 percent from a year earlier to the lowest for the quarter in six years, the Ministry of Economy, Trade and Industry (METI) said on Thursday.

The fall would mark the latest in a series of signs of economic slowdown, clouding the outlook for Prime Minister Shinzo Abe’s drive to reflate the economy and spurring calls for more monetary stimulus.

South American Aluminum Production Wanes

US aluminum producer Alcoa announced this week the full shuttering of its Alumar smelter in Brazil.

Alcoa and minority partner BHP Billiton curtailed two potlines at the 440,000-metric-tons-per-year plant over the course of 2013 and 2014. Now the third and last will also be mothballed.

It’s the fifth, and largest, Brazilian smelter to be shuttered since 2009 – a major retreat for what was once one of the world’s top producing countries.

Reuters’ Andy Home writes that’s it’s symptomatic of a broader decline in primary aluminum production in South America.