European Union

Much of the focus so far, and nearly all of it gloomy, has been on the impact of the U.K.’s decision to leave the European Union at some point in the future. Most are proceeding with caution because, as yet, no formal announcement of intent has been given and the exit process will take a minimum of two years, so once the dust has settled both sides will dig in for a prolonged period of trench warfare during which the real work will be done, negotiating the exit terms.

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Although most (apart from a naive few who are still gazing at the sunlit uplands of total independence) concede Britain will be worse off, at least in the short to medium term, not so much has been said about the impact on Europe.

Durable Trade in Durable Goods

Apart from the fact that the U.K. runs a massive trade deficit with Europe, Germany alone exports close on $100 billion a year of goods and services to the U.K., mostly cars and high-end consumer goods. The UK is also a net contributor to the E.U. budget. Net is the key word here, as Brexiters made much of a spurious £350 million a week figure that supposedly Britain paid to the E.U.

In fact, when the payments the E.U. makes back to British farmers — such as aid to deprived areas, support for research, etc. — the net figure is probably half that, but the U.K. contribution remains a significant part of the E.U.’s €145 billion annual ($160 billion) budget.

Screen Shot 2016-07-11 at 16.18.40

E.U. Positive and negative contributor states. Source: Financial Times.

This chart from the Financial Times shows the contributions per capita, not the total contributions, so those countries in the upper section with the larger populations are the major source of funds – Germany, France, the U.K. and Italy

Screen Shot 2016-07-11 at 16.18.22

The E.U.’s 2015 budget. Source: Financial Times.

The FT says that, under the pre-Brexit status quo, Britain would have made a net contribution of £65.7 billion from 2014 to 2020, with £47.5 billion ($60 billion) of the total coming in the years 2016-2020. Read more

As if there hasn’t been enough fall out from the U.K.’s decision last month to leave the European Union, a Financial Times article reveals that European Commission president Jean-Claude Juncker is set to ditch fast-tracking the European Union’s trade deal with Canada, officially known as The Canada and European Union Comprehensive Economic and Trade Agreement (CETA), a deal that has already taken five years to negotiate.

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In a move criticized as undemocratic, Juncker had sought to push approval through on the nod of trade ministers and ministers of the European Parliament, giving no recourse to the 38 parliaments (some of them are regional, only 28 are national members of the E.U.) if they don’t agree to it.

France, Germany Block Fast-Track

Apparently, Berlin and Paris put a stop to the Commission’s move, seen by some as yet another example of the Commission’s undemocratic behavior put into the spotlight by Britain’s objections to rising control from Brussels. Read more

In its future energy scenarios report, the U.K.’s network operator, the National Grid, said even its most optimistic scenario suggests it will miss the European Union’s15% energy consumption from renewable sources 2020 climate target for member-states by at least two years.

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“While we believe the electricity sector can achieve its contribution to the 2020 renewable target, we believe the progress required in the heat and transport sector is beyond what can be achieved on time. As a result, none of our scenarios achieve the 15% level by the 2020 date. Our (most optimistic) Gone Green scenario is the earliest to reach this, meeting the target by 2022,” the report stated.

Renewables_Chart_July-2016_FNL

Our Renewables MMI fell 2% to 53 this month as it still traded in the narrow range it has fluctuated in for much of the year, but the U.K.’s situation mirrors that of many industrialized nations and shows just how difficult it has been to reliably grow renewable energy markets without burning coal or natural gas as backups. Despite the best of intentions, the U.K. simply cannot make its 15% energy reduction targets and the Leave campaign took full advantage of that fact last month when it promised citizens that it would get an independent U.K. out of such deals. But can it? Really?

Can the UK Escape EU Climate Deals By Leaving?

Withdrawing from the E.U. will certainly give the U.K. an easier route on heat and transportation policies in the short-term. The island nation will no longer be obligated to hit the 15% reduction target for 2020 whether it actually leaves two years from now or later.

But when it comes to renewable electricity, long lead-times to build new wind and solar farms (particularly wind in the U.K.) mean most of the projects needed to hit the E.U.’s 30% reduction goal for 2030 have already been granted planning permits and government money has been spent on their contracts. In other words, the genie is out of the bottle for almost all of the U.K.’s 2020 goals and even for some of its 2030 goals. It’s going to be really hard to put that genie, economically, back in the bottle.

The U.K.’s Own Goals Are More Ambitious in the Long Term

There’s also the fact the U.K.’s own unilateral Climate Change Act actually imposes even tougher requirements for cutting carbon emissions. Under the Act, the U.K. must cut its carbon emissions by 80% on 1990 levels by 2050. Again, whoever is Prime Minister and in charge of the National Grid can push the 15% 2020 goal and even the 30% 2030 goal set by the E.U. further off, but that 80% 2050 goal will only hang more ominously over the U.K. like a figurative sword of Damocles if politicians decide to do that.

The 2008 Climate Change Act also requires the government to set legally binding “carbon budgets,” which have already been set up. A carbon budget is a cap on the amount of greenhouse gases emitted in the U.K. over a five-year period. The committee provides advice on the appropriate level of each carbon budget. The budgets are designed to reflect a cost-effective path to achieving the long-term objective of an 80% reduction by 2050. The first four carbon budgets have already been put into legislation and run through 2027.

Free Download: The June 2016 MMI Report

The early implementation of regulations makes it even more difficult for any future government to get out from under the U.K.’s own 2050 targets as utilities, local governments and the federal bureaucracy has already appropriated money to achieve its short-term goals. So, the possibility of a repeal of the 2008 Climate Change Act is highly unlikely, as well, although some are vocally advocating it just as they did Brexit when that idea was called “bonkers” and we all know how that turned out.

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So, as we discussed above, if the new, post-Brexit U.K. allows open access to workers from the European Union — and not allowing open borders and easy employment for other Europeans was the central plank and sticking point of the entire Leave campaign — it might be easier to make a deal with those former partner nations in the E.U. That would also raise the question, “what was all of this for?”

Free Download: The June 2016 MMI Report

If discarding the objective of banning open access proves too much of a barrier, the U.K. may opt to fall back on World Trade Organization rules which will mean tariffs and possibly other bureaucratic barriers such as quotas will be established between the U.K. and Europe. That will encourage firms to locate future investment inside the single market rather than in the U.K.

What Might A Future Deal Look Like?

In the meantime, and a final solution could be two years away, the U.K. benefits from a lower pound which will boost exports to the single market and rest of the world. There are a number of models the U.K. could agree with Europe on, long-term, to establish trade rules and coexist in the future.

Germany exports the third-most of its goods to Great Britain behind only the U.S. and France. Negotiators are already trying to solve the puzzle of how to let the U.K. leave the E.U. without Germany leaving all of that business on the Brexit table. Source: Adobe Stock/Luzetania.

The Remain camp’s favorite is the Norwegian model that gives tariff-free access to the single market in return for free movement of labor, acceptance of many of the E.U.’s laws and payment into the E.U. budget, although no say whatsoever, into how that money is spent. The movement clause is likely a dealbreaker for Leave hardliners. Read more

Whatever you may think of the merits of Britain’s decision to leave the European Union, and you’d be hard pressed to find any of those merits, one early casualty is likely to be the British Steel industry, of which the most high profile example is Tata Steel’s Port Talbot steel mill.

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It has been the subject of huge speculation and media attention since the Indian owners mooted closure or sale in the Spring of this year.

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

Has the Brexit doomed any sale of Tata Steel’s Port Talbot facility? Source: Adobe Stock/Petert2

After initially inviting bids to buy the massive steel works and associated facilities, Tata had begun to enter serious talks with the British government about keeping the plant when it became clear millions of pounds of financial aid, lower power costs and a 25% government stake in the business may be in the cards.

Is a Port Talbot Sale Viable?

That has now been thrown into doubt, in fact scuppered is probably more accurate as Tata assesses the viability of keeping a steel production plant in Britain if Britain is probably no longer part of the European single market. Read more

Democracy can be a great system, but it also has some risky aspects.

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One of them is the referendum, especially when it’s done in a period of instability. When people are unhappy, they look for what they think is a short-term solution to their problem, overlooking what’s really best for the country. The Brexit is a perfect example of this. The British people are unhappy because their economy isn’t doing so well, blaming foreigners that cross its borders as part of the European Union and the regulations imposed on member states by Brussels. Read more

The British pound slumped to its lowest level since 1985 early this morning as results of the U.K.’s vote on European Union membership came in with the leave campaign winning the vote by close to a 2% margin.

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The currency tumbled to as low as $1.3460 on Friday, which was its lowest level in 31 years.

It fell about 10% from the 2016 high of $1.50, which it hit just hours earlier when most polls suggested the remain campaign had a slight polling lead. That was before polls closed.

As of this writing, Dow Jones Industrial Average futures are down 600 points, nearly 3%, hours before U.S. markets open. Japan’s Nikkei Average, which was open and trading as the votes were counted, dropped 8% while the U.S. dollar briefly fell below 100 yen to a dollar.

Free Download: The June 2016 MMI Report

Investors fled to safe havens as gold climbed 5% and briefly hit $1,330 an ounce. We will update this post in the morning as this story develops.

In exactly 30 days the people of Britain will vote on whether to leave the European Union.

Free Download: The May 2016 MMI Report

For the people of the U.K., and indeed the rest of Europe their decision could be a turning point in the future of their country and the wider European community. It is no exaggeration to say Britain’s exit could spark the break-up of the E.U.

The near-miss Austria experienced yesterday in voting in a far right president illustrates how extreme tensions within the European Union have become. Only by all the opposing parties supporting pro-E.U. Green party socialist Alexander Van der Bellen were they able to beat the far-right Freedom party candidate Norbert Hofer from becoming head of state, the margin was a miniscule 31,000 votes out of an electoral return of 4.64 million.

Angry Voters

Dissatisfaction with the E.U., supported by fears of immigration destroying the social fabric and cultural heritage of societies across the continent, has played a major part in not just the U.K.’s referendum but in the rise of both far-right and far-left parties across Europe in recent years.

Anecdotal evidence can be very misleading, dependent as it is on the social mix such opinion is garnered from and the geographic location. Until recently, the decision in the U.K. seemed on something of a knife edge, particularly in the weeks following the announcement by Boris Johnson, London’s charismatic former mayor, that he was actively campaigning for the Leave vote, but in recent days the markets at least have been pricing in a Stay outcome, as evidenced by the strength of sterling.

Investment Sentiment

Indeed, a poll this week showing a late swing by older voters to maintain the status quo resulted in a sharp jump in the value of the pound as this FT graph shows.

Source: Financial Times

Source: Financial Times

Alluring as the Leave campaign’s image of a free and unrestricted future for the UK would be, most are coming to realize such an outcome is unlikely to be achievable. The least-damaging outcome in the months after leaving would be for a quick trade deal with the rest of the E.U. Read more

Last week, we briefly covered the decision by European Union lawmakers to vote against the application by China to be considered a market economy, a recognition China says it is due automatically by December following an agreement in 2001 set to mature this year.

We also published an in-depth look at what China market economy status would mean for U.S./E.U relationship with China.

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The European Parliament’s decision was overwhelming, 546 votes in favor and only 28 against, with 77 abstentions so, while the vote is non-binding, it raises the stakes for the European Commission, which will decide shortly whether China deserves to have its status upgraded.

Terrible Timing For Europe

For both sides the debate is at the wrong time. Europe’s steel industry is being decimated by cheap imports from China, raising the stakes for politicians otherwise inclined toward a more free-market approach. The British, in particular, find themselves (not for the first time) somewhat isolated in wanting more open engagement even though their domestic steel industry has been hit harder than most.

Chinese imports are allegedly being dumped in the EU and other foreign markets. Source: Adobe Stock.

Chinese imports are allegedly being dumped in the EU and other foreign markets. Source: iStock.

In reality, the decision is much more political than practical. Market economy status matters when it comes to deciding whether a country is “dumping,” exporting goods at below cost price. Nations deemed to be market economies can resist anti-dumping measures if they can show that domestic prices are no higher than the price at which goods are sold overseas. Read more

US Steel plant in Granite City wide

The U.S. Steel Granite City Works captured by Google Street View in September, 2014 — a year and two months before the latest idling of the mill.

Dan Simmons has seen a lot during the 38 years he’s worked at U.S. Steel’s Granite City Works in Illinois, just outside St. Louis.

From starting out as a general laborer, to swinging hammers on the track gang, to “feeling like Mr. Haney from Green Acres” while trucking around the mill, Simmons took it all in. There were days “you were whistling when you came in, and whistling when you left,” he said.

But nothing compares to what he’s seeing now.

“I have grown men coming into my office, crying,” said Simmons. “You see the pain, the ‘what ifs,’ the blank stares…”

Simmons, who just turned 56, is now the president of the United Steelworkers Local 1899, and some of the grown men coming to him are pipefitters just like he had become during his long tenure, which began in 1978.

However, those men and women aren’t coming to him because they’ve been hurt on the job. They are coming to plead for help, because they have lost their jobs, and in many cases still don’t know when they’ll land their next one.

Cyclicality in steel production is nothing new, but it wasn’t until 2008 — when the global markets began crashing — that USS Granite City Works endured its first indefinite idling in its history.

“We had the unemployment office cycling 400 people through at a time,” Simmons told MetalMiner. “The biggest fear is not knowing. If I could have given them a definitive timeframe, they would’ve said, ‘OK, I can handle that.’ But after two to three months, people come to me and don’t know what to do with themselves.”

And now, after the mill went idle a second time in December 2015, some of those workers have been without a job for nearly half a year. Last December, 1,500 people were laid off — 75% of the mill’s total workforce. Across the country, a total of 13,500 steel workers have been laid off over the past year.

Simmons knows what it’s like to feel that fear firsthand. “I got a brother that works here, a brother-in-law that works here, so it’s personal. You worry about where your whole family will be.”

So what’s different today, compared to 2008?

For Simmons and scores of others in the country’s steel sector and other manufacturing industries, much of the pain can be traced back to one main source: China.

A History of Unfair Trade?

The world may have never encountered a more crucial Year of the Monkey than 2016.

That is, at least as far as global trade between China and the Western world is concerned. At the end of this year, China believes it ought to receive Market Economy Status (MES). This would allow China to enjoy the same market status as the U.S. and European Union when it comes to anti-dumping investigations before the World Trade Organization.

In its quest to grow its economy over the past two decades, China has become the leading producer — by far — of steel, aluminum, cement and other industrial materials. Read more