UK

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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Did you honestly think it had gone away? In the week that the U.K. government is set to announce article 50, formally notify its European partners that it plans to leave the E.U. within two years, we’re reminded of the ongoing political process which is likely to add significant volatility in the year ahead.

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The U.K.’s (or at least Great Britain’s, Scotland is vowing to hold its own referendum on staying in the U.K.) decision to leave the E.U. will have far-reaching consequences but, realistically, does not look likely to signal a breakup of the E.U. itself. Recent elections in the Netherlands saw a swing back to liberal pro-E.U. political parties and a rejection of more xenophobic and anti-E.U. sentiments as espoused by Geert Wilders and his Party for Freedom. Although she is likely to do well in the first round, the Dutch result does not bode well for Marine Le Pen in the upcoming French elections with pro-E.U. parties doing well in the polls. The E.U., politically, is currently showing a united front particularly in its pre-negotiating stance with the U.K.

Clean Break? Or Regulatory Cooperation?

Britain, on the other hand, is waging what can the politely be called an internal debate between those who are lobbying for a hard Brexit or clean break from all E.U. laws and institutions, and those on the other side taking a more pragmatic view that it could be in Britain’s interest (if it genuinely wants some form of open access to E.U. markets) to maintain compliance with many E.U. regulations and institutions. 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.

Referendums can also distill complex issues into a simplistic choice. Citizens democratically voted to choose their leaders and these leaders should be the ones making informed and rational decisions on complex issues. Given the complexity of the economic issues facing the U.K., the average British, Northern Irish or Welsh citizen doesn’t have the knowledge or the time to make an informed decision on what’s best for him/herself, not to mention for the whole nation.

David Cameron should know this better than anyone, but the prime minister took a gamble (supposedly agreeing to allow the vote over pizza in a Chicago airport) as he presumably thought it would be an easy win for the “Remain” forces. He got away with his the Scottish referendum on independence back in 2014, but he miscalculated badly this time, taking Britain out of Europe almost by mistake.

Many experts in the matter call this the most irresponsible and irreversible act by a British government in generations and there is nearly a unanimous opinion among economists that the Brexit will be followed by a permanent loss of growth.

But let’s focus on what matters to us: What does the Brexit means for metal prices? What happens now is anyone’s guess, but here is ours based on how markets are reacting:

Short-term: Dollar Up + Economic Fears = Metal Prices Down

On Friday, markets reacted to the decision. Two major developments are important for metal prices and bearish short-term:

Dollar Index rises sharply as Britain votes to leave. Source: MM analysis of stockcharts.com

The U.S. dollar index rises sharply as Britain votes to leave. Source: MetalMiner analysis of @stockcharts.com data.

The British pound plummeted and the Euro fell sharply. That caused the US dollar to gain against these currencies. The dollar index rose sharply on Friday. A rising dollar is bearish for metal prices and, consequently, base metals fell on Friday. This is just a one-day move but it is likely that the Euro and British pound will continue to decline in Q3 as markets recognize the risks the vote poses for Europe as a whole.

The second reaction was a selloff in global stock markets, the U.S. included. The vote comes at a time when uncertainty already plagues U.S. stocks, with corporate profits declining, price to earnings ratios at a decade-long high and questions around the Federal Reserve’s ability to stoke growth.

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In addition, we have some countries and sections sliding into recession. The turmoil in Europe only adds to a market already heading for trouble, as we’ve been noting for some time now. The correlation between stock markets and metal prices is not always strong but it’s hard to imagine metal prices rising while people lose their faith in the economy and stock markets collapse.

The short-term guess: The dollar rises and stock markets plunge, weighing on metal prices and perhaps triggering the last leg down of this bear commodity market. That would potentially trigger more shutdowns as producers struggle with low prices.

Medium/Long Term: Dollar down + Supply cuts = Metal prices up

This is even a bigger guess but it can’t hurt to make a hypothesis…

As stock markets plunge, the Fed will not only hold off on raising rates but could even put rates into negative territory like other central banks have recently done. That would disappoint yield-seeking investors and would put pressure on the dollar. Also, after the storm passes and the EU and Britain figure out the next steps, their currencies should find stabilization.

The medium/long-term guess: The dollar weakens and mine shutdowns help tighten metal markets. Industrial metal prices start to recover.

What This Means For Metal Buyers

In theory, the Brexit should add pressure to metal prices in the short-term. However, these are just predictions. Fortunately, metal buyers don’t need to rely on predictions. They need to constantly monitor markets and react to the most recent market information. One thing is for sure: volatility is going to pick up and metal buyers better have a plan.

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For decades, the hospitality, retail, food and construction industries have taken particular advantage of the European Union’s rules allowing freedom of movement, meaning Europeans can work legally in any of the 28 countries that are members, even if they are unskilled laborers. Non-Europeans must obtain work visas under immigration rules that require graduate-level skills and a minimum annual salary of 20,800 pounds.

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Now that the U.K. has voted to leave the E.U., though, that could all change. When the U.K. does finally untangle itself from its E.U. member-state neighbors — a process that many are promising will be complete within two years — it’s likely to start requiring European citizens to clear the same visa hurdles as other foreign workers. Three-quarters of the 2.2 million people from other E.U. countries currently working in Britain wouldn’t make the cut, according to the Migration Observatory at Oxford University.

Migrants Take the Blame for UK Unemployment

The Leave campaign convinced a slim majority of U.K. citizens, 52%, that it has been too easy for “migrant workers” from Europe to waltz into the country and take British jobs.

Who would benefit from a Brexit? Not the EU. Source: Adobe Stock/Stephen Finn.

Now that the U.K. is officially leaving the European Union, what will happen to non-citizens with jobs on the island?  Source: Adobe Stock/Stephen Finn.

“We have absolutely no power to control the numbers who are coming with no job offers and no qualifications from the 28 E.U. countries,” former London Mayor Boris Johnson said in a speech before the vote. Read more

Drilling in the North Sea started in the ’60s but really took off after the 1971 oil crisis as higher oil prices supported massive investment in deep offshore drilling technologies and infrastructure required to exploit what was, at the time, one of the most challenging environments in the world for extracting oil and natural gas.

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The city of Aberdeen flourished as the beachhead for this campaign and for 50 yeas it has grown and matured as a world class center of excellence in support services and facilities developing technologies and competencies that have been applied in deep-water offshore environments like the Gulf of Mexico, the South Atlantic and in the Arctic ever since.

But the collapse of the oil price, high taxation and dwindling reserves have hastened the end of a region whose days were always numbered by the finite nature of the resource.

Source Financial Times

Source: Financial Times

Yet as oil majors ponder the timing of closing and decommissioning offshore oil rigs, the challenges are yet again driving innovation and technologies that will be of benefit in decades to come around the world for those companies active in the work. Read more

Yesterday, Stuart Burns examined how the UK exiting the European Union would affect the UK. In part two he looks at the effects of a Brexit on the EU.

A Brexit would have a wider political impact on the EU, both by disrupting internal political dynamics and because of the risk of political contagion if the “proof of concept” of leaving the EU encourages disintegrative forces in other member states.

If the UK Goes First, Who is Second?

A Brexit would probably encourage some less committed member countries or regions to consider renegotiation or even outright exit, particularly if the UK were seen to flourish. It would change the dynamic between Germany and France, possibly allowing them to dominate European policy even more than currently but possibly showing up flaws in their relationship which have remained masked by having the third party of the UK to play off.

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Germany would certainly miss the UK’s more liberal influence as a counterweight to France in policy debates. France, on the other hand, may welcome that. Read more

And boy will it occupy some column inches in the UK, Europe and, no doubt, the rest of the world in the coming four months right up to referendum day in June.

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If you had asked me a week or so back, I would have said it is almost inconceivable that Britain would have voted to actually leave the European Union. Most Brits are, by nature, Euro skeptics but they, like the Scots last year, were always going to take the pragmatic path and stick with the devil you know… or so I thought.

Leaders in Favor of a Brexit

Since then, arguably, the Conservative party’s brightest — Michael Gove — has come out for the Leave campaign and, duiring the weekend, the conservatives’ most charismatic — London Mayor Boris Johnson — has joined him. Boris, in particular, is doing it as a platform for his future bid for leadership, there can be little doubt about that, but he is popular with “the man in the street” and joining the out campaign will sway sentiment.

It has already swayed the markets, sterling nosedived on the news hitting barely more than $1.40, dollars to the pound, from $1.45 the week before.

Source HSBC

Source: HSBC

Needless to say, there will be much debate about whether a Brexit would be good or bad for the UK, but what may be of more interest outside of this little isle is whether it will be good or bad for Europe?

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Europe is once again in the news as a cause of fear in the financial markets. This time it’s not due to Greece or any of the Club Med countries but more due to the EU economy and the Euro as a whole.

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The value of the euro fell to its lowest level in years this week, hitting $1.19 a 15% fall from May and the lowest level since 2005, In response European stocks fell sharply amid uneasiness about whether the region is on the verge of a new economic and financial crisis.

Source NY Times

Source: NY Times.

Stock markets were already under pressure from falling oil stocks as Brent crude hit a 5-year low, interpreted by many as a sign that global demand has collapsed resulting in a glut of oil driving prices down. The markets are betting on the European Central Bank (ECB) introducing sovereign and corporate debt purchases at their next meeting on January 22, a form of “Quantitative Easing.”

Indeed, in the New York Times Jean Pisani-Ferry, an economist who serves as a policy adviser to the French government, is quoted as saying the markets have already priced in the introduction of QE and if the ECB fail to act, the consequences could be dire.

“Disappointing those expectations would bring an abrupt and damaging unwinding of positions: Long-term interest rates would rise, stock markets would sink, and the exchange rate would appreciate,” he wrote.

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When we think of countries rich in energy production we think of the US and particularly Texas with its oil and gas industry. We think of Saudi Arabia and its oil, gas and, possibly one day, solar. Maybe we think of Canada and its hydroelectric and tar sands, but per capita the richest energy hub has to be Norway.

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Ah, Little Norway. In terms of population it has just 5 million people and a landmass of less than 150,000 square miles. Much less than Texas and only about the size of Montana. Yet with massive oil and gas reserves, 256 gigawatts of hydroelectric power production, sustainable forests and the potential for tidal power in its fjords Norwegians pretty much top the pile when it comes to global per capita income and ownership of energy resources.

Yet sitting on all that energy isn’t, in itself, terribly profitable. So, copper producers are not alone in hoping to see the country expand its power sharing network of undersea cables with the rest of Europe. Norway just agreed to a $2.4 billion/420-mile subsea cable to carry 1.4 GW of spare hydroelectric supply to the energy-starved UK market, said by some to be teetering on the edge of blackouts if its madcap race to low emissions by 2025 hinders investment in stable supply sources.

The UK is mandated by the Climate Change Act to reduce its 1990 CO2 emissions by at least 80% by 2050, the fourth carbon budget (2023-27) will therefore require that emissions be reduced by 50% from 1990 levels by 2025. Likewise, Germany’s inexplicable early shutdown of its nuclear capacity has left the country dangerously low on generating capacity and actually emitting more emissions than it did 4 years ago when coal-fired plants were brought online to keep the lights burning. Norwegian transmission company Statnett, which already has undersea interconnector links with Denmark and the Netherlands, is said by the FT to be working on a 300-mile subsea cable to Germany at a similar cost to the UK project.

Enterprising as the Norwegians are, they are not alone in driving the interdependence of Europe’s power grids. A joint venture between the UK’s National Grid and Elia, its Belgian counterpart called project Nemo will see an interconnector linking Kent in the UK and Zeebrugge in Belgium that is expected to add an additional 1 GW to the UK’s electrical grid. The UK already has an existing network of international connections between the UK and France, the Netherlands and Ireland. Further connections help the national grids even out the supply from variable sources like wind with demand spikes that rarely coincide across different European time zones.

Copper demand for undersea cabling and associated onshore transmission and facilities will run in the tens of thousands of tons. Local cable manufacturers are hoping much of the business will remain in the EU. As an alternative to investing in yet more wind farms and with the benefit of making more efficient use of existing generating capacity you have to say these projects are welcome and, indeed, overdue. Just a pity they are not being driven by the EU but left to commercial interests to make them happen, but, then again, left to the politicians they would probably still be on the drawing board.

With the exception of geothermal energy most forms of renewable electricity generation have an intermittency to their delivery. Even hydro-electric power can fall short in periods of drought or low rain fall as the Chinese can attest to on the Three Gorges dam across the Yangtze River.

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Hydro, though, is generally taken as the dream power source. Usually large, sustainable for long periods of time, non-polluting – apart from the millions of tons of cement used in the construction phase – and, once built, environmentally acceptable.

Wind in its various guises and solar have both received massive state funding, usually at the cost of consumer tariffs, and while the cost is coming down and the reliability is improving they are both inherently unreliable in terms of power delivery requiring back-up generation capacity which is expensive and fossil fuel-based. In addition, at least in the UK, there has been a massive public backlash to unsightly turbines dotting the countryside to the point where few onshore projects are now being approved.

Solar farms are also facing increasing opposition, termed a blight visually they are also criticized for taking up valuable farming land. There is one other form of power generation, however, which is as non-polluting, environmentally acceptable and potentially has even greater longevity than hydro and has potential to add leisure facilities if planned and coordinated properly – and that is tidal.

So having signed up in a moment of madness to ruinously expensive greenhouse gas emission targets, the British government is now welcoming a project that, if rolled out around the country, could generate some 8% of the UK’s power and last for 120 years.

Better still, the first stages of the project are being partially underwritten by private money in the form of the UK’s pension funds and insurance companies. Prudential is to be a cornerstone investor in an £850 million first stage Lagoon One tidal project in Swansea due to start construction next year and be operational by 2018 according to local reports.

Source: Tidal Lagoon Swansea Bay

Source: Tidal Lagoon Swansea Bay

The first phase of the project comprises a 6-mile horseshoe in the Swansea Bay, part of the Severn Estuary in South Wales, and will produce 320 megawatts of electricity, but subsequent stages will add 1.5 gigawatts and a further 1.8 Gw by 2025 with combined power costs below that of wind or solar on current estimates.

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