Author Archives: Stuart Burns

A New Defender on the Roads?

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“The king is dead, long live the king” — or so the headline may read if Jim Ratcliffe, founder and CEO of one of the U.K.’s largest companies, is successful in his bid to create an entirely new and modern Defender following the demise of the old Land Rover Defender in 2016.

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Fans of the long-running Defender bemoaned its loss when Jaguar Land Rover (JLR) finally called time on the model last year. Reports that they intend to bring out a replacement in two years are dismissed by Ratcliffe as likely to be more Chelsea Tractor (British slang for a road-only 4×4) than a real Defender. JLR will go for more of a volume SUV, not a vehicle totally committed to the off road, he believes.

Judging by the firm’s gradual expansion of its range into more road-focused models, he may well be right.

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Thyssenkrupp and Tata Steel have finally made it to the altar.

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After 18 months of mostly behind-the-scenes negotiations to resolve several potentially “deal-off” stumbling blocks, all the major issues have been resolved. The two firms have signed a memorandum of understanding to create a 50:50 joint venture based in Amsterdam, Netherlands, called Thyssenkrupp Tata Steel (TTS).

The behemoth will rank second to ArcelorMittal with 21 million tons of annual steel capacity generating sales of €15 billion ($17.8 billion) and employing 48,000 people, The Telegraph reported.

New Focus

TTS will focus on three main production hubs: Ijmuiden in the Netherlands, Duisburg in Germany and Port Talbot in South Wales, the paper reports, Analysts say improved viability will come from cost savings of between €400 million and €600 million a year arising after 2,000 redundancies and another 2,000 jobs going out of the combined business as overlapping operations are removed.

Not surprisingly, TTS sees the value proposition as the enhanced opportunity for the combined group to move its business up the value chain in cooperation rather than competition with each other.

Hans Fischer, Tata Steel Europe’s chief executive, said “We need to focus on higher value products, China has huge overcapacity and there is a risk they will flood the market. The answer is not to compete with them, but try but find a solution where we have products that cannot be produced easily. We need to be a technology leader.”

Tata wriggling out of the old British Steel Pension fund liabilities was the final major hurdle to overcome — albeit to be fair, at considerable cost to the parent — and the willingness of British workers to agree to an end to the final salary scheme and reduced benefits for existing members underlines their desperation for a deal, matched by compromises made in Germany by workers fearful of the prospects of foreign competition with the European steel industry.

But therein lies the dilemma.

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China Zhongwang is a company that is used to controversy.

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Then again, you don’t get to be the world’s second-largest aluminium extruder in the space of a few years without ruffling a few feathers.

Zhongwang’s attempts to muscle in on the global stage by buying Aleris Corp immediately ran into opposition from U.S. senators. Just this week, Zhongwang USA, an investment firm backed by Zhongwang Group’s chairman and Aleris Corp, announced its intention to extend the deadline for a decision by two weeks to end September, Reuters reported.

Zhongwang USA is not part of Hong Kong-listed China Zhongwang Holdings Ltd, but Liu Zhongtian heads up both companies — a fact that has clouded multiple investigations against one entity or another in recent years.

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The announcement by the U.K. and France that they would prohibit the production of diesel and petrol cars by 2040 made for good headlines, but came as little surprise when you consider the pace of change in the automotive industry.

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China’s announcement last week that it was considering setting a timeline for phasing out traditional fuel cars will likely have a more profound effect on the development of new energy vehicles (NEV), for two reasons.

First, China is already the world’s largest car market, producing over 28 million vehicles in 2016, according to the Financial Times. Significant changes in a market of that size causes more than just ripples in the global automotive market.

Second, a centrally controlled command economy such as China’s has shown that policies that are robustly pursued by Beijing can achieve rapid change over short time frames. More than any other country in the world, with the possible exception of India, China has an imperative to address atmospheric pollution. The incentives in China to switch from traditional combustion engines to NEVs has already made China the world’s leading electric car market, with 507,000 NEVs sold domestically in 2016.

Beijing’s announcement, however, should not be seen as a purely altruistic move to improve the environment.

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The workings of the London Metal Exchange, however vital for the day-to-day pricing of the metals consumers buy, are often something of a mystery to the average industrial user.

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Not least, we have always felt, because the language used is the jargon of insiders, traders, brokers and dealers who transact tens, even hundreds, of millions of dollars of transactions in a day. They quietly — or not, if you have ever witnessed open cry trading – move the world’s metal markets in the process.

The accurate and efficient working of those markets is of vital importance to producers, traders and consumers of base and ferrous metals. If markets fail to operate efficiently, if volumes fall and liquidity wanes, the spread between buy and sell can increase, trades do not get promptly laid off and risk increases along with volatility.

We may not know it, we may not like it, but an efficient futures market is in the interest of every metals consumer — so when the new CEO of the LME Matt Chamberlain was officially confirmed in his role in April, one of the first steps was a grassroots review of the Exchange in consultation with users and industry.

To his credit, this was aimed as much at wider users of the Exchange’s services as it was those insiders active on the ring on a daily basis. The result of a long discussion process over several months has been 162 responses from the market, including, in the interest of full disclosure, from MetalMiner.

The result is probably of more interest than the process. But before we pick through the bones, the most encouraging message is the LME’s renewed commitment to physical trading, to the philosophy that has underpinned the exchange for 140 years — that any changes that are made in the way the exchange operates or the services it provides will be driven by the overriding principle that they should support, not harm the LME’s relevance to or ability to serve the physical market, explained Miriam Heywood, the LME’s head of media relations.

For a market that has seen the rise of the CME in the U.S. and the SHFE in China in recent years, it would have been understandable to make hasty attempts to mimic its competitors.

But the LME hasn’t done that, industrial users will likely be pleased to hear.

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For firms buying from suppliers in Europe, the rise of the Euro this year must have caused acute problems. Or, for those with contracts buying from European suppliers in dollars, those contracts will adjust sharply come renegotiation, as current exchange rates are applied to new contracts.

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The future direction of the world’s second-most-widely-used currency is of interest to many firms that directly or indirectly are a part of extended global supply chains.

Europe, too, is perplexed by the rise of the Euro. The dollar has declined relative to the Euro by more than 13% this year, driven by tensions with North Korea and dysfunction in Washington, according to The New York Times.

But investor appetite for the Euro has been fueled by more than tensions over North Korea.

Whereas the Euro is seen as a relative safe haven compared to the dollar, there is also a growing realization the Trump administration may not be able to deliver on tax reforms promised during his campaign at the end of last year. As a result, the relatively better-performing European markets may offer investment opportunities not previously available.

Nations Push Back Against Quantitative Easing

Many in northern Europe — Germany, in particular — are pushing for an end to quantitative easing (QE) for fear that it is stimulating asset bubbles.

The Telegraph reported comments by Deutsche Bank chief John Cryan last week saying property prices in advanced economies had hit record levels. In the same speech, Cryan urged European policymakers to start tapering relief of the Eurozone’s €60 billion ($72 billion) per month stimulus program sooner rather than later.

On the other hand, policymakers are worried about the impact of bringing money printing to an end and postponed a decision this month because of the recent weakness of the dollar. Any firm decision to taper or cease QE would result in the Euro strengthening further, potentially choking off Europe’s nascent recovery (during which growth has returned for the first time this year since the financial crisis).

Interest Rates Still Low

Inflation remains stubbornly low. At 1.5% last month, they show little prospect of hitting the 2% target this side of 2019, The New York Times reports.

The Federal Reserve began raising interest rates at the end of 2015, but the European Central Bank (ECB) is reluctant to do anything that could undermine what it still sees as a fragile recovery.

The absence of rising headline inflation figures to create an imperative — policymakers are largely turning a blind eye to asset price inflation for the time being, preferring to sweat over the rise in the Euro.

Indeed, Jörg Krämer, the chief economist at Commerzbank in Frankfurt, said as much in a recent note to clients, saying the pace of Euro strength is driving the ECB’s QE policy right now. Commerzbank is not expecting the Euro to continue to strengthen — and they may well be right.

If investors think there is a chance Congress will support the Trump administration’s tax reform that would allow businesses like Google and Apple to repatriate profits held overseas, the exchange rate landscape would transform overnight.

Half of what has been estimated as up to $1 trillion dollars is held in currencies other than U.S. dollars, so the demand for dollars would be immense, as would the boost to the U.S. economy if funds were repatriated and invested. Of course, that is the administration’s intent; for now, Washington seems in such a logjam that investors are discounting the prospects of such legislation being passed anytime soon.

The Euro, therefore, is being carried by its own relatively optimistic narrative: decent growth, low inflation and a sense of stability and, Brexit excepted, harmony not seen since the financial crisis. It’s hard to see the Euro weakening this year, but further direction may come in next month’s meeting of the ECB.

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MetalMiner is expecting any decision to taper QE to be kicked further down the road, putting a lid on further rises.

Euro strength is today’s problem, asset prices are tomorrow’s — that seems to be the order of the day.

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Mining stocks took a hammering last week, prompting questions as to whether the recent bull run in metal prices has come to an end.

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As steel and iron futures in China slid, share prices in iron ore and base metal miners were sold off around the world in a bearish wave of sentiment sparked, according to mining.com, by the continued appreciation of the Chinese currency against the U.S. dollar.

The Renminbi hit 6.447 against the dollar, gaining nearly 7.8% so far this year and a 21-month peak that appears to be worrying policymakers concerned about China’s export competitiveness.

According to the MetalMiner index, the Dalian exchange 62% Iron Ore settlement price closed at Yuan 534 per metric ton last week, down nearly 7%. Yet, steel demand remains robust in China and iron ore stocks that China’s port dropped for a fifth straight week according to commodity news, to 133 million tons the lowest since May. Indeed, because the currency is still appreciating, it is reported traders like to buy future cargoes in dollars, stockpile them and sell in Renminbi.

Investors Wary of Environmental Measures

One fear weighing on investors of mining stocks is China’s drive for environmental improvements, which is widely expected to result in the closure of steel mills, power plants, aluminum smelters and other sources of pollution (such as zinc and copper smelting).

According to the article, China plans to conduct 15 rounds of inspections during its new campaign starting this month and continuing until March of next year. Any plants that do not meet tougher environmental standards face closure. The resulting loss of production capacity, it is feared, will hit import demand for raw materials such as iron ore and bauxite.

Not surprisingly, iron ore spot prices declined toward the end of the week, but some are seeing current weakness as a natural correction to months of bullish strength.

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Physical demand remains strong, suggesting local traders are to frightened by Beijing’s environmental program just yet. Most are waiting for November, when the heating season starts and enforced closures are expected.

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Details are pretty sketchy at present, but a recent Reuters article sheds light on an investigation underway by Germany’s competition regulator into a suspected violation of antitrust laws in the steel industry.

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According to Reuters, the investigation expands an ongoing cartel office inquiry, which already covers makers and sellers of stainless steel, car manufacturers and suppliers, as well as companies in the forging sector.

The suspicion is of “anti-competitive collusion between companies” on flat steel products. Although not all steel firms are currently under investigation, many of the largest ones are.

Both ArcelorMittal and Salzgitter have confirmed units of their company have been searched in the first phase of an operation late last month that included seven companies and three private homes in Germany. According to the Reuters report, Manager Magazin reported that included in the investigation is the German Steel Federation, an industry association, although the publication did not cite any sources in its report.

Interestingly, any collusion may be limited. Kajor steel producer Thyssenkrupp and steel distributor trader Kloeckner & Co. both said they had not been searched, according to Reuters, nor is this part of a wider European Union action. Allegations appear to be restricted to several steel producers in Germany, although some of them, such as ArcelorMittal, are multinationals.

This week we covered the impact on the automotive industry of Hurricane Harvey and the likely boost to demand that will come from replacement of used and new vehicles damaged by the floods.

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Today we look at Harvey’s impact on the oil, natural gas and refining markets — not that you will need any reminding of the impact of Harvey if you have been into the gas station to refuel your car.

According to the Financial Times, the average retail price of petrol in the U.S. rose to $2.59 per gallon on Saturday, quoting to the American Automobile Association. That was up about 10% from its level the week before Harvey hit, and its highest level since August 2015 as refineries were taken out across southern Texas. Ten refineries in the region were still shut down on Saturday morning, according to the Financial Times, with a combined total of about 2.9 million barrels per day of refining capacity, representing a whopping 16% of the U.S. total, according to the Department of Energy.

The scale of the hit to U.S. supplies and the near instant spike in prices underlines just how reliant the U.S. is on the Gulf Coast for refining, refined product exports and LNG exports. Due to their location inland, primary production from shale resources in the Permian and Eagle Ford escaped damage and were back online as soon as wind speeds dropped, but lower-lying refineries were not so resilient.

This all goes to highlight a worrying exposure the U.S. has to this particular part of the world. Whether you believe in global warming, whether you accept climate change, whether you think it is all some left-wing plot is not the issue. The issue is Gulf crude production has more than doubled since 2005, leading a 75% nationwide increase, and now accounts for almost two-thirds of total U.S. crude production, up from 54% in 2005.

Yet while oil import dependency has plunged from 60% in 2005 to just 25% today, the refining of domestically produced oil has concentrated even more in the Gulf region.

Refining capacity in coastal Texas and Louisiana has, according to the Financial Times, increased by a quarter since the middle of the last decade, such that the region now handles half of all U.S. refining.

The U.S. isn’t the only one exposed to this one region. Rising total exports of refined products have left 90% of gross exports leaving from the Gulf region exposing neighbours in the region, who are reliant on U.S. supplies, to disruption in the event of a natural disaster — like a hurricane — or even a terrorist strike.

Some would argue that the flooding of southern Texas is less of a one-in-500-year occurrence than politicians would have us believe. The whole of the Mississippi delta is gradually sinking into the sea as levees built in the last century and canals built for oil extraction access prevent the river from depositing fresh silt and simultaneously allow the ingress of brackish water that kills off the vegetation once covering the area, the Economist reported last month. Storms and floods account for for almost three-fourths of weather-related disasters the Economist wrote this month and they are becoming more common.

Source: The Economist

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According to the insurer Munich Re, the Economist states that Harvey is the third 500-year flood to hit Houston since 1979. The U.S. may have little choice in the medium term than to continue its heavy reliance on Gulf-based refining and related infrastructure; if that is the case, then significant work needs to be done to better protect those facilities in the future.

Hurricane Harvey may have lashed Texas and Louisiana with 120 mph winds and record rainfall creating a disaster of near biblical proportions, but the Houston Automobile Dealers Association is already estimating the impact on the used car market.

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Quoted by CNBC, Stephen Wolf, chairman of the association, estimates that Harvey could have wrecked as many as half a million vehicles — resulting in, once the floodwaters recede and insurance companies pay out, a significant boost for the already robust used car market.

Houston alone is a top 10 market for new vehicle sales, according to Bloomberg, while the Houston metropolitan area ranks eighth nationwide in registered vehicles, with 5.6 million in operation prior to the storm. Bloomberg reports that more than 325,000 new vehicles were sold in the region during the last 12 months and as many as 130,000 new vehicles that were on dealer lots in the Houston area may have to be scrapped because of flood damage. Demand to replace dealers’ and owners’ lost vehicles would be a welcome boost to an industry that had seen its annualized selling rate drop to 16.4 million vehicles in August from 17.2 million a year earlier.

By way of a comparison, Reuters cites the experience of auto sales in New York following Hurricane Sandy in October 2012. The following month, auto sales rose 49% compared to the previous year, with all the replacement sales caused by the widespread flooding of the New York metropolitan area arising in the few months following the disaster.

Although all manufacturers could see an increase in demand for replacement vehicles, some brands are likely to benefit more than others.

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