Author Archives: Stuart Burns

Lacking a Trumpian figure in overall charge of such measures, import controls take time to be worked out in Europe, as they require consensus among E.U. members that often have conflicting priorities.

One issue they do seem to agree on, though, is the need to protect Europe from rising imports of cheap steel products.

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The E.U. has had in place temporary measures for a year now, according to a Reuters report. The bloc has had in place for a year a system of “safeguard” measures to control the incoming steel following Washington’s imposition of 25% steel import tariffs.

The measures set quotas for 26 grades of steel, including stainless, and were set at the average level of imports in 2015-2017, plus 5%. They allowed for a further 5% hike due in July and the same again in July 2020.

Following complaints that Europe’s steel market is too weak to absorb the planned increase in quotas, the European Commission has proposed that this year’s hike should be 3% effective from Oct. 1.

The figures seem to support this complaint.

Reuters reported that the E.U. steel association EUROFER estimates apparent steel consumption, which includes inventory changes, will fall by 0.6% this year and rise by 1.4% in 2020.

Set this weak demand position against last year’s imports — imports of finished steel products rose by 12% in a market that grew by only 3.3%, effectively increasing import penetration and depressing prices for domestic producers.

The revised measures also involve limiting any one country to a 30% share of imports of hot-rolled flat steel during a quarter, a move that may hit Germany before any other (it being the region’s largest consumer by some margin).

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Close neighbor Turkey is cited as one likely casualty of the move as a significant supplier of steel products, along with stainless steel from Indonesia.

GDP figures may be holding up well, but metal consumption in China suggests the global slowdown and the ongoing trade war with the U.S. are taking their toll on China’s manufacturing sector.

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Reuters reported top state primary aluminum producer Chalco is quoted as filing an 8% fall in output, with primary aluminum output of 1.89 million tonnes in the first half of the year, down from 2.06 million tons compared with the first half of 2018.

Overall, revenue actually rose 15% to 94.9 billion yuan, despite a 10% drop in the primary aluminum segment, helped by rising alumina output. Alumina output increased 3.2% year-on-year to 6.82 million tons, fueling a trading revenue increase of 23%.

But higher primary metal costs and weak prices in the primary sector hit profits. In the second quarter alone, Chalco’s net profit dropped 52.7% from a year earlier, while revenue was up 11.3% year on year.

In a separate Reuters article, the news source reported exports have also been hit, falling 4.3% in August from the previous month despite a weaker yuan. Unexpected production outages at two key smelters meant there was less metal available for overseas shipments following flooding at Hongqiao’s premises earlier last month and a separate outage in Xinjiang.

Last month, China exported 466,000 tons of unwrought aluminum, including primary metal, alloy and semi-finished products. The total was the lowest since February and was also down 9.9% from August 2018.

Supporting the aluminum picture, imports of unwrought copper — including anode, refined and semi-finished copper — products into China stood at 404,000 tons last month, Reuters reported, down 3.8% from the 420,000 tonnes in July and also down 3.8% year on year. The article went on to state the decline came despite copper prices in China being mostly high enough in August for traders to make a profit by buying on the London Metal Exchange, the global price benchmark, and selling on China’s Shanghai Futures Exchange (encouraging bookings of physical copper imports into China).

The blame for the drop in demand is laid at China’s bruising trade war with the United States, driving a fourth straight month of contraction in factory output in August, according to an official survey.

China is not alone, of course.

U.S. manufacturing output has remained positive, albeit slower than a year earlier. However, early indicators, like the Institute for Supply Management survey, showed a contraction in August — the first since 2016, according to Bloomberg. That suggests at least parts of the manufacturing landscape are facing rising headwinds; we would be complacent to think the consequences of the trade war are falling solely on China.

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Western Europe is also slowing fast. German manufacturing is arguably already flirting with recession as a consequence of a slowing Chinese economy.

Just as a rising tide lifts all boats, falling global GDP correspondingly depresses prospects for all.

Zerophoto/Adobe Stock

No one would argue that Thyssenkrupp has had its fair share of challenges in recent years.

Formed from a merger in 1999 between steelmaking giants, Krupp and Thyssen, a recent Sky News article observed, makes them both older than the country of Germany.

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Krupp was instrumental in the creation of railways in the country that became Germany and pioneered the Bessemer process, the first way of mass producing steel. During the 1900s, it expanded into heavy manufacturing. Both companies contributed to the miracle of German resurgence after World War II.

Once twin jewels in the German industrial crown, the combined company made a string of what proved to be bad investment decisions in Brazil with a major plate mill and in the U.S. with downstream processing operations.

Eventually, Thyssenkrupp managed to extricate itself with considerable losses. However, buoyed by healthy profits from its industrial products divisions — such as elevators, ships and high-speed trains — it struggled on amid growing demands for change.

But after its bid to hive off its steelmaking division into a joint venture with Tata Steel was recently blocked by the European Commission, talk of the group breaking up has again resurfaced, as its bonds are trading at junk status, according to Reuters. Credit cover is being reduced or withdrawn in some markets for parts of its troubled empire.

The group’s shares will this month be relegated from the DAX after more than 30 years of trading on the country’s flagship blue-chip index (Thyssen was one of the founding members).

The group has scant hope it will ever regain its former status as it seeks to sell off its more lucrative divisions to raise cash.

The latest prospect is the elevator division. Even though it may be the smallest of the quartet that makes up two-thirds of the world’s lifts — along with U.S. firm Otis, Swiss group Schindler and Finland’s Kone — Thyssenkrupp is equally well-regarded.

The most likely buyer at present seems to be Kone; the combined business would be the world’s largest elevator manufacturer, making up 28% of the market. The downside, however, would be a source of profitable revenue would be lost to a group that is currently losing €2.7 million a day ($2.9 million) and has net debts of €5 billion ($5.4 billion) – equal to twice the company’s market value, according to Sky News.

For both suppliers and customers of the group, the most worrying development must be the gradual reduction in credit rating. If suppliers cannot insure their debt, they cannot in many instances supply, thus forcing the group to diversify and fragment its supply base.

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The group has survived many trials and tribulations over the decades. It will no doubt survive the current period, but it will be a different, much reduced Thyssenkrupp that emerges in the decade ahead.

Following a decade of hype, there remains huge debate about the viability of carbon capture as a solution to carbon emissions from coal-fired power stations.

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A recent article in the Financial Times lays out both sides of the argument. On the one hand, there is the one put forward by the coal lobby, broadly drawing on the work of coal miners in the form of Coal21, an industry body in Australia backed by 26 mining groups (including BHP, Anglo American and Glencore). On the other hand, there is a more disparate group of academics, research bodies and NGOs who rubbish the miners’ position as untenable.

Coal21, however, is pouring a considerable amount of money into research, lobbying and, most controversially, marketing in an effort to influence the debate in its favor.

The industry club has invested $4 million in advertising to promote the prospects for carbon capture and sequestration (CCS) as a solution to coal’s carbon emissions. That comes in addition to some $400 million BHP has pledged over five years to reduce its emissions and those of its customers.

Meanwhile, Glencore, the world’s largest coal exporter, is building a pilot plant to capture and store carbon emissions from a nearby coal-fired power station in the Surat basin in Australia, funded in part by Coal21. The plan is to capture some 200,000 tons a year of carbon, but commercial projects in Canada and the U.S. are said to be running at 50% efficiency, at best (in one case, little more than 5%). Glencore will need new technology if it hopes to reach the 90% efficiency CCS plants are headlined to achieve.

Even then, grave doubts remain as to their economic viability for coal-fired power generation.

Source: Financial Times

CRU research is cited by the FT estimates the technology is only viable if the carbon dioxide (CO2) can be sold to other industries as a commercial source of CO2. Generally, it is either simply stored underground or used to boost oil field production by pumping sequestered CO2 back into oil reservoirs.

Without the value generated by selling CO2 to other industries, the cost of the technology needs to fall by 50% to make pure CO2 storage economical, the Financial Times reports. Cynics suggest miners’ focus on CCS as a solution has more to do with countering what they see as an increasingly negative view of coal use as the consequences of rising CO2 levels is more widely accepted.

Coal miners may be facing a losing battle, regardless of public perceptions.

The article reports that in many parts of the world, solar, wind and battery storage produces electricity at lower cost than coal, not to mention the advantages of lower CO2 producing natural gas and the latter’s greater flexibility to provide swing production to balance renewables’ lower predictability.

Although huge sums have been poured into CCS research and multiple pilot plants have been set up around the world, the technology is still less efficient than necessary and more expensive to operate than required if it is to be economical (certainly for coal-fired power generation).

But there are other industries where large quantities of CO2 are generated. The arguments for CCS may be on a firmer footing for industries like cement, steel, and oil and gas.

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If the technology can be further refined to reduce emission from these industries, that would be a huge gain — but for coal-fired power stations, CCS looks like a lost cause.

President Donald Trump’s suggestion that the U.S. could buy Greenland from Denmark was met with incredulity in Nuuk, Copenhagen and across Europe.

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“Greenland is not for sale. Greenland is not Danish. Greenland belongs to Greenland. I strongly hope this is not meant seriously,” Greenland Prime Minister Mette Frederiksen said during a visit to the territory on Sunday, as reported by The Times.

The prime minster added, “Thankfully, the time where you buy and sell other countries and populations is over. Let’s leave it there. Jokes aside, we will of course love to have an even closer strategic relationship with the United States.”

Frederiksen is said to have rejected Trump’s proposal, describing the notion of selling Greenland as “an absurd discussion.”

Strangely, Trump seems to have taken affront that the 58,000 population of Greenland did not want to be bought and sold like chattels. He then tried to lean on Denmark by commenting on how the U.S. protects Denmark and, as a result, should be more willing to sell its semi-autonomous territory (Greenland governs itself but relies on Denmark for its defense and foreign policy).

After being flatly refused by both Nuuk and Copenhagen, President Trump reacted in an apparent fit of pique, canceling his planned trip to Denmark next month.

Crass as the handling of this idea has been, it is not the first time the U.S. has tried to buy its massive neighbor.

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British Steel is still limping along, losing £5 million a week while it continues looking to secure a buyer.

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After reporting on the group entering into the Official Receiver’s hands in the spring we have been following its ups and downs in the expectation that eventually the most likely bidder would be Britain’s largest steel producer, Liberty House, owned by steel entrepreneur Sanjeev Gupta. The group already owns several other steel assets in the U.K. and mainland Europe.

While Liberty House appeared to be the frontrunner, it seems to have been sidelined in favor of a more controversial bidder: Turkish pension fund Oyak.

The bidder is controversial because Oyak oversees the Turkish military’s $15 billion pension fund. While Turkey was seen as a key NATO ally of the west a decade ago, it has slipped into increasingly nationalistic and antagonistic rhetoric under autocratic leader Recep Tayyip Erdoğan. Clearly, Oyak will be close to both the military in Turkey and the government of President Erdoğan, and has come under criticism from labor unions back home in Turkey.

Oyak recently closed Chemson, a Wallsend-based firm that makes additives used in the production of PVC plastic, moving production to Austria and Turkey at a loss of 64 jobs.

Last week, it announced it would cease production at the site by the end of September, the Guardian reported, raising fears that a successful bid for British Steel could likewise be followed by a hollowing out of jobs as the new owners drive for profits.

But are such fears well-founded?

British Steel has struggled to make a profit and is badly in need of further investment if it is to survive. Indeed, the reason Oyak is preferred over Liberty is the latter has been quite clear that it would close one of Scunthorpe’s blast furnaces and use metal from another of its steel mills in Yorkshire, with the loss of many more jobs than the few hundred Oyak proposes.

Oyak, on the other hand, is looking to raise production. Last year, Scunthorpe produced 2.8 million tons, but the new buyer has plans to raise production to 3 million tons and, eventually, 3.2 million tons, according to the Financial Times. It also intends to dramatically improve productivity, said to be woefully poor by European standards.

Oyak is not new to steelmaking. The fund owns 49.3% of Turkey’s largest steelmaker, Erdemir, as well as a sprawling range of mining and manufacturing assets ramging from automotive to cement (in addition to steel).

Oyak’s plans for British Steel are a double-edged sword.

On the one hand, it wants to preserve and indeed expand production, which will find widespread support in the U.K.

On the other hand, it is coming cap in hand to the British government looking for contributions to improve the steelmaker’s carbon footprint.

The plan is to move from coal to gas-powered blast furnaces and eventually — and most controversially, because it has not been done at scale before — to hydrogen, taking the company to a near-zero carbon footprint.

Oyak said it plans to invest some £900 million in the plant (although over what time frame that investment will come is unclear), but a figure of £300 million from the government has been reported as the sum it is looking for.

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Why Oyak is planning to do this in the U.K. and not at home with Erdemir is a question; the cynic would suggest it know the economics of such a move are shaky but believes the British government may be more up for taking a punt than the authorities back home.

At present, any contribution would have to be on the basis of commercial loans if the U.K. is to avoid falling afoul of E.U. subsidy legislation — although whether the U.K. would be subject to that post-Brexit remains to be seen.

Various sources are reporting both a slowing in demand growth and a fall in output for primary aluminum. So far this year, that combination has been led by a faster fall in output, pushing the market into a larger deficit position as the first half progressed.

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Reuters reported the results of a poll showing a forecast for a global aluminum deficit of 550,000 metric tons this year — down from an earlier estimate of 868,240 tons — as demand growth has recently slowed.

Inventory levels support estimates of a deficit.

Primary inventories in warehouses tracked by the Shanghai Futures Exchange (ShFE) are hovering at their lowest since April 2017, according to Reuters. LME stockpiles have improved recently, but are still down 22% from the beginning of the year.

Not surprisingly, futures markets in China are showing more resilience to a generally depressed commodities sector. The ShFE’s most-traded aluminum contract is at its highest since May 29, hitting 14,285 yuan ($2,022.02) a ton last week before easing to close at 14,200 yuan a ton.

The LME, on the other hand, has continued to drift lower over the last two weeks after failing to hold above $1,800 a ton in July.

The disparity in outlook is down to the domestic production situation in China.

New smelter startups have been delayed as Beijing is taking a hard line with aluminum producers, forcing those keen to open up new capacity to close corresponding capacity at older, less efficient plants. Summer production has at best been flat and first-half production is marginally down from last year’s level.

Investors have been encouraged as Typhoon Lekima stormed over Shandong province, causing widespread flooding. Although there are no reports yet of aluminum outages as a result of the typhoon, the expectation is some smelters will suffer flooding and/or power failures, resulting in lost production.

Consumption, however, is softening, both in China and the rest of the world.

Weaker automotive production is a significant factor, as trade worries are causing just that — worries — rather than a significant downturn in non-automotive consumption so far. Expectations are for a pickup in Chinese domestic primary production this fall as the impact of the flooding wanes and those delayed startups come onstream.

Meanwhile, consumption is expected to soften further in Europe and Japan as both areas flirt with stagnation at best or, possibly, outright recession (being the only remaining mature markets open to China after tariffs essentially shut off the U.S. market).

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The prospects this year for a rise in aluminum prices remain poor. However, if demand holds up and supply continues to be constrained, it could set the scene for a gradual rise next year, particularly if a resolution to the trade war is miraculously agreed.

Automotive markets just about everywhere are in decline this year.

The question is: to what extent is this a cyclical downturn as opposed to a structural shift?

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The Financial Times article reported Indian passenger vehicle sales fell 31% last month from the same time a year earlier, according to the Society of Indian Automobile Manufacturers. It was the worst month since the turn of the century in a dismal spell that has seen sales fall 20% or more for four consecutive months, while sales have failed to rise for more than a year.

India’s economy is slowing, with GDP growth falling to a five-year low of 5.8% in the first quarter of 2019. In addition, a liquidity squeeze caused by a crisis in its shadow banking sector is choking off consumer demand and business expansion.

The article goes on to explain that about 40% of new car loans came from these shadow banks, making liquidity tight. Although a reduction in India’s high car taxes — the government levies a 28% goods and services tax on cars, with the effective rate including other duties rising as high as 48% for some vehicles — is a possibility, it is unlikely the new administration’s cash-strapped budget could afford it.

Significant as India’s car market is — as recently as last year, India’s motor market was thought to be on course to overtake Germany and Japan and become the world’s third-largest, the Financial Times reported – Germany’s is even larger.

Yet, declines are dramatic in Germany, too.

Source: ING Bank

Germany’s problems are more nuanced.

Domestic production has been hit by the delayed introduction of the new worldwide light vehicle test procedure, which caused severe disruption to German automotive production and shipments.

But matching the introduction of the China 6 emission standard has also caused a downturn in Germany’s largest automotive export market: China.

To underline the importance of the market, ING Bank reported that in 2018 almost one-quarter of all cars sold in China were German. BMW and Daimler recorded more than one-third of their total car sales in China. For Volkswagen, the share is even bigger (40%).

Yet new car sales in China have fallen for 13 months in a row, a slump that started in the second half of 2018 when the trade war between China and the U.S. began to heat up, according to ING.

The trade war has been a factor. U.S. customs duties on Chinese goods worth U.S. $250 billion (with U.S. $300 billion to follow Sept. 1) and Chinese customs duties on U.S. goods worth U.S. $110 billion, car and car parts from China are being taxed at 27.5% in the U.S. since July 2018. U.S. autos are subject to China’s standard tariff rate of 15%.

Given that some German car manufacturers actually export U.S.-produced cars to China, there has been a clear and direct impact of the trade conflict on the German car industry.

But that is only part of the story.

The switch to China 6 meant consumers held off buying the older models despite a major distributor push to discount old stock.

But the industry worries China could be going through a structural shift.

According to ING, China is already the largest ride-hailing market in the world, with over 459 million customers and a turnover of around U.S. $53 billion. By comparison, where it all started in the U.S. there are currently 66 million users generating U.S. $49 billion in turnover.

To put things into perspective, one-third of the Chinese population already uses alternative mobility solutions, while in the U.S. the figure is around 20% and in the E.U. it is just 18%. Further, while in the U.S. ride-hailing is used occasionally by a car owner, in China many users are not yet on the car ownership ladder; as ride-hailing becomes more widespread, those users may elect never to become car owners.

According to JustAuto, new vehicle sales in China fell by 4.3% to 1.81 million units in July from 1.89 million units a year earlier, according to wholesale data released by the China Association of Automobile Manufacturers. This includes all vehicle types, passenger vehicles and commercial vehicles, with the cumulative seven-month total at 14.13 million units – down by 11.4% from the 15.96 million units sold in the same period of last year.

Jeff Schuster, president of global forecasting at LMC Automotive, is quoted in Europe’s Autonews as saying global light-vehicle sales will decline 2.6% in 2019 to 92.2 million units. Through 2025, he doesn’t see more than 2% growth as the mature markets of western Europe, the U.S., Japan and Korea contract in volume over the next five to seven years. Only electric vehicle production as a subset — coming from a very low base — is set to rise.

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The industry’s current downturn is in part cyclical and production will recover regionally as consumer confidence and access to credit improves.

At the same time, there is a structural shift happening that will impact the industry’s long-term future and create significant challenges for global western carmakers in the years ahead.

We are not stock market investors at MetalMiner. While we may hold shares, either as direct punts or as part of pension or investment funds, we do not consider ourselves stock market experts and, as such, rarely cover market movements unless part of a wider review of financial markets.

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That said, few can have missed the wild gyrations U.S. stock markets — also mirrored in Europe and Asia — have been going through this month. Those movements might lead one to question whether this has implications for commodity markets in general and metal markets in particular.

Anyone who has attended one of our market seminars will know there are clear correlations between share prices and commodities, so it is not an idle question to ask whether this month’s falls are a correction or the early signs of an end to the bull market that has powered shares higher for some 11 years.

Source: Financial Times

To answer that question, it helps to review why share prices have taken such a hammering.

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A recent article in the ever insightful Stratfor Worldview this month underlines how the world is not short of copper ore deposits — they are, at least in this example, just in the wrong place.

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The article covers a long-running dispute between the Pakistani government and mining company Tethyan Copper Co., a joint venture between Canada’s Barrick Gold Corp. and Chile’s Antofagasta PLC, the article explains.

The dispute is over the legality of Tethyan’s claim and rights to exploit the copper and gold reserve at Reko Diq in Pakistan’s remote southwest Balochistan province, close to the Iran border.

Pakistan’s mining rights and practices, not to mention its infrastructure, are not fit for the purpose, as Tethyan’s story underlines all too well.

Rights were originally granted to BHP by way of a decades-old pact called the Chagai Hills Exploration Joint Venture Agreement (CHEJVA), signed in 1993 between the Balochistan Development Authority and the Australian miner. The rights were subsequently acquired by Tethyan, which has been in a long-running dispute ever since.

The company has invested some $220 million in exploration to prove the resource and carry out feasibility studies. However, probably in a bid to wring more out of the firm, legal challenges were taken to the provincial courts. The resulting legal proceedings caused delays, which finally drove the firm to take the case to the World Bank’s International Centre for Settlement of Investment Disputes (ICSID) and the International Chamber of Commerce, resulting in a $5.9 billion fine against the Pakistani authorities.

The current impasse is in neither party’s interests.

Tethyan has offered to negotiate a settlement, but with the Chinese on the sidelines bidding to extend their Belt and Road involvement in the region, conflicting loyalties and priorities are in play.

A solution, though, would be very much in Pakistan’s interests.

The resource is said to be the largest untouched deposit in the world, containing an estimated 2.2 billion metric tons of mineable ore that could yield 200,000 metric tons of copper and 250,000 troy ounces of gold annually for over half a century, Stratfor reports.

But exploiting it requires international expertise and finance.

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The ore must be processed into a fine powder at the mine head before converting it into a slurry concentrate for transport through a 682-kilometer pipeline to the Arabian seaport of Gwadar. At the port, the company planned to dry the concentrate before loading it onto ships for smelting abroad — missing an opportunity to value add to refine it into pure metal.