Author Archives: Stuart Burns

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Although opinions will differ, it is hard to see the failure of a proposed U.S. $2.3 billion merger between China’s Zhongwang USA, LLC and U.S.-based Aleris as anything other than the result of protectionist policies.

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Some two dozen US lawmakers had urged U.S. Secretary of the Treasury Steven Mnuchin to reject the proposed sale, saying Aleris was involved in the production and testing of specialized alloys used by the defense industry.

Considerable opposition was mounted by the Committee on Foreign Investment in the United States (CFIUS), a federal government body that reviews foreign investments in domestic firms, and determines whether those potential investments may impact national security. Lawmakers appealed to the CFIUS, saying Aleris’ research and technology were critical to U.S. economic and national security interests.

But the reality is Aleris USA has little or no involvement in the defense sector.

“Even the very small number of products that end up in the military through the supply chain were not made in the US but in Aleris’ European operations and did not involve sensitive technology,” the firm is reported as saying.

There were two forces acting against the takeover.

A Cloud Over Zhongwang

The first factor is Zhongwang’s connection to the stockpiling of thousands of tons of aluminum in Mexico, suspected of either being illegally exported from China under misreported tariff codes, or diverted to Mexico when it became clear they could not be legally imported into the U.S. without incurring anti-dumping duties.

Either way, a cloud hung over the company ever since these developments came to light two years ago. No amount of denials and PR work on its behalf have been able to shake the image that there is a less savory side to the company’s operations — or, at least, to that of its owner, Liu Zhongtian.

If the merger had been rejected on this basis, it would make more sense. It could be argued there are concerns about if  Zhongwang would be a reliable steward for Aleris based on its connection to these unresolved past issues.

Pushback from U.S. Manufacturers

The second factor is opposition from U.S.-based semi-finished products manufacturers.

Zhongwang USA made much (maybe too much) of its investment plans for Aleris post-merger, stating it intended to create 1,000 new jobs and make capital investments to expand capacity to better serve the growing automotive sector. AluminiumInsider reports this was met by an icy reception from much of the American aluminum industry and domestic labor unions, in addition to American lawmakers. Maybe another Chinese entity would have had a better chance of success, but maybe the growing anti-Chinese sentiment in the White House was always going to inhibit such a move.

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The CFIUS recommendation to block China Venture Capital’s takeover of Portland-based Lattice Semiconductor last June has more rationale as a security issue. The Aleris situation, however, appears to be more of a political decision, supported by trade fears of increased domestic competition.

President Donald Trump may not have said much, if anything, about China’s steel exports during his recent tour. Both European and U.S. legislators, however, are carrying out investigations into not just simple dumping but more complex and illegal activities, such as shipping via third parties to hide the origin and avoid pre-existing dumping tariffs.

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A Reuters article this week explains how the European Union’s anti-fraud office (OLAF) said it has found Chinese steel was shipped through Vietnam to evade the bloc’s tariffs.

In part, the current case may be a matter of timing.

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Yes, the aluminum price has fallen back this month.

Yes, it is looking decidedly weak compared to its high point of $2,215 per metric ton earlier this month.

Yes, inventory on the Shanghai Futures Exchange (SHFE) is building rapidly, hitting a record high this week of 666,581 tons, according to Reuters.

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That’s not where we expected aluminum to be back in the summer when the market was talking all about smelter closures in China this winter and supply constraints.

Does that mean the market thinks the constraints are not going to happen? Is this another case of Beijing talking up their policies but failing to enforce them?

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Searching for a return and shying away from an already record equities market, investors are getting back into commodities.

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Not all commodities, it has to be said, but squeezed fundamentals and solid global GDP growth are encouraging investors to get back into oil and some metals — like copper and zinc — after several years of poor commodities performance.

The S&P has gained 82% in the last five years, while the S&P Goldman Sachs Commodity Index (GSCI) has dropped by 34% as commodities have been out of favor.

But the fundamentals are changing for many commodities this year, encouraging renewed interest in the sector among fears that equities my soon top out.

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Heard of the Paradise Papers?

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How about the Panama Papers a year back? Those revelations brought down the heads of two governments and severely compromised many reputations, exposing as they did a multitude of wrongdoings, notably related to tax evasion.

Well, the Paradise Papers are said to contain highly confidential details of the financial arrangements enjoyed by more than 120,000 people and companies named in the 13.4 million files, many of them leaked from offshore law firm Appleby, the Washington Post and Telegraph report.

The documents have been reviewed by the German newspaper Süddeutsche Zeitung and the International Consortium of Investigative Journalists.

We are used to stories of the super rich dodging their taxes. Some might even admire the ingenuity of their advisors, conveniently forgetting that when our local school is closed through lack of funds or we blow a tire on a highway that desperately needs pot holes to be filled, it is because our city, state or central government lacks the funds to keep such services running effectively.

Those funds are raised from taxation, and while you and I are paying our tax, there is a significant number of the super rich and many corporations that pay little or no tax. British charity Oxfam is quoted as stating that the top 1% of people in the world own more wealth than the other 99% combined. Or, in other words, 62 of the richest billionaires own as much wealth as the poorer half of the world’s population.

Nor is it just the eye-wateringly wealthy. Plenty of household names are among those revealed in the Paradise Papers.

Lewis Hamilton, four-time world F1 champion is among those running scams that allows him to run a private jet but not “own” it, thus avoiding declaring the income needed to run it as income. There will be many, many more similar revelations over the coming weeks, but whether it will bring any changes in controlling these ever more sophisticated avoidance arrangements is subject to doubt. It should be added, however, many of them are not illegal — they just exploit loopholes our politicians have allowed to be exploited for years.

OK, enough of the populist rant, you might be saying. What does this have to do with the metals markets?

Well, prominent names coming out as clients of Appleby, exploiting tax avoidance schemes on a grand scale are names like Facebook, Apple, and metals miner and trader Glencore, among others (including India’s Jindal Steel).

Some of Glencore’s most shadowy dealings are around the operation of and payments made in connection to its copper and cobalt mines in the Democratic Republic of Congo, where it runs the Katanga copper mine. Papers appear to support rumors already circulating that an associate of Glencore’s Dan Gertler, an Israeli businessman, is said by the Telegraph to be linked to allegations of bribery and corruption in central African countries over many years.

It must be said, nothing in the papers directly implicates Glencore in making payments of an unethical nature, but the suspicion seems to be where there is smoke there may well be — or may well have been — fire.

Glencore is one of the largest miners in the world, with sales of $152 billion (£116 billion). But even accepting that the papers raise the question of why firms need a shadowy web of 107 offshore companies to run such an enterprise, why are shareholdings and dealings held in these offshore entities if not for tax avoidance purposes? No company or individual is obliged to pay more tax than the law requires. Unfortunately for the majority of us, our lawmakers are incapable of agreeing internationally how we should tax corporations or those wealthy enough to access similar sophisticated services.

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As a result, in excess of $150 billion a year of tax goes unpaid, according to the graph below from The Washington Post.

An article in the Financial Times this week reporting on recent research done by the Trancik Lab at MIT and the Norwegian University of Science and Technology last year suggests that the future for low-emissions vehicles might simply be smaller vehicles.

Benchmark Your Current Metal Price by Grade, Shape and Alloy: See How it Stacks Up

Benchmark Your Current Metal Price by Grade, Shape and Alloy: See How it Stacks Up

Both pieces of solid research support the fact that larger, electric-powered vehicles have a higher life cycle carbon footprint than smaller combustion engine autos.

Let us first define what the research is saying about life cycle emissions. To capture an electric car’s full environmental impact, the research says regulators need to embrace life cycle analysis that considers car production, including the sourcing of rare earth metals that are part of the battery, plus the electricity that powers it and the recycling of its components. The most crucial elements appear to be the source of the electricity used to charge the batteries and the size (and therefore quantity of lithium and cobalt) of the batteries.

Early early vehicles (EVs) were small vehicles with limited batteries and limited ranges, but Tesla changed all that with the model S. With the marker they laid down to the market, vehicle sizes and the range they can offer on a single charge have risen. As a result, so has the size of the batteries, to the point where a model S can weigh up to 2,250 kilograms, but a significant part of that is the massive battery that powers its impressive range.

Source: Financial Times

According to data from the Trancik Lab quoted by the Financial Times, a Tesla Model S P100D saloon driven in the U.S. Midwest produces 226 grams of carbon dioxide (or equivalent) per kilometer over its life cycle. That numbers comes in less than an equivalent large luxury internal combustion engine (ICE) saloon, but much more than a smaller ICE vehicle that may produce less than 200g/km over its life cycle.

Note the reference to the location, as part of the calculation takes account of the electricity-generating capacity — in a solar- or wind-rich environment like Spain or Nevada, it will have a lower carbon footprint than in a coal-rich area, like Poland.

And therein lies part of the problem for legislators, keen to drive our migration to a “zero emission” transport future.

Of course, that is a fiction — all power, even renewables, has a carbon footprint. Power sources, however, vary considerably. To guide both automotive policy and power generation, legislators need to start looking at this more holistically than simply just, in the case of cars, what comes out the tailpipe.

Source: Financial Times

Size for size, EV has some 50% lower life cycle emission signature than an equivalent size ICE. The MIT research acknowledges that fact, but the drive for ever longer ranges (required in only a tiny fraction of real life journeys) will reduce the benefit a switch to EV could deliver. The irony is that by the time legislators get around to working out how to incentivize and/or penalize better car choices, the market will be evolving to negate the benefits. The rise of sharing services will mean journeys will be completed less in our own vehicles and more in hired services, so that we do not make purchase choices based on range and where transport providers could coordinate vehicles for longer distances. Battery technology will also improve in the next decade, increasing power density per kilogram of lithium and potentially reducing, or even removing, the need to cobalt altogether.

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While legislators fumble forward trying to accommodate the fact they are encouraging poor buying choices and the development of technologies in the wrong direction, be prepared for the fact that we see about turns in EV incentives from the current “all EVs are good” to “some EVs are good —  but some are going to be taxed.”

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Much like governments encouraged millions to switch to diesels, only for them to heavily penalize diesel cars less than 10 years later, we could see an equally ham-fisted about change on EV tax legislation down the road.

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The oil market is in a state of high excitement.

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In the space of just a week or so, analysts have gone from being pretty sanguine about the possibility of price rises — giving muted credit to OPEC and its partners in stemming the flow of excess production and stabilizing the market – to talking about Brent crude hitting $75 a barrel before the end of the year.

True, that suggestion by Bank America Merrill Lynch was a bit of an outlier, but several are talking of $70 being possible, according to the Financial Times.

So, what’s stirred the oil market?

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Industrial metals are in the grips of a bear market, various outlets report, and one of the main narratives sounds like a case of the market having its cake and eating it too.

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The FT reports that the oil price, as referenced by the Brent crude quotation, has topped $60 a barrel for the first time in two years.

The article quotes various sources suggesting that while demand is strong, the rise in prices is driven more by supply constraints than by a sudden surge in demand (which caused the China-inspired super-cycle in the last decade). This time, a combination of reduced investment in new capacity (resulting from low prices in recent years) and the OPEC-led production constraints initiated in November 2016 are gradually tightening the market. Trader Trafigura is quoted as predicting demand will outstrip supply by as much as 4 million barrels a day by the end of the decade as supply becomes under better control and the U.S. shale industry fails to make up the delta between supply and gradually rising demand.

That’s where the have the cake and eat it too part comes in.

At the same time, industrial metals are rising strongly. Copper passed $7,000 per ton last month and aluminum is knocking on the door of $2,200 per ton. The cobalt price has doubled in the last 18 months and nickel, long in the doldrums due to over-supply and poor demand from the stainless sector, has also been on the rise due to projected battery demand from electric vehicles and charging infrastructure.

On the face of it, this appears like investors are picking and choosing their good news. If electric vehicles are such a strong bet that metals demand is set to soar, then surely oil demand is set to collapse. That prospect should undermine the oil price, you may reasonably suggest.

If only it were that simple.

Even a doubling of battery production would suggest an extra 750,000 vehicles based on 2016 global electric vehicle and hybrid production of 773,600 units, according to EV-volumes.

There was modest, by global light vehicle sales, of 90 million units in 2016, just 0.86%. Yet for cobalt, it’s still significant when you consider the battery industry currently uses 42% of global cobalt production, so an ongoing rise of 42% increase in lithium ion battery demand (2016 over 2015) would be highly disruptive to cobalt demand.

Plug-in vehicle sales grew 20 times faster than the overall market, justifiably causing concern that cobalt supply could be strained by this one market application.

Worryingly for cobalt, the fastest-growing market is also the largest.

Driven by government subsidies, the Chinese market, at some 351,000 units last year, also grew at 84% over 2015. The switch to EV and PHEV cars is part of Beijing’s drive against pollution, so incentives are not likely to be relaxed anytime soon. Growth of this magnitude dwarfs the 13% and 36% growth rates in Europe and the U.S., respectively.

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No wonder cobalt prices have doubled and yet oil prices have virtually ignored the message the rise in EV sales is telling us. One is major disruption to a small, constrained and geographically, supply market, while the other is a long-term trend to a still growing vast supply and demand market that will take years to impact consumption figures.

An interesting article in The Telegraph this week explores the challenge facing the U.K.’s industrial sector in terms of power costs and the government’s competing priority of decarburizing the U.K.’s economy.

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The U.K. is not alone in this.

Much of Europe and the U.S. face a similar challenge of rising energy costs and concerns that industry is disadvantaged relative to competitors due to high energy costs and that retail consumers are being forced to pick up much of the bill for the government’s green agenda.

According to the article, British industry already pays well above the average for Europe, and Europe itself is a high-power-cost region relative to many other parts of the world.

Source: Telegraph

Only Denmark has higher industrial power costs than the U.K. Denmark generates much of its electricity from wind turbines, for which the technology is only just becoming economically viable, without subsidy and without costing in the backup generating capacity the variability of wind demands.

Decarburization and social policies, which includes subsidies for renewables but also programs to improve energy efficiency, add 20% to U.K. bills at present. But — and it’s a big “but” — they are rising fast.

Levies for such programs are estimated by Andrew Buckley, a director at the Major Energy Users Council (MEUC), to reach 40% by 2020, according to The Telegraph. Some major users, such as the steel industry, have been made a special case and the government has reluctantly granted an 85% rebate of green taxes for steelmakers. However, that makes the problem worse for firms that do not qualify; every subsidy for one is pressure to increase costs on another.

Some firms are moving off grid, investing in their own turbines, solar parks or micro gas plants, sometimes backed up by battery storage if based on renewables.

Rather than ease the problem for those left on the grid, it makes the situation worse. Funding a network with fewer consumers spreads the fixed costs over those that are left.

Of course, the U.K. is not alone in this, but policymakers create different policies in different countries depending on their priorities. Consumers, even in common markets like the EU, can therefore find themselves paying substantially more than their neighbours.

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For the top ten highest energy users, the annual energy bills stands at around £120 million ($155 million). If they are paying 20% or more than their neighbor, that could equate to a £24 million disadvantage before they produce a single ton of product.

No wonder energy is becoming such a hot topic despite low oil and coal prices.

McKinsey is a highly respected firm of consultants, but we rarely report findings of its work because the material released into the public domain is often too generalist for our practitioners at the coal face of metal procurement.

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Arguably, a recent article on the future of containerization could be said to be in the same vein, comparing as it does their findings in 1967 to today and weighing up current trends extrapolating how the industry could change over the next 50 years. Fifty years is a long time — many of us won’t even be working anymore by then — but of course changes will happen gradually over the period. Some of the developments they mention are already in process today.

Careful not to make specific predictions, McKinsey suggest the following may happen by 2067. Like cars, the firm sees ships becoming autonomous — a scary thought, but, realistically, if you can do it with trucks and cars, why not boats?

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