Author Archives: Stuart Burns

Pragmatically, you could hope Indian Prime Minister Narendra Modi’s Bharatiya Janata Party (BJP) focus on Hindu nationalism is more a smokescreen to deflect attention from a deteriorating economy than it is the start of India’s spiral to increasing polarization and fragmentation of its multicultural democracy.

The economy has certainly been on a slide for much of the last year and the BJP has been harassed increasingly by the opposition Indian National Congress over its handling of the economy.

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India’s consumer price index increase reached 7.35% in December 2019 from a year earlier, the third month in a row in which it has breached the Reserve Bank of India’s 4% target.

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We have covered the precious metals and palladium, in particular, a few times over recent months, not because we have suddenly become PGM investors (although looking at price performance, that would have been a fortunate move) but simply because they are the only metals sector showing any real dynamism.

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The base metals have at best been lackluster. Aluminum has been range-bound for much of the last nine months, as has most of the base metals complex.

Copper has perked up since about November on the back of expectations of a thaw in U.S.-China trade relations. Nickel got interesting toward the back end of August when the market reacted to news of an Indonesian export ban but has since sunk back.

Only the precious metals have risen and sustained their rises during the period — albeit for differing reasons.

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The inverse relationship between the strength of the U.S. dollar and the price of commodities has held good over time.

That relationship isn’t a constant, of course. Political, economic or supply-demand fundamentals can trump dollar strength at times of stress. However, as a broad measure, it can impact prices day to day, week to week and year to year.

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While stock prices are currently at all-time highs, commodity prices are as cheap today as they pretty much have been for decades — not historic lows, but relatively speaking commodities have not enjoyed the same boost from cheap money and asset-boosting policies like quantitative easing that stock prices have seen.

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The assassination of Iranian top military official Qassem Soleimani outside Baghdad airport last week caused a near 4% surge in oil prices and a drop in share prices as investors took fright at the prospect of an all-out war between the U.S. and Iran. Not long after, however, oil prices retreated over 4% to below $60 per barrel Wednesday morning after President Donald Trump said Iran appeared to be “standing down.”

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In reality, while that remains a possibility, a more likely outcome is an ongoing lower-level exchange of tit-for-tats as evidenced by Iran’s attack overnight earlier this week on two airbases housing U.S. and coalition forces in Iraq.

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2020 will — economically, anyway — be shaped in no small part by what happens in China.

The world’s second-largest economy has been on a slide in terms of GDP growth for years now. The 18-month trade war with the U.S. has contributed to that decline and has been the cause of considerable investor anxiety.

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As we head into not just a new year but a new decade, we could be forgiven for thinking we are in much better shape than we were a year ago.

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The British have overwhelmingly affirmed their intent to leave the European Union on Jan. 31. While the terms of any deal with Europe will not be known for another year, the firm departure date of Dec. 31, 2020 — with or without a deal — at least suggests we will not have the can-kicking of the last three-plus years.

Meanwhile, America’s trade war with China is showing some signs of thawing. A little progress has been made in terms of a phase one deal, in which the Trump administration refrained from imposing a new tranche of tariffs that was set to start in December and decided to halve its current 15% tariff rates imposed on $120 billion of Chinese products. In return, China is said to have agreed to substantially increase agricultural purchases, a move that would benefit American farmers who have been bearing the brunt of the trade war.

But according to some sources, the phase one deal will be unlikely to contribute to a sharp reduction of tension in their relations because it leaves unresolved some key issues that have been at the heart of the trade war, such as intellectual property rights and state subsidies.

According to The Times this week, America’s stock markets were buoyed in the second half of 2019 by three interest rate cuts in quick succession made by the U.S. Federal Reserve. Since September, the central bank has also injected hundreds of billions of dollars into short-term money markets to ease a squeeze on lending.

Central banks’ ability, however, to add further support in 2020 is limited.

The Fed is expected to possibly add one more rate cut. However, in Europe, rates are at rock bottom or already negative; further fiscal stimulus would have to come from governments, not central banks.

Both Europe and the U.S. would benefit from investment in infrastructure. There are some signs a loosening of the purse strings may occur in the U.K. and the Netherlands, but Germany is the kingmaker (at least in Europe). Although more conciliatory noises have been emanating from the German Federal Ministry of Finance, it seems unlikely Germany is going to boost E.U. growth by dropping its balanced budget policy, however beneficial that would be for both Germany and the rest of the E.U.

Despite comments that China’s manufacturing picked up in November, there seems little doubt growth is slowing in the world’s second-biggest economy.

An article in The Telegraph quotes Fathom Consulting predictions of a real growth rate closer to 4% in 2020, regardless of what the official figures may report. The expectation is China will add stimulus next year in order to sustain growth and avoid recession, but CRU predicts most of the fiscal aid will come from government spending (unlike in 2019, when it came from tax cuts).

In the long run, this wouldn’t be good news because China already has a debt mountain of more than 250% of GDP. Corporate and household debt have soared rapidly and, while not an immediate threat, poses a longer-term risk to the economy as the population ages and the country’s ability to fund that debt comes under strain.

Keep up to date on everything going on in the world of trade and tariffs via MetalMiner’s Trade Resource Center.

2020 holds a number of risks, but the optimist in us should suggest the November U.S. presidential elections could be a spur to achieve trade solutions with China and Europe that could see less volatility and uncertainty among the major economies.

Risks will remain, but fundamentally the global economy has more positives than negatives.

While some have been predicting an end to the bull market and a looming recession, we remain optimistic that 2020 will see continued growth.

In the short term, a new five-year gas transit agreement between Russia and Ukraine, agreed just 12 days before the current agreement is to expire, is good news for Europe, Russia and Ukraine — a rare example of pragmatism and compromise in today’s winner-takes-all approach to diplomacy.

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But in the longer term the agreement, heralding as it does a waning of the Russian-Ukrainian interdependency, removes an issue that demands a degree of cooperation and opens to the possibility that bilateral tensions could rise in the future.

Still, for now, as a Stratfor Worldview report observes, Europe will not have to worry about keeping the lights on or heating their homes this winter and nor will Ukraine (so economically dependent as it is on gas transit revenues).

The deal is the result of compromise on both sides.

As part of the deal, Russia will gradually reduce its use of Ukrainian pipeline infrastructure over the next five years as it expands its access to the European natural gas market through the Nord Stream 2 and TurkStream pipelines.

Ukraine, meanwhile, will use the next five years to continue its efforts to reduce its dependence on natural gas that comes directly from Russia by ramping up domestic gas production and searching for alternative routes for imports.

As gas volumes decrease through the Ukrainian system — decreasing from the current volume of 90 bcm to 65 bcm next year and just 40 bcm in 2021 — and the infrastructure continues to age, income would be expected to decrease and maintenance expenditure to rise. However, as part of the deal, Russia has agreed to fix transit fees over the next five years at a higher level to allow Ukraine to sustain its roughly $3 billion in revenue even though volumes will halve, Stratfor reports.

It will be interesting to see whether pragmatism and compromise can prevail over the completion of the new Nord Stream 2 and TurkStream pipelines — not between Europe and Russia but between Europe and the U.S.

According to Reuters, President Donald Trump signed a bill late this month imposing sanctions on the Nord Stream 2 gas pipeline project led by Gazprom, Russia’s state-controlled gas company. The project aims to send gas under the Baltic Sea, bypassing Ukraine and doubling the capacity of the existing line.

Source: Stratfor

The threat of sanctions blocking access to the U.S. financial system forced Allseas, a Swiss-Dutch company that lays deep-sea pipe, to suspend work on the project. All but a 100-mile (160-kilometer) stretch remains to be completed, the article states.

Most European countries are furious at the U.S. action, seeing it as interference in an internal European project. The U.S. has been against Europe’s greater reliance on Russian gas since the Obama administration on the grounds it strengthens Putin’s economic and political grip on Europe. Europe suspects the U.S. simply wants to substitute cheap Russian gas for more expensive U.S. liquefied natural gas (LNG) shale gas exports, arguing that if the U.S. were really concerned about Russian influence over Europe, the president would be a stronger advocate of mutual defense and, in particular, NATO.

For now, work toward completion of the last 130 kilometers of the Nord Stream 2 pipeline has been stopped by the sanctions threats, but Russian state media reported Gazprom’s pipe-laying vessel Akademik Cherskiy, currently in the far east, would be brought to the Baltic to complete the pipeline regardless.

Europe’s desire to see dialogue and cooperation with Russia, as opposed to distrust and detachment, may yet prove naive.

Europe relies on Russia for something like half its natural gas supplies and Russia has shown it is not above restricting supplies to achieve its political ends, as happened in 2014 after the Russian annexation of Crimea and Moscow’s attempts to pressure Ukraine — and, hence, Europe — by cutting off gas supplies.

Some European countries agree with the U.S. that diversification, whether to the U.S. or elsewhere, would make more sense, however convenient and cheap Russian gas is. Over-reliance is clearly a risk, however strongly many on the other side argue Russia needs the revenues even more than Europe needs the gas.

Keep up to date on everything going on in the world of trade and tariffs via MetalMiner’s Trade Resource Center.

Mark it down as yet another item on the world’s agenda to be resolved in 2020 requiring compromise and pragmatism all round.

As if the downturn due to a trade-war-induced slowdown in China were not enough, the European automotive industry is facing the challenge of a rapid switch from diesel to petrol engines that has been gathering pace for the last two years. At the same time, the industry has also had to deal with the implementation of new legislation designed to reduce car makers’ overall fleet emission levels.

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An article in the Financial Times explains the impact of the new legislation on Europe’s automakers, an industry that supports some 14 million workers across the continent.

Quoting Max Warburton, an auto analyst at Bernstein, the article says each carmaker faces its own CO2 target based on the weight of its vehicles. A business selling smaller cars, such as PSA, therefore has a lower CO2 target than a company with a heavier average vehicle, such as Mercedes-Benz owner Daimler.

The targets for each company vary from around 91 g/km to just over 100 g/km. Some carmakers, like PSA, have already made good progress, switching less fuel-efficient, four-cylinder GM engines in their new Astra range to new three-cylinder PSA engines has improved efficiency by some 21%.

However, carmakers like PSA do not have a lot of luxury saloons and SUVs in their lineup. Daimler, BMW and JLR do, and the situation is made worse by a rise in sales of such vehicles in recent years.

Europe — once the home of the small, fuel-efficient compact — has fallen in love with the SUV.  Some 40% of cars sold in the E.U. are now SUVs and automotive carbon emissions have, as a result, risen for the first time in a decade.

Potential fines for missing these new fleet emission limits are punishing, the FT states. Every gram over the target incurs a penalty of €95 — multiplied by the number of cars sold by the carmaker, the costs could be crippling. “It’s just stunning how much is going to have to be achieved in the next 18 to 24 months,” Warburton is quoted as saying.

If the industry sold exactly the same mix of vehicles in 2021 as it did last year, carmakers together would face penalties of €25 billion, the Financial Times reports.

This comes on the back of 17 months of slowing car sales in China, Germany’s biggest auto export market, and the losses being sustained on the sale of every electric vehicle (EV) sold, such as they are. EV sales in Europe have stalled without heavy subsidies: the buying public is, well, not buying.

Relatively higher prices and range anxiety, exacerbated by inadequate charging infrastructure and long charging times, are putting off buyers despite boosters suggesting the EV market is on the cusp of take-off.

European carmakers are already reining back sales of luxury gas guzzlers like Mercedes AMG range in order to help meet the new targets, but those are by far the most profitable part of their range — putting overall company profitability under pressure.

Job losses, even in highly protected job markets like Germany where an axed position is estimated to cost the employer around €100,000, are likely over the next 2-3 years. A separate Financial Times article states in the next decade almost a quarter of a million auto jobs will be lost in the country, quoting Ferdinand Dudenhöffer, the director of the Center for Automotive Research at the University of Duisburg-Essen.

The article goes on to report German automakers and part suppliers, from Daimler and Audi to suppliers including Continental and Bosch, have already announced around 50,000 jobs will be lost or are at risk so far this year, as their traditional businesses become less profitable. This comes at a time of potentially crippling investment demands in the switch to EV production and development of the supply chain such as battery plants.

The Financial Times estimates the German car industry alone, which directly employs 830,000 people and supports a further 2 million in the wider economy, will be forced to plow some €40 billion into battery-powered technologies over the next three years. Job losses so far have been limited by automakers’ relative healthy profits this decade.

From 2020 onwards, however, the situation is set to deteriorate as overall profitability suffers. “No one will survive in the form they exist today,” Ralf Kalmbach of consultancy Bain & Co, who has spent 32 years advising German carmakers, is quoted as predicting.

The E.U. is making some concessions to limit the damage. Carmakers will be measured on only 95% of their fleet in 2020, giving them a little breathing space to continue selling their most-polluting — and often most-profitable — vehicles longer.

But unlike the U.S., European firms cannot buy and sell credits, they can only pool overall fleet results with competitors, which naturally carries a cost.

Keep up to date on everything going on in the world of trade and tariffs via MetalMiner’s Trade Resource Center.

Ultimately, legislators and the industry will have to find solutions to redress the imbalance between what consumers want to buy and what manufacturers want to sell them. That will require a combination of penalties, incentives, investment and rapid technological innovation – a challenging and heady combination of demands to be met in the first half of the coming decade.

In early June, automakers Fiat Chrysler and Renault looked as if they were on the verge of a 50-50 merger that would have created a $35 billion global auto giant, the No. 3 automaker in the world.

But almost as soon as the deal seemed done, it collapsed.

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Hemmed in by labor unrest, characterized most strikingly by the yellow-vest protests, Paris could not risk the loss of influence at the merged business. Its 15% shareholding in Renault would have been cut in half and with it any hope of stemming French jobs losses at a merged multinational operation.

A ‘European thing’

As Business Insider reported at the time, the proposed merger was largely a “European thing.”

FCA’s U.S. operations were and remain a cash cow, prospering on SUV and pickup sales; however, the Fiat brand has been a notable failure in the U.S. market.

Renault hasn’t been a factor in the U.S. since the early 1990s, and neither company is strong in China, the world’s largest car market.

So FCA went looking for a new partner and, ironically, seems to have found it in another French group: PSA, the owner of Peugeot.

Merger money

Fiat Chrysler and Peugeot agreed this week to a 50-50 merger to create the world’s fourth-biggest carmaker with revenues of €170 billion and a combined workforce of about 400,000. The intention  to invest in new technologies, such as electric vehicles (EVs), at a time of profound and challenging change in the automotive industry.

The Financial Times reports the merger of Peugeot and Fiat will form a group with recurring operating profits of more than €11 billion and sales ahead of General Motors and Hyundai-Kia.

The Financial Times went on to say, based on the firms’ current market capitalizations, the new entity would have an equity value of about €41.1 billion.

Despite targeting annual cost savings of around €3.7 billion, PSA and FCA said no plants would close as a result of the merger.

But no plant closures doesn’t mean no job losses.

The article quotes Ferdinand Dudenhöffer, of the CAR-Center Automotive Research at Universität Duisburg-Essen, who said PSA’s Opel unit would be the “loser” in the merger and predicted at least 10,000 engineering job losses overall. “Opel’s role in the new group will become weaker. [It will have to] fight alongside mass-market brands Fiat, Citroën and Peugeot for the same customers,” he is quoted as saying.

Challenges ahead

FCA and PSA are not alone in facing profound challenges over the next few years created by looming legislation led by Europe over emissions targets.

The pressures on automakers are being exacerbated by a slowdown in the global automotive market, just as cash flow is being squeezed by the massive investment required for a switch to electric vehicles.

In an upcoming article, we will explore the dichotomy automakers in Europe are facing. Driven by legislation to reduce average fleet emissions, automakers are bringing a wave of new EV models on to the market, but the general public remains wary of EVs and is not making the switch (except in a few incentive-driven countries).

Keep up to date on everything going on in the world of trade and tariffs via MetalMiner’s Trade Resource Center.

The FCA-PSA merger may give the combined group the financial clout and resources to make the aforementioned transition.

But until the paying public can be persuaded to change, government legislation might create the greatest challenge to carmakers in the new decade.

Despite a somewhat chaotic year, with markets buffeted by trade wars and geopolitical risks, the global economy has continued to expand (albeit at a slower pace than previously).

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The market’s reaction to media coverage of trade wars has no doubt been a factor in depressing share price performance and, more importantly, to postponing investments that would otherwise have stimulated more significant growth.

Economic growth in some regions has undoubtedly been hit by the knock-on effects of the trade war.

China has arguably been hit the hardest, but the drop in consumption there has spilled over into major suppliers of luxury goods, autos, and machinery — such as Germany.

But a recent Stratfor report paints a more promising picture for 2020, suggesting a combination of factors should see a gradual recovery.

Source: Stratfor

The recovery would — indeed, could — be much stronger but for politicians’ unwillingness to use fiscal stimulus in some countries.

Again, Germany leads the pack here, as a deep-seated commitment to always balance the budget philosophically prevents them from using fiscal stimulus, even though it would be of considerable benefit — not just to Germany but also its neighbors in the E.U.

By keeping growth sub-optimal in Germany, growth remains anemic across much of the E.U. Stratfor predicts 1% growth for 2020. Only the U.K. may manage better, now that it has settled its political infighting and the re-elected Conservative government budgets for substantial infrastructure investment, said to be £100 billion over the next five years.

Europe is not alone in having limited fiscal firepower to boost growth. As Stratfor observes, emerging markets are also set for a difficult 2020.

Argentina will be mired in an economic crisis, the Stratfor report says. Brazil and India will each struggle to make the structural reforms necessary to resume higher levels of growth. The Turkish economy, driven by unsustainable levels of stimulus, may continue its slow recovery — but no quick acceleration is likely.

Meanwhile, developed markets have no capacity to cut interest rates and limited appetite for quantitative easing along the lines employed following the financial crisis.

It is to be hoped that with the upcoming 2020 elections, President Donald Trump will make resolving trade disputes a key goal.

The United States-Mexico-Canada Agreement (USMCA) is expected to be approved by Congress after the White House and House Democrats recently reached an agreement over revisions.

Meanwhile, the U.S.-China trade war is showing some encouraging signs of a thaw but still has a long way to go. U.S.-E.U. discussions probably have a lot of disappointments in store before a deal is struck.

Broadly, though, progress in these areas should reduce tensions and encourage investment. Stratfor makes the point that the impact of these disputes is waning (see the graph below):

Source: Stratfor via Bloomberg Economics

As time goes by, the status quo becomes the new normal and firms find a way to cope. If this is correct, it means 2020 should be less disrupted than 2018-2019 has been and offers the prospect of continued growth — maybe not strong growth, but certainly positive.

Keep up to date on everything going on in the world of trade and tariffs via MetalMiner’s Trade Resource Center.

After 10 years of a bull market, that’s probably the best one can expect from a late-cycle growth curve.