Author Archives: Stuart Burns

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The press has been all over the trade war-induced falls across stock markets. The New York Times reported this week that the S&P 500 was off 2.4% on Monday, the worst day since early January.

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In all, the S&P 500 is down 4.6% so far this month, while the tech-heavy Nasdaq composite index fell 3.4% — its worst decline in 2019.

European and emerging markets have likewise fallen sharply following tit-for-tat announcements between President Donald Trump and President Xi Jinping. This all comes despite the U.S. economy doing well, expanding 3.2% annualized in the first three months of the year and with unemployment down to 3.6%, its lowest level since 1969, the paper reports.

Indeed, it is suggested it is just those healthy numbers that have encouraged the president to up the ante in the face of apparent Chinese intransigence on certain key issues.

To keep stock-market falls in perspective, though they come on the back of a 17% rise so far this year, arguably the market has already achieved a year’s gains in just four months; a correction was to be expected.

The sharp falls, though, show how complacent the markets had become trusting a deal between the U.S. and China was just weeks, if not days away.

That this escalation of trade tensions came on the back of a return to robust growth is no surprise.

It is suggested by The New York Times that both sides have been emboldened by solid domestic growth, not to mention a need to pander to their domestic audiences – in Trump’s case, in the run-up to next year’s elections. Meanwhile, Xi is cognizant of his own nationalist rhetoric of recent years, making compromises to China’s Made in China 2025 march to global pre-eminence a personal humiliation.

So with the scene set for a possibly protracted standoff, you have to wonder why Trump has opened a second front with the European Union.

Conventional wisdom suggests generals wage one war at a time, as fighting on two fronts risks aligning your opponents against you and dividing your forces.

So why has the president chosen this moment to escalate his previous rhetoric with the E.U. over trade issues, threatening again in recent days to levy tariffs on automobiles from the E.U., among other categories? Possibly because the chances of securing a really meaningful victory over China are receding. Counterbalancing that with a win against Europe would allow some face-saving in the run-up to next year’s elections, but the risks are huge.

President Trump faces a May 18 deadline to decide whether to put tariffs on up to $53 billion worth of European cars. E.U. Trade Commissioner Cecilia Malmström is quoted by CNBC as saying she hopes the Trump administration could delay the deadline as it focuses on inking a deal with China, but recent comments from the White House suggest otherwise.

Trump may judge the Europeans more likely to compromise than China, as they certainly have more to lose. Europe is facing a shaky domestic economy already battered by trade tensions with China in the fallout from U.S. action, a decline in sanctions hit Russian trade and rising energy prices (in part due to U.S. action against Iran).

Last but not least, the ink is barely dry on the revised and still to-be-ratified United States-Mexico-Canada Agreement (USMCA). Cracks are showing among the trade partners, as Canada and Mexico mull tariffs of their own in order to pressure Trump to drop his steel and aluminum tariffs.

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If there is any takeaway from the current highly uncertain political and economic outlook, it is consumers need redundancy and options in their supply chains. Well-established, multiyear supply chains are having their economic fundamentals upturned on a tweet. While companies do not want to be chopping and changing suppliers on a whim, having options at least enhances supply chain durability and may just keep production lines running.

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Is President Donald Trump’s latest round of tweets and the resulting global stock market selloff just a negotiating ploy or is it the first signs the much-vaunted trade deal may not be going quite as smoothly as markets had obviously been pricing in?

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The following VIX graph of volatility illustrates better than words how investors had been assuming the trade deal was a done deal in waiting. (Instead, the U.S. on Friday, May 10 raised tariffs on $200 billion in goods from China, upping the rate from 10% to 25%, to which China vowed to respond.)

Source: Bloomberg via the Financial Times

Bolstered by stronger growth in both the U.S. and China during the first quarter, both sides seem unhelpfully bullish in the closing stages of the negotiations and, as such, rowing back on some previous commitments and playing hardball on still unresolved issues.

U.S. President Donald Trump’s renewed threat — which came to fruition — to raise tariffs on Chinese imports, specifically mentioning increasing the levy on $200 billion in Chinese goods to 25% on Friday of last week, sent stock markets into paroxysms.

The U.S. S&P tumbled as much as 2.4% earlier last week, the Financial Times reported, before it clawed back some of the losses.The European FTSE Eurofirst 300 index ended last Tuesday down 1.4% — its biggest one-day drop since February — and slipped a further 0.1% on Wednesday.

Asian markets reacted similarly, resulting in the MSCI World index of global stock markets falling 1.7% last Tuesday, its second-biggest decline of 2019. Coming on the heels of the president’s suggestion that the United States could subject remaining Chinese goods exports (worth some $300 billion to $350 billion) to annual tariffs, in addition to the previously identified $200 billion, has worried investors this deal may not be the done deal they had been thinking.

According to the geopolitical advisory firm Stratfor, up to this point China has focused its concessions on directly addressing the countries’ trade imbalance by guaranteeing increased purchases of U.S. goods and opening market access, along with addressing some structural issues. But reports from the U.S. Chamber of Commerce representatives who have knowledge of the negotiations have indicated that the White House had been backing off its demands over some structural issues, including China’s industrial subsidies and cybertheft, the firm reports.

The biggest snags now appear to be over China’s resistance to U.S. demands for legal changes addressing intellectual property theft and its disagreement with the enforcement mechanisms attached to U.S. demands. It could be that Beijing, having failed to enforce intellectual property rules itself, fears agreeing with the U.S.’s dictation of the judgement and compliance of any such agreement and, by extension, any sanctions Washington decides to impose in the future into some kind of legal framework as being an unacceptable risk.

Put simply, Beijing fears it cannot police or ensure compliance at the local level within China to any agreement reached.

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Nevertheless despite the unhelpful rhetoric and the pressure both Trump and Xi are no doubt facing from their core support — in Trump’s case to wring as many concessions out of China as originally demanded and in Xi’s case to give away as little as possible yet still achieve an agreement — and must be hampering both parties, progress does seem to be happening.

With nationalism on the rise in both countries, concessions are the last move more extreme elements in both camps will accept, but some concessions are an inevitable part of negotiation.

Maybe markets were a little too sanguine earlier this year to think it was a done deal, but nor should they be frightened off by a few tweets: an eventual deal is in both parties’ interest.

It is often tough to discern fact from fiction, particularly when it comes to corporations and politicians.

Two developments this month in Europe raise questions about the relationship and balance of influence between major corporations and government. Are corporations reacting to markets or seeking to stimulate political action is often the question?

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Following President Donald Trump’s imposition of 25% import tariffs on steel products, Europe took action to protect its domestic markets against a flood of foreign steel looking to find a new home by imposing a range of measures to monitor imports and impose safeguards.

According to the Financial Times, a European Commission official claimed the E.U. has some 52 anti-dumping and anti-subsidy measures in force on steel products, saying: “The EU reacted swiftly to the US tariffs on steel and imposed safeguard measures to protect EU industry from trade diversion.”

These measures preserve the traditional levels of imports into the E.U., ensuring fair conditions for a sector struggling with overcapacity. Even so, ArcelorMittal has said the measures are “insufficient” and announced its decision to temporarily cut production at some of its plants on the continent.

According to the Financial Times, the company said that it would idle steelmaking facilities at its Krakow site in Poland and decrease output at Asturias in Spain. In addition, it will slow down a planned increase of shipments by its Italian unit.

In total, these actions will reduce its annualized crude steelmaking production by 3 million tons — equivalent to 7% of its European output last year.

Imports are not the sole reason for the firm’s decision. The group also blamed high energy costs and increased prices for carbon credits, which polluters must use to compensate for emissions under a Brussels scheme aimed at curbing climate change. Foreign suppliers, of course, do not have to pay for carbon credits, which is another gripe of the firm; the firm would like to see a “green” tax on imports, equivalent to the carbon charges E.U. producers face, to level the playing field.

The E.U. produces 170 million tons of steel a year, yet remains heavily dependent on imports, which have the effect of dragging down market prices. As such, domestic producers frequently struggle to make a profit.

So bad had the situation got for German group ThyssenKrupp that it has been working to separate its steel and capital goods divisions for the last few years. Central to this strategy was the merger of its steel division with Tata’s European operations to create what would be the second-largest steel group in Europe after ArcelorMittal.

According to the FT, Margrethe Vestager, E.U. competition commissioner, had been taking evidence from consumers, particularly in the automotive sector, who fear the reduction in competition would give the remaining steel groups too much pricing power.

But despite working on the plan since 2017, they were scrapped last week after regulatory scrutiny from the European Commission made a deal untenable.

E.U. regulators forced ArcelorMittal to make significant divestments to gain regulatory approval for its acquisition of Italian steelmaker Ilva last year and demanded further concessions from ThyssenKrupp and Tata in return for approval.

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Who wins in politically charged Brussels remains to be seen.

With the European elections due next month, there is even more intrigue and jockeying going on in the corridors of power than normal.

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Not surprisingly, the most alarmist headlines were run by the most biased of news channels: the BBC.

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Long advocates of left-wing sympathies, the Beeb — as the BBC is affectionately known in the UK — has for many years also been leading the charge on environmental issues. Not that we have any problem with having an environmental conscience — anyone watching the rapid the bleaching of the world’s barrier reefs can’t help but feel a part of themselves die in the process — but we would much rather see the BBC reporting on sound scientific data than listen to them pushing one political angle, like some mogul-backed, partisan media outlet.

So when a BBC article shouts “UK Parliament declares climate change emergency” you expect it is possibly hyperbole. What does the statement even mean, you may ask. Are we about to be inundated by a monsoon, fry in a heatwave, be washed away in a tsunami or blown away in a typhoon?

Apparently desperate to address something other than Brexit, the British government appears likely to commit the U.K. to an even tougher carbon emissions target than it already has — indeed, tougher than any other major economy in the world.

According to the Financial Times, the proposals build on the 2008 Climate Change Act, which targeted reducing emissions by 80% from 1990 levels by 2050. The U.K. is on track to achieve this, having made steady progress in the interim with emission levels falling more than 40% over the last 29 years.

But the last 20% will be the hardest if the U.K. seeks to achieve zero emissions. The rest of Europe has signed up to similar targets, but exempted certain key industries (such as agriculture, aviation and shipping).

True zero emissions represent a significant challenge, whatever politicians may say.

It will require a sweeping overhaul of energy use from homes to transport to even what we eat. It involves a pledge to phase out diesel and electric cars by 2040, quadruple energy supplies from low-carbon sources such as renewables and supplement a hydrogen economy where natural gas is currently used (80% of British homes are reliant on natural gas for heating and/or cooking).

Heavy carbon-emitting industries will have to adopt carbon capture technology, which has to date proved less than satisfactory and expensive to operate. Nevertheless, the government has already invested some limited funds in pilot projects and has undertaken to do more.

The tough ones will be aviation (an alternative to fossil-fueled jet engines is a long way off), shipping (which is moving to 0.5% low sulfur fuel but still remains a massive source of carbon emissions) and agriculture, which is probably the worst offender.

There is no known trick of science that stops a cow breaking wind and little that can be done about the acres of corn that need to be cultivated to feed that cow. The Committee on Climate Change acknowledges one of the biggest and hardest changes will be to humans’ diets. More plant-based and less animal- and fish-based protein would have a profound impact on carbon emissions but will take a fundamental shift in the wider population’s habits.

Still, some trends are in favor of the needed changes.

Electric cars are predicted to be cheaper to buy and run than petrol- or diesel-fueled vehicles by 2030 (if not before). Wind power is already said to be cheaper than natural gas, the Financial Times says, providing storage costs to achieve continuity are subsidized, but even that may cease to be necessary as battery technology improves and wind turbine costs continue to fall.

The committee’s report suggests the changes needed, spread over the next 20-30 years, need not be onerous or disruptive to growth; indeed, they may present significant opportunities for new technologies and for the industries that exploit these opportunities.

Whether the world has 30 years, none of us knows. The U.N. says we could have just 12 years to effect change before we reach a point of no return; they may, like the BBC, be trying to promote a project fear agenda to effect change (we really don’t know).

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In the meantime enterprising firms have the opportunity to develop new products and services to meet what is already becoming a relentless process of change.

Every cloud has a silver lining.

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The International Maritime Organization’s (IMO) Jan. 1, 2020 deadline for shipping companies to use low-sulfur (0.5% max) fuel has been on and off in the news for months, but without much interest from those outside the industry or the environmental organizations that lobbied for its introduction.

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But now, with the deadline just months away, the implications are becoming more apparent.  Shipping lines are scrambling to fit scrubbers, but some are finding they have left it too late.

It currently takes some six weeks to retrofit a scrubber. With the surge in demand for scrubber equipment and a shortage of qualified engineers, yards are full of work over the next 12 months. Some 4.4 million twenty-foot equivalent units (TEU) in container ship capacity is taken out of service this year, according to JOC. That amounts to about 380 container ships and is already contributing to the worst on-time performance by carriers on the Asia-U.S. trades since 2012, the article reports.

In total some 550 box ships, totaling 6 million TEU, are due to be equipped with scrubbers — at a rate of about 30 vessels a month, consequently squeezing capacity.

Not all vessels are going for scrubbers, despite the current cost advantage.

The majority of vessels will opt to burn low-sulfur fuel oil, for which the premium is between U.S. $170 and $320 per metric ton over 3.5% sulfur fuel (apart from South America, where low-sulfur fuels already predominate and the premium is only $40/ton).

It costs between U.S. $5 million and $10 million for a scrubber system depending on the vessel and where it is fitted, plus greater maintenance and the downtime required for installation. But the price difference between low-sulfur fuel oil and heavy fuel oil can add U.S. $1 million to an Asia-Europe round trip for a ULVC.

Those opting not to fit scrubbers but pay the fuel premium are either biding their time by waiting for an installation slot or hoping the fuel premiums will fall. The change will likely also hasten the scrapping of older vessels deemed uneconomic to retrofit or operate at the higher fuel costs.

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As a result, shippers can expect rates to rise this year and next — either as a result of reduced capacity or lines paying higher bunker premiums (or both).

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What a difference a month makes in commodity markets.

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Just a month back, we reviewed the delicate balance OPEC was facing in trying to drive prices higher without having to make further cuts in output.

It seemed every time they squeezed the market higher, greater U.S. shale output slowed the advance, yet OPEC lost market share.

But now the U.S. seems to be coming to OPEC’s aid.

The market was finely balanced after a loss of output from Libya, where a civil war is raging, and Venezuela, where state bankruptcy and U.S. sanctions have put output into what appears to be, if not terminal decline, then a fall that could take many years of investment before it can recover.

The Financial Times and the Times both reported this week that moves by the Trump administration to remove waivers previously granted to key oil-consuming countries has taken the market by surprise. The news caused oil prices to spike in anticipation of the market being deprived of Iranian production.

Japan, South Korea, Turkey, India and China will, according to the Financial Times, face pressure to cancel Iranian oil imports as the U.S. seeks to increase pressure on Tehran over what it sees as its role in state-sponsored regional terrorism.

Source: Refinitiv

The oil price has already risen sharply this year. Brent crude climbed 2.6% on Monday to $73.80 a barrel, after hitting a high of $74.31 in early Asia trading following the announcement by a U.S. official. West Texas Intermediate, the U.S. marker, rose as much as 1.2% to a high of $64.74, the highest intraday level in two weeks, the Financial Times reported.

According to the Financial Times, the U.S. hopes its traditional oil-producing allies will raise output to offset further falls in Iranian supply — as they did last year — but this decision is not without complications.

Saudi Arabia and OPEC are in conflict with the U.S. in wanting higher oil prices and a balanced market, yet the U.S. is making no efforts to restrict its own shale oil output, expecting OPEC to raise or lower its supply to keep prices stable.

The latest forecasts from major agencies, including OPEC and the U.S. Energy Information Administration, see the market in a deficit of up to 500,000 barrels a day this year, before more supplies from Iran — and possibly Venezuela and Libya — are lost, the Financial Times reports.

A tighter oil market will increase gasoline prices, contrary to a campaign pledge from the president to lower them. The U.S. still imports at least one-third of its oil supply and remains exposed to global oil prices, despite being the largest producer in the world this year.

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It would appear prices could rise further as the removal of waivers begins to bite and major consumers switch to other supply sources. Despite slower global growth, energy and transport costs look set to continue to rise. (We will be covering a development in marine transport next week that predicts higher container rates in 2019-20 and suggests supply chain managers should be factoring in higher costs later this year and next.)

Reports that Panasonic is stepping back from its commitment to develop its Reno, Nevada Gigafactory with Tesla have the note of warning about them suggesting all is not well with Tesla or for sales of its new Model 3 batteries, which the new factory was designed to make, according to TechCrunch.

But Tesla blames lowered deliveries of the Model 3 on delivery problems to Europe and China, not lack of demand.

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The firm further suggests its upcoming launch of its lease option on the Model 3 in North America will substantially increase demand.

That may be so, but the row back raises questions as accuracy of the original predictions for the Gigafactory and, by extension, for wider battery demand.

The Reno facility has been a partnership between the Japanese battery giant Panasonic and Tesla, with Panasonic making the battery cells and Tesla incorporating them in its Model 3 battery packs and energy storage products, Powerwall and Powerpack.

Together, the companies have invested U.S. $4.5 billion in the facility. According to Reuters, they had been planning to expand the plant’s capacity to the equivalent of 54 gigawatt hours (GWh) a year in 2020 from 35 GWh at present, according to a report in FinFeed.

However, as of July 2018, the plant was only reported to be running at an annualized run rate of 20 gigawatt hours of capacity.

TechCrunch also cast doubts on how successfully the plant is being run. The outlet notes that as of November, Panasonic had 11 production lines operating at Gigafactory 1 and that the company planned to add two more lines by the end of the year to bring total capacity up to 35 gigawatt-hours — but it is unclear if that was reached.

Output was meant to double next year, but after citing financial reasons the two companies have said they intend to increase production from the existing equipment rather than invest in more capacity. Tesla’s record as a mass manufacturer has come in for considerable criticism over the last 18 months, first with repeated delays in deliveries of the Model 3 and now apparent significant underutilization of the battery plant.

Tesla’s Gigafactory was meant to be America’s answer to a growing Chinese dominance in battery production.

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The firm will not be alone in seeking answers to why the project is apparently performing so poorly. Simple delays in Model 3 deliveries appear to be only part of the problem.

Call me cynical if you will but Russian aluminum firm Rusal’s announcement, reported in the Financial Times last week, that it intends to invest $200 million for a 40% stake in a new Kentucky aluminum rolling mill — in partnership with privately owned Braidy Industries — has the ring of payback to it.

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The announcement comes just months after the U.S. dropped sanctions on the Russian company. The move marks the largest project to secure backing since President Donald Trump announced plans to impose tariffs of 10% on aluminum imports. As such, you can’t help but wonder what kind of “understanding” was reached that not only should Russian oligarch Oleg Deripaska park his shares in controlling En+ Group out of his direct day-to-day control, but that the group should make a major investment in U.S. aluminum production – a step domestic American producers have largely failed to do, despite Trump’s promises the tariffs would result in a wave of investment from domestic aluminum (and steel) producers.

Not that the fundamentals of the move are unsound.

Aluminum use in automotive – the intended market for the new plant’s output – is on the rise and the domestic U.S. market is painfully tight.

According to the Financial Times, under the agreement Rusal will supply the new mill with 2 million tons a year of primary aluminum for the next decade, further tying the group into the U.S. supply chain and making a repeat of the sanctions fiasco nearly impossible.

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According to Reuters, spot 62% grade iron ore for delivery to China recently rose 1.6% to $93 per metric ton and the most-traded May 2019 iron ore contract on the Dalian Commodity Exchange soared as much as 4.1% to 710.5 yuan ($106) per ton — the highest for the Asian benchmark since 2013.

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Such robust price performance was not a one-day spike, but was reflected across the week as the contract gained nearly 10% during the first week of April on a combination of strong steel mill buying and concerns over constrained supply from both Australia and Brazil.

Nor was the bullish sentiment confined to iron ore, as Reuters reported coking coal on Monday rose 1% to 1,258.5 yuan ($187.29) a ton, and coke rose 1.4% to 2,048.5 yuan ($304.86).

Demand is at its seasonal peak as the weather warms in China and construction work begins in earnest, pushing up steel futures by more than 3% in early April. According to Reuters, the most-active construction steel rebar contract on the Shanghai Futures Exchange recently rose as much as 3.6% to 3,710 yuan ($552) a ton, its highest since Aug. 22, while hot-rolled coil jumped as much as 3.4% to 3,955 yuan a ton ($588).

Such performance suggests the steel market is roaring in China, fueled by another infrastructure spending spree, but the reality is something different.

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The Trump administration announced this week it was considering the imposition of tariffs on $11 billion worth of European Union imports, said by the Financial Times to include such diverse products as passenger helicopters, Roquefort cheese, olive oil and wines.

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The move is said to be in response to harm the administration claims is being caused to Boeing by E.U. subsidies for Airbus. U.S. Trade Representative Robert Lighthizer is said to have a list of E.U. products on which he intends to levy tariffs as retaliation for long-running U.S. complaints about European aircraft development cost subsidies to the Airbus Group.

Airbus, it must be said, counters that Boeing has received, in one form or another, similar subsidies and support, an argument that has brought temporary truces over this issue in the past. This time, however, the argument appears to be swept aside by the current administration, maybe because Boeing is under intense pressure over the 787 Max grounding and new build cancelations.

Although no friend of the World Trade Organization (WTO), the Trump administration has pointed out the organization has ruled Airbus’ past payments illegal under a May 2018 ruling regarding Airbus subsidies, but Airbus claims it has since cleaned up its act and no longer follows the practices ruled against in the report.

The move by the Trump administration comes on the heels of a separate WTO ruling establishing that the U.S. had itself illegally subsidized production of Boeing aircraft — a decision that incensed U.S. officials, according to the Financial Times.

So, are we clear on who is at fault?

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