Author Archives: Stuart Burns

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Copper is on a tear.

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Copper rose to its highest point in nearly four years last week following further curbs on domestic production in China, closing at new year-to-date high for 2017. LME and Comex copper continued its longest bull run in more than a year, after closing at its highest level since January 2014 on Dec. 22.

Analysts suggest prices are being lifted by hopes that a stronger U.S. economy under a lighter tax regime will fuel demand for the metal. Maybe of more importance is the largest copper producer in China, Jiangxi Copper, was rumored to have been ordered on Monday to halt output for at least a week before a further assessment based on local pollution levels. The effect has been to boost support for Shanghai copper, which rose to a 2-month high. The firm disputes it has been ordered to halt production, but so bullish is sentiment the market has shrugged it off and continued to buy copper.

Following years of oversupply, robust demand for copper, particularly from buildout of charging networks required for electric cars and infrastructure for the integration of renewable energy investments, is driving expectations of further price rises, according to the Financial Times. As a result, prices hit U.S.$7,312/metric ton last week, the highest level since January 2014, as import data for China showed November refined metal imports jumped 19% to 329,168 metric tons.

While demand appears robust, the impression is developing that the supply market will be squeezed next year.

The Financial Times reports that analysts at Citibank estimate that nearly 30 labor contract negotiations are set to take place in copper-mining countries next year, potentially affecting 25% of global mine supply.

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Q1 could see prices take a breather and may present a time to buy forward if prices come off a little. Chinese New Year holidays often see a run-up in demand before the holidays, but overall the quarter suffers from the prolonged closedowns.

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Do we have a case of genuine material injury to U.S. jobs or do we have a case of commercial shenanigans in Boeing’s application to the U.S. Department of Commerce reported imposition of triple digit duties on Bombardier’s sale of new C-Series jets to number two U.S. airline Delta Air Lines?

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Boeing had called for countervailing duties of 79.41% to offset what it described as harmful Canadian subsidies to Bombardier. It also identified a “dumping margin” of 80.5%, based on the unpublished prices at which it claims Bombardier sold the C-Series planes to Delta, for a combined border charge of just under 160% on the Bombardier jets.

Delta, placed an order for 75 of the 100- to 150-seat single aisle C-Series jets some 18 months ago, according to Reuters. While the list price starts at $79.5 million, new project early sales typically enjoy substantial discounts to generate interest in the program and generate an early start to production. In that respect, initial launch discounts are common in the airline industry — whether they constitute dumping is debatable. It may be simplistic, but if all airlines do it then no one airline should be penalized.

Boeing claims that Delta received the planes for $20 million each, well below an estimated cost of $33 million and below what Bombardier charges in Canada. So far inconclusive, the numbers suggest — possibly, if correct — extreme discounts and some action may be valid.

However, dumping prices are usually imposed on products imported into a country. In this case, Delta’s order is to be manufactured on a new assembly line at Airbus’ factory in Mobile, Alabama, technically making it a U.S. airplane.

But this assembly option has arisen only in recent months following Airbus’ surprise move last October buying a majority stake in the struggling C-Series program.

At root, this could be a large part of the issue.

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It is often easier to criticize from the outside than to resolve from within — that is as true of boardrooms as it is of government.

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It should come as no surprise that President Trump’s well-intentioned claims during his election campaign to bring American jobs back to American steel mills — “When I’m president, guess what, steel is coming back to Pittsburgh,” he said during an April 2016 rally — have proved much harder to achieve in office than may have appeared to him and his supporters on the campaign trail.

Some believe the protectionist, low-hanging fruit of withdrawing the U.S. from the Trans-Pacific Partnership and ordering investigations into trade pacts such as NAFTA and the KORUS FTA have, if anything, exacerbated problems for domestic steel mills by prompting a flood of steel imports from firms trying to bring in steel before tariffs are hiked or other barriers are imposed. The New York Times has been accused — with some justification — of running an agenda counter to the Trump administration’s policies, but the facts are clear: steel imports have boomed since Trump came into power.

Source: New York Times

U.S. steel imports were up 19.4% in the first 10 months of 2017, compared to last year’s figures, according to the American Iron and Steel Institute (AISI). The New York Times points to ArcelorMittal’s decision to close a furnace at its Conshohocken, Pennsylvania steel plant in the new year, laying off 150 of the plant’s 207 workers as evidence of the impact. ArcelorMittal blamed low-priced imports, as well as low demand for steel for bridges and military equipment — both areas Trump promised he would make a key focus for investment if elected.

Although progress on trade issues has come too late for workers at Conshohocken, it is not too late for the industry as a whole.

The administration appears at odds over how to achieve control over imports, with some advocating hefty tariffs, others quotas, and all awaiting the results of the Department of Commerce’s 232 investigation by Jan. 15. The president will then have 90 days to decide what to do, the New York Times states.

If supportive and the report is acted on, plants like Conshohocken stand to benefit the most. Although underutilized at present, its speciality is ultra-strong, military-grade steel (a national security requirement if ever there was one).

Blocking imports, though, is not universally popular.

The auto industry frets that reducing imports will raise prices and impact competitiveness among domestic automakers, resulting in job losses worse than those experienced by the steel industry.

Source: New York Times

The steel industry itself has largely maintained employment over recent years after recovering from the financial crisis of 2008, despite investing in automation, which has helped improve efficiencies and productivity in the face of significant imports from Canada, eastern Europe and elsewhere (China features less nowadays and is well down the list due to earlier anti-dumping legislation).

Quite how the administration balances these competing priorities of domestic steel producers versus domestic steel consumers remains to be seen. Rhetoric so far this year suggests sympathies lie firmly with producers, but legislation needs to be finessed enough not to cause more damage than it intends to avoid.

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As we say, criticizing from the outside is much easier than finding solutions from within. Coming up with viable solutions will be the administration’s big challenge in 2018.

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Last week, China issued a global call to for countries to support the World Trade Organization (WTO) and the principles of global trade in the face of a perceived pullback from the U.S.

This week, China is risking another trade dispute by cutting export taxes on some steel products and fertilizers while completely canceling those for sales abroad of steel wire, rod and bars from Jan. 1, according to a Ministry of Finance announcement on Friday reported by Reuters. With the move, it appears, comes the expressed intention of boosting exports into markets already perceived as oversupplied.

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Just last month, the G20 convened a meeting in Berlin which included discussion of how to tackle excess global steel capacity over widespread fears China is using export markets to sell excess capacity.

That is a position China denies and points to the enforced closure this year of 100 million tons of legal and 120 million tons of illegal steel production. In reality, though, although the closure of illegal capacity — much of it scrap-based electric arc furnace (EAF) plants — the “closure” of legal capacity has been a mixed bag. Much of it was the permanent shuttering of already idled, older steel capacity.

China is not alone in having excess steel capacity — it arguably is not even in the forefront of global low-cost suppliers.

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Wondering why aluminum prices have pulled back from highs of $2,200 per metric ton on the LME?

After all the hype about environmentally driven smelter closures in China this year and the additional curtailments to be forced on the market in certain provinces during the winter heating seasons, most were expecting the run up in prices to hold steady (at least during the winter period).

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In practice, although prices have made impressive gains from lows of $1,700 per ton earlier this year to five-year highs of over $2,200 per metric ton, it was largely on the pretext of constrained primary metal supply that it is beginning to become apparent is not happening.

According to China’s National Bureau of Statistics (admittedly not the most reliable of sources) Reuters reports China’s aluminum smelters churned out 2.35 million metric tons of the metal in November, down 7.8% from 2.55 million tons in October and down 16.8% from a year ago.

In reality, while headline smelter capacity has been closed, new planned capacity has continued to quietly come onstream.

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Arcane as it sounds, by refusing to approve new judges to the World Trade Organization’s (WTO) appellate panel (a form of supranational court in all but name, a Telegraph article explains) the U.S. is depriving the panel of the resources to function.

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The panel should have seven judges, such that at least three are always available to hear cases. With one judge having retired, the panel is down to six; by the end of this month, it will be down to four.

There is already a 40-case backlog and resolutions are taking too long, the Telegraph reports. Reducing the panel’s capacity further would effectively disable one of the WTO’s most important and successful functions, which is to settle disputes between states in a rules-based environment.

The U.S. action is driven by a deep-rooted dissatisfaction with the way the WTO operates and is aimed at achieving change rather than a desire to leave – despite what President Donald Trump tweets in soundbites.

Not Playing by the Rules

Firstly, the U.S. believes — with considerable justification — that some large developing countries do not abide by the rules, or rather hide behind the rules.

China, for example, is the world’s second-largest economy and has a disproportionate share of global trade. Yet, its status as an emerging economy allows it to avoid many of the constraints placed on developed economies.

Even after 16 years of WTO membership, China still has a massive state sector enjoying far-reaching subsidies and favored treatment by the state. In fact, recent actions in the name of combating pollution have, if anything, concentrated steel production even more among state producers as China, has shut 100,000 tons of electric arc furnace (EAF) private production capacity, thus concentrating and supporting power among the largely state-owned traditional blast furnace producers.

U.S. Perception of WTO Activism

The second issue is the U.S. believes the WTO has become more activist over time, deliberately dismantling protectionist measures in its rulings, ostensibly in the name of promoting global trade but to the detriment of major importers (like the U.S.).

Some will undoubtedly criticize the U.S. for its actions, but better to force through change than wholesale resignation from the organization and the rules-based system that has done so much over the last 20 years to resolve disputes amicably and avoid trade wars.

Even if changes are accepted to the WTO rules, patterns of global trade will take time to adjust.

Steel jobs are not going to flood back to the U.S., regardless of the president’s assurances. As the article points out, the U.S. already has massive tariffs in place against Chinese steel, but the U.S. steel industry is not powering back to employment levels seen before the WTO.

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Trade imbalances within the North American Free Trade Agreement (NAFTA) fall outside of the WTO remit and are a topic in their own right, but arguably the U.S. imbalances with the rest of the world have gone on for long enough.

Providing a ready and reliable export market to emerging economies has lifted hundreds of millions out of poverty and achieved an industrial revolution in Asia and South America; that should now allow those countries to trade on equal terms.

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As befits a letter from European treasury ministers to U.S. Treasury Secretary Steven Mnuchin, the wording is couched in polite and respectful terms. The letter acknowledges the U.S. has every right to set its internal tax code, but draws attention to proposals they fear could have serious consequences for global trade.

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According to an article in The Telegraph, the letter asks the U.S. government to consider certain issues raised by a series of measures President Donald Trump has put forward that would increase the tax burden on foreign companies operating in the U.S. and distort domestic U.S. manufacturers’ behaviour.

“It is important that the US government’s rights over domestic tax policy be exercised in a way that adheres with international obligations to which it has signed up,” the letter is reported to say. “The inclusion of certain less conventional international tax provisions could contravene the US’s double taxation treaties and may risk having a major distortive impact on international trade. We would therefore like to draw your attention to some features of the proposals being discussed that cause significant concerns from a European perspective.”

The diplomatic terms mask serious worries in the treasury departments of the signatories: Britain, France, Germany, Italy and Spain. President Trump’s intention is to encourage reshoring and the return of American jobs perceived to have been lost in the process of globalization.

But the fear is the proposals would seriously hamper trade and investment — not just between the U.S. and Europe but also between the U.S. and the rest of the world, without achieving the president’s desired outcome.

According to the article, one of the issues is a proposed cut in corporation tax from 20% to 12.5%, specifically for income derived from exported goods. The treasury ministers (not unreasonably as that’s clearly what it is designed to do) believe the tax cut would violate U.S. obligations under World Trade Organization (WTO) rules, which ban countries from introducing fiscal incentives that distort trade by making exports cheaper or imports more expensive.

The ministers are also quoted as saying that a 20% “excise tax” on financial transactions, including on a U.S. firm importing goods from its own factories abroad, could “discriminate in a manner that would be at odds with international rules.”

The U.S. Senate has already agreed to moves that would lower the corporate tax rate from 35% to 20%, and some Europeans have objected, saying it would go against a series of agreements between the U.S. and Europe to keep corporate tax rates broadly in line with each other.

That argument, however, is on shakier ground. The U.K., for example, already has a 19% corporate tax rate and some smaller European states have even lower rates.

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Whether the U.S. will take notice of Europeans’ concerns remains to be seen. The president’s ambivalence to the WTO is well known, but even he can see such extreme moves as differential taxation for domestic and imported goods could kick off a tit-for-tat reaction; that is no more in the U.S. interest than it is for other major trading blocs, like Europe.

Liquefied natural gas . donvictori0/Adobe Stock

Natural gas has long been promoted as a less-polluting alternative to coal and less-costly alternative to nuclear power.

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Its green credentials are not whiter than white, but relative to coal, modern combined cycle gas turbine power plants (CCGT) are highly efficient, emit low levels of pollution and crucially can be turned on and off quickly to provide intermittent or peak power demands, in addition to balancing more variable sources (such as renewables).

The Non-Nuclear Option?

After Fukushima, many major economies have moved away from nuclear.

In addition to Japan’s near complete shutdown of its nuclear generating capacity, Germany followed suit. Even France, long a champion of nuclear power, has said less of its generating capacity will be met by nuclear in the future.

The expectation was that natural gas would be the natural successor to nuclear power, as countries took an increasingly responsible view to reducing carbon emissions. But despite a surge of investment in natural gas liquefaction facilities and the construction of new liquefied natural gas (LNG) carriers, the growth in LNG consumption has been much lower than expected.

LNG Demand Drops in Europe

In fact, some markets are going backwards, the FT reports.

Natural gas demand in Europe is 12% lower than it was 10 years ago. Chinese and Indian demand continues to grow, but the dramatic gains by solar power and wind, where costs have fallen 85% since 2009, have severely limited the prospects for natural gas as a power source.

Indeed, India’s entrenched coal industry and coal-based electricity generating capacity means its future is likely to be predominantly solar and coal — not natural gas at all.

China, like Europe, has adopted renewable power (particularly wind) on the basis of cost, as costs have tumbled for both solar and wind (again, particularly wind) to below the cost of natural gas.

As new supply-side capacity comes onstream, the market for natural gas has shifted from long-term contracts signed prior to new LNG facilities even being started to a competitive spot market; yet even here, prices are not low enough to spur a significant switch from renewables investment to gas.

Only in the U.S., where shale gas prices are low, has natural gas consumption risen significantly. However, even that is more geared toward chemicals feedstock and to supply exports rather than to meet rising demand due to power generation.

Looking Ahead

The future, at least over the next few years, is not any rosier for gas producers.

U.S. production is rising, Russia is opening up new resources in the north and is looking to export more, projects in Australia have created a major competitor to Qatar and Middle Eastern suppliers. Meanwhile, the world’s second-largest reserves in Iran are waiting for investment to bring them to market. The Financial Times suggests new finds in the eastern Mediterranean by Israel, Egypt, and off East Africa may never see sufficient investment to develop liquefaction and export, and are destined only for local consumption.

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This is not exactly music to the ears of aluminum producers for whom LNG liquefaction and regasification plants and the construction of LNG carriers has been a particularly profitable niche industry over the last decade. LNG gas codes call for controlled chemistry and manufacture that has created a higher value add industry for more sophisticated and capable producers.

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ArcelorMittal’s proposed purchase of Italy’s troubled Ilva steel plant was hailed by nearly all parties as a successful solution to one of Italy’s thorniest and longest-running industrial and environmental problems.

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The Ilva steel plant has been dogged for years by under-investment, losses and, most seriously, repeated toxic emissions linked to high cancer and respiratory disease rates in the area.

ArcelorMittal had undertaken to clean up the plant and tackle open-air mineral waste deposits that, according to the Financial Times, spew such serious pollution into the air that the local Taranto authorities have to declare periodic “wind days” (on which schools near the plant are forced to close to avoid dust exposure).

ArcelorMittal’s €1.8 billion (U.S. $2.15 billion) purchase of the plant from the Italian owners would have saved Italy’s largest steel works from insolvency, securing some 20,000 jobs at the plant and supply chain but also, according to pledges made by the firm, would clean up the environmental problems.

Yet politicians in the Taranto and wider Puglia area have mounted a legal challenge to the takeover on the grounds that it does not tackle pollution from the plant quickly enough.

No one said doing business in Italy was easy — but many fear ArcelorMittal could walk from the deal if local politicians continue to obstruct the process.

The European competition authorities in Brussels have already raised objections to the deal on the grounds that ArcelorMittal would control more than half the European market in premium galvanized steel should the purchase go through without divestments in other areas.

Fortunately for the local community that desperately needs the deal to ensure employment while addressing the environmental catastrophic they find themselves in the European steel market is doing rather well at the moment and it remains in ArcelorMittal’s interests to secure the plant if the local communities interests can be shown to be taking precedence.

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For the time being though the combination of EU and local opposition means the fate of one of Europe’s largest steel plants remains in the balance.

China has always had a long-term dream — America has always scoffed — at the idea that one day China’s economy may exceed that of the U.S.

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Many still believe that is inconceivable. However, relentless growth at 6% gradually has its effect, and a Financial Times article quoting EIU research states that at current growth rates, it is likely that China’s GDP will exceed the U.S.’s by 2026, less than 10 years from now.

The key phrase here is “at current growth rates.”

U.S. growth is picking up and China’s is slowing down from its recent trends over the last decade, but even so the idea is no longer fanciful. Which country has the largest GDP though is, in and of itself, less of an issue. More important is which has the highest productivity, the greatest innovation and attracts investment in new technologies; those measures point the way to future prosperity.

The U.S. has always prided itself as having the greatest innovation, creating the new companies that rise from disrupter start-up to billion-dollar global brands.

Thanks in part to Silicon Valley, that is no false claim.

The word “unicorns,” referring to start-up companies that are valued at over a billion dollars (nearly all in tech or tech-related sectors) was coined only in 2013, but many of the names we are familiar with today are U.S. companies.

It seems almost inconceivable to us in the West that places like Shenzhen, on China’s border with Hong Kong, and Hangzhou — the city near Shanghai where Alibaba was founded — could challenge Silicon Valley as the global center of cutting-edge tech, but that is exactly what the Economist is suggesting is underway.

As the article says, China is catching up with the U.S. in its creation of unicorns. In June 2016, one-third of the world’s 262 unicorns were Chinese, representing 43% of the $883 billion worldwide valuation attached to these companies, according to the McKinsey research.

Source: Financial Times

The Financial Times reports that last year, according to McKinsey research, China ranked in the top three countries for venture capital investment in some particularly competitive fields of digital technology, including: virtual reality, autonomous vehicles, 3D printing, robotics, drones and artificial intelligence.

Beijing is actively supporting firms in these new fields, the Chinese have always played the long game with patience and planning. Ten years from now these technologies will be major disrupters of nearly every walk of life, business and even society.

Artificial intelligence and robotics alone will change the way businesses operate and it is probable many businesses will not survive the disruption such technologies will introduce.

Already, Chinese consumers are more, as the Financial Times would term it, “at ease” with technology. For example, mobile payments in China outstrips those of Americans by 10-to-1 last year, and China’s ecommerce market is already twice the size of the U.S.’s. Nor are Chinese tech giants like Tencent or Baidu as readily accessible to Western investors, the game is rigged by Beijing such that their firms invest heavily overseas but foreign investors are barred from taking direct stakes in the equivalent Chinese firms.

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The landscape is changing fast and is not immediately apparent to those of us in the West, but the direction is clear and progress relentless. New technologies will increasingly be dominated or heavily influenced by Chinese firms in the next decade.