Author Archives: Stuart Burns

Despite steel producers’ best endeavors, aluminum continues to make inroads into the industry’s previously unassailable position as construction material of choice for the automotive industry.

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Stronger and, hence, thinner grades of steel allow automotive body formers to find new applications for steel where aluminum seemed like the obvious choice. However, at best this is slowing the uptake of the light metal, not turning the situation around.

Novelis’ announcement that it is bringing its automotive alloy Advanz 6HF – e/s200 to North America after successful development and uptake in Europe only re-enforces the impression that both steel and aluminum producers are innovating and investing like mad — but aluminum is gradually winning market share.

And it is not hard to see why. Aluminum has lower mechanical properties than steel when compared on samples of the same thickness, but has the far lower weight, 2.7g/cm3, compared to 7.85g/cm3. This means thicker sections or parts can be formed while still achieving substantial weight gains.

Novelis Advanz 6HF – e/s200 is one of a range of alloys the firm has developed broadly based on the 6000 series with careful control of alloying elements and production giving enhanced properties. But in some applications producers have developed 7000 series alloys as used by the aerospace industry in aircraft wings and bodies to achieve even higher properties.

7000 series alloys are harder to form and more expensive but have even higher mechanical properties — circa 600MPa compared to circa 300Mpa for 6000 series — and allow automakers to achieve better weight gains. In an Aleris presentation, the company illustrated how the use of 3.5 millimeter thick 7000 series alloy in the manufacture of B pillars achieved the same safety crash performance as 2 mm boron UHS steel, but resulted in a 40% weight saving.

As if to reinforce Novelis’ announcement, competitor Aleris has just opened its new $400 million auto body sheet production centre in Lewisport, Kentucky, and started delivering product to customers. Like Novelis, the firm uses primarily scrap as its feedstock, boosting its green credentials. Aleris produces a range of proprietary alloy grades with enhanced properties over common 6061 grades specifically tailored for a variety of automotive applications. The 6000 series is the industry’s grade family of choice, as they sit comfortably between cheaper and less strong 5000 series and stronger but more expensive (and often harder to form) 7000 series.

In Europe, manufacturers like Audi are going Body in White — meaning the whole structural body shell, plus closing panels like hood, trunk and doors, as wholly or largely in aluminum.

Not surprisingly, this is more at the premium end of the market, where the pressure to improve fuel economy from larger engines is greatest and where higher margins can more readily absorb the cost of using aluminum.

But you do not need deep research to show the direction — Repair and Drive in a recent article quoted a Ducker Worldwide study that predicted that aluminum doors will have gone from virtually zero use as a material in 2014 to 25% of the North American fleet in 2020.

Underlining how rapid the uptake is underway, the consulting firm also estimated 71% of hoods would be aluminum by 2020, up from 50% in 2015, and bumper beams would grow from 33% aluminum in 2015 to 54% in 2020, the article explained.

The current administration’s adverse reaction to broader climate change policies is not the issue here. Automotive is a global business and U.S. manufacturers need to be at the forefront of design and material use to maintain their global positions. The legislation for ever higher fuel efficiency is going to remain a relentless one-way dynamic, encouraging automotive construction to use ever lighter materials and aluminum producers to continue to innovate with alloys and production processes to meet the industry’s demand.

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For now, the focus is on improved 6000 series; in time, more components will justify the use of 7000 series alloys. Either way, the industry has shown it is willing to spend big bucks to stay in what is proving to be a very lucrative race.

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Every action has an equal and opposite reaction, said Newton, and John Locke was not alone in discussing the principal of unexpected consequences — so the interest Chinese aluminum smelters are showing in expanding overseas should come as no surprise after Beijing has forced many aluminum producers to close capacity in the country ahead of the winter heating season.

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China Hongqiao Group , the world’s biggest aluminum producer, is looking into the possibility of moving recently shuttered illegal or un-permitted smelting capacity overseas, according to Reuters.

Hongqiao had to shut 2.68 million tons in annual smelting capacity in its home province Shandong at the end of July. The firm is rumored to be looking at moving this capacity to Indonesia where it already has a 1-million-ton alumina refinery.

“It’s a good time to go global,” said Chen Xuesen, deputy director of the strategy development department at state-owned Chinalco, underlining the fact that Chinese smelters are not content with the largest domestic market in the world. With that constrained, they are now looking for further expansion overseas.

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Rising wages would traditionally sound a warning bell for manufacturing companies, but a recent article in The Economist explores many positive aspects of the current surge in blue-collar wages in the U.S.

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Stagnant wage growth since the financial crisis has not only been a reflection of poor productivity growth but also, many would argue, laid the foundations for the populist support which swept Donald Trump to power. The Economist notes that in the five years following the end of the recession from June 2009, wages and salaries rose by only 8.7%, while prices increased 9.5%. In 2014 the median worker’s inflation-adjusted earnings, by one measure, were no higher than they were in 2000.

Yet in 2015, the article notes, the median household income, adjusted for inflation, rose by 5.2% followed in 2016 by another 3.2%. Rather than abating, this year to the third quarter wage growth for factory workers, builders and drivers outstripped that for professionals and managers, with some blue-collar workers seeing rises of 11% in the buildings trade.

Unfortunately, this is not being paid for by rising productivity.

In the manufacturing sector, for example, the article notes output per hour worked is just 0.1% higher than a year ago and remarkably has not grown at all in the past five years.  To the extent rising wage costs are being met, it appears to be due to a cheapening dollar. On a trade weighted basis, the article says the dollar has fallen by almost 9% since the start of the year. A weakening dollar and growing world economy have increased demand for American goods, with exports up in the first three quarters of the year by nearly 4% over 2016.

More encouragingly, a rising oil price has spurred investment in the tight oil and gas markets.

Data from Baker Hughes show that the active oil rig count in America has risen from 568 a year ago to 907 today. Indeed, so significant as the oil and gas industry been that the article reports UBS data saying that energy investment has driven nearly three-fifths of all economic growth in 2017. As a result, however, wage growth has not been equal in all regions. Southern oil states such as Texas and Oklahoma account for almost all the acceleration in manufacturing employment this year, whereas those areas that have been in long-term manufacturing decline have seen almost no growth at all.

So far, inflation has remained subdued despite the proportion of male prime age workers remaining close to a record low of 89%, with nearly all growth coming from increases of women in the workforce. Hopefully, rising wages will encourage more male jobseekers in the 25-54 age range to return to the workplace — a development that will be needed if rising wages are not to spur greater inflation.

And inflation is showing the first signs of reawakening. Whether that is due to unemployment falling to a 17-year low or other effects is not clear, but the Federal Reserve Bank of New York’s underlying inflation gauge has jumped to 2.96%, a post-Lehman high.

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Nevertheless, rising incomes for lower and middle earners will not only have the beneficial effect of reducing inequality. By spreading wealth amongst the wider population, it will be a greater spur to GDP than if it were concentrated in the hands of a wealthy few.

There is widespread agreement and considerable evidence to suggest the global weather patterns of El Niño and La Niña can have a significant impact on commodity prices.

But impacting average temperatures and rainfall as these weather patterns do, the most significant impact is, not surprisingly, on agricultural commodities in the grain sector.

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As Agriweb observes, “Dry weather conditions in the U.S. can threaten the development of corn, soybeans and wheat crops, and dry conditions in Argentina and southern Brazil can impact corn and soybeans.”

El Niño and La Niña broadly act as opposites, reflecting as they do the interaction of large areas of warm water in the Pacific with global weather patterns. We were under the influence of El Niño effects last year, but have recently moved into conditions meeting the La Niña pattern. The La Niña pattern is characterized by a shrinking of a large pool of warm water in the Pacific as a strengthening of westbound trade winds carry warm surface water from the east to west and allow an upwelling of colder waters in eastern regions. The overall temperature of surface water decreases and on the western side of the Pacific the arrival of warmer waters increases rainfall while on the western side cooler temperatures tend to reduce rainfall, resulting in drought conditions. The last La Nina year was 2011-2012 where drought conditions caused a grain prices to surge.

According to the Climate Change Centre, drawing on work by the National Oceanic and Atmospheric Administration (NOAA), NOAA’s National Weather Service, released in a recent report, “El Nino/Southern Oscillation (ENSO) Diagnostic Discussion,” La Niña conditions have a 65-75% chance of prevailing through to the February-April 2018 period.

But what impact can this have on metal markets?

Clearly, mining and metal extraction are less weather-dependent than the growing of crops. However, while a shortage of water for the irrigation of field crops can be dramatic for crop yields, it can also be significant for the generation of hydroelectric power for the mining sector and metal smelting in certain regions of the world.

As the above graph from a University of Sydney School of Economics paper last year illustrates, in La Niña years rainfall can be reduced in areas like the eastern Pacific such as Chile and Peru. The reverse can be the case in southeast Asia and Australia, where excessive rainfall has caused flooding and resulted in supply disruption for mining companies in the iron ore, tin and bauxite markets prompting price rises over short timeframes.

The paper suggests 20-30% of metal price variations at the one-to-two year horizon can be attributed to El Niño/La Niña oscillations.

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As a more frivolous aside, for anyone yet to book their winter ski vacation in North America this year, the developing La Niña would suggest the current outlook favours above-average temperatures and below-median precipitation across the southern tier of the United States, and below-average temperatures and above-median precipitation across the northern tier of the United States.

So, head to the northern Rockies for the snow and colder temperatures.

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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.