Author Archives: Stuart Burns

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Well, that didn’t go very well, did it?

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After a couple of weeks scurrying around European capitals and intense lobbying directly to E.U. leaders, Britain’s Prime Minster Theresa May received short shrift at an E.U. conference in Salzburg, Austria last week.

May sacrificed a lot internally in the run-up to the conference. She faced intense opposition from her own hard right against her so called Chequers plan (termed thus because it was presented at the prime minister’s grace-and-favor residence Chequers in the summer), she lost two cabinet colleagues who resigned over it and has faced opposition from just about everyone, inside her party and out.

May had hoped it would form the basis of a negotiated exit agreement encompassing a free trade deal on goods but not services, plus much more with the E.U.

The E.U., meanwhile, has problems of its own — granting the U.K. any kind of conciliatory deal would make matters much worse.

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At a recent forum for business leaders, I was surprised the topic of conversation was not Brexit or Donald Trump’s latest tweet, or even cricket, but when the next recession would hit.

That hasn’t been the case for many years now. Since 2009, we have experienced a more or less constant bull market, giving us the longest run of positive growth for a hundred years. Business leaders have been cautiously optimistic growth would continue for the foreseeable future; only recently has the tone changed.

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Not that it has felt quite that joyous — markets have been volatile, particularly commodities, and in Europe government-imposed austerity aimed at balancing excess state spending needed to nurse sick economies back to growth has meant many have felt life has been tough up until the last few years.

But now many in government, industry, academia and even the media are asking the question: when will the next recession hit?

Typically, the media, as here in The Telegraph, are being somewhat more sensationalist about the issue. For example, “The next downturn could rival the Great Depression and wipe $10 trillion off US household assets,” the headline of The Telegraph article reads.

But even so, the article in question makes some sound observations.

Martin Feldstein, president of the U.S. National Bureau of Economic Research and a former chairman of the White House Council of Economic Advisors, was quoted as saying “We have no ability to turn the economy around, fiscal deficits are heading for $1 trillion dollars and the debt ratio is already twice as high as a decade ago, so there is little room for fiscal expansion.”

The worry is that after years of sluggish growth, ultra-low interest rates and the buildup of a massive Federal Reserve balance sheet of assets the world’s major economies lack the fiscal, monetary, and emergency tools to fight the next downturn.

Source: St. Louis Fed

Nor is the U.S. the worst-placed. The economy is still experiencing good levels of growth, the Fed is gradually putting up interest rates (which will allow it to cut later if needed) and the country is blessed with a strong central bank.

But Europe has no fiscal backup, rates are still at record lows and the ECB has committed to holding its reference rate at minus 0.4% until the end of next year, the article states, by which time the end of the cycle could be almost upon us.

Another Telegraph report is suggesting there is a one-in-three chance of a U.S. recession within the next two years, citing the most probable catalyst as the Federal Reserve overtightening monetary policy.

Two economists from the CME Group are quoted as predicting the next recession was unlikely to be caused by mortgage debt or financial panic, as in 2008. Instead, Bluford Putnam and Erik Norland predict the recession will be triggered by U.S. interest rates being raised too high, which will cause trouble in emerging markets and overvalued technology stocks.

Certainly, technology stocks are a concern we all like to ignore when we look at our latest portfolio revaluation. The S&P 500, which is 25% tech stocks, is up 300% since March 2009, while the Nasdaq, which is majority tech stocks, is up 600% — those seem sustainable today based on current earnings, but are they long term?

The stock market, tech stocks included, remains remarkably solid and earnings remain robust such that, at least on current numbers, valuations are not ridiculous.

But economies outside of the U.S. are already showing signs of distress from the modest Fed tightening we have seen so far.

Some emerging-market currencies — like those of Turkey, South Africa and Argentina — already fragile, have taken a pounding this year, dramatically raising local currency costs for dollar-denominated debt.

The biggest gorilla in the room is China, facing a combination of long-term structural issues, such as a shaky shadow banking sector, non-performing debt and a slowing economy due to a trade war with the U.S. that is getting out of control.

The U.K.’s former prime minister Gordon Brown is quoted as saying the world is “in danger of sleepwalking into a future crisis,” adding the next crisis could well start in Asia because of the amount of lending through the shadow banking system.

Unfortunately, the climate of international cooperation is not the same as it was in 2008; today, the focus would be on apportioning blame instead of fixing problems. “Countries have retreated into nationalist silos and that has brought us protectionism and populism. Problems that are global as well as national and local are not being addressed,” Brown is quoted as warning.

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For now there is not much buying organizations can or should be doing. Most expect the next crisis could be 12-24 months away, but the sheer number of parties that are talking about it could herald its arrival by sheer dint of expectation.

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I know, it’s not really a metals topic — my editor will no doubt berate me for wandering off the reservation — but it has to be said the current speculation about which car Bond will drive in the next movie has got to be of the topic of the month, hasn’t it?

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According to the Financial Times, there is a battle royal developing between Aston Martin – long considered the only authentic wheels for our hero — and upstart Lotus, provider of Bond’s principal transport on two occasions (“The Spy Who Loved Me” in 1976 and in the 1981 film “For Your Eyes Only”).

We are not suggesting Lotus does not make fine cars, although arguably their road cars never quite lived up to the promise of their track record. From their racing debut in the late 1950s, a series of iconic drivers and Colin Chapman’s magic combined to create a dream team that competed at the highest level in the 1960s, ’70s and ’80s.

Drivers like Graham Hill, Jochen Rindt, Emerson Fittipaldi and Mario Andretti, not to forget possibly the greatest of them all Jim Clark (winner of two F1 titles for Lotus), firmly established the mark as an innovative and exciting brand that, from its humble origins in Norfolk, took on the might of Ferrari, Renault, Honda and other famous British teams, like Brabham and BRM.

There is no question Lotus has a fine racing pedigree. As a road car, however, they have never attained the same suave mix of power, prestige and understated competence that is and always has been Aston Martin.

Bond, though, is quintessentially British, and following a brief ownership by Ford, Aston Martin Lagonda has been privately held for over 10 years by a consortium including British and Kuwaiti investors. Soon to go public via an IPO, you too could buy a slice of history when it goes public later this year.

Not so for Lotus which, along with Swedish Volvo and British-based London cab company London Electric Vehicle Company is owned by Chinese Geely. To be fair, much like Volvo, Geely is a good steward of Lotus, allowing the firm to create its own direction and innovation while providing ample funding when needed. Still, diehards would argue it dilutes the Britishness of the brand.

Featuring in a Bond movie, though, would certainly help revitalize lackluster sales at Lotus and may create other one-off opportunities.

For example, Aston recently produced a series of 25 DB5 models — the same as used in “Goldfinger” — made at the car’s original home in Newport Pagnell, the company will sell the specials for £2.75 million apiece. Styling and design for the movies can, like technology developed for racing, feed back into road cars, according to the Financial Times. Much of the engineering for the DB10 car, a model created exclusively for the most recent Bond film “Spectre,” went into the company’s latest models (the DB11 and the Vantage).

Some argue that Bond should go back to Bentley, the brand used in his first film and in Ian Fleming’s books. A brand that in the heyday of the Bond series became a “poor man’s” Rolls Royce – if the buyer of a Bentley could ever be termed a “poor man.”

But in this decade, Bentley has emerged as a fine builder of high-powered executive saloons — maybe not quite what they were in Bentley’s own racing days, but that was well before F1.

No, for 50 years Bond and Aston Martin have been indivisible. Every attempt at substitution – Lotus, BMW, Ford, once a Lincoln convertible for goodness sake – has fallen flat.

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There really is no substitute — please, EON Productions, just don’t be tempted to make it electric.

The aluminum market is facing much more uncertainty now than it was in February 2018 when Norsk Hydro agreed with Rio Tinto to buy the 205,000-ton-per-year capacity ISAL aluminum smelter, located in Hafnarfjörður, Iceland.

According to the Financial Times, that deal included the balance 53.3% share in the Aluchemie anode plant in the Netherlands that Hydro does not own and a 50% share in the aluminum fluoride plant in Sweden, from Rio Tinto.

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The transaction to acquire Rio’s last remaining aluminum assets in Europe was initially expected to be finalized in the second quarter of 2018 following the surprise agreement by Rio to sell its aluminum Dunkerque smelter in France to Liberty House for U.S. $500 million in June.

The announcement of sanctions on Oleg Deripaska in April this year — and by extension En+ and Rusal, the largest aluminum producer outside of China — has cast some doubts on alumina supplies for European smelters, as Rio sources some of the alumina for its ISAL plant from the Russian company’s Aughinish refinery in Ireland.

But Rio seemed quite confident it could source alumina from elsewhere and Norsk Hydro certainly has enough alumina supply options around the world that raw material supply should not be a major issue.

No, the main reason the firm pulled out seems to be the initial feedback from the E.U. competitions authority, which was raising concerns about market domination reducing competition in Europe if the deal had gone through.

Norsk Hydro makes around 2.1 million tons of primary aluminum a year and ISAL would further consolidate its position as the largest primary supplier in the European market. However, competition authorities may still have had one eye on the Rusal situation.

If, as some are now beginning to question, the sanctions are not lifted in October when the current extension expires, primary metal supply will become very tight in Europe again.

Rusal produced some 3.7 million tons last year according to its annual accounts. While a proportion is consumed domestically, some 0.9 million tons, a significant percentage is exported to the European market, usually under annual supply agreements. If that tonnage is denied the European market due to sanctions, competitions authorities may worry the remaining suppliers will have too much influence to ensure an open and competitive marketplace.

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Fortunately, Rio is making good profits out of its aluminum business, the Financial Times reports — some U.S. $1.58 billion last year — so it is hardly desperate for a sale.

Still, investors were not heartened by the news. Rio’s share price dropped $0.14 on the news, down nearly 16% from its 2018 high of $86.75 in May of this year.

It has been a long, tortuous road, but finally ArcelorMittal’s reported €2 billion purchase of Italy’s Ilva steel plant looks like it is nearing completion.

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The deal was largely contingent, according to a European Commission Press release, on an agreement between unions and the buyer over future employment at the plant.

Early and vocal opposition from unions was all around staffing levels with both rival bids. India’s JSW was the rival bidder at the time, indicating significant job cuts in order to address one of Ilva’s three key challenges.

According to union officials reported in the local press at the time, the Mittal-led consortium wanted to reduce staff numbers from 14,200 in 2016-2017 to 8,400 by 2023, while the rival bid would cut head count to 7,800 over the first year but then bring it back up to 10,300 by 2023.

The final deal agreed this month and announced on the company’s website states ArcelorMittal has committed to initially hire 10,700 workers based on its existing contractual terms of employment. In addition, between 2023 and 2025, ArcelorMittal has committed to hire any workers who remain under Ilva’s extraordinary administration (essentially, its nationalized current operating position).

Challenges Facing Ilva

Ilva faces three main challenges.

The first has been decades-long environmental breaches resulting in reported raised incidences of cancers and respiratory diseases in the area.

The second is probably a contributing factor to the first: endemic losses caused by uncompetitive staffing levels, overseas competition and underinvestment.

The third is the fact that Ilva is located in an area of high unemployment with scant opportunities for workers to find alternatives. If Ilva were to be closed, the impact on the region’s economy would be devastating. Yet, the plant requires massive investment to cut the environmental pollution and to improve efficiency if it is to have a future. ArcelorMittal has committed to invest some€4 billion, with €1.1 billion of the investment to go toward environmental cleanup, while €1.2 billion will go into production improvements.

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As Europe’s largest steel plant and, as such, a strategic source of employment in a depressed area, it was unlikely the plant would be allowed to close by the Italian government. A takeover was inevitable at some stage, but the buyer was always going to need deep pockets.

ArcelorMittal will make a better steward than many others and, at least, ensures a future for the plant.

There used to be a time when you were wary of parking your car in an unlit street or side road for fear you may come back to find it jacked up on blocks and all four shiny alloy wheels missing.

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Locking wheel nuts went a long way to alleviating that fear and theft of alloy wheels is mercifully much reduced … only, it would seem, to be replaced by a new worry: theft of your catalytic converter.

According to The Telegraph, thieves are cashing in on six-year highs in prices for the rhodium, palladium and platinum in your car’s catalytic converter — particularly if you own a BMW, Audi or Volkswagen, at least here in the U.K. — the article reports.

Thieves are becoming very discerning, choosing certain models because of their relatively higher precious metal content (such as older Honda Jazz and Accord models) or due to their greater road clearance and easy accessibility (such as the Mitsubishi Shogun SUV).

For reasons of accessibility alone, SUVs are a favorite target because a jack isn’t required to get underneath, speeding up the process and reducing the chance of being seen or heard.

Nor does it take long to do. Apparently, a gang using battery-powered saws can have your motor jacked up or slid under and the requisite parts cut out in around 5 minutes – probably the same nifty team that used to steal your alloy wheels have just found an alternative target.

Rewards are probably similar too, the article suggests. Thieves earn up to £300 (U.S. $400) from your stolen catalytic converter, with the devices often exported to jurisdictions where the traceability of materials sold for scrap is not as rigidly enforced as the U.K.

Catalytic converters have been fitted in the exhaust of the majority of petrol cars manufactured since 1992 and diesel cars since 2001.

According to the British Automobile Association, the metal case of the converter contains a ceramic honeycombed structure that provides a massive surface area across which exhaust gases flow. Precious metals like platinum, palladium and rhodium are coated onto this ceramic structure, exploiting their properties as catalysts with the intention of cleaning the exhaust gases of harmful pollutants.

To extract the precious metals is a complex and potentially toxic process that can only be done in a sophisticated recycling plant. However, as metal prices rise, these platinum-group metals (PGMs) become progressively more valuable as scrap; as such, our vehicles are now said to be more at risk than in the past.

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Beware parking up at a country fair, event or show where the vehicle is left all day among thousands of other vehicles. Apparently, there are vibration-sensitive alarm systems you can have fitted to pick up the vibrations from a saw, and you can get your catalytic converter welded to the vehicle frame to make it harder to remove.

Despite such precautions, thefts are rising, so keep away from those side roads, unlit streets or parking overnight on the front drive, or your car may sound more like a Sherman tank than a limousine next time you go to start it up.

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Some commentators were calling the imminent collapse of the aluminum price last month — certainly, it tested the bottom of its recent range, at just below $2,000 per metric ton on the LME.

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But the price has since rallied and is currently range bound between $2,000-$2,075, seemingly suppressed by a strong dollar and the general depression of commodity prices by fears of a trade war. Yet, it is supported by the net deficit position the Western world’s aluminum market has been in last year and this year.

One dynamic that has not featured greatly — but is fast becoming a major concern — is the alumina price.

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The markets appear strangely relaxed about the growing economic and political standoff between the U.S. and China.

Maybe because it has been a slow burn over the last six months or maybe because no one quite believes either side would be stupid enough to allow a full-blown trade war to develop, but markets are generally quite sanguine … so far.

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Yes, the Chinese stock market is down. In addition, commodity prices are depressed relative to where we would have expected them to be back in Q1, when global growth was strong and there appeared little to deflect both mature and emerging markets from enjoying another couple of years of robust growth.

Gideon Rackman, writing in the Financial Times, argues that we are being far too relaxed about this, that for a number of reasons the prospect of these initial $50 billion of tariffs escalating to $200 billion — or worse — is real and the consequences should worry us.

For a number of reasons, neither side is likely to back down.

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As the Oct. 23 deadline approaches, the aluminum market is taking no risks on continued supply from Russia’s Rusal, Reuters reports.

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The industry traditionally gets together in Berlin this week to negotiate annual supply contracts for 2019 with billet makers, rolling mills and casting plants rubbing shoulders at a conference known, as Reuters notes, as the “mating season” … except one stag in the herd has been shut out.

European customers will avoid 2019 supply deals with Rusal. “We can’t agree a deal with Rusal on the basis that sanctions will be lifted by Oct. 23,” a Rusal customer in Europe is quoted by Reuters as saying, adding “Anyone that has a relationship with Rusal will be preparing for the sanctions to remain in place for now.”

The aluminum market has so far been relaxed about the fallout from Rusal being placed under sanctions at the beginning of April once a stay of execution was granted later in the month. The expectation has been the sanctions would be lifted in October.

But over the last week or two, doubts are being raised and the fear factor is dissuading buyers from taking the risk.

This is no small issue for the industry, although the market has since had time to adjust to the idea. The reality is the aluminum supply market is in deficit and Rusal still contributes some 6% of global supplies.

Even if sanctions are somehow avoided next month, Rusal will be without its normal quota of annual supply contracts, forcing it to sell on the spot market. Reuters suggests this will contribute to volatility next year, even if the market can access all the metal it needs.

But if Oleg Deripaska fails to sufficiently distance himself from Rusal and En+, such that sanctions are applied as currently expected, expect physical delivery premiums in Europe to rise again and for considerable disruption to the supply market next year. You cannot take nearly 4 million tons a year of metal out of an already tight market and not expect there to be casualties.

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The industry’s calm over the summer is going to be tested in coming weeks as the deadline approaches. Even if sanctions are avoided, the result of Rusal being left with only a spot market next year will in itself contribute to volatility buyers could do without.

To be fair, not all shale gas drilling is slowing, but in the Permian Basin, which has seen the most incandescent growth in recent years, according to the Financial Times, growth is slowing markedly, according to Schlumberger, Halliburton and the U.K.’s Weir Group – all majors suppliers to, or active players in, the fracking industry.

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Source: Financial Times

The article cites logistical challenges, including labor costs and a lack of adequate pipeline capacity constraining growth. The article states the following factors have undermined the economics of oil production in the region:

  • rising costs for labor and equipment
  • difficulties in disposing of the unwanted water and natural gas produced alongside the oil
  • and, above all, a shortage of pipeline capacity for taking crude from the wilds of west Texas to refineries and export terminals along the Gulf of Mexico coast.

The Financial Times quotes Bill Thomas, chief executive of EOG Resources, who said: “When you’re focused on one basin, one play, it gets very difficult to continue high rates of growth.”

Source: Financial Times

From a low two years ago, the tight oil industry’s rebound has been impressive. Much of it is coming from the Permian Basin, with national production up by 1.5 million barrels a day in the 12 months to July.

But questions are being asked as to whether or not the Permian may be reaching a plateau. New wells drilled alongside older wells are relatively less productive than the original when assessed on the basis of their length and the weight of sand used in the fracking process — so-called “parent” and “child” wells, as the Financial Times calls them.

That would suggest the long-term potential for the region to continue impressive growth at ever-lower cost is called into question.

Whether that proves to be the case remains to be seen. Of course, the Permian is not the only tight oil resource in the country. While others haven’t seen the level of investment the Permian has enjoyed in the last two years, subject to oil prices, the other regions still have huge potential.

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What it probably does say is the stellar growth of recent years is unlikely to continue and may be slower from the middle of this year onwards. With the dramatic rise in steel prices following the U.S.’s imposition of a 25% import tariff on steel products, it was to be expected drillers would find both exploratory work and infrastructure investment slowing. However, the Financial Times suggests the slowdown has caught many in the industry by surprise and suppliers’ share prices have taken a hit as a result.