Author Archives: Stuart Burns

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Socialist Shadow Prime Minister Jeremy Corbyn and Microsoft tech entrepreneur Bill Gates do not make obvious bedfellows.

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But when Gates suggested earlier this year that governments should tax new robot “employees,” just like they do human employees, socialists everywhere picked up the idea as a way of mitigating or resisting the perceived onslaught from such new technology on workers’ jobs.

Gates raised the idea in an interview with Quartz in February.

“Right now, the human worker who does, say, $50,000 worth of work in a factory, that income is taxed and you get income tax, social security tax, all those things, if a robot comes in to do the same thing, you’d think that we’d tax the robot at a similar level,” he said.

Corbyn actively proposed such a tax at his party’s annual conference this week in the U.K., saying the application of such a measure would spread the benefits gained by ”greedy” employers exploiting advanced technology to reduce wage bills.

Not surprisingly, such attitudes have earned Corbyn and his socialist allies the label of Luddites (the bands of English workers who destroyed machinery, especially in cotton and wool mills, in the early 1800s, believing such technology threatened their jobs).

But some advanced economies have already adopted the concept and many others are actively considering it.

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Fracking as a technology has been a spectacular success in transforming the energy landscape in the U.S., Elsewhere, however, it has failed to catch on, largely due to concerns about the environmental consequences of ground water pollution or sometimes, as in the U.K., by illogical worries about fracking causing tremors or earthquakes, concerns that environmental groups are only too keen to stoke up.

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Of all places, the Middle East would not spring to mind as an obvious place for fracking to catch on. The region is blessed with some of the most extensive oil and natural gas reserves in the world, even after decades of extraction.

But that is precisely where BP’s largest new project is starting this year, according to a Telegraph report.

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It would be an exaggeration to say steel producers have never had it so good, but on the whole, conditions have been supportive of the sector this year — both globally and in top producer China.

What’s Up, Beijing?

Beijing’s supply side reforms, cutting out older, less efficient steel plants largely on environmental grounds has directly supported the larger state steel sector. Much of the “illegal” and less well-regulated (therefore more polluting) producers are concentrated in the smaller end of the private sector. These have been the first to suffer enforced closure as Beijing pushes through its aim of closing some 50 million tons of capacity this year.

A widespread clampdown on the scrap-based EAF producers (virtually all of whom are in the private sector, and deemed illegal because they often do not have licenses and more polluting because they are based on scrap)  has constrained supply and given rebar prices a drug-induced high.

Benchmark Your Current Metal Price by Grade, Shape and Alloy: See How it Stacks Up

The move underpins Beijing’s rationale to achieve as many wins as possible, reduce capacity to avoid anti-dumping moves by trading partners, improve environmental conditions (specifically particulate emissions, which cause smog), and consolidate a highly fragmented domestic steel industry all while simultaneously minimizing job losses and supporting the state sector at the expense of the private sector.

Bingo — they have it all!

Tale of the Tape

So far, you should say, Beijing is doing very well. Capacity has closed, particularly older and therefore likely less efficient capacity; steel production is actually up 4% year-on-year, and prices have risen robustly.

The state sector is doing very well, enjoying high prices, strong demand with the removal of their smaller competitors and, following an 18% fall in iron ore prices over the last month, look set to make even better profits in the last quarter. Iron ore import volumes have also fallen of late, as the graph below from the FT shows, but that may partly be due to large inventories that had built up as the price rose.

Source: Financial Times

Steel prices in China as tracked by MetalMiner’s IndX have weakened this month, but with the fall in raw material costs Chinese producers’ margins have held up well.

Free Download: MetalMiner’s September 2017 MMI Report

In the rest of the world, China’s reduced exports, down 26% year-to-date due to anti-dumping barriers and improved domestic demand, have created some respite for foreign steel mills, particularly Russian, Turkish, Ukrainian and Canadian suppliers that have stepped in to take China’s place as low-cost supplier to the U.S. and European markets.

Producers in Europe are still complaining bitterly about competition, but as with the U.S., realistically it is less about China and more about low-price suppliers in Russia, Ukraine and elsewhere.


On the back of rising global steel demand and soft input costs, steel producers’ margins should be supported even in Western markets and prices remain firm next year — even if China’s demand grows only slowly.

It seems to be the perennial question among those dependent on and those active in the metals market – what are the prospects for China?

And, well,  we should be concerned.

As both the world’s largest producer and largest consumer – in many cases constituting nearly half of global consumption and production of many metals – China and what its economy does is the primary driver on price direction and pace of change.

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What’s Happened in China This Year…So Far

This year, metal prices have risen strongly on the back of robust demand fueled in part by a mini stimulus boom initiated last year. Anxiety is growing as to how long China can keep that demand solid and what the medium-term impact of the country’s rising debt-to-GDP ratio will be. The rising “credit gap” is split 70% in the stodgy public sector, which is contributing relatively less to growth and not in the more dynamic private sector where most growth is being generated.

As such, Beijing feels it has enough ammunition to handle any fallout without it seriously impacting the economy — and with the economy growing in a broad-based manner, across manufacturing, trade and services as well as construction. HSBC, in their most recent Metals Quarterly, remains cautiously optimistic that growth will remain solid around 6.7% next year.

What This Means for Metal Buyers

For metals consumers, however, it has been about more than macroeconomic issues.

Supply-side reform has been a major driver of price this year, with enforced consolidation in the steel sector driving shortages of certain product areas like rebar, and hence fueling price rises. Meanwhile, smelter closures in aluminum have pushed prices to multi-year highs. Arguably those price rises are investor-fueled and could, at current levels, be somewhat overdone — but much depends on how vigorously Beijing continues to implement environmental policies during the upcoming winter heating period.

Clearly the market thinks it will follow through with the policy as investors are positioning themselves for shortages within China. Although the rest of the world is technically in deficit, comparing production to consumption in that country results in still more than 85 days of inventory with unknown additional tonnage available in stock and finance trades. This will act as a damper on price rises in the medium term, but the market is quite capable of spiking further in the short term.

We will have a follow-on article on steel, nickel and stainless, where despite prices being off recent peaks, there is much to suggest we will not see a sell-off next year and prices could be well supported at current levels.

Investors sometimes have short attention spans.

Benchmark Your Current Metal Price by Grade, Shape and Alloy: See How it Stacks Up

Just a month ago, worried by the escalating tension between the U.S. and North Korea, the gold price was rising, hitting its highest level in over a year at $1,358 an ounce as the dollar weakened and tensions ratcheted up.

However, Trump’s United Nations speech threatening annihilation on North Korea failed to support the gold price, as investors took a cue from central bank announcements that the Fed intends to start unwinding its multi-trillion dollar balance sheet in October.

The Financial Times reports the prospects of higher interest rates make gold less attractive, since the metal provides no yield.

After peaking in early September, gold remains up 13% on the year. Silver prices are up 6% in the year-to-date. The Fed seems set on a rate hike by December, followed by probably two more next year.

Yet, the gold price is merely the most visible of many undercurrents caused by the Fed’s gradual withdrawal of liquidity as it unwinds its eight-year stimulus program.

Little attention has been given of the impact this gradual draining of liquidity will have on emerging markets.

Already, a few alarm bells are beginning to sound.

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A New Defender on the Roads?

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“The king is dead, long live the king” — or so the headline may read if Jim Ratcliffe, founder and CEO of one of the U.K.’s largest companies, is successful in his bid to create an entirely new and modern Defender following the demise of the old Land Rover Defender in 2016.

Benchmark Your Current Metal Price by Grade, Shape and Alloy: See How it Stacks Up

Fans of the long-running Defender bemoaned its loss when Jaguar Land Rover (JLR) finally called time on the model last year. Reports that they intend to bring out a replacement in two years are dismissed by Ratcliffe as likely to be more Chelsea Tractor (British slang for a road-only 4×4) than a real Defender. JLR will go for more of a volume SUV, not a vehicle totally committed to the off road, he believes.

Judging by the firm’s gradual expansion of its range into more road-focused models, he may well be right.

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Thyssenkrupp and Tata Steel have finally made it to the altar.

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After 18 months of mostly behind-the-scenes negotiations to resolve several potentially “deal-off” stumbling blocks, all the major issues have been resolved. The two firms have signed a memorandum of understanding to create a 50:50 joint venture based in Amsterdam, Netherlands, called Thyssenkrupp Tata Steel (TTS).

The behemoth will rank second to ArcelorMittal with 21 million tons of annual steel capacity generating sales of €15 billion ($17.8 billion) and employing 48,000 people, The Telegraph reported.

New Focus

TTS will focus on three main production hubs: Ijmuiden in the Netherlands, Duisburg in Germany and Port Talbot in South Wales, the paper reports, Analysts say improved viability will come from cost savings of between €400 million and €600 million a year arising after 2,000 redundancies and another 2,000 jobs going out of the combined business as overlapping operations are removed.

Not surprisingly, TTS sees the value proposition as the enhanced opportunity for the combined group to move its business up the value chain in cooperation rather than competition with each other.

Hans Fischer, Tata Steel Europe’s chief executive, said “We need to focus on higher value products, China has huge overcapacity and there is a risk they will flood the market. The answer is not to compete with them, but try but find a solution where we have products that cannot be produced easily. We need to be a technology leader.”

Tata wriggling out of the old British Steel Pension fund liabilities was the final major hurdle to overcome — albeit to be fair, at considerable cost to the parent — and the willingness of British workers to agree to an end to the final salary scheme and reduced benefits for existing members underlines their desperation for a deal, matched by compromises made in Germany by workers fearful of the prospects of foreign competition with the European steel industry.

But therein lies the dilemma.

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China Zhongwang is a company that is used to controversy.

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Then again, you don’t get to be the world’s second-largest aluminium extruder in the space of a few years without ruffling a few feathers.

Zhongwang’s attempts to muscle in on the global stage by buying Aleris Corp immediately ran into opposition from U.S. senators. Just this week, Zhongwang USA, an investment firm backed by Zhongwang Group’s chairman and Aleris Corp, announced its intention to extend the deadline for a decision by two weeks to end September, Reuters reported.

Zhongwang USA is not part of Hong Kong-listed China Zhongwang Holdings Ltd, but Liu Zhongtian heads up both companies — a fact that has clouded multiple investigations against one entity or another in recent years.

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The announcement by the U.K. and France that they would prohibit the production of diesel and petrol cars by 2040 made for good headlines, but came as little surprise when you consider the pace of change in the automotive industry.

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China’s announcement last week that it was considering setting a timeline for phasing out traditional fuel cars will likely have a more profound effect on the development of new energy vehicles (NEV), for two reasons.

First, China is already the world’s largest car market, producing over 28 million vehicles in 2016, according to the Financial Times. Significant changes in a market of that size causes more than just ripples in the global automotive market.

Second, a centrally controlled command economy such as China’s has shown that policies that are robustly pursued by Beijing can achieve rapid change over short time frames. More than any other country in the world, with the possible exception of India, China has an imperative to address atmospheric pollution. The incentives in China to switch from traditional combustion engines to NEVs has already made China the world’s leading electric car market, with 507,000 NEVs sold domestically in 2016.

Beijing’s announcement, however, should not be seen as a purely altruistic move to improve the environment.

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The workings of the London Metal Exchange, however vital for the day-to-day pricing of the metals consumers buy, are often something of a mystery to the average industrial user.

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Not least, we have always felt, because the language used is the jargon of insiders, traders, brokers and dealers who transact tens, even hundreds, of millions of dollars of transactions in a day. They quietly — or not, if you have ever witnessed open cry trading – move the world’s metal markets in the process.

The accurate and efficient working of those markets is of vital importance to producers, traders and consumers of base and ferrous metals. If markets fail to operate efficiently, if volumes fall and liquidity wanes, the spread between buy and sell can increase, trades do not get promptly laid off and risk increases along with volatility.

We may not know it, we may not like it, but an efficient futures market is in the interest of every metals consumer — so when the new CEO of the LME Matt Chamberlain was officially confirmed in his role in April, one of the first steps was a grassroots review of the Exchange in consultation with users and industry.

To his credit, this was aimed as much at wider users of the Exchange’s services as it was those insiders active on the ring on a daily basis. The result of a long discussion process over several months has been 162 responses from the market, including, in the interest of full disclosure, from MetalMiner.

The result is probably of more interest than the process. But before we pick through the bones, the most encouraging message is the LME’s renewed commitment to physical trading, to the philosophy that has underpinned the exchange for 140 years — that any changes that are made in the way the exchange operates or the services it provides will be driven by the overriding principle that they should support, not harm the LME’s relevance to or ability to serve the physical market, explained Miriam Heywood, the LME’s head of media relations.

For a market that has seen the rise of the CME in the U.S. and the SHFE in China in recent years, it would have been understandable to make hasty attempts to mimic its competitors.

But the LME hasn’t done that, industrial users will likely be pleased to hear.

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