China is without a doubt the most dynamic emerging market of the decade. For the world’s largest communist state, it must feel like they are sailing a ship driven by the wind in one direction and the tides in another. After tax and regulatory changes last year that would have stopped most economies in their tracks, China’s growth has slowed a fraction — from 11.9% for 2007 to 10.6% for the first quarter 2008. But the story is anything but a gentle reduction in growth. Under the surface, there have been changes in investment with winners and losers all around. Read more
Author Archives: Stuart Burns
In spite of statements from China in Bloomberg, stating that $2400/ton is the support level for lead and that China is cutting back exports to support the world price, the metal has continued to fulfill its image and has sunk like the proverbial lead balloon. The reality is China, which produces a third of the world’s lead, would lose money if it exported at current levels. Dealers are hoping the cessation of Chinese exports may support the price but so far there have been no signs that this is the case.
Following five years of shortages earlier in the decade and massive investment in new mines, the metal moved into surplus and stocks have now reached an 18 month high precipitating the fall in prices to close at $2195/ton on Friday. The sentiment remains overwhelmingingly negative and prices could fall further.
Just when consumers thought one of the main drivers of current material cost ” sea freight rates ” would be coming down as new shipping capacity came on stream, it looks as if the credit crunch has done for them what it has for the housing market, according to a Bloomberg report.
Small to medium sized shipyards and those new to the market are finding it increasingly difficult to find loans. Previously, owners could expect to pay 1% over Libor for 12-15 yrs and be able to borrow up to 85% of the value. Now rates are higher than the 1% premium, the terms are reduced to 10 years and borrowings to no more than 65% of the value. Consequently, only the larger lines and owners with deep pockets can afford to keep their orders firm. Shipbuilding grade steel has increased by 47% since the start of the year and the viability of some of the Chinese shipyards not yet built but who had taken orders for new vessels is in doubt. Brokers estimate between 10 and 30% of the 2561 new vessels on order will not be built. No surprises then that freight rates have already begun to increase again as the availability of space has decreased. Rates were expected to decline by 56% over the next three years but instead are at a five month high as far fewer vessels have been delivered. Read more
Gold has certainly had a roller coaster ride this last 12 months, up to a peak of $1030/ounce before falling back some $200. You’ve heard the popular saying: “When the dollar falls, gold rises.” In reality, the relationship between the euro, the dollar, and gold has been 94% accurate, according to a Reuters report in Mineweb.
In that case, what could the current fall in gold tell us about the direction of the euro and the dollar? If the dollar were to make a significant gain against the euro this year, from its current 1.55 towards 1.45 last seen in 2007, we could see a flood of cheaper imports, particularly steel, come into the market. The dollar won’t change the fundamentals of the world steel industry, but a combination of a stronger dollar and more imports could curtail price rises later this year if the assumed relationship between gold, the euro, and the dollar holds true.
Return you say? Since when was a penny made from steel? Well, for any of you too young to remember (thankfully that includes me) the US minted steel pennies during the second World War. The rising cost of metals has meant the US mint is losing $100 million a year making 7.4 billion pennies and 1.2 billion nickels at considerably more than their face value. At current metal prices, it costs 1.26 cents to make a penny (97.5% zinc and 2.5% copper) and 7.7 cents to produce a nickel (75% copper and 25% nickel). That is better than late last year though when a penny was costing 1.67 cents and a nickel nearly a dime. It’s debatable if this money is lost as it remains in circulation but the House panel that overseas the Mint would like a debate on the merits of bringing back a predominantly steel penny and nickel according to an article in the Associated Press. It raises a bigger question why not just junk the penny altogether ” when did you last buy anything for a penny? The country could save on precious metal resources not to mention costs, if it just dropped a coin that many would argue is out of date. According to Henry Paulson getting rid of the penny made sense but wasn’t politically doable ” now is that just the kind of logic you expect from a politician?
Is the rise in metal prices really so inevitable? We usually place considerable weight on articles appearing in Purchasing.com, but I have to take issue with a feature from yesterday which suggests metals will continue to rise on the back of power problems around the world. Certainly the first quarter of this year has seen it’s fair share of power problems, but many of them are unlikely to be repeated — nor was power the sole driver behind first quarter price rises. For example, the bad weather in China caused power problems, but it was a one in 50 year period of severe weather. Also, it is unlikely to be an issue going forward, serious as it was for aluminum, zinc and many ferro alloys. Power stations may be closed or run at reduced capacity for the Beijing Olympics, but so will the power hungry industries those power stations fed. The power problems affecting aluminum, precious metals and ferro alloy production in South Africa are more entrenched, but they were significantly exacerbated by heavy rains, as were the flooding of Queensland’s iron ore mines — neither of which is likely to be of such magnitude again in the coming months. Somehow I don’t see power being the deciding factor. It will have an influence in certain situations, but the extent to which demand continues to grow will be more of an issue.
Contrary to expectations earlier this year that the weak dollar would boost exports and shield domestic producers from imports, it looks like US imports are set to rise again, according to the Steel Business Briefing. Sighting import license applications SBB says US applications for April came in at 2.64m metric tons, 16% higher than the March preliminary import count of 2.28m tons, which in turn was higher than February. Interestingly, this is despite a continued decline in steel imports from China, suggesting the export taxes imposed in January by the Chinese authorities are having the desired effect. For April, China will likely fall to fifth place among the largest steel exporters to the US at 168,000 tons. That lags behind Canada at 646,000 tons, Mexico at 239,000 tons, Japan at 193,000 tons, and Korea at 172,000 tons — based on the license applications.
So if imports are rising, does this mean increased competition for domestic producers and lower prices for consumers in the months ahead? Not yet, as strong global demand, still rising raw material costs and capacity issues mean prices will be high for the second and third quarter at least. Read more
A mining giant is blocked from a major new investment due to a human rights group campaigning on behalf of Indian tribes. Sound like a typical story of a US minerals company being prevented from starting a major domestic project? Well, no — contrary to popular belief, it is not free reign in the developing world but restrictions at home.
This is Vedanta Resources, a major Indian metals and mining group under siege from a human rights and environmental group Survival International, reported in the Daily Telegraph.
Apparently Vedanta has been working their way through the regulatory process for several years in order to gain approval for a major new bauxite mine in Orissa State, Eastern India. The bauxite would be used for making alumina and finally aluminum, a metal that is experiencing rapidly growing demand in India in line with the rest of the economy. One of the less well reported issues of globalization is that multi nationals face similar environmental challenges all over the world now — a fact of which Vedanta is only too well aware.
Here’s an old idea that has caught the attention of commentators this week but with a new twist due in large part to the high price of the metals involved. Metals and material have been recycled for decades and in many countries considerable encouragement is given by governments in an effort to reduce raw material and energy consumption. But the rise in the price of gold, silver and many other metals used in the electronics industry has given the recycling of mobile phones, laptops and other electronic devices a major boost and promoted the phrase urban mining. The figure that caught my eye was a direct correlation to the mining industry ” one ton of ore from a gold mine produces just 5 grams (0.18 ounce) of gold on average, whereas one ton of discarded mobile phones can yield 150 grams (5.3 ounces) or more, according to an article in Reuters.
The article goes on to say the same volume of discarded mobile phones also contains around 100 kg (220 lbs) of copper and 3 kg (6.6 lbs) of silver, among other metals. Hence the phrase urban miners used to describe the recycling industry that has grown up around this resource. The company being reported, Eco-System of Honjo, Japan typically produces about 200-300 kg (440-660 lbs) of gold bars a month with a 99.99 percent purity, worth about $5.9 million to $8.8 million. That’s apparently the equivalent of a small gold mine.
In a country with 128 million people with over 80% mobile phone ownership and who on average change them every 2 years 8 months, you would think there would be a never ending supply of raw material. But you would be wrong, only 10-20% of the phones discarded each year are recycled. Why? Largely because of fears that the phones contain personal data, people horde them away rather than risk releasing them for recycling. As PC’s, laptops and now even mobile phones have become the gateway to our bank, share dealings, health records, and in fact every item of sensitive data in our lives the risks are perceived to be ever greater of letting them fall into the wrong hands. Particularly in Japan where the use of the mobile phone is more advanced than in the US or Europe, phones can be used for payment of bills, move funds around bank accounts, pay rail and bus fares. Indeed the mobile phone is becoming the mobile wallet.
It does raise an interesting concept though.
As the world’s reserve of metals becomes ever smaller, to what extent can we access those already used and available in manufactured goods? Certainly we have only scratched the surface so far and the high prices of all metals will encourage this resource to be pursued much more vigorously in the future.
A recent Bloomberg article suggested that although tin prices are currently strong they are expected to come off in the short term due to slowing domestic Chinese demand. The same article states half the tin consumed in China is used in electronics soldering, a previously robust area of value add growth for Chinese companies. But a combination of rising wages costs, softening demand due to lower exports to the west and the appreciating RMB have significantly reduced growth prospects. China’s quarterly trade surplus shrank for the first time in more than three years from January to March due to falling exports. Many small electronics factories in the southern province of Guangdong were being closed after China’s new labor laws mandating minimum wages and setting limits on over time raised production costs.
China’s domestic tin prices are starting to drop lower than world prices as demand softens and rising production pushes the market into over supply. Although China became a net importer of tin this year, following the imposition of a 10% export tax this January, higher export prices could over come this and encourage exports again. Many say the retreat of China as a major exporter is the primary reason for the current high world prices.