This morning in metals news, U.S. construction spending dipped in the final month of 2019, China’s top electric vehicle battery maker has signed a supply deal with Tesla and Caterpillar recently reported its fourth-quarter and full-year 2019 financial results.
Before we head into the weekend, let’s take a look back at the week that was and some of the metals storylines here on MetalMiner, including coverage of: aluminum production and prices; Trump’s tariffs on aluminum and steel derivatives; the coronavirus’ potential impact on iron ore; General Motors’ electrification drive; and the arrival of Brexit.
General Motors announced this week it would take another step towards electrification by investing $2.2 billion in its Detroit-Hamtramck assembly, which will be the automaker’s first plant devoted 100% to the production of electric vehicles (EVs).
The automaker said the plant would produce all-electric trucks and SUVs.
The successor to the 1994 North American Free Trade Agreement, dubbed the United States-Mexico-Canada Agreement (USMCA), has now made its way through both chambers of the U.S. Congress.
In December, the White House and House Democrats reached a deal over revisions to the USMCA, yielding an overwhelmingly bipartisan 385-41 vote Dec. 19 that sent the deal over to the Senate.
On Thursday, the Senate voted 89-10 to approve the USMCA via the United States-Mexico-Canada Agreement Implementation Act. Sen. Pat Toomey was the only dissenting Republican vote.
This morning in metals news, 2019 proved to be a down year for Ford Motor Company’s sales in China, Norsk Hydro plans to ramp up production of recycled aluminum this year and Rio Tinto awarded an A$400 million contract for the design of a new mine in Australia’s Pilbara.
Ford sales drop in China
Ford saw its sales in the Chinese market drop 26.1% in 2019 compared with the previous year, according to the company’s most recent sales results release.
Ford sold 567,854 vehicles in China last year.
The Automotive Monthly Metals Index (MMI) picked up three points, rising to a January MMI reading of 89.
U.S. auto sales
General Motors reported it delivered 2.89 million vehicles in the U.S. market in 2019, up 12.7% compared with 2018.
As if the downturn due to a trade-war-induced slowdown in China were not enough, the European automotive industry is facing the challenge of a rapid switch from diesel to petrol engines that has been gathering pace for the last two years. At the same time, the industry has also had to deal with the implementation of new legislation designed to reduce car makers’ overall fleet emission levels.
An article in the Financial Times explains the impact of the new legislation on Europe’s automakers, an industry that supports some 14 million workers across the continent.
Quoting Max Warburton, an auto analyst at Bernstein, the article says each carmaker faces its own CO2 target based on the weight of its vehicles. A business selling smaller cars, such as PSA, therefore has a lower CO2 target than a company with a heavier average vehicle, such as Mercedes-Benz owner Daimler.
The targets for each company vary from around 91 g/km to just over 100 g/km. Some carmakers, like PSA, have already made good progress, switching less fuel-efficient, four-cylinder GM engines in their new Astra range to new three-cylinder PSA engines has improved efficiency by some 21%.
However, carmakers like PSA do not have a lot of luxury saloons and SUVs in their lineup. Daimler, BMW and JLR do, and the situation is made worse by a rise in sales of such vehicles in recent years.
Europe — once the home of the small, fuel-efficient compact — has fallen in love with the SUV. Some 40% of cars sold in the E.U. are now SUVs and automotive carbon emissions have, as a result, risen for the first time in a decade.
Potential fines for missing these new fleet emission limits are punishing, the FT states. Every gram over the target incurs a penalty of €95 — multiplied by the number of cars sold by the carmaker, the costs could be crippling. “It’s just stunning how much is going to have to be achieved in the next 18 to 24 months,” Warburton is quoted as saying.
If the industry sold exactly the same mix of vehicles in 2021 as it did last year, carmakers together would face penalties of €25 billion, the Financial Times reports.
This comes on the back of 17 months of slowing car sales in China, Germany’s biggest auto export market, and the losses being sustained on the sale of every electric vehicle (EV) sold, such as they are. EV sales in Europe have stalled without heavy subsidies: the buying public is, well, not buying.
Relatively higher prices and range anxiety, exacerbated by inadequate charging infrastructure and long charging times, are putting off buyers despite boosters suggesting the EV market is on the cusp of take-off.
European carmakers are already reining back sales of luxury gas guzzlers like Mercedes AMG range in order to help meet the new targets, but those are by far the most profitable part of their range — putting overall company profitability under pressure.
Job losses, even in highly protected job markets like Germany where an axed position is estimated to cost the employer around €100,000, are likely over the next 2-3 years. A separate Financial Times article states in the next decade almost a quarter of a million auto jobs will be lost in the country, quoting Ferdinand Dudenhöffer, the director of the Center for Automotive Research at the University of Duisburg-Essen.
The article goes on to report German automakers and part suppliers, from Daimler and Audi to suppliers including Continental and Bosch, have already announced around 50,000 jobs will be lost or are at risk so far this year, as their traditional businesses become less profitable. This comes at a time of potentially crippling investment demands in the switch to EV production and development of the supply chain such as battery plants.
The Financial Times estimates the German car industry alone, which directly employs 830,000 people and supports a further 2 million in the wider economy, will be forced to plow some €40 billion into battery-powered technologies over the next three years. Job losses so far have been limited by automakers’ relative healthy profits this decade.
From 2020 onwards, however, the situation is set to deteriorate as overall profitability suffers. “No one will survive in the form they exist today,” Ralf Kalmbach of consultancy Bain & Co, who has spent 32 years advising German carmakers, is quoted as predicting.
The E.U. is making some concessions to limit the damage. Carmakers will be measured on only 95% of their fleet in 2020, giving them a little breathing space to continue selling their most-polluting — and often most-profitable — vehicles longer.
But unlike the U.S., European firms cannot buy and sell credits, they can only pool overall fleet results with competitors, which naturally carries a cost.
Ultimately, legislators and the industry will have to find solutions to redress the imbalance between what consumers want to buy and what manufacturers want to sell them. That will require a combination of penalties, incentives, investment and rapid technological innovation – a challenging and heady combination of demands to be met in the first half of the coming decade.
In early June, automakers Fiat Chrysler and Renault looked as if they were on the verge of a 50-50 merger that would have created a $35 billion global auto giant, the No. 3 automaker in the world.
But almost as soon as the deal seemed done, it collapsed.
Hemmed in by labor unrest, characterized most strikingly by the yellow-vest protests, Paris could not risk the loss of influence at the merged business. Its 15% shareholding in Renault would have been cut in half and with it any hope of stemming French jobs losses at a merged multinational operation.
A ‘European thing’
As Business Insider reported at the time, the proposed merger was largely a “European thing.”
FCA’s U.S. operations were and remain a cash cow, prospering on SUV and pickup sales; however, the Fiat brand has been a notable failure in the U.S. market.
Renault hasn’t been a factor in the U.S. since the early 1990s, and neither company is strong in China, the world’s largest car market.
So FCA went looking for a new partner and, ironically, seems to have found it in another French group: PSA, the owner of Peugeot.
Fiat Chrysler and Peugeot agreed this week to a 50-50 merger to create the world’s fourth-biggest carmaker with revenues of €170 billion and a combined workforce of about 400,000. The intention to invest in new technologies, such as electric vehicles (EVs), at a time of profound and challenging change in the automotive industry.
The Financial Times reports the merger of Peugeot and Fiat will form a group with recurring operating profits of more than €11 billion and sales ahead of General Motors and Hyundai-Kia.
The Financial Times went on to say, based on the firms’ current market capitalizations, the new entity would have an equity value of about €41.1 billion.
Despite targeting annual cost savings of around €3.7 billion, PSA and FCA said no plants would close as a result of the merger.
But no plant closures doesn’t mean no job losses.
The article quotes Ferdinand Dudenhöffer, of the CAR-Center Automotive Research at Universität Duisburg-Essen, who said PSA’s Opel unit would be the “loser” in the merger and predicted at least 10,000 engineering job losses overall. “Opel’s role in the new group will become weaker. [It will have to] fight alongside mass-market brands Fiat, Citroën and Peugeot for the same customers,” he is quoted as saying.
FCA and PSA are not alone in facing profound challenges over the next few years created by looming legislation led by Europe over emissions targets.
The pressures on automakers are being exacerbated by a slowdown in the global automotive market, just as cash flow is being squeezed by the massive investment required for a switch to electric vehicles.
In an upcoming article, we will explore the dichotomy automakers in Europe are facing. Driven by legislation to reduce average fleet emissions, automakers are bringing a wave of new EV models on to the market, but the general public remains wary of EVs and is not making the switch (except in a few incentive-driven countries).
The FCA-PSA merger may give the combined group the financial clout and resources to make the aforementioned transition.
But until the paying public can be persuaded to change, government legislation might create the greatest challenge to carmakers in the new decade.
Industrial production in the U.S. moved in a positive direction in November, aided in part by the end of the nationwide strike at General Motors that spanned over September-October.
According to the U.S. Federal Reserve’s monthly industrial production index, production gained in November after falling in three of the previous four months (production increased 0.8% in August).
The industrial production index reached a value of 109.2 in November (a value of 100 is equivalent to industrial production levels in 2012). The index bounced back from the September value of 108.5.
“These sharp November increases were largely due to a bounceback in the output of motor vehicles and parts following the end of a strike at a major manufacturer,” the Fed said in a release. “Excluding motor vehicles and parts, the indexes for total industrial production and for manufacturing moved up 0.5 percent and 0.3 percent, respectively. Mining production edged down 0.2 percent, while the output of utilities increased 2.9 percent.”
By market group, manufacturing production jumped 1.1% in November from the previous month, while durables increased 2.2%.
Meanwhile, the “indexes for primary metals and for computer and electronic products advanced 1 percent or more, while the indexes for nonmetallic mineral products, furniture and related products, and machinery declined modestly,” according to the Fed.
The news come amid encouraging developments on the trade front.
Last week, the U.S. and China announced they had reached an agreement in principle on a “phase one” deal, one that would see the U.S. pull back $160 billion in tariffs in exchange for increased purchases of U.S. agricultural goods by China.
Meanwhile, the White House and House Democrats also reached an agreement regarding revisions to the United States-Mexico-Canada Agreement (USMCA), the proposed successor to the 1990s-era North American Free Trade Agreement (NAFTA).
Both deals have yet to be finalized, however. (For further commentary on recent trade developments, read Don Hauser’s article published earlier this week.)
Week in Review: Tariffs on Argentina, Brazil?; nickel prices slide; Saudi Aramco debuts on Riyadh exchange
Before we head into the weekend, let’s take a look at the week that was and some of the metals storylines here on MetalMiner:
- Stuart Burns on President Donald Trump’s recent announcement regarding tariffs on steel and aluminum from Argentina and Brazil.
- Nickel prices have seen a significant downward correction.
- November proved to be a solid month for automotive sales in the U.S. market.
- Burns delved into the economic and political situation in Zimbabwe, plus their implications on mining.
- India appears set to become a net importer of iron ore next year.
- U.S. construction spending in October picked up 1.1% on a year-over-year basis.
- Oil behemoth Saudi Aramco finally floated some shares, albeit only on the Riyadh exchange.
- Australian rare earths miner and processor Lynas Corp. announced the site for its new cracking and leaching plant.
- Indian steel demand fell in October for the first time in seven months.
- U.S. steel prices have bounced back over the last month.
- The spread between palladium and platinum widened this past month.
- Glencore announced a cobalt supply deal with South Korean company SK Innovation.
- Power outages in South Africa resulted in price support for palladium and platinum.