Articles in Category: Macroeconomics

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In recent weeks, the Chinese yuan (CNY) has weakened against the U.S. dollar (USD). A weaker yuan makes imports cheaper, all other things holding equal.

As we can see in this chart, during the past couple of weeks the yuan weakened back to roughly December levels.

Will this currency change result in surging steel imports due to the increased attractiveness of Chinese steel prices?

Source: MetalMiner analysis of data

The Price Spread Still Remains Fairly High, Apples to Apples

The chart below shows the spread between U.S. and Chinese CRC prices since January 2018.

Source: MetalMiner data from MetalMiner IndX(™)

Around the time the U.S. tariffs took effect, U.S. prices increased, while Chinese prices started to move lower.

Fast forward to mid-May 2019 and the differential still remains higher than during the pre-tariff period. The differential is down to just over $200/st — from around $400/st, the 2018 peak — as shown by the spread line in purple, which measures the straight arithmetic difference between the two prices.

Why should we look at Chinese prices? It’s certainly not because China serves a major trading partner for steel. Looking at the statistics, in fact, only around 1% of China’s steel exports come to the U.S.

The reason to study Chinese steel prices owes to the fact that China drives global production, with over 50% of global steel produced in China. In pure price trend analysis, we know it remains a key to future pricing for the U.S., as it will be for all country-level analyses.

As such, examining the Chinese CRC price offers value, regardless of whether or not an organization plans to actually import from China.

A Tactical Examination of the CRC Price Differential

In terms of a more hands-on assessment for buyers looking at importing steel from China, a second look at the spread below takes into account the 25% tariff and $90 per ton in estimated import charges (e.g., freight, trader margin, etc.).

Source: MetalMiner data from MetalMiner IndX(™)

The chart above depicts $90 in importing costs added to the Chinese CRC price only, plus the 25% tariff rate, with the extra 25% added on top only after March 23, 2018.

Adding the import tariff decreases the spread, as shown by the purple line. Subsequently, the tariff triggered a drop in the spread.

At the arrows, we see the differential shift after March 23, 2018, when Chinese prices effectively rose to around $900/st. At that point, the spread dropped significantly, as expected, as shown by the sudden drop in the purple line.

While a spread in China’s favor still remained throughout 2018, into 2019 one could say tariffs leveled the relative price difference. Additionally, U.S. steel prices dropped in line with Chinese prices (plus the tariff and import costs).

With the spread essentially flat, tariffs look to essentially “level the playing field,” as prescribed by their use.

What Does This Mean for Industrial Buyers?

With the Chinese currency weakening once more against the U.S. dollar, MetalMiner expects Chinese imports will start to look increasingly attractive to would-be U.S.-based importers.

However, once we account for the tariffs and import costs, the spread between U.S. and Chinese prices looks effectively negligible.

The fact that U.S. prices for CRC dropped very recently also offset some of the would-be increase in the spread following the weakening of the yuan against the dollar.

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Given that Chinese imports only account for a small percentage of U.S. steel imports at this time, and given the flattening of the spread, the Chinese yuan must depreciate more significantly or U.S. prices must begin to rise once more before we can expect to see a major uptick in imports of Chinese CRC steel.

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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:

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This morning in metals news, the International Monetary Fund (IMF) released a slightly more positive 2019 growth forecast for China, a fire led to damages at one of Rio Tinto’s Pilbara iron ore operations, and Polish copper producer KGHM said it may freeze operations in Canada and the U.S.

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IMF Sees 6.3% Growth in China This Year

The IMF has revised its 2019 growth forecast for China, up to 6.3% from 6.2%, CNBC reported.

The world continues to wait for some sort of resolution to the ongoing trade talks between the world’s preeminent economic powers, the U.S. and China.

Growth has been slowing around the world, and China was no exception, posting its lowest growth level in 28 years, CNBC reported.

Fire Hits Rio Tinto Iron Ore Mine

Miner Rio Tinto announced a fire had damaged one of its Pilbara iron ore operations in Australia, Reuters reported.

According to the report, the fire broke out Saturday night at the miner’s East Intercourse Island port operation.

Recently, Rio Tinto declared force majeure on some contracts after Tropical Cyclone Veronica battered the northwest Australian coast, damaging the Cape Lambert A port terminal.

KGHM Could Freeze U.S., Canada Mines

Polish silver and copper producer KGHM said it doesn’t have plans to sell its assets abroad, but it would consider freezing its mines in Canada and the U.S. if they require major investments, Reuters reported.

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“We are not currently thinking about selling foreign assets. We’re considering strategies for the next few years,” KGHM Chief Executive Marcin Chludzinski told Reuters.

A few years ago it was not uncommon to hear pundits calling the end of the dollar’s supremacy, the decline of the greenback’s position as the world’s reserve currency.

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Those pundits predicted the dollar would eventually be overtaken by a rising China — or, at the very least, by a multi-currency world of euros, yen and the rapidly rising renminbi.

Then came the broad market rout of 2015 and all that went into reverse.

You won’t have heard those calls for the dollar’s demise of late: why? Because despite the current administration’s weaponization of the currency – the imposition of geopolitically inspired controls on dollar transactions, such as sanctions on Russian oligarchs, Iran, North Korea, and so on — the dollar is being used more now than it was five years ago.

True, those most impacted, like Russia, have significantly reduced their reserve holdings of dollars and diversified into gold and other currencies. According to the Financial Times, Russia has reduced its holdings of dollars from 46% of the total foreign currency reserves to 22% and increased its holdings in gold.

Russia one can understand, but the surprise has been China.

Today, the renminbi is less international by three key measures than just before that 2015 meltdown, the Financial Times explains. At its peak more than four years ago, the Chinese currency had become the fourth-most widely used currency for cross-border payments, according to SWIFT, the global financial messaging service.

But for most of the past few years, it has been in fifth place, having fallen in larger monthly volumes, year on year, than other global currencies. Similarly, the Financial Times says, yuan-denominated trade accounted for 30% of total Chinese trade in 2014, but has since slipped to about half that level.

Moreover, offshore bond issuance denominated in renminbi is about half the roughly $900 billion level of 2014, according to JPMorgan.

The only parties to kick the trend are central banks, which, as of the third quarter, carried 1.8% of the world’s reserves in renminbi, according to IMF data. But that was up only slightly from 1.1% when the Chinese currency was first included in the data at the end of 2016 and still pales to banks’ appetite for gold, holdings of which are now at their highest level since 1971.

Fortunes for the renminbi could be about to change, though.

Recently, Chinese government bonds have become accepted into a widely used global index, a move that could ultimately spur some $2 trillion of fund inflows into China’s onshore debt market, according to the Financial Times. That signifies the country’s debt market, the world’s third-largest, could in itself spur demand for renminbi.

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Even so, China’s aspiration for the renminbi to rank alongside the dollar still looks to be a long way off.

No need to rush to the forex dealer with your greenbacks just yet.

Readers of The Telegraph are somewhat inured to dire warnings from the paper’s International Business Editor Ambrose Evans-Pritchard. However, his articles are well-researched and in the case of a piece this week, well balanced with arguments for and against his central theme that the bond market, supported by wider data, is showing sufficient warning signs regarding a recession that we should take the prospect seriously.

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The piece isn’t alone in calling out the inversion of the U.S. bond market as a warning sign.

Simply put, the yield on 10-year U.S. Treasuries slipping below shorter-dated maturities tends to be a reliable indicator that a contraction is coming.

As this graph from The Telegraph, illustrates the yield curve has proved a remarkably accurate predictor of America’s post-war recessions.

Source: The Telegraph

This is the first time that the curve has turned negative since 2007, just ahead of the last financial crisis. In an earlier post, Evans-Prichard explains that inversions actually mean something important — that bond investors think interest rates are going to be lower in the future than they are now.

A bet on lower interest rates is a bet on lower inflation and poor growth — a sentiment that can become self-fulfilling.

If the yield curve were to shortly switch back into positive territory, it may be treated as an anomaly.

Meanwhile, 10-year German Bund yields recently crashed below zero after a gauge of manufacturing orders dropped to what the article terms slump levels of 40.7 (last seen in 2009). It could be a negative return on 10-year German Bunds is making higher-yielding U.S. Treasuries seem an attractive alternative and, in the process, distorting the market.

Other indicators, however, suggest this could be part of a wider malaise.

Source: The Telegraph

Trade war or not, the Chinese economy is in the grip of a long-term cyclical and structural slowdown.

Recent fiscal stimulus from tax cuts and spending could add about 1%, to GDP but this is a far cry from the stimulus of 4% in 2015-16 and 10% of GDP a decade ago following the financial crisis.

China isn’t going to ride to the rescue this time. The article quotes Capital Economic’s proxy measures of the Chinese economy, suggesting real growth is closer to 4.0-4.5% this year. Even with the uplift in sentiment that a settlement to the trade dispute between the U.S. and China may bring, it is unlikely this will result in a strong resurgence in global growth.

Europe, in particular, has no room for stimulus with the European Central Bank stopping quantitative easing last year and negative interest rates still prevailing in some economies. Heavily indebted states, like Italy, are said to be into the third quarter of recession just as bank credit is becoming constrained.

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Despite some of the dire data, Evans-Prichard is not predicting an outright recession, but rather a period of stagnation during next year. His view is predicated on the expectation that the U.S. should continue with positive — if slowing — growth and that emerging-market growth may be sufficient to offset the slowdown in Europe.

Nevertheless, he cautions a close watch on that inverted yield curve; if it perseveres, it could be a harbinger of worse to come.

The U.S. Census Bureau and Department of Housing and Urban Development on Tuesday released data on February housing construction, revealing the month was a particularly slow one for new construction.

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According to the joint report, February housing starts reached a seasonally adjusted annual rate of 1.16 million, down 8.7% from January’s revised rate of 1.27 million. On a year-over-year basis, February 2019 housing starts were down 9.9% from February 2018’s 1.29 million.

In addition, single‐family housing starts in February hit 805,000, down 17.0% from the revised January figure of 970,000. The February rate for units in buildings with five units or more was 352,000, according to the report.

Privately‐owned housing units authorized by building permits in February were at a seasonally adjusted annual rate of 1.3 million, 1.6% below the revised January rate of 1.32 million and 2.0% below the February 2018 rate of 1.32 million. Single‐family authorizations in February were at a rate of 821,000, unchanged from the revised January figure of 821,000. Permits for units in buildings of five units or more came in at a rate of 439,000 in February.

Meanwhile, privately‐owned housing completions in February hit a seasonally adjusted annual rate of 1.30 million, up 4.5% from the revised January estimate of 1.25 million and is 1.1% above the February 2018 rate of 1.29 million. Single‐family housing completions in February were down 10% from January to 816,000, while completions for for units in buildings with five units or more was 473,000.

Housing starts had been trending steadily upward in recent years until a downtick throughout much of 2018.

Source: U.S. Census Bureau, HUD

With recession fears popping up around the world, it remains to be seen if the recent data constitutes a short-term blip or a harbinger of some kind of sustained economic downturn. In 2018, housing starts jumped from 1.29 million in February to 1.33 million in March.

Prior to the Great Recession, U.S. housing starts in February 2007 hit 1.48 million before dropping to 1.10 million in February 2008 and plummeting to 582,000 in February 2009. February 2010 housing starts bounced back slightly (604,000) before falling further still in February 2011 (517,000).

So far this year, both January and February housing starts were down on a year-over-year basis.

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The next housing starts data release from the Census Bureau and HUD is scheduled for April 19.

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Stock and currency markets have been a little perkier the last week or so as expectations rise of some form of Chinese stimulus to boost demand — and, hence, global growth.

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That optimism, though, may be somewhat misplaced.

China has limited scope of debt-fueled stimulus of the type employed in the past, so a pick-up in demand resulting from fiscal measures may be more muted than some optimists hope.

Still, hopes were raised when Premier Li Keqiang closed a briefing to the National People’s Congress with a number of announcements. Beijing intends to use tools such as lowering bank reserve requirements, according to Bloomberg.

However, a promise to reduce VAT on manufactured goods from the current 16% to 13% from April 1 gave a definite fillip to traders and cast depression among hard-pressed aluminum semis manufacturers in the region. More competitively priced Chinese aluminum semi-finished product is the last thing regional aluminum producers want on their doorstep.

The measure is expected to further boost exports, which have already been running at near-record levels in 2018-19. According to Aluminium Insider, exports have risen from 517,000 tons per month last August to 552,000 tons in January to set a new record. Primary producers, who had been meeting to negotiate capacity closures in the face of slowing demand, are reportedly now likely to reverse that decision in the hope demand will pick up.

According to Aluminium Insider, the move is expected to pump in the region of CNY 600 billion (U.S. $90 billion) into the manufacturing sector, boosting the country’s gross domestic product by 0.6%. The move comes as the latest in a series of changes to the country’s tax regime conducted by Beijing, carried out to bolster the economy after manipulations of monetary policy and further debt-based spending have become increasingly difficult avenues for effecting change.

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Optimism is supported by the widespread belief that an agreement on China’s trade war with the U.S. is just a matter of weeks away — but the much-touted trade summit between President Donald Trump and Premier Li Keqiang has been postponed yet again, and may now not take place until well into April or even May.

A successful trade deal is by no means a certainty, as much as the markets will look for any deal to be better than no deal.

Well, some folks have been talking about it for a while, but figures this week suggest the long-anticipated slowdown has arrived.

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Negative numbers out of China have been reported for some months now, particularly falling PMI figures suggesting a steadily deteriorating outlook. Beijing has set a target of GDP growth range of 6.0-6.5% this year, according to The Telegraph, down from a hard target of 6.5% over the last two years, and blamed the trade war.

It’s debatable whether China will even manage 6% this year. While the trade war with the U.S. has exacerbated problems, the slowdown started before President Donald Trump’s Section 232 and Section 301 actions.

Nevertheless, the trade war is certainly making matters worse.

Another article in The Telegraph reports a sharp fall in Chinese shipments. Imports and exports are both falling, while Premier Li Keqiang is quoted as saying this week that “Instability and uncertainty are visibly increasing and externally generated risks are on the rise, downward pressure on the Chinese economy continues to increase, growth in consumption is slowing, and growth in effective investment lacks momentum.”

Until now, a sluggish Europe and a slowing China were being counterbalanced by a robust U.S. economy and decent growth in other emerging markets.

But last week, shock jobs data suggests U.S. growth is not a given.

The 20.7% slump in February was four times greater than predictions of a 5% decline, with just 20,000 workers added to payrolls — some 160,000 fewer than expected.

Some are attributing the sharp slowdown to the impact of tariffs and negative investment sentiment, mounting pressure on the president to reach a deal with the China this month. The tariffs were promoted as a solution to the growing trade deficit, but so far at least the opposite has prevailed.

The U.S. Department of Commerce is quoted as saying last week that a 12.4% jump in December contributed to the record $891.3 billion goods trade shortfall last year. The overall trade deficit surged 12.5% to $621.0 billion, the largest since 2008, effectively junking suggestions that the U.S. could tariff its way out of the deficit.

The situation may not have been helped by the president’s tax giveaway that has in part been spent on the import of luxury goods, such as autos. The impact of higher domestic prices, though, seems as much psychological as actual, with consumers postponing purchases in the face of rising prices.

Salaries are rising, unemployment is low, consumers are not fearful of their future in the way they are in a recession, but they may be deferring buying in the hope of a trade deal and a reduction in costs later in the year or next.

The danger is by then we really may be in a recession if the economy, both in the U.S. and globally, does not get back on track this year.

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Negative sentiment has a tendency to be self-fulfilling.

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Everything in the garden may look rosy from the U.S., but there is no doubt that the global economy is slowing.

Recent data from Germany suggests the engine of the European Union is suffering as much as anyone.

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A Telegraph article last week examines recent economic data from Germany and Italy to better understand the current state of the main European economies.

Even peeling away the more sensationalist rhetoric, the figures do not looking encouraging.

German industrial output fell sharply in December, led by falling car sales as car companies struggle with changes in emission standards.

But this wasn’t a one-month aberration.

German industrial production fell by 3.2% over the second half of last year, the sharpest contraction since the Lehman crisis, the article reports, with manufacturing orders down 7% in January from a year earlier. The economy has been hit by a downturn in China, East Asia and Turkey — all major trading partners – with the malaise spreading from autos to construction, chemicals and the pharmaceutical sectors. The stock market is down and German GDP contracted 0.8% in the third quarter.

Source: The Telegraph

Meanwhile, in Italy, Europe’s latest problem child, is struggling to balance the aspirations of the populist governing coalition of Lega/Five star, with structural long-term problems in the economy.

The article quotes some really astonishing details. According to the IMF, productivity levels in Italy’s non-tradable sector has fallen by 16% since 1966, while per-capita income has dropped by 4% over the last two decades.

The workforce is contracting at an alarming pace, with almost 160,000 people leaving the country each year. Meanwhile, the country is struggling to finance the rollover of some €400 billion euros of debt in 2019, which is twice the entire GDP of Greece, the article notes.

So far, markets have been relatively sanguine about Italy’s GDP to debt, with 10-year bonds only trading at a 286-point premium, but the Lega/Five Star coalition has shown it has scant love of Brussels-imposed limits on spending and, in the face of popular demand, it may yet try to spend its way out of trouble.

Source: The Telegraph

Apparently, some economists say the only way to break out of this perennial trap is for Italy to leave the euro, devalue by 30 pc, and restructure its debts. However, so far there appears to be little appetite in Italy to leave the Euro, despite the constriction membership has imposed on the economy for the last two decades.

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The E.U. has little room for monetary stimulus, with interest rates at -0.4% and an end called to its bond buying QE. Germany could do a mini-China and splurge on much-needed infrastructure spending, but as The Telegraph notes, with so many legal debt brakes in the government finances, quite how they would finance such a boost is hard to see.

Under the circumstances, slower European growth seems an almost certainty in 2019, and even the European Commission’s recently revised prediction — from 1.9% growth for 2019 made in the fall to 1.3% just recently — may prove implausibly optimistic by the end of 2019.

Venezuela at a Crossroads

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We wouldn’t be the first to say Venezuela is at a crossroads, and we may not be the last, but rarely in the last decade has this once-thriving economy had the chance to seize a brighter future from the wretched state it finds itself in today.

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Juan Guaidó, the 35-year-old leader of the National Assembly, has the support of the United States, much of Latin America and the European Union for his claim to legitimacy as president of Venezuela. The incumbent, Nicolas Maduro, who has presided over the collapse of the economy, has the backing of the army and a range of authoritarian regimes around the world who see in Guaidó’s populist rise the unhelpful assertion of the people over autocratic rule.

Russia, Turkey and China are all positioning themselves to prevent what they see as the U.S.’s meddling. But as The Economist points out, the world should not stand idly by and let the Venezuelans struggle with this on their own.

There is a real danger the army will simply impose martial law to maintain the status quo. After five years of wretched inflation and growing poverty, what was once one of Latin America’s richest countries has been reduced to its poorest.

With the world largest reserves of oil and gas, and sitting in America’s backyard, it is hardly in the West’s interest to allow this festering boil to erupt into civil war, let alone perpetuating the humanitarian disaster that is unfolding.

As The Economist observes, Maduro has presided over an inexorable decline in the economy. Annual inflation is now running at an unimaginable 1.7 million percent, which means that bolívar savings worth $10,000 at the start of the year dwindle to $0.59 by the end.

Venezuela has vast reserves of oil and gas; however, starved of investment and plundered by Maduro’s corrupt generals, production has tumble to 1.1 million barrels a day from nearly 3.0 million less than five years ago. According to The New York Times, the National Assembly estimates that some U.S. $30 billion has gone missing from state oil company PDVSA’s coffers in the last few years.

Even allowing for much of this being due to mismanagement and populist price controls, it still suggests corruption on a large scale.

In an increasingly isolationist America, some will ask: is this America’s problem?

Well, quite apart from the humanitarian disaster – over 3 million people have fled the country due to hunger, repression and to escape dire poverty – if America doesn’t step in, Russia will.

Venezuela has the oil and gas reserves to once again become a major economic power in the region — do we want that to be an open liberal democratic society or a puppet of Moscow or Beijing? It is reported by the paper that Russia has already moved 400 “private military personnel” to the country in moves that echo of Crimea.

Thankfully, so far the Trump administration is playing an economic, not a military game.

The Treasury Department has in effect put a U.S. embargo on Venezuelan oil by saying funds arising from payment for oil exports cannot be repatriated to PDVSA but must be held pending Guaidó’s appointment. It has also promised U.S. $20 million in food and medical aid to ease economic hardship for the country’s citizens (but payment is contingent on Guaidó coming to power).

Maduro, meanwhile, is busy selling what’s left of the country’s assets, a report in the Times states his administration is selling a fifth of his country’s gold reserves for cash to keep his regime solvent. Twenty-nine tons of gold are being sold to the United Arab Emirates — three tons were shipped last month and 15 tons were in the process of being sold last week (the balance will be sent shortly). The Times states the sale represents about a fifth of Venezuela’s previous total reserves of 132 tons.

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Venezuelans no doubt hope the end game is fast approaching, it is up to the West to help manage that process without bloodshed and, if possible, with an international consensus as to what is to follow.