Articles in Category: Macroeconomics

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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.

China is one of the most-watched economies in the world because its health ties in heavily with overall global economic growth. Further, there is a strong correlation between the Chinese economy as an industrial metals demand generator and the primary metals market outlook.

MetalMiner has always followed some Chinese indicators in order to completely understand and correlate metals markets. Let’s take a look at some indicators buying organizations may want to consider.

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Chinese Annual GDP Growth is Flattening

The International Monetary Fund (IMF) recently lowered its 2019 annual average global growth projection down to 3.5% from 3.7% on the heels of China’s growth slowdown: why?

China’s contribution to total global growth is strong, accounting for an estimated one-third of total growth annually.

Figure 1. China’s flattening growth curve may mean a continued sideways trend in base metals. Source:

The Chinese Caixin Manufacturing Index Is Trending Downward

The China Caixin Manufacturing PMI, an index which measures manufacturing confidence, is presently trending negatively.

The most recent downward trend emerged with the United States tariff changes in early 2018; however, the Chinese Caixin PMI is still trending higher than it did in 2017.

Figure 2. Chinese Caixin Manufacturing Index, 2014 – 2018

Figure 3. Chinese Caixin Manufacturing Index – Previous 14 Months

While Chinese manufacturers’ confidence appears lower overall as measured by the PMI, the bigger picture of Chinese economic confidence is more nuanced.

The Manufacturing PMI showed weaker sentiment when compared to other major sectors of the Chinese economy, while the Industrial Production and Mining Indexes showed improved confidence over the prior reporting period. In terms of the automotive industry, car production figures dropped while total vehicle sales and car registrations went up in absolute numbers.

Honson To, chairman of KPMG in the Asia-Pacific region and China, also finds reason to remain optimistic over China’s growth prospects this year, namely in the areas of domestic infrastructure projects and high-tech manufacturing. He expects infrastructure investments to contribute to continued Chinese growth, especially in the areas of high-speed railways and roads. Additionally, he projects further growth in the advanced manufacturing sector during 2019.

Beyond the direct stimulus impact, these upgrades to infrastructure will benefit the country by strengthening regional transportation across the vast country. While China boasts the world’s largest population, in terms of density it is much further down the list; therefore, improved regional infrastructure should provide a domestic stimulus for the Chinese national economy.

On the other hand, there will likely be a lag by up to a year in terms of how these domestic infrastructure projects will impact growth numbers, given the nature of such projects, as pointed out by Alistair Ramsay, a research manager with Fastmarkets, during a Jan. 25 BrightTalk presentation on the steel sector in China entitled “Ferrous Metal, Full Steam Ahead?

The Chinese Stock Market is Showing Weakness

Figure 4. The China Shanghai Composite Stock Market Index declined throughout 2018.

A look at the Shanghai Composite Stock Market Index shows a trend toward declining stock prices throughout 2018.

Additionally, a recent Goldman Sachs analysis of 20 well-traded stocks shows more weakness than expected coming from the domestic side of the Chinese economy, stating that the slowdown is visible in the data from the 20 stocks selected for the analysis.

Weakened performance in the consumer and producer markets has led to much speculation that the domestic slowdown has hit to a greater extent than expected.

Domestic pessimism over the Chinese economy’s health due to the U.S.’s aggressive tariff policies is viewed as the key issue, as tariffs are effectively curbing exports and slowing overall growth.

This, in turn, is impacting the U.S. through poorer market performance (take, for example, Apple’s recent off-target profit estimates resulting from weaker Chinese domestic demand for iPhones).

Foreign Direct Investment Inflows into China Remain Stable

As a factor potentially in support of China’s growth in the sectors identified by Honson, foreign direct investment (FDI) throughout the first half of 2018 (the latest dates for which figures are available) remained stable against a backdrop of falling FDI worldwide across both developed and developing countries.

According to the latest figures from the Chinese Ministry of Commerce, “FDI went up 3 percent year-on-year to $135 billion in 2018, while that of the world’s total and developed countries slumped 41 percent and 69 percent, respectively, in the first half of 2018.”

The strength of FDI in China is only second to the United States, according to another recent analysis. It should be noted that these figures, like those of the Chinese government, do not reflect the latter months of 2018 and are based on a 10-year analysis.

Others are more critical of the FDI situation in China, pointing out that even Chinese investors may prefer to invest elsewhere given a restrictive domestic investment environment resulting from recent Chinese government policies.

According to Baker McKenzie, Sweden, the UK, Germany and France were the top destinations for Chinese investment in the first half of 2018.” The move toward heavier Chinese investment in the E.U. was also spurred on by the trade situation with the U.S., according to the same report.

The Yuan Regained Weakness Against the Dollar in 2018

Figure 5. Long-term Comparison of the USDCNY – Index of the U.S. Dollar Against the Chinese Yuan

Chinese policymakers are well-known for their currency price control.

Once the yuan was devalued in 1994, the currency stayed under very tight government control, with very little change against the dollar for many years.

Quantitative easing is a popular technique; the Chinese government is well-known for injecting liquidity in the banking system to control the value of the currency.

Figure 6. The Appreciation of the Yuan Against the Dollar As a Result of Trade Policies During 2018 Quickly Reversed

The long-term effect of China’s intensive depreciation policy is to make steel and aluminum products cheaper.

Even in the current trade environment with applicable tariffs, steel and aluminum are still cheaper when compared with buying them in the U.S. due to the currency exchange rate between the U.S. and China. This situation is more or less continuing in an unmitigated fashion, as the Chinese government continues to exert artificial controls on the exchange rate. 

So What Does That Mean for Metals?

If it’s not a stock market boom year, we might expect the metals market to continue to trend sideways, if not head upwards.

MetalMiner’s Annual Outlook provides 2019 buying strategies for carbon steel

However, if the dollar stays strong, that should offset some of the gain — metals may see lower prices and then still fall in line with the sideways trend. This question is still undecided and is wrapped into the story of trade between the U.S. and China.

Beyond the strong U.S. dollar, the global production outlook appears moderate.

To read more about China’s growth in historical context, see Stuart Burns’ recent article.

The New York Times reports this week that China’s economy continues to gently slow its pace of growth.

For the last three months of 2018, growth came in at 6.4% compared with a year earlier, the paper said, its slowest pace since a decade ago. For the full year, the Chinese economy grew at 6.6% — its weakest pace of growth since 1990, but still stellar compared to Europe or the U.S.

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Should we be surprised?

No, we shouldn’t be.

China is, after all, a maturing economy and has appeared to be on a managed deceleration for years. Not since the debt-fueled, post-financial-crisis boom in 2010, when it peaked at over 12%, has growth been in double digits.

But some are wondering whether we should we be questioning the numbers themselves.

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This morning in metals, we’re tracking the following stories.

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  • Global aluminum value chain under fire from China. The OECD has released a report titled “Measuring distortions in international markets: the aluminum value chain,” in which the organization places particular emphasis on unfairly subsidized aluminum in China, according to a release by the Aluminum Association. “Looking across the whole value chain … shows subsidies upstream to confer significant support to downstream activities, such as the production of semi-fabricated products of aluminum,” the report’s opening reads. “Total government support for [17 aluminum firms] reached up to USD $70 billion over the 2013-17 period, depending on how financial support (i.e. concessional loans) is estimated,” the report continued. “Although all 17 firms received some form of support, it is highly concentrated: the top 5 recipients receive 85% of all support, most of it at the smelting stage of the value chain.”
  • Nucor Corp. breaking ground in the Midwest. Reuters reports that Nucor is planning to build a plate mill for $1.35 billion in Sedalia, Missouri, to be fully operational in 2022. The new mill would produce 1.2 million tons a year of plate products and create about 400 full-time jobs, according to the company’s release. “Tax reform, continued improvements to our regulatory approach and strong trade enforcement are giving businesses like ours the confidence to make long-term capital investments here in the United States,” Reuters quoted Chief Executive Officer John Ferriola as saying in a statement.

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  • Small business owners’ confidence in economy, outlook on business conditions weakens yet again. The Wall Street Journal reports (paywall) that the National Federation of Independent Business’ optimism index has fallen for the fourth straight month. “Over the past few months, owners’ expectations for the future have tempered, while reporting continued solid economic activity,” the NFIB said in its report, based on responses from 621 small-business owners, according to the WSJ. “The Index remains at historically high levels but can’t be expected to improve every month.” As the WSJ article noted, “the survey results mirror those from the Conference Board, whose December survey suggested growing economic-growth concerns.”

The dollar has been on a tear this year, boosted by a large corporate tax cut, a hawkish Fed and the imposition of import tariffs, the Financial Times suggests.

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These policy interventions were specifically designed to help Republicans in November’s midterm election, but they are unlikely to have a lasting positive effect.

Election-motivated fiscal giveaways typically increase macroeconomic instability, while tariffs reduce rather than enhance productivity. Neither will sustain the 2018 dollar recovery in the medium term, the news source believes, nor will the effects of quantitative easing (QE) continue to support mature markets (now that the policies are being withdrawn on both sides of the Atlantic).

According to the Financial Times, since late 2010 the dollar has rallied 35% in broad terms and 50% against emerging-market currencies, while the total return to U.S. stocks is 430% and German bonds have made more than 80%.

These gains have come as both a direct and indirect result of massive QE in the U.S. and Europe, funds have flowed out of emerging markets into those that are direct beneficiaries of QE. As QE is reversed, so too will the flow of funds; QE-supported markets will suffer and, relatively speaking, emerging markets will again become more attractive, the Financial Times believes.

The issue for commodities is what impact this will have on the dollar.

Dollar strength has been one factor depressing commodity prices this year. If the dollar were to weaken relative to a wider basket of currencies, this could have an inflationary effect on prices.

How quickly dollar strength ebbs remains to be seen.

The most recent hike in Fed funds was deemed by many to be a step too far — or at least too fast. At least, the White House that would have preferred a more cautious Fed approach.

The Fed’s position is that we could see two more rate hikes in 2019, a move that would support dollar strength (providing GDP growth remained positive), but recent assessments this week suggest there may be no further rate hikes next year, paving the way for a weaker dollar sooner rather than later in 2019.

Of course, dollar strength is only one of several dynamics impacting the price of commodities, but it remains a consistently strong correlator over time. Other factors include GDP and stock market growth in emerging markets, to the extent that an end to QE boosts investment interest in emerging markets that too could be supportive of commodity prices.

MetalMiner’s Annual Outlook provides 2019 buying strategies for carbon steel

For now, prices appear under pressure, but what 2019 holds for us — once the current sell-off runs its course — remains the be seen.

This morning in metals, here are a couple news items that piqued our interest:

  • China giving the U.S. a break in trade “war” by lifting the tariff on cars… According to a story originally reported by Bloomberg today, China will lift the 25% retaliatory duty on cars for three months (thanks, China!) in an effort to defuse trade tensions with the U.S. The tariff “will be scrapped starting Jan. 1, China’s finance ministry said Friday, ” according to the article. “The temporary tax reduction for U.S. car imports comes as China heads for its very first annual vehicle sales decline in 28 years amid the trade war and an economic slowdown that’s undermining consumption momentum.” Full article here.


  • …And here’s why: China’s economy is sputtering across the board. According to the WSJ, many economic and industrial indicators in China are causing worry. “Weakness was seen across the industrial sector,” the paper reports (paywall). “Automobile production shrank 3.2% last month from a year earlier, extending a 0.7% contraction in October. Chemical materials and products rose 1.9%, decelerating from 4.4% growth. Retail sales rose 8.1% in November from a year earlier, slowing from an 8.6% year-over-year gain in October.” Full article here.


  • Cuba’s nickel production expected to top 50,000 tons in 2018. Nickel mining is a primary source of export revenue for the Communist country, according to a Reuters article, which has foundered in recent years. However, earnings from nickel are up over last year for Cuba, the 10th largest nickel producer globally (who knew!), so things are looking up for the island nation…at least in regards to nickel production. Full article here.

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The Week That Was

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To review what MetalMiner covered over the past week, check out my colleague JP Morris’ excellent rundown here over at our sister site Spend Matters — we couldn’t have written it better ourselves!

A hint of the highlights:

Here’s to a happy and relaxing weekend.

Ed. note: Enjoy this timely dispatch from London by MetalMiner’s Editor at Large.

Not just Europe but the entire world was surprised at Britain’s decision following a referendum in 2016 to leave the EU.

At the time, the media was full of the story but in the interim we have all rather switched off as the negotiations have taken a tortuous route back and forth without appearing to make any progress. Brits have largely despaired that their government will ever come to a workable solution, an opinion reinforced last week when the latest (and according to the EU) final deal was presented to parliament, only for it to be roundly rejected and face the prospect this week of being formally thrown out if it is put to a vote.

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Now, even though Prime Minister Theresa May has just delayed a Commons vote for the plan that was originally scheduled for tomorrow, the prospect of Brexit is not some far-off threat; come the end of March, the UK formally leaves the EU and — whatever happens — will have to accept a new form of relationship with its neighbors.

The questions is, how will we get there at this point?

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