Articles in Category: Macroeconomics

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Some would argue the credit rating agencies do not have the best record in making predictions on the future direction of financial markets.

Need buying strategies for steel in 2018? MetalMiner’s Annual Outlook has what you need

However, they do have considerable resources at their disposal, so when they issue particularly dire warnings, common sense suggests we should pause and consider their analysis.

An article in The Telegraph quotes James McCormack, in charge of sovereign ratings at Fitch Ratings Inc., as saying the agency forecasts the U.S. Federal Reserve base rate could rise to 3.25% by the fall next year, as the Fed doubles the pace of rate rises in 2018 to head off the potential for higher inflation sooner rather than later.

Fitch is forecasting four rate rises this year, double the pace that the markets are currently expecting, The Telegraph reports.

Nor is the rating agency alone — the World Bank said financial markets are the biggest risk to the global economy and that markets are underestimating the turmoil rising rates will cause in the years ahead.

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Everyone loves a forecast, a prediction, even a few ideas on what the future holds, and we become particularly obsessed with such ideas at the start of a new year.

So, we thought it would be fun to review a few sources’ suggestions on what 2018 may hold, some as specific predictions like those in the Financial Times, and some as possible standout black swan events that could catch us off guard, such as those in The Telegraph newspaper.

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Firstly, some of the Financial Times’s suggestions. They came up with 20 of them, but many are political and somewhat niche for our readership, like whether or not Britain’s Prime Minister Theresa May still be in power by the end of 2018. It’s a topic only the Brits are obsessed with and as it’s not exactly going to roil international markets one way or the other, we will ignore it here, as will non metal-market issues, like whether the AT&T-Time Warner merger will go through without big changes to both.

However, of more interest are questions like “Will Trump trigger a trade war with China?” Yes, in the FT’s opinion. The paper believes Trump will deliver on his protectionist campaign rhetoric and take punitive actions against China in 2018, resulting in China either imposing retaliatory measures or taking America to the World Trade Organization (WTO). (While on the Trump train of thought, another ditty from the FT is “Will the president will be impeached in 2018?” — or, at least, whether or not proceedings will be brought against him by the end of the year.)

Back to China, the driver for metal markets will be Chinese demand and Chinese GDP growth. At least officially, growth will continue to headline at 6.5% throughout 2018, the FT believes, although it clearly does not believe the official figures and makes the point real growth will be somewhat lower. Emerging market growth overall is expected to rise above 5% through 2018 despite the U.S. Federal Reserve increasing rates, which could spark taper tantrum spoilers (as in 2013). Even so, emerging market growth is expected to remain robust, aided by ongoing strong growth in the U.S. and Europe.

Political Turmoil Shakes Things Up Worldwide

Politically, 2018 could be an interesting year.

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Last week, the Fed hiked interest rates by 0.25%. Most expected the hike following June’s announcement of a likely increase. The hike should not impact markets in any major way.

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Along with the rate hike, the Fed also revealed a modified forecast for U.S. domestic growth for 2018. The forecast calls for 2.5% growth, up from the previous forecast of 2.1%. Tax reform could help support the growth forecast.

The U.S. Dollar

The U.S. dollar remains in a long-term downtrend since the beginning of the year. The two latest Fed rate hikes (circled in orange below) resulted in a slight increase of the U.S. dollar. However, the prior hikes failed to support any kind of dollar rally.

Source: MetalMiner analysis of Trading Economics

The U.S. dollar traded sideways during the last quarter of 2017. From here, the U.S. dollar could either change trend or continue falling.

Current indicators suggest that the long-term trend appears stronger and the U.S. dollar weakness looks to continue, as it has failed to breach prior resistance levels. However, buying organizations will want to watch the U.S. dollar closely.

The CRB and DBB Indexes

Commodities and industrial metals usually trade inversely to the U.S. dollar; both remain in an uptrend.

The CRB index has breached our own resistance levels several times since summer. Oil prices, which account for a significant portion of the CRB mix, are the cause of the index’s rise.

Source: MetalMiner analysis of Trading Economics

This month, the CRB index fell after breaching previous levels. The small drop came as a result of  a higher U.S. dollar this month (commodities and the dollar historically correlate negatively). In bullish markets, these represent typical price movements.

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The DBB industrial metal index also appears to be in an uptrend this month, driven by the increase in base metal prices and a stronger steel industry. Therefore, buying organizations could expect price movements to the upside.

China has always had a long-term dream — America has always scoffed — at the idea that one day China’s economy may exceed that of the U.S.

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Many still believe that is inconceivable. However, relentless growth at 6% gradually has its effect, and a Financial Times article quoting EIU research states that at current growth rates, it is likely that China’s GDP will exceed the U.S.’s by 2026, less than 10 years from now.

The key phrase here is “at current growth rates.”

U.S. growth is picking up and China’s is slowing down from its recent trends over the last decade, but even so the idea is no longer fanciful. Which country has the largest GDP though is, in and of itself, less of an issue. More important is which has the highest productivity, the greatest innovation and attracts investment in new technologies; those measures point the way to future prosperity.

The U.S. has always prided itself as having the greatest innovation, creating the new companies that rise from disrupter start-up to billion-dollar global brands.

Thanks in part to Silicon Valley, that is no false claim.

The word “unicorns,” referring to start-up companies that are valued at over a billion dollars (nearly all in tech or tech-related sectors) was coined only in 2013, but many of the names we are familiar with today are U.S. companies.

It seems almost inconceivable to us in the West that places like Shenzhen, on China’s border with Hong Kong, and Hangzhou — the city near Shanghai where Alibaba was founded — could challenge Silicon Valley as the global center of cutting-edge tech, but that is exactly what the Economist is suggesting is underway.

As the article says, China is catching up with the U.S. in its creation of unicorns. In June 2016, one-third of the world’s 262 unicorns were Chinese, representing 43% of the $883 billion worldwide valuation attached to these companies, according to the McKinsey research.

Source: Financial Times

The Financial Times reports that last year, according to McKinsey research, China ranked in the top three countries for venture capital investment in some particularly competitive fields of digital technology, including: virtual reality, autonomous vehicles, 3D printing, robotics, drones and artificial intelligence.

Beijing is actively supporting firms in these new fields, the Chinese have always played the long game with patience and planning. Ten years from now these technologies will be major disrupters of nearly every walk of life, business and even society.

Artificial intelligence and robotics alone will change the way businesses operate and it is probable many businesses will not survive the disruption such technologies will introduce.

Already, Chinese consumers are more, as the Financial Times would term it, “at ease” with technology. For example, mobile payments in China outstrips those of Americans by 10-to-1 last year, and China’s ecommerce market is already twice the size of the U.S.’s. Nor are Chinese tech giants like Tencent or Baidu as readily accessible to Western investors, the game is rigged by Beijing such that their firms invest heavily overseas but foreign investors are barred from taking direct stakes in the equivalent Chinese firms.

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The landscape is changing fast and is not immediately apparent to those of us in the West, but the direction is clear and progress relentless. New technologies will increasingly be dominated or heavily influenced by Chinese firms in the next decade.

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This afternoon in metals news, the U.S. renewable energy industry has reason to worry about the Republican tax proposal, union members at the Quebrada Blanca copper mine in Chile move closer to a strike, and precious metal prices fall.

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Renewables Market Pushes Against BEAT Tax

While the Republicans’ latest attempt at an overhaul of the U.S. tax system is receiving the usual praise and criticism, the renewable energy sector is concerned – and understandably so. As Dino Grandoni explains in the Washington Post, the bill may inadvertently end investment in wind and solar energy.

Currently, many companies have large multinational corporations finance wind or solar energy projects, and in return, give the latter the renewable energy credit that the government provides. But these credits may be cancelled out as part of the base erosion anti-abuse (BEAT) tax, which is meant to discourage multinationals from moving profits abroad.

According to the American Wind Energy Association’s Peter L. Kelley, the BEAT tax – if it is not amended to exempt renewables credits – could put an end to more than half of the country’s wind projects.

Strike Brewing at Quebrada Blanca Mine

A quarter of the workforce at the Quebrada Blanca copper mine in Chile moved closer to a strike, as the 106-member union rejected Canadian miner Teck Resources’ contract offer on Wednesday, Reuters reports. Ninety-six percent of the union voted to reject the offer and strike, said the president of the union. Read more

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This morning in metals news, the U.S. Department of Commerce launched an anti-dumping and anti-subsidy probe into Chinese aluminum imports, oil prices rise above $60/barrel and copper prices fall for a third consecutive day.

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Commerce Dept. Launches Aluminum Probe

On Tuesday, the U.S. Department of Commerce launched an anti-subsidy and anti-dumping probe of imported Chinese aluminum alloy sheet, Reuters reports. Beijing is less than happy about the investigation and released a strongly-worded statement on Wednesday, arguing that the move 10would harm both countries.

What sets this probe apart is that it was initiated by the Commerce Department itself, whereas usually these investigations are requested by companies and industries claiming harm from imports. The last time the Commerce Department initiated an anti-subsidy probe was in 1991, on Canadian softwood lumber.

If the probe proceeds, preliminary anti-subsidy and anti-dumping duties could be issued in February and April 2018, respectively.

The End of the Global Oil Oversupply?

Is it the beginning of better days for oil exporters? OPEC and Russia’s agreement last year on oil production cuts has helped prices recover. Brent crude oil reached $64 a barrel this week, the New York Times reports, and some analysts are expecting prices to top $70 next week. Read more

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It seems almost churlish to remind Zimbabweans who are celebrating in the streets following the announcement last week that tyrant Robert Mugabe has finally been forced by his own party (and the military) to resign after 37 years of progressively more authoritarian rule, that his removal was the relatively easy bit.

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Now begins the long journey of stitching back together an economy devastated by decades of corruption and mismanagement. That period has left the average per capita GDP in Zimbabwe at just $1,008, less than a fifth of that in neighboring South Africa.

The military seems content with replacing Mugabe with one of his closest aides, former Vice President Emmerson Mnangagwa, many fear they are simply replacing one tyrant with another.

The authorities are at pains to maintain a veneer of legitimacy to what is in effect a coup, but the proof of the pudding will be if free and fair elections are held within a reasonable time frame. Mugabe claimed he was democratically elected, but, in reality, although in 1980 he was voted in on a broad-based groundswell of popular support, widespread vote rigging and intimidation has assured his re-election for the last twenty years.

The tragedy and opportunity for Zimbabwe is the country is fabulously blessed in natural resources.

Tragedy, because as in so many African countries, politicians have been unable to resist the temptation to blunder any source of wealth for their own ends — think Nigeria, the DRC and South Sudan — but blessing because at least the country has the means, if they can find the political resolve, to turn the economy around.

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Rising wages would traditionally sound a warning bell for manufacturing companies, but a recent article in The Economist explores many positive aspects of the current surge in blue-collar wages in the U.S.

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Stagnant wage growth since the financial crisis has not only been a reflection of poor productivity growth but also, many would argue, laid the foundations for the populist support which swept Donald Trump to power. The Economist notes that in the five years following the end of the recession from June 2009, wages and salaries rose by only 8.7%, while prices increased 9.5%. In 2014 the median worker’s inflation-adjusted earnings, by one measure, were no higher than they were in 2000.

Yet in 2015, the article notes, the median household income, adjusted for inflation, rose by 5.2% followed in 2016 by another 3.2%. Rather than abating, this year to the third quarter wage growth for factory workers, builders and drivers outstripped that for professionals and managers, with some blue-collar workers seeing rises of 11% in the buildings trade.

Unfortunately, this is not being paid for by rising productivity.

In the manufacturing sector, for example, the article notes output per hour worked is just 0.1% higher than a year ago and remarkably has not grown at all in the past five years.  To the extent rising wage costs are being met, it appears to be due to a cheapening dollar. On a trade weighted basis, the article says the dollar has fallen by almost 9% since the start of the year. A weakening dollar and growing world economy have increased demand for American goods, with exports up in the first three quarters of the year by nearly 4% over 2016.

More encouragingly, a rising oil price has spurred investment in the tight oil and gas markets.

Data from Baker Hughes show that the active oil rig count in America has risen from 568 a year ago to 907 today. Indeed, so significant as the oil and gas industry been that the article reports UBS data saying that energy investment has driven nearly three-fifths of all economic growth in 2017. As a result, however, wage growth has not been equal in all regions. Southern oil states such as Texas and Oklahoma account for almost all the acceleration in manufacturing employment this year, whereas those areas that have been in long-term manufacturing decline have seen almost no growth at all.

So far, inflation has remained subdued despite the proportion of male prime age workers remaining close to a record low of 89%, with nearly all growth coming from increases of women in the workforce. Hopefully, rising wages will encourage more male jobseekers in the 25-54 age range to return to the workplace — a development that will be needed if rising wages are not to spur greater inflation.

And inflation is showing the first signs of reawakening. Whether that is due to unemployment falling to a 17-year low or other effects is not clear, but the Federal Reserve Bank of New York’s underlying inflation gauge has jumped to 2.96%, a post-Lehman high.

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Nevertheless, rising incomes for lower and middle earners will not only have the beneficial effect of reducing inequality. By spreading wealth amongst the wider population, it will be a greater spur to GDP than if it were concentrated in the hands of a wealthy few.

Welcome to the (re)launch of the MetalMiner Podcast!

(We’re calling it a relaunch because, well, remember this?)

With everything that’s been happening on the international trade policy front over the past year, we wanted to give metal buying organizations more insight into the issues they may not be reading or hearing enough about — or at all — in the mainstream B2C media.

What better way to do so than go straight to the source — or sources — and interview some key movers and shakers on the manufacturing and policy fronts? So we’re starting a brand-new series called “Manufacturing Trade Policy Confidential.”

New Series: Manufacturing Trade Policy Confidential

In this first episode of the series, MetalMiner Executive Editor Lisa Reisman interviews Michael Stumo, CEO of the Coalition for a Prosperous America.

Stumo’s concerns, and those of his organization, cut across industry sectors and political leanings. In this conversation, Stumo outlines what he sees as the most crucial elements to consider in today’s trade environment, touching on everything from China to the German Mittelstand to Alexander Hamilton as economic visionary.

Manufacturing Trade Policy Confidential: Background

If you’ve visited MetalMiner’s digital pages over the past several months, you’re no stranger to the phrase “Section 232” — shorthand for the U.S. Department of Commerce investigation into whether certain steel imports constitute a national security risk, under the namesake section of the U.S. Trade Expansion Act of 1962.

The outcome of the investigation (findings from which were slated to come down last summer but have been delayed) could have significant effects on upstream and downstream manufacturing organizations, ranging from metal producers to buying organizations – even the mom-and-pops.

But Section 232 is only one small part. Trade circumvention, China’s non-market economy status, domestic uncertainty amidst proposed tax plans and many other issues have pushed us to start this new podcast series.

We’ll be publishing several more interviews in the coming weeks and months – stay tuned!

Follow the MetalMiner Podcast on SoundCloud.

Heard of the Paradise Papers?

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How about the Panama Papers a year back? Those revelations brought down the heads of two governments and severely compromised many reputations, exposing as they did a multitude of wrongdoings, notably related to tax evasion.

Well, the Paradise Papers are said to contain highly confidential details of the financial arrangements enjoyed by more than 120,000 people and companies named in the 13.4 million files, many of them leaked from offshore law firm Appleby, the Washington Post and Telegraph report.

The documents have been reviewed by the German newspaper Süddeutsche Zeitung and the International Consortium of Investigative Journalists.

We are used to stories of the super rich dodging their taxes. Some might even admire the ingenuity of their advisors, conveniently forgetting that when our local school is closed through lack of funds or we blow a tire on a highway that desperately needs pot holes to be filled, it is because our city, state or central government lacks the funds to keep such services running effectively.

Those funds are raised from taxation, and while you and I are paying our tax, there is a significant number of the super rich and many corporations that pay little or no tax. British charity Oxfam is quoted as stating that the top 1% of people in the world own more wealth than the other 99% combined. Or, in other words, 62 of the richest billionaires own as much wealth as the poorer half of the world’s population.

Nor is it just the eye-wateringly wealthy. Plenty of household names are among those revealed in the Paradise Papers.

Lewis Hamilton, four-time world F1 champion is among those running scams that allows him to run a private jet but not “own” it, thus avoiding declaring the income needed to run it as income. There will be many, many more similar revelations over the coming weeks, but whether it will bring any changes in controlling these ever more sophisticated avoidance arrangements is subject to doubt. It should be added, however, many of them are not illegal — they just exploit loopholes our politicians have allowed to be exploited for years.

OK, enough of the populist rant, you might be saying. What does this have to do with the metals markets?

Well, prominent names coming out as clients of Appleby, exploiting tax avoidance schemes on a grand scale are names like Facebook, Apple, and metals miner and trader Glencore, among others (including India’s Jindal Steel).

Some of Glencore’s most shadowy dealings are around the operation of and payments made in connection to its copper and cobalt mines in the Democratic Republic of Congo, where it runs the Katanga copper mine. Papers appear to support rumors already circulating that an associate of Glencore’s Dan Gertler, an Israeli businessman, is said by the Telegraph to be linked to allegations of bribery and corruption in central African countries over many years.

It must be said, nothing in the papers directly implicates Glencore in making payments of an unethical nature, but the suspicion seems to be where there is smoke there may well be — or may well have been — fire.

Glencore is one of the largest miners in the world, with sales of $152 billion (£116 billion). But even accepting that the papers raise the question of why firms need a shadowy web of 107 offshore companies to run such an enterprise, why are shareholdings and dealings held in these offshore entities if not for tax avoidance purposes? No company or individual is obliged to pay more tax than the law requires. Unfortunately for the majority of us, our lawmakers are incapable of agreeing internationally how we should tax corporations or those wealthy enough to access similar sophisticated services.

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As a result, in excess of $150 billion a year of tax goes unpaid, according to the graph below from The Washington Post.