Articles in Category: Public Policy

For those on the other side of the pond, the debacle that is Brexit must feel rather like a distant joke, particularly the defeat this week of Prime Minister Theresa May’s Brexit plan by not just Parliament, but a large number of her own party.

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There may be many of a more nationalist or independent disposition outside the U.K., who have cheered on Britain’s original decision to leave the E.U.

And then there may be those who have supply chains embedded in the U.K. — or, indeed, in continental Europe — who worry about the disruption a “hard” exit from the E.U. would entail. (A hard Brexit is generally taken to mean an exit without a deal in place that safeguards the existing terms of trade between the U.K. and E.U.)

Readers will not be surprised to hear voters in the U.K. are similarly split.

Some want separation from the E.U. at any price — those are hard line “Brexiters,” many of whom come from more rural and northern parts of the country. A proportion of referendum voters were Remainers, who never wanted to leave the E.U. and willingly accepted both the financial cost and the imposition of European rules as an acceptable price for the economic and security benefits of being part of, if not a united Europe, at least an integrated single European market.

Ranged in between — and without a referendum, we will never know quite know how many this includes — are a variety of opinions from Leavers, who have since seen what leaving really means and changed their minds, to those who would be willing to try a partial separation of the sort May negotiated with Brussels (but has been soundly thrown out by Parliament this week).

The scale of the government’s defeat on her plan should not be understated.

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This morning in metals news, the E.U. approved new steel import curbs extending until 2021 with a vote Wednesday, the copper price picked up as the U.S. dollar loses momentum and the United States Trade Representative (USTR) says it will set up a system for exclusions if the tariff rate increases on the $200 billion of duties imposed on Chinese imports in September (currently sitting at 10%).

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E.U. Moves Forward with New Steel Quotas

As expected, E.U. member states voted to impose new steel quotas, part of the ongoing response to the U.S.’s Section 232 tariffs imposed in March 2018 and fears of redirected steel supplies flooding Europe.

E.U. member states approved provisional measures in July 2018, but the approval Wednesday puts quotas into place that will extend to July 2021.

Copper Rises, Dollar Softens

The U.S. dollar was cruising ever-upward throughout the tail end of 2018, but that momentum has seemingly slowed of late.

The U.S. dollar and base metals like copper correlate inversely, meaning a drop in one typically presages a rise in the other.

As Reuters reported Wednesday, the LME three-month copper price jumped for a second straight day, moving up 0.8%.

The U.S. dollar index declined to start the year but has bounced back in the past week, sitting at 96.04 as Wednesday morning.

USTR to Allow for Exclusions if Tariff Rate Rises on Chinese Goods

According to a Bloomberg report, the USTR has promised two senators that there will be an exclusion request process on the previously announced $200 billion in tariffs on Chinese goods if the tariff rate rises to 25%.

The $200 billion tariff package, imposed in September, came at a 10% tariff rate, with a built-in increase to 25% as of Jan. 1, 2019.

That increase, however, was postponed, as the U.S. and China began a 90-day negotiating period to hash out trade differences.

Unlike the previous $50 billion tariff package announced last year, the larger tariff package was not looped into a tariff exclusion request process (that is, a process by which companies can make the case that they need exemptions from the duty).

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However, according to the USTR letter cited by Bloomberg, the U.S. will allow for exemption requests if the tariff rate is ultimately elevated to 25%.

Thought you had the China supply risks covered? More than one supplier, multiple logistics options, natural disaster contingency planning… yep? Try this: employee arrest and detention.

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Here’s What Happened

As we reported soon after it happened last week, the Bureau of Consular Affairs under the U.S. Department of State has issued a warning of an increased risk of arbitrary arrest and detention when U.S. citizens, particularly those of dual nationality, come to leave China. According to the notice, Chinese authorities have asserted broad authority to prohibit U.S. citizens from leaving China by using ‘exit bans.’ The post states China uses exit bans coercively:

  1. “To compel U.S. citizens to participate in Chinese government investigations,
  2. To lure individuals back to China from abroad, and
  3. To aid Chinese authorities in resolving civil disputes in favor of Chinese parties.”

According to the notice, U.S. citizens may be detained without access to U.S. consular services or information about their alleged crime. U.S. citizens may be subjected to prolonged interrogations and extended detention for reasons related to “state security.”

Why It Happened

Sounds serious, doesn’t it? But to be fair, the current notice is largely a repeat of one issued the same time last year and China retains a Level 2 caution, according to U.S. authorities — meaning two out of four travelers should “exercise increased caution” when in the country. This is a warning that has at times applied to parts of Europe due to a perceived risk from terrorism.

According to Conde Nast Traveler, the advisory follows high-profile cases in December in which two Canadian businessmen, Michael Spavor and Michael Kovrig, were detained for unspecified reasons, citing a Reuters report. Both Kovrig and Spavor remain in detention in China and are awaiting trial, with the U.S. and Canada calling for their release. In total, some 13 Canadians have been detained of late in moves said to be linked to the arrest of Huawei executive Meng Wanzhou.

Some put the restatement of the travel advisory down to increased trade tensions between the U.S. and China following President Trump’s trade war, but while such issues don’t help, the reality is China has always imposed strict censorship laws and still rigidly controls free speech. It uses such laws in situations that Western societies find arbitrary and unrelated, but the Chinese no doubt brought in the laws with the express intention of giving them a catch-all legal framework to bring leverage if they felt an individual, company or even country was not acting in China’s best interests.

What It Means for Metal Buyers

Buying organizations should, from time to time, be reminded that China is not a benign democracy, but an autocratic single-party state controlled by an increasingly powerful centrist elite.

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The West’s view that China would become progressively more liberal and democratic over time has proved to be fundamentally flawed — and with that realization, our perception of risk for employees and contractors we send or employ there should change too.

This morning in metals, we’re tracking a travel advisory for China issued yesterday by the U.S. Department of State — which could impact manufacturers and suppliers who have individuals traveling to and from China for business.

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“Exercise Increased Caution”

  • Issued yesterday, the travel advisory cautions U.S. travelers to “exercise increased caution in China due to arbitrary enforcement of local laws as well as special restrictions on dual U.S.-Chinese nationals.” Some of that arbitrary enforcement is taking the shape of “exit bans,” which effectively means that Chinese authorities are preventing travelers from leaving the country on very shaky grounds, and in certain cases not allowing them access to consular services, not disclosing how long the traveler may be detained, and/or not allowing them to leave for years.
  • For manufacturing organizations or their suppliers, individuals traveling in and out of China may be affected by these exit bans. Speculation as to why Chinese authorities have stepped up their arbitrary enforcement of travel regulations abounds, including retaliatory action vis-a-vis recent trade disputes with the U.S. and a Huawei executive being detained in Canada, but MetalMiner will follow up on this story as more details or insight become available.

In Other Metals News

  • European carmakers still need steel imports to remain competitive. That’s what the ACEA, an association representing EU automakers, said recently, in response to the European Commission’s decision to propose definitive steel safeguards, according to Argus Media. “Motor vehicle manufacturing has increased by 5mn units per year since 2014, and some increase in steel imports has been necessary to meet this higher demand,” ACEA secretary general Erik Jonnaert is quoted as saying.
  • According to the article, “hot-rolled coil (HRC) will remain a global quota under the definitive safeguard, but cold-rolled coil and hot-dip galvanized coil — both of which are used by carmakers — have country-by-country and quarterly quotas that could have a greater impact on supply.”

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Few would have predicted this five years ago, but India is facing a real dilemma.

It is exacerbated by the country’s predilection for subsidies and set against the backdrop of a chronic power generation landscape.

As any regular traveler to India will know, while power outages are not as common as they once were, they remain an almost daily occurrence in many areas. According to the FT, quoting figures from the New Delhi-based Energy and Resources Institute, per-capita electricity consumption by the country’s 1.3 billion people is just 38% of the global average, while tens of millions of households still lack grid connections — so demand growth is high and set to continue for decades to come.

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Not surprisingly, the government has made the push for reliable, universally available electricity a long-running key policy priority; a policy based largely on coal-fired coal plants that was roundly condemned by both environmental organizations and many Western governments.

India’s Coal Paradox

Coal is the only fossil fuel India has in abundance, with extensive deposits situated in the northeast of the country, although power plants in the west and south often import coal from Indonesia rather than haul product across the country on a rickety rail network. Oil and gas have never been favored because they are largely imported.

As for those subsidies mentioned earlier, the Gujarat state government has just awarded two major coal plants run by Adani — Tata Power and Essar Power — increased power rates to help stem heavy losses the plants are incurring due to uneconomic imported coal supply costs.

Over the past couple years (and estimated into the future), India’s thermal power capacity additions have given way to solar and wind. Source: FT.

Part of the problem for coal-fired plants has always been competitively priced coal supplies; even though the country has abundant supplies, it suffers from an appalling logistics infrastructure. Today, only plants sited very near to the deposits in northeastern India remain viable. Most of the rest are in trouble, with Credit Suisse estimating half of them as being ‘stressed’ – i.e. interest payment exceeding profits – putting some $35 billion of investments at risk, the FT reports.

Various sources’ share of India’s total electricity capacity. Source: FT.

Renewable Energy Power Price Collapse Plays Its Part

The second — and, in many ways, more profound — dynamic at work is the collapse of renewable energy power prices.

According to the FT, Japan’s SoftBank, as part of a consortium in 2017 agreed to sell power from a northern Indian solar park for Rs2.44 per unit, well below the cost of coal power, which typically costs well over Rs3. Last year, state-run NTPC — by far the biggest thermal power producer in India — has canceled several plans for large coal projects, including one for a giant 4GW plant in southern Andhra Pradesh state, while Adani Power invested more than $600 million in a solar plant in sunny southern Tamil Nadu. Coal is no longer seen as economically viable in India — not from an environmental point of view, but purely based on the cost of production.

Not surprisingly, in recent meetings, state thermal power station equipment manufacturers were bemoaning (off the record) the dire state of the market, with little on offer except repair and maintenance.

After he was elected in 2014, Prime Minister Narendra Modi and his government set an ambitious target of increasing India’s renewable energy capacity by 2022 to 175GW, equivalent to 40% of the country’s total power capacity. This was a target seen as more for external consumption than a genuine strategy; but last year, despite the backlog of coal-fired plants still in the works, more solar power capacity was brought on stream than coal, suggesting the 40% target may yet be achieved, particularly if better storage solutions can be achieved to smooth out the variability of renewable power supply.

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Until then, coal plants are still needed to provide base-load and increasingly intermittent power, a role they are not as well suited to as gas, but in the absence of anything else may be of such need that those subsidies keep rolling in.

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This morning in metals news, the aluminum price slides to a 16-month low, Liberty House could be looking to expand its presence in the Middle East and the mid-February deadline for the Section 232 auto investigation draws nearer.

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Aluminum Drops Post-Sanctions Delisting

The aluminum price continued to fall Monday after last week’s announcement on the delisting of previously sanctioned Russian companies.

According to Reuters, the LME aluminum price dropped 0.5% Monday, continuing the decline after the price hit a 16-month low last week.

Liberty House Continues on the Acquisitions Trail

As we noted last week, Liberty House recently acquired miner Rio Tinto’s Dunkerque aluminum smelter, as Sanjeev Gupta’s GFG Alliance continues to snap up assets.

According to a report in The National, the steel tycoon could now be turning to the Middle East, specifically the U.A.E.

According to the report, which cites a Liberty House official, the company is in talks to buy steel and aluminum assets in the country.

Section 232 Auto Probe Deadline Inches Closer

The Trump administration’s Section 232 investigation of steel and aluminum import levels came to a close in the spring with much fanfare, yielding blanket tariffs of 25% and 10%, respectively.

However, the administration didn’t stop using Section 232 then and there, as it launched yet another 232 probe in May, this time looking into imports of automobiles and automotive parts.

The law requires Secretary of Commerce Wilbur Ross to present a report to the president within 270 days after the launching of a 232 investigation, making for a mid-February deadline.

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In an interview with the Financial Times, Ross said his report is still a “work in progress” but also noted the president’s flexibility in terms of what he can do with respect to potential automotive tariffs.

The recently signed United States-Mexico-Canada Agreement (USMCA), inked during the Group of 20 summit in Argentina, included stricter auto content rules for tariff-free vehicle trade. The new trade agreement bumps the automotive content threshold from 62.5% to 75%. In addition, USMCA included a provision that 40-45% of auto content must be produced by workers making a minimum of $16/hour.

Well, that was something and nothing, wasn’t it?

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The non-event of the month was the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) announcement this week of its intention to end sanctions on En+ Group plc, UC Rusal plc, and JSC EuroSibEnergo, all vehicles associated with Russian oligarch Oleg Deripaska.

Deripaska remains on the sanctions list. However, following his nominal separation from the firms, OFAC decided to end sanctions.

Deripaska is reported to have put plans in place to reduce his shareholding in holding company En+, which is currently 70% to fall to 44.95%, while a Russian bank will take title to a portion of Deripaska’s shares, according to Aluminium Insider.

The article states Deripaska will also be required under the agreement to hand over shares in En+ to charitable foundations and assign voting rights above a 35% threshold to a voting trust. Other shareholders deemed to have a familial or professional relationship will be compelled to do the same.

Once the entire plan has been executed, En+ will retain ownership of 56.88% of Rusal, with Deripaska’s stake reduced to 0.01%.

That’s good news, aluminum buyers may retort, and yes, it is in terms of finally settling a source of some disquiet that has been underlying the market since May.

But the fact that the aluminum price barely moved underlines the reality that the market had long expected this outcome — and barely reacted, accordingly.

What happens next year remains to be seen.

The whole metals complex has been at best trading sideways during the second half this year, buoyed by decent demand but depressed by worries about global growth and trade wars.

The lifting of sanctions frees up some 200,000 tons of Rusal primary metal sitting on the LME for consumption, and potentially 10 times as much sitting in off-warrant or off-market stock and finance trade storage.

The LME metal is unlikely to go anywhere fast. Currently, the LME supports rollover of maturing stock and finance trade contracts with two-year forwards at a sufficient premium to one-month forward to facilitate extension.

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As such, the market is not going to be flooded with Rusal metal that would cause a further weakening of prices. That clearly is the market’s assessment, too, otherwise prices would have fallen significantly after the announcement.

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This morning in metals news, the U.S. Treasury Wednesday announced it will lift its sanctions against companies owned by Russian oligarch Oleg Deripaska (which includes aluminum giant United Company Rusal), Chinese steel prices hit a five-week high and Alcoa cuts aluminum production amid a labor dispute at its Becancour smelter in Quebec.

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U.S. to Lift Sanctions on Russian Firms

On Wednesday, the U.S. Treasury Department announced it would delist several Deripaska-controlled companies, not long after previously announcing a sanctions deadline pushback to Jan. 7.

“Treasury sanctioned these companies because of their ownership and control by sanctioned Russian oligarch Oleg Deripaska, not for the conduct of the companies themselves,” Treasury Secretary Steven T. Mnuchin said. “These companies have committed to significantly diminish Deripaska’s ownership and sever his control. The companies will be subject to ongoing compliance and will face severe consequences if they fail to comply. OFAC maintains the ability under the terms of the agreement to have unprecedented levels of transparency into operations.”

According to the Treasury Department’s announcement, it will terminate the sanctions imposed on En+ Group plc, UC Rusal plc and JSC EuroSibEnergo in 30 days.”

MetalMiner’s Take: LME aluminum prices have increased slightly today on the news knowing that the Trump administration will lift sanctions on Russian companies owned by oligarch Oleg Deripaska.

However, the increase does not appear sharp. Prices increased following the previous pattern, and aluminum prices are still lower than they were at the beginning of the month. This decision will not have a large impact on the aluminum market.

In April, when the sanctions were announced, the aluminum market felt constraint regarding supply; prices subsequently spiked.

However, current market conditions are far different from April 2018.

Crude oil prices are lower, commodities are decreasing and the U.S. dollar is rising. Also, Section 232 and all the other tariffs still remain in effect.

Therefore, buying organizations won’t see dramatic changes in LME aluminum prices, in both the short and long terms.

Alcoa to Cut Production at Quebec Smelter

Alcoa announced Wednesday that it will cut production by half at its Aluminerie de Bécancour Inc. smelter in Quebec.

“The Bécancour aluminum smelter, owned by Alcoa (74.95%) and Rio Tinto Alcan Inc. (25.05%), has nameplate capacity of 413,000 metric tons per year, across its three potlines,” Alcoa said in a release. “Two of the facility’s potlines were curtailed on January 11, 2018, after union members rejected a proposed labor agreement for hourly employees.”

Alcoa said curtailment of the one operating potline, which has a nameplate capacity of 138,000 metric tons per year, was “necessary to ensure continued safety and maintenance in light of recent retirements and departures.”

Alcoa and the union representing its workers still remain without a labor agreement almost a year after the other two potlines were curtailed.

“After extensive negotiations this year, ABI and the union have yet to reach an agreement on key terms to improve productivity and profitability,” Alcoa said in its release. “ABI’s management remains committed to reaching a negotiated agreement.”

According to Alcoa, curtailment of the one operating potline will begin Friday, Dec. 21.

Chinese Steel Prices Hit Five-Week High

Chinese steel prices, which have lagged of late, rose to their highest level in five weeks, Reuters reported.

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Shanghai rebar steel prices rose as much as 1.8% Thursday before settling up 1.5%, according to the report.

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In a ruling that caught many by surprise, an environment court in India set aside a provincial government order to shut down Vedanta’s copper smelter plant permanently.

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This is the same plant over which the local population in the southern Indian state of Tamil Nadu have been protesting primarily because of pollutants from the smelter.

It was this plant in Tuticorin that was ordered shut down by the government after hundreds of angry local residents had, in May this year, spilled out on the road to protest against the plant’s environmental impact. As we noted earlier this year, the protests turned bloody, as police fired on the protesters, killing 13 people.

With this new legal order, Vedanta has high hopes of restarting this vital smelter, but the Tamil Nadu government says it will not budge, and would file an appeal in the country’s highest court.

A report on moneycontrol.com said the National Green Tribunal’s (NGT) ruling had raised hopes of a revival, especially because the shutdown of Vedanta’s copper smelter had “dealt a blow to its valuations.”

The tribunal directed the Tamil Nadu state pollution regulator to pass a new order of renewal of consent for the smelter within three weeks. It also directed Vedanta to spend about U.S. $14 million (about 1 billion rupees) in three years for the local people’s welfare.

But the Tamil Nadu Environment Minister told reporters after the ruling that his government will fight this order, since it does not want the smelter to reopen.

Vedanta Ltd is part of the oil-to-metals conglomerate Vedanta Resources, run by Indian businessman Anil Agarwal. The Tuticorin smelter is one of the two largest in India, and Vedanta desperately wants it to resume operations as the group braces for rising raw material costs.

At the time of the closure in May, Sterlite Copper Vedanta Ltd CEO P. Ramnath said the closure of the plant would push India’s annual import bill by an estimated $2 billion.

The Tuticorin facilities include a custom smelter, a refinery, a phosphoric acid plant, sulphuric acid plants and a copper rod plant.

News of the tribunal order was welcomed by the Indian share market.

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On Dec. 17, Vedanta’s shares rose by 6.5% in early trading following news of the ruling. Towards the end of the day, it cooled off a little after the Tamil Nadu government made it clear that it planned to challenge the order at the Supreme Court of India.

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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