Commentary

There seems little doubt and even less debate that the tragic fire at Grenfell Tower in London was, if not caused by, then certainly greatly exacerbated by the aluminum cladding on the outside of the building.

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The original fire was started by an exploding refrigerator on the fourth floor of the 24-story public housing block. The residents thought they had the fire under control, but the refrigerator was positioned against an external wall. Flames then escaped out of the window and ignited flammable insulation between the building’s external aluminum cladding and the original external wall.

Source: The New York Times

As the diagram shows, taken from an excellent evaluation of the tragedy in The New York Times, the highly combustible insulating polyethylene panels positioned between the old wall and the external cladding acted like a chimney, funneling heat and flames vertically.

Within a few minutes, what had started as a minor fire engulfed the whole building and incinerated the floors above.

Although the total number of dead may never be known — some of the occupants were illegal immigrants and, as such, unregistered — and is potentially even unknown to anyone outside of the flat they were occupying, it is believed about 79 people died.

Hard questions are rightly being asked: Why was cladding installed that included insulation that was known to be flammable?

What isn’t being as widely debated in the U.K. yet is the contents of that New York Times article highlighting that the use of such flammable materials is forbidden in the U.S. and many European countries — yet, for reasons that are not entirely clear, those materials are permitted in the U.K.

Lax Regulations Played a Role in Tragedy

The cladding itself does not appear to be the sole culprit.

Grenfell Tower was clad, according to The New York Times, with an aluminum product known as Reynobond PE, consisting of two sheets of aluminum sandwiching an insulating core. Reynobond PE is made by Arconic (formerly known as Alcoa). Arconic has been selling Reynobond PE in the U.K. for years, but takes a different marketing approach in the U.S. and much of Europe.

In the U.S., fire regulations insist that polyethylene sandwich Reynobond should not be used in buildings taller than about 33 feet, that being the height firefighters’ ladders can readily reach. The firm’s literature clearly states that non-flammable or fire-resistant insulating materials should be used on buildings over this height.

Yet despite repeated warnings over the years, British building regulations, rather than tightening up in this area, seem to have been relaxed.

In the case of Grenfell Tower, the installation material used between the wall and the external cladding was also made of a very similar, highly combustible plastic to that used in the panel sandwich core. When the fire from the exploding refrigerator escaped out of the window, it was able to readily access this exposed installation, allowing an inferno to rapidly establish itself between the cladding and wall, and rising up 25 stories, gutting everything above the fourth floor. In the process, the cladding also caught fire, showering burning debris on firefighters and those seeking to escape the building below.

The aluminum itself is unlikely to have reached a temperature at which it would have caught alight, but with the melting point of about 660 degrees Celsius and fire authority estimates of temperatures exceeding 1,000 degrees Celsius in the upper parts of the tower, the aluminum panels will have readily melted in the heat. Aluminum does not burn until nearly 7,000 degrees Fahrenheit, or nearly 4,000 degrees Celsius, but with the panel surfaces melting it provided no protection to prevent the flammable sandwich core from igniting along with the insulation installed in the space between the panel and the wall.

Whether aluminum cladding can survive from this disaster in the U.K. as an architectural product specified on new and existing buildings remains to be seen. Even if totally fire-resistant insulation were specified, it would be a brave architect that clad a new residential building with aluminum panels in the future.

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The tragedy is that the 79 deaths and the huge cost of upgrading some 600-plus similar high-rise buildings in the U.K. could have been avoided if the British fire regulations had drawn on experience bitterly learned from earlier fires in the U.S., Europe and elsewhere.

The facade of the Federal Reserve Bank. Aaron Kohr/Adobe Stock

Economists rarely agree on much, but the current debate on whether to raise the U.S. Federal Reserve’s base rate and to reverse quantitative easing is generating more disagreement than normal.

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One of our favourite economic journals, the Economist, argues in an article last week that the Fed’s narrow focus on a 2% inflation rate is proving detrimental to encouraging productivity growth in the U.S. economy.

Citing numerous sources of research, the paper suggests a more relaxed, less rigid limit would allow the Fed to take its fixation off the current low level of unemployment and refrain from holding back future growth as a result of further rises in the base rate.

The headline unemployment rate of 4.3% is the lowest in 16 years, and stands at levels that in previous recoveries would already be fueling wage rises and inflation. Yet despite unprecedented levels of quantitative easing and only just off record low interest rates, inflation has remained benign (to the consternation of economists far and wide).

Having increased rates three times in the last six months, the Fed is not only intending a further rise this year, Chairman Janet Yellen indicated in a report last week that the Fed intends to begin shrinking the balance sheet caused by quantitative easing by the end of this year at the latest and possibly as soon as September.

Initially, the plan is to start asset sales at a modest $10 billion dollars a month, increasing in steps each quarter until it reaches $50 billion a month, according to a report in the Telegraph.

The combination of increasing base rates and the withdrawal of dollar liquidity through bond selling would have a profound impact global impact.

The announcement elicited a response from Ben Bernanke, Yellen’s predecessor as chairman of the Fed. He urged the Fed to allow the economy to grow gradually into the 4.4 trillion Bond portfolio and not to take the risk of reversing quantitative easing too soon. The worry is that is the pincer movement of firmer rates and withdrawal of liquidity would prompt a stall in the global recovery, potentially pushing the U.S. back into recession.

The Fed has very little room at current interest rate levels to cut rates in the event of another recession. Last time it had 4.75% plus QE — at this point it has just 1% and a full QE balance sheet. How would it cope?

Professor Tim Congdon, founder of the Institute of International monetary research, is quoted in the Telegraph as saying if the Fed really goes ahead with reversing QE there will be trouble three to six months later, and the economy could tank in 2018.

That may be a worst-case scenario, but it does illustrate the polarization of views and underlines the fact we are in uncharted territory. No central bank has ever created such a huge balance sheet as the Fed following the last financial crisis and, honestly, they have very little idea of what impact unwinding it will have.

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The law of unforeseen or unintended consequences looms large and suggests a little more flexibility around inflation may be a price worth paying to allow time to more gradually return the finances to “normal.”

In the week when the world pensively awaits the U.S.’s Section 232 judgement — a move promised by President Donald Trump during his election campaign and aimed largely at China — a recent Reuters report on Chinese steel exports makes interesting reading.

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Source: Reuters

China’s steel exports have been sliding for months.

According to Reuters, China’s January-May export total was 34.2 million tons, down 26% from last year’s equivalent period and the lowest level since 2014. The year drop in export tonnage amounted to 12.1 million tons — roughly equivalent to Canada’s production over a full 12-month period, Reuters reported.

Yet bizarrely enough, China produced 72.78 million tons of steel in April, an all-time record Reuters says. The following month, China tallied the second-highest monthly total at 72.26 million tons.

Meanwhile, profits on products like steel rebar have surged to $162 dollars per ton this month, as inventory levels have fallen and demand has remained robust (particularly from the construction sector). Investment in real estate is running at an annual growth rate over 6%, Reuters reports. Although there are fears of overheating in some regions, real estate has been stronger for longer than analysts outside the market expected.

As we noted in a piece yesterday reviewing the 232 probe, China’s share of the U.S. import market for steel products has been falling for the last couple of years, mainly due to successful anti-dumping cases. China no longer appears even in the top 10.

So, what exactly is going on in China with respect to steel production and demand? Can we take it that Beijing’s actions to tackle excess steel production have finally resolved China’s deflationary impact on global steel markets?

First, Reuters notes that China has been quite successful in permanently closing previously shuttered steel plants, as well as in in tackling older and more environmentally damaging mills. Those actions combined has resulted in the removal of some 100 million tons of capacity.

In addition, Beijing’s focus on environmental issues has hastened the closure of induction furnaces, which use scrap rather than iron ore as their input and are often labelled as producers of sub-standard products (and, hence, unapproved). Unapproved equates to illegal by Beijing — as such, their production and their closures does not figure in the normal statistics. A significant proportion of China’s rebar production came from these mills, which explains the record profits being earned by surviving state-owned manufacturers of the same products as they capitalize on the removal of these scrappy competitors.

Unfortunately, nobody expects China’s construction market to continue at the current pace and a slowdown is in the forecast for the second half of the year.  Replenishment of low inventory levels will maintain steel mill production runs for a while, but as Reuters notes, China’s mills have a notoriously poor record in adjusting output to demand. So, we should expect that as demand eases, inventorying levels will rise, prices will fall, and access production may well begin to leak through exports onto the international market.

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While America’s anti-dumping legislation will largely protect that market from Chinese material, the rest of the world may find itself under pressure next year from greater availability of Chinese steel at falling prices, further fueling an already rising tide of protectionist sentiment in both developed and emerging markets.

So far, June is busting out all over, but not in the way metals producers would like.

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Market observers may actually observe a possible change in trend (note: the current bull market, which began in May 2016, appears to have run out of steam).

First, the Fed hiked interest rates by 0.25% last Thursday. Though expected, it will most likely not impact markets in an abrupt way.

Let’s take a look at some of the key indicators:

Dollar Up

Source: TradingEconomics.com

The most recent Fed rate hike breathed a little life into the dollar, which has fallen for most of this year.

We believe this could have a direct impact on the metals industry — namely, causing prices to fall.

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It is not unusual for the wrong thing to be done for the right reasons.

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Whether it is the rule of unexpected consequences or blind adherence to doctrine, there are countless historical examples of individuals, companies and governments that made decisions, claiming the moral high ground, which have resulted in damage or impoverishment to those the decision was intended to assist.

The mining sector and even some unions have reacted angrily to South Africa Minister of Mining Mosebenzi Zwane’s announcement last week at a presentation in Pretoria of a new mining charter intended to further extend South Africa’s Black Economic Empowerment (BEE) rules.

The charter sets out a number of significant changes to the rules governing ownership of South Africa’s vast mining industry.

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A new front seems to have opened up in India’s steel wars.

Only this time, the country seems to be fighting for its steel companies to be allowed to sell its steel in a foreign market.

India has complained to the World Trade Organization (WTO) that the U.S. had failed to drop anti-subsidy duties on certain Indian steel products. The move comes on the heels of India itself having imposed anti-dumping duty on 47 steel products from six nations in May.

According to the Indian government, the U.S. had not kept its promise of an April 2016 deadline to comply with a WTO ruling that faulted it for imposing countervailing duties on hot-rolled carbon steel flat products from India.

In December 2014, the WTO ruled against the U.S.’s move to impose high duty on imports of certain Indian steel products. The world body said the high duty by the U.S. was inconsistent with various provisions of the Agreement on Subsidies and Countervailing Measures.

The U.S. sought time until the April 2016 deadline to comply with the ruling. Realizing that the deadline had passed away without any action on part of the U.S. authorities, India has now requested the WTO dispute consultations with the U.S. regarding U.S. compliance.

Some experts say the U.S. will have to amend its domestic norms to comply with the WTO’s verdict on countervailing duties.

In May, India imposed anti-dumping duty on products from six nations — China, Japan, South Korea, Brazil, Russia and Indonesia — to protect its own industry from cheap imports.

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It won’t have escaped your notice that the shine has gone off the metals market.

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Prices have been softening across not just metals but other commodities, like oil, too.

Consumers, of course, will not be complaining, but are nevertheless keen to understand what is going on and whether we are seeing a temporary dip or a move into a prolonged bear period.

Commodities in general are facing multiple headwinds.

While demand for iron ore and oil is steady, both markets are in oversupply. Oil prices have received short-term support from favorable comments around output cuts. Prices have subsequently continued to soften as long positions have been unwound and investors have concluded prospects of a supply balance are receding.

In China, the authorities have been squeezing investors by increasing shadow banking borrowing costs, resulting in positions being unwound and prices softening.

In the U.S., markets surged after President Donald Trump’s election victory with the expectation his campaign promises of trillion dollar infrastructure investment would create a building and consumption boom.

Since those heady days, the realization has set in that the desperately needed investment may not be quite as significant as first thought.

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Steel and stainless steel buying organizations have expressed concern to MetalMiner about the potential outcome of the current Section 232 steel investigation led U.S. Secretary of Commerce Wilbur Ross.

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According to a recent Reuters article, Ross, when discussing the Section 232 steel investigation told a Senate Appropriations Subcommittee last week that, “there is a genuine national security issue,” suggesting his agency would make recommendations that would potentially curb steel imports.

He went on to suggest several potential policy recommendations, including: “Imposing tariffs above the current, country-specific anti-dumping and anti-dumping duties on steel products; imposing quotas limiting the volume of steel imports; and a hybrid ‘tariff-rate quota’ option that would include quotas on specific products with new tariffs for imports above those levels,” and intimated that this last option would help mitigate price risk for steel consumers. Ross made several additional comments to allay consumers’ concerns regarding price increases.

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British elections and referenda have recently proved to be anything but boring.

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Last week’s general election — called just a few short weeks ago at a time when Theresa May’s Conservative Party had a small but solid majority and the left wing Labour Party appeared in complete disarray — has delivered a crushing defeat for the prime minister’s hard Brexit policy.

The election result has once again thrown wide open the debate on what kind of deal the U.K. will — or even can — seek to strike with the European Union (EU) over the year ahead.

Theresa May called the election to give herself a stronger mandate to argue with the Europeans that no deal — meaning a break with Europe, falling back on basic World Trade Organization (WTO) rules — would be preferable to any kind of compromise the EU tries to impose.

Although not stated, it was tacitly understood the election was also intended to deliver her a larger majority in the House of Commons. That larger majority would have enabled her to ignore disruptive minor elements of her own party who may disagree with elements of a deal as the negotiation process unfolds.

What transpired was a dramatic swing to the left, with the loss of Conservative seats to the Labour Party. The result? No party enjoyed an overall majority.

The Conservatives have therefore been forced into a loose coalition with Northern Ireland’s Democratic Unionist Party (DUP), whose agenda differs from the Conservatives in one significant way.

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Editor’s Note: This is the second of two posts — the first of which ran yesterday — from our Sohrab Darabshaw on renewable energy in India. 

India saw nearly $10 billion invested, both in 2015 and in 2016, in renewable energy projects. Last year, $1.9 billion of green bonds were issued. India’s solar targets alone need $100 billion of debt.

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Posting in the Bloomberg View opinion section, columnist Mihir Sharma, however, struck a slightly skeptical note.

“India is not like China, or the U.S., or Australia or Germany when it comes to meeting its Paris pledges,” he wrote. “In India, hundreds of millions of people still live without electricity — a big part of what keeps them desperately poor. India also has a shrunken manufacturing sector, partly because electricity is so expensive (relatively) and its supply so variable. No democratically accountable Indian government can ever favor an international agreement over fixing these two problems.”

Sharma added coal “looks bad” in India at the moment because “its economy is struggling and because it is so services-intensive. Over the past few years, coal plants have used less and less of their capacity as growth has slowed.”

But, if India’s economy does take off, Prime Minister Narendra Modi might indeed be faced with such a choice.

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