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Although opinions will differ, it is hard to see the failure of a proposed U.S. $2.3 billion merger between China’s Zhongwang USA, LLC and U.S.-based Aleris as anything other than the result of protectionist policies.

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Some two dozen US lawmakers had urged U.S. Secretary of the Treasury Steven Mnuchin to reject the proposed sale, saying Aleris was involved in the production and testing of specialized alloys used by the defense industry.

Considerable opposition was mounted by the Committee on Foreign Investment in the United States (CFIUS), a federal government body that reviews foreign investments in domestic firms, and determines whether those potential investments may impact national security. Lawmakers appealed to the CFIUS, saying Aleris’ research and technology were critical to U.S. economic and national security interests.

But the reality is Aleris USA has little or no involvement in the defense sector.

“Even the very small number of products that end up in the military through the supply chain were not made in the US but in Aleris’ European operations and did not involve sensitive technology,” the firm is reported as saying.

There were two forces acting against the takeover.

A Cloud Over Zhongwang

The first factor is Zhongwang’s connection to the stockpiling of thousands of tons of aluminum in Mexico, suspected of either being illegally exported from China under misreported tariff codes, or diverted to Mexico when it became clear they could not be legally imported into the U.S. without incurring anti-dumping duties.

Either way, a cloud hung over the company ever since these developments came to light two years ago. No amount of denials and PR work on its behalf have been able to shake the image that there is a less savory side to the company’s operations — or, at least, to that of its owner, Liu Zhongtian.

If the merger had been rejected on this basis, it would make more sense. It could be argued there are concerns about if  Zhongwang would be a reliable steward for Aleris based on its connection to these unresolved past issues.

Pushback from U.S. Manufacturers

The second factor is opposition from U.S.-based semi-finished products manufacturers.

Zhongwang USA made much (maybe too much) of its investment plans for Aleris post-merger, stating it intended to create 1,000 new jobs and make capital investments to expand capacity to better serve the growing automotive sector. AluminiumInsider reports this was met by an icy reception from much of the American aluminum industry and domestic labor unions, in addition to American lawmakers. Maybe another Chinese entity would have had a better chance of success, but maybe the growing anti-Chinese sentiment in the White House was always going to inhibit such a move.

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The CFIUS recommendation to block China Venture Capital’s takeover of Portland-based Lattice Semiconductor last June has more rationale as a security issue. The Aleris situation, however, appears to be more of a political decision, supported by trade fears of increased domestic competition.

Before we head into the weekend, let’s take a look back at the week that was:

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Free Download: The November 2017 MMI Report

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This morning in metals news, Nucor announced a major project at its Bourbonnais, Illinois plant, Aleris has a new automotive sheet facility in Kentucky and Chinese automotive sales drop in October.

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Nucor Announces Plant Expansion in Illinois

Nucor is building a merchant bar mill at its plant in Bourbonnais, Illinois plant, the company announced Wednesday.

The full-range merchant bar quality (MBQ) mill will have an annual capacity of 500,000 tons and is expected to cost $180 million, according to the Nucor release. The project will take approximately two years to complete.

“This new MBQ mill is right in line with our long-term strategy for profitable growth. It takes advantage of our position as a low-cost producer to displace tons currently being supplied by competitors outside the region. It also builds on our market leadership position by further enhancing our product offerings of merchant bar, light shapes and structural angle and channel in markets in the central U.S.,” said John Ferriola, chairman, CEO and president of Nucor.

“Combined with our other full-range bar mills, we are now strategically located to supply all markets with high-quality bar products and exceptional service.”

Aleris Announces New Automotive Sheet Facility

Aleris opened a new automotive body sheet facility in Lewisport, Kentucky, the company announced.

The project represents a $400 million investment, according to the Aleris release.

Chinese October Automotive Sales Fall

According to data from the Chinese Association of Automobile Manufacturers (CAAM), yearly sales are up, while sales for October dipped from the previous month.

According to CAAM, In October, the production and sales of automobiles in China reached 2,604,000 and 2,704,000 units, respectively, down 2.5% and 0.2% from September. Meanwhile, production and sales were up 0.7% and 2% year-on-year.

Free Download: The November 2017 MMI Report

For the first 10 months of 2017, the production and sales of automobiles were 22,957,000 and 22,927,000 units, respectively, up 4.3% and 4.1% year-on-year.

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This morning in metals news, U.S. Steel faces a potential lawsuit for dumping toxic materials into Lake Michigan, a Chinese aluminum producer cuts smelter capacity and NAFTA renegotiation talks resume.

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U.S. Steel Could Face Lawsuit for Chromium Dumping

U.S. Steel faces a lawsuit after dumping toxic chromium in Lake Michigan, the Chicago Tribune reported.

According to the report, the 56.7 pounds of chromium released in late October by the company’s Midwest Plant was 89% higher than its water pollution permit allows over 24 hours.

Luoyang Xiangjiang Wanji Aluminium Cuts Back Smelter Capacity

Winter is coming, which means it’s time for those capacity cuts in China.

According to a report by Platts, China’s Luoyang Xiangjiang Wanji Aluminium, located in the Henan province, announced major capacity cuts. On Wednesday, the firm announced 30% cuts of aluminum and alumina capacity, running from today through March 15, 2018, according to the report.

Time For Another Round

Yet another round of talks focused on renegotiating the North American Free Trade Agreement (NAFTA) kicked off Wednesday in Mexico City.

Tensions have ramped up of late from all sides, according to the report, as the U.S. tries to  push through a set of demands being balked at by China and Mexico.

Free Download: The November 2017 MMI Report

Although the hope was that a deal could be reached by the end of the year, the teams agreed to extend talks into next year.

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Searching for a return and shying away from an already record equities market, investors are getting back into commodities.

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Not all commodities, it has to be said, but squeezed fundamentals and solid global GDP growth are encouraging investors to get back into oil and some metals — like copper and zinc — after several years of poor commodities performance.

The S&P has gained 82% in the last five years, while the S&P Goldman Sachs Commodity Index (GSCI) has dropped by 34% as commodities have been out of favor.

But the fundamentals are changing for many commodities this year, encouraging renewed interest in the sector among fears that equities my soon top out.

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This morning in metals news, the CEO of Northam Platinum indicated the platinum price is due for upward movement, raw steel production in the U.S. last week was up significantly and Chinese aluminum production was down during October.

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Platinum on the Rise?

As we’ve noted here in recent weeks, palladium has outdone platinum of late — normally, it’s the other way around.

But according to Northam Platinum CEO Paul Dunne, platinum should be on its way back up.

“We have said for a number of years from various public platforms that you would see a phased recovery with palladium running first, then rhodium, and finally platinum,” Dunne said in a report by Mining MX. “Palladium has been off to the races over the past year and the rhodium price has now started to move in recent months rising around 50%.”

Raw Steel Production Up

According to data from the American Iron and Steel Institute (AISI), U.S. raw steel production was up 9.3% for the week ending Nov. 11 compared with the same week last year.

Domestic raw steel production was 1,739,000 net tons for that week, with a capability utilization rate of 74.6%. 

Production for the week ending Nov. 11 was up 1.4% from the previous week, when production was 1,715,000 net tons and the rate of capability utilization was 73.6 percent.

Chinese Aluminum Production Drops in October

Primary aluminum production in China fell 2.3% in October from the previous month, according to a Reuters report citing government data.

Free Download: The November 2017 MMI Report

According to the report, factors contributing to the drop include high costs and the closure of illegal capacity.

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.

An article in the Financial Times this week reporting on recent research done by the Trancik Lab at MIT and the Norwegian University of Science and Technology last year suggests that the future for low-emissions vehicles might simply be smaller vehicles.

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Benchmark Your Current Metal Price by Grade, Shape and Alloy: See How it Stacks Up

Both pieces of solid research support the fact that larger, electric-powered vehicles have a higher life cycle carbon footprint than smaller combustion engine autos.

Let us first define what the research is saying about life cycle emissions. To capture an electric car’s full environmental impact, the research says regulators need to embrace life cycle analysis that considers car production, including the sourcing of rare earth metals that are part of the battery, plus the electricity that powers it and the recycling of its components. The most crucial elements appear to be the source of the electricity used to charge the batteries and the size (and therefore quantity of lithium and cobalt) of the batteries.

Early early vehicles (EVs) were small vehicles with limited batteries and limited ranges, but Tesla changed all that with the model S. With the marker they laid down to the market, vehicle sizes and the range they can offer on a single charge have risen. As a result, so has the size of the batteries, to the point where a model S can weigh up to 2,250 kilograms, but a significant part of that is the massive battery that powers its impressive range.

Source: Financial Times

According to data from the Trancik Lab quoted by the Financial Times, a Tesla Model S P100D saloon driven in the U.S. Midwest produces 226 grams of carbon dioxide (or equivalent) per kilometer over its life cycle. That numbers comes in less than an equivalent large luxury internal combustion engine (ICE) saloon, but much more than a smaller ICE vehicle that may produce less than 200g/km over its life cycle.

Note the reference to the location, as part of the calculation takes account of the electricity-generating capacity — in a solar- or wind-rich environment like Spain or Nevada, it will have a lower carbon footprint than in a coal-rich area, like Poland.

And therein lies part of the problem for legislators, keen to drive our migration to a “zero emission” transport future.

Of course, that is a fiction — all power, even renewables, has a carbon footprint. Power sources, however, vary considerably. To guide both automotive policy and power generation, legislators need to start looking at this more holistically than simply just, in the case of cars, what comes out the tailpipe.

Source: Financial Times

Size for size, EV has some 50% lower life cycle emission signature than an equivalent size ICE. The MIT research acknowledges that fact, but the drive for ever longer ranges (required in only a tiny fraction of real life journeys) will reduce the benefit a switch to EV could deliver. The irony is that by the time legislators get around to working out how to incentivize and/or penalize better car choices, the market will be evolving to negate the benefits. The rise of sharing services will mean journeys will be completed less in our own vehicles and more in hired services, so that we do not make purchase choices based on range and where transport providers could coordinate vehicles for longer distances. Battery technology will also improve in the next decade, increasing power density per kilogram of lithium and potentially reducing, or even removing, the need to cobalt altogether.

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While legislators fumble forward trying to accommodate the fact they are encouraging poor buying choices and the development of technologies in the wrong direction, be prepared for the fact that we see about turns in EV incentives from the current “all EVs are good” to “some EVs are good —  but some are going to be taxed.”

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Much like governments encouraged millions to switch to diesels, only for them to heavily penalize diesel cars less than 10 years later, we could see an equally ham-fisted about change on EV tax legislation down the road.

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This morning in metals news, Japan’s aluminum industry is considering crafting a set of quality assurance guidelines (on the heels of the Kobe Steel quality data falsification scandal), LME copper move further away from last week’s one-month low and Kobe Steel blames its plant managers for the data scandal.

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Changes to Aluminum Industry in Japan?

On the heels of Kobe Steel’s quality data falsification scandal, many in Japan are asking the same question: how can we prevent the same thing from happening again?

The scandal has rocked Kobe Steel, the third-largest steelmaker in Japan. As a result, the Japanese aluminum industry is considering building a new set of quality assurance guidelines, Reuters reported.

Copper Moves Up

London copper moved up Monday, Reuters reported, powered by strong demand and a lagging U.S. dollar.

Copper moved up 0.7% to $6,832.50 a ton by 0719 GMT, according to the report, up from a one-month low last week of $6,761.50 a ton.

Kobe Steel Plant Managers Get Blame for Scandal

As with any scandal, designation of blame is inevitable — and vis-a-vis Kobe Steel’s quality data falsification scandal, Kobe is blaming its plant managers, according to The New York Times.

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According to an internal company report, plant managers were at the center of the issue — instead of scrapping products that fell below quality guidelines and manufacturing new ones, the plant managers signed off on the sub-standard metal products.

Everything about India’s growth script is gigantic.

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Take the Indian Railways (IR) expansion drive, for example.

The IR a few days ago floated a global tender to procure rails, and, get this – 700,000 metric tons of it.

Two things unique about this development – the quantity and the fact that for the first time the IR has decided to invite private parties to supply the rails.

The Indian government has earmarked about $132 billion to upgrade a creaking network, established when the British ruled India, which includes huge track-laying projects to modernize passenger and freight movement.

So far, the state-run steel supplier Steel Authority of India Limited (SAIL), held a monopoly of supplying rails to IR. But now, with the Ministry going in for a global tender, not only foreign players but even domestic steel companies — such as Jindal Steel & Power Ltd., one of the biggest non-state steelmakers — could benefit.

The additional rail tracks will help the railways towards clearing the track renewal backlog.

Some important notes:

  • Indian Railways is the country’s largest employer with 1.4 million personnel.
  • The carrier has a track length of around 115,000 kilometers, making it the world’s largest railway network under a single management.
  • It runs around 20,849 trains daily and transports 23 million passengers and 3 million tons of freight.
  • It operates 10,773 locomotives, 63,046 coaches and 245,000 wagons.

Going forward, IR is contemplating a mega-renovation in partnership with state and central administrations. The plan includes constructing elevated corridors for Indian cities like Mumbai and Delhi, alongside existing rail tracks, for which a portion of the new rails will be used.

SAIL, according to a report by news agency Reuters, has failed to supply rails to Indian Railways.

India’s steel ministry, said the news report, had asked SAIL to make sure it met its target of 1.14 million tons of supplies in 2017-18. Reuters earlier reported the upgrade for the IR was at risk because of rail shortages from SAIL. Between April and August, SAIL could supply only 70% of its monthly targets set for Indian Railways.

For 2017-18, SAIL has committed to providing only 1.14 million tons, against a requirement for 1.46 million tons.  SAIL, which has posted losses for nine straight quarters, is targeting capacity additions of 2 million tons a year.

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IR expects annual demand for steel rails to rise to 1.5 million tons in the year ending March from about 800,000 tons in the prior 12-month period.