That the news is all about trade makes a change for us business folks from the tittle-tattle around the private lives of politicians or celebrities, as trade is topic that actually touches all of us (whether we are immediately aware or not).
That President Donald Trump has made trade dispute a central plank of his first presidency is no surprise.
Throughout his presidential campaign, Trump frequently made reference to what he sees as unfair trade terms enjoyed by America’s trade partners and his intention to use whatever means he could to right the perceived wrong. “Trade wars are good,” he famously said on the campaign trail — he has certainly followed through with that in office.
Just as there appears to be a thaw — or at least a renewed willingness to talk — between the U.S. and China following the G20 summit in Japan, the president has renewed his previous spat with Europe, which ranges across a number of topics.
In addition to the general argument that the U.S. exports less to Europe than Europe does to the U.S., there are specific grievances over automobiles. The U.S. applies a lower rate of duty on European sedans than Europe does on U.S. cars and the company-specific case of subsidies to Airbus, the administration claims, are unfair.
This last one has been the subject of a flare-up this month. The U.S. threatened fresh tariffs on $4 billion covering 89 European products, The Guardianreports, including olives, Italian and Dutch cheese, Scotch whiskey, Irish whiskey, pasta, coffee, and ham. These items join products worth $21 billion that were announced as potential targets for tariffs in April, the paper reports, which included Roquefort cheese, wine, champagne, olive oil and seafood (such as oysters).
The latest list notably also includes a number of copper products, metal consumers should note, including bars, plate, strip and foil (the full list can be found here). The rights and wrongs of the case can be argued with equal validity on both sides, the E.U. claims — and has done since 2004 — that Boeing receives illegal subsidies. Meanwhile, U.S. claims Airbus does.
The reality is both receive state support in one form or another and the WTO has upheld cases in favor of both parties against the other.
U.S. construction spending in May totaled an estimated $1,293.9 billion, according to the U.S. Census Bureau, marking a 0.8% decline from April’s $1,304.0 billion.
The estimated May 2019 spending figure marked a 2.3% decline on a year-over-year basis; according to economists polled by Reuters, construction spending was forecast to increase 0.1% in May.
Private construction spending in May was $953.2 billion, down 0.7% from the revised April estimate of $960.3 billion.
Under the umbrella of private construction, May residential construction spending fell 0.6% from the previous month, down to $498.9 billion. Nonresidential construction spending fell 0.9% in May, down to $454.3 billion.
Meanwhile, public construction spending fell 0.9% to $340.6 billion. Under public construction, educational construction was nearly flat at a seasonally adjusted annual rate of $79.3 billion. Highway construction fell 3.2% to $111.6 billion.
The May ABI checked in at 50.2 after recording a value of 50.5 in April; any value greater than 50 indicates billings growth.
Billings grew in the Midwest (51.6) and the South (51.4) regions, held flat in the West (50.0), and fell in the Northeast (47.6).
Despite the technical increase as reflected by the ABI, the past four months have showcased a slowdown not seen in seven years, according to the AIA.
“In fact, for the last four consecutive months, firm billings have either decreased or been flat, the longest period of that level of sustained softness since 2012,” the AIA said in its ABI release. “In addition, while both inquiries into new projects and the value of new design contracts remained positive, they both softened in May as well, another sign that the amount of pending work in the pipeline at firms may be starting to shrink.”
May Housing Starts Fall 0.9%
Last month, we reported U.S. housing starts, at a seasonally adjusted rate of 1.29 million, fell 0.9% in May compared with the previous month.
In addition, the National Association of Realtors (NAR) reported April pending home sales dropped 1.5% over the previous month. NAR’s Pending Homes Sales Index, which is based on contract signings, fell 2.0% in April, marking the 16th consecutive month of decline for the index.
Actual Metal Prices and Trends
The Chinese rebar price rose 0.6% month over month to $582.52/mt as of July 1. Chinese H-beam steel dropped 1.5% to $554.85/mt.
GM’s chief economist said U.S. light-vehicle SAAR for the first half of the year is expected to reach 17.0 million units.
“The U.S. economy continues to grow at a healthy pace. Jobs are plentiful and inflation remains low,” said Elaine Buckberg, GM’s chief economist. “Auto demand was better than anticipated in the first half and we expect strong performance in the second half of the year. If the Fed cuts rates, as widely expected, lower financing costs will provide further support to auto sales.”
Meanwhile, Ford Motor Co. is scheduled to announce its Q2 sales results at 9:15 a.m. ET on Wednesday, July 3.
Fiat Chrysler reported it had its best June in 14 years, posting total sales growth of 2%, tallying 206,083 vehicle sales. Ram pickup truck sales surged 56% in June to 68,098 vehicles and 179,454 vehicles in the quarter.
According to a monthly forecast released jointly J.D. Power and LMC Automotive, June retail sales were expected to fall 2.9% compared with June 2018, while total sales were forecast to drop 1.5% year over year.
Despite slumping sales this year, automakers have cashed in on higher average transaction prices. According to J.D. Power and LMC Automotive, new-vehicle prices are up 4% in the first half of the year compared with the first half of 2018.
“While the first half of 2019 is expected to deliver its weakest retail sales since 2013, the growth in prices has been nothing short of remarkable,” said Thomas King, senior vice president of J.D. Power’s data and analytics division. “Average transaction prices set a record during the first half, which has big implications for manufacturer revenues.”
GM Announces Michigan, Texas Investments
Last month, GM announced plans to invest $150 million in its Flint Assembly plant and $20 million at its Arlington Assembly plant.
Meanwhile, the $20 million investment in the Texas plant aims to upgrade the plant’s conveyors in preparation for the rollout of the automaker’s new full-size SUVs. According to a GM release, the upgrades are expected to be completed next year.
Actual Metal Prices and Trends
The U.S. HDG price fell 6.9% month over month to $779/st as of July 1. The U.S. platinum bar price increased 1.7% to $834/ounce, while palladium surged 15.8% to $1,516/ounce.
U.S. shredded scrap steel fell 7.1% to $274/st. LME copper jumped 2.8% to $5,981.50/mt.
Jaguar Land Rover’s (JLR), decision to invest hundreds of millions of pounds to enable its Castle Bromwich plant in the U.K. to build electric cars, as reported by the Financial Times, is interesting on a number of levels.
Specifically, for JLR it underlines the drastic steps the firm is being forced to take following a collapse of sales over the last 18 months. Buyers have turned away from JLR’s diesel engine lineup — some 50% of JLR’s models are diesel-powered — amid a backdrop of wider automotive sales slumps across Europe and in China.
Switching to petrol engines is but a stopgap for a manufacturer whose range is skewed heavily to larger, less fuel-efficient models.
European environmental standards will require manufacturers to meet a fleetwide average of 57 miles per U.S. gallon by 2021 – already a demanding target with high mix of diesels and a number of electric options in its range.
But with a switch to petrol and following recent suggestions by the E.U. that the limit should be ramped up to 92 mpg by 2030, JLR could struggle to survive.
So, switching to all-electric for some of its key models — like the replacement for the XJ, the flagship Jaguar saloon— is, while immensely challenging, the only viable option.
The challenge — and the source of JLR’s reluctance to build its existing all-electric I-Pace in the U.K. — has been the lack of a U.K. supply chain.
Many of the drivetrain components, like motors, were produced by third parties but are increasingly being made in-house, according to thedrive.com. The most significant factor, however, is the lack of a significant automotive battery maker in the U.K., the Financial Times reported.
Perhaps the imposition of harder post-Brexit borders with the E.U. will encourage U.K. manufacturers to establish a major battery facility at some stage in the future — or, maybe, Castle Bromwich will be the last major automotive investment in the U.K.
Either way, for now sourcing major components from Europe is a brave move, particularly with so much uncertainty around about trade terms.
From a wider perspective, JLR’s investment suggests manufacturers do not believe politicians will carry through with such threats, despite all the current political posturing over a hard Brexit. It also suggests manufacturers believe there will be some form of a softer compromise that allows low-tariff or tariff-free trade with the E.U. and, more importantly, relatively free movement of goods. That, or some solution requiring only light touch border controls that allow just-in-time supply chains to continue to operate with levels of flexibility similar to the current regime.
All other U.K. car manufacturers are either keeping their cards close to their chests while waiting to see the outcome of the Oct. 29 deadline to leave the E.U., or are actively moving to Europe by announcing investment for new models will go into mainland European plants.
JLR’s move is against the current grain and raises the question of whether it has anything to do with the level of state financial support it has received, desperate as the government is to build momentum against the prevailing tide of lost investment to the E.U.
No automotive company invests in new facilities without going cap in hand to the government to see what help it can get; typically it is 9-10%, but it won’t be long before news leaks out of quite how much JLR has secured for Castle Bromwich.
Think Rolls-Royce, Bentley, Jaguar, Lotus, Morgan and, my own favorite, Aston Martin. The U.K. is also home to most of the world’s Formula One racing teams research, development and production facilities.
Yet, at a less glamorous but arguably more important level, the U.K. automotive industry is not only key to the country’s manufacturing base, it also operates as one of the most sophisticated and integrated supply chains in Europe.
As the graphic below from industry site SMMT illustrates, over 80% of U.K.-made cars are exported — over 50% of them into Europe, but the rest worldwide.
On the supply side, more than half of the parts used in making those vehicles come in from overseas, linking Europe into one large, integrated manufacturing supply chain.
Vehicle manufacturing is the U.K.’s second-largest manufactured product export, making up 11.4% of the total. By comparison, the U.S. has automotive exports ranked down at fifth at only 8.4% of exports.
So, when automotive production declines in the U.K., even for one or two months, it has a significant knock-on effect to the rest of the economy.
Arguably, the U.K. has not faced such a challenging period since its darkest days in the 1970s. According to the Financial Times,car production in May dropped by 15%, its 12th straight month of decline. Production for the domestic market was 25% lower than the same period last year, while export output dropped over 12%. All of this comes with the backdrop of a fundamentally cheaper exchange rate following the 2016 referendum to leave the E.U., which should have made U.K. exports significantly more competitive.
Source: Financial Times
Part of the reason for the decline, after years of bad press, has been buyers’ sudden change of heart regarding diesel engines.
Some manufacturers, like Jaguar Land Rover, were producing over 90% of their fleet with diesel engines and have been frantically trying to adjust to the market’s growing aversion to oil burners. But equally, it has to be said, carmakers are taking the opportunity to switch investments in new models from the U.K. to the E.U. mainland (in case the U.K. fails to secure a true free trade agreement with the E.U.).
Any form of partial free trade agreement that involves border checks and/or tariffs will have a detrimental impact on the ability of automotive companies to run an integrated, just-in-time supply chain with their European parts suppliers.
Automotive companies see this as a significant risk and, when faced with choices, have opted to favor investment in their European plants, even though the U.K. operations have traditionally performed more efficiently.
In the unlikely event the U.K. concludes a true free trade agreement — by which I mean one, like now, that does not require border checks — it is possible some of this decline will be reversed.
However, it will take years before carmakers will have enough trust in the political relationship between the U.K. and E.U. to feel comfortable investing hundreds of millions in new models to be made in the U.K.
In the meantime, automotive is unlikely to get back to its recent 2017 peak.
Vale’s Feijao mine disaster, which killed around 250 people, has resulted in the loss of around 6% of seaborne supply since late January, the ABC reports.
The market is feeling the squeeze.
Iron ore inventories at Chinese ports have dwindled away to the lowest level in more than two years. The current price is approaching U.S. $120/metric ton, still well short of the record U.S. $191/ton in early 2011 or the $160/ton reached in the last big rally seven years ago. However, the current price is still rising inexorably and resulting in mill margins becoming so pressured that some producers have slipped into the red.
Chinese steel futures are reacting to the tight market with rebar prices hitting a near eight-year high and hot-rolled coil climbing to an all-time peak, Reuters reported. Steel demand from downstream sectors in China is reported to be very strong, yet finished steel prices are not rising fast enough to spare steel mills from becoming squeezed in the tight raw material supply market.
Needless to say, with delivered cost prices from Australian iron ore mines into China at around $30 per ton, Rio Tinto, BHP and their smaller brethren are making hefty margins. But in recognition of the probability that Brazil’s mine closure issues are more short term than long term, Australian miners are not investing in major new projects. Rather, they are spending cash paying down debt, making cost-saving investments and distributing surpluses to shareholders.
Elevated iron ore prices are not expected to persist into next year. The consensus forecast is for prices to drop back into the $80-$90 range by next year, ABC reports, so Chinese steel mills’ pain is likely to be relatively short-lived.
Following consolidation in the industry and the closure of many illegal or unlicensed producers, the remaining behemoths will be able to ride out the few months of negative or poor margins in the expectation falling raw material costs and/or rising finished steel prices will come to their rescue later this year.
The E.U. has experienced its fair share on that front: tariffs on steel and aluminum (along with much of the rest of the world), threats to the automotive industry (particularly the German car industry) in the form of heightened tariffs and threats to pull out of NATO if Europe doesn’t pay its way.
So far, much of the aforementioned has proved to be bluster. Subsequent negotiations have watered down some of the threats and/or postponed implementation to allow for some form of a negotiated settlement.
That the Euro is undervalued and the dollar relatively overvalued is no secret.
That both are where they are, it has to be said, is also not due to one or two simple actions but to a combination of circumstances — some deliberate and often coming with both intended and unintended consequences.
The dollar, for example, has hit a 17-year high, according to the Federal Reserve’s broad dollar index, The Telegraph reports. Trump’s tax cuts came at the top of the cycle and pushed the budget deficit to 4% of GDP, encouraging the Fed to prematurely raise rates last year.
Meanwhile, the manufacturing trade deficit has ballooned to $900 billion as U.S. manufacturers struggle against a strong dollar and the imposition of import tariffs raising raw material costs. After an initial boost, this is now having a toxic mix of depressing economic growth while holding up the dollar, making an export-led recovery harder.
The Euro has gone in the opposite direction.
Quantitative easing (QE) has depressed the Euro for the last five years. The trade-weighted index fell 14% a year after Mario Draghi, president of the European Central Bank, signaled bond buying was coming in 2014. That has been a powerful stimulus, such that Germany is now running a current account surplus of 8.5% of GDP and Europe as a whole is running a surplus of $300 billion-$400 billion per annum.
Since QE stopped last year and hastened by a slowing China, growth in Europe has slumped; the ECB is desperate to get it going again.
But the ECB will have to be a lot more radical than it was with previous measures.
Yields on 10-year German Bunds are -0.3%, in the paper’s words, and the bond markets are signaling an ice age. Inflation expectations — and, by association, growth — have collapsed, but the ECB will have to get radical if it is going to achieve any impact, which will be seen as currency manipulation in Washington (a position that, for once, lawmakers on both sides can agree on).
The president will have plenty of support for retaliatory action.
The article suggests one measure is playing Europe at its own game. The Economic Policy Institute in Washington proposes buying the bonds of any country engaged in currency manipulation to neutralize the effect by driving up the value of its currency (in this case, the Euro). Used in conjunction with the president’s favorite approach of slapping on tariffs, the most likely target being cars, that type of response would have a deeply damaging impact on the European economy.
The U.S. dollar is also a key currency in the precious metals market.
Source: MetalMiner data from MetalMiner IndX(™), Macrotrends.net and Yahoo.com
U.S. and Chinese gold bullion prices, as seen in the chart above, move closely together. Meanwhile, they both tend to move inversely against the dollar.
In other words, as the dollar gains strength, gold prices grow weaker in both countries.
The yuan fluctuates more widely against the dollar, with little apparent impact on gold prices.
Source: MetalMiner data from MetalMiner IndX(™) and Investing.com
Here is a more typical look at the relationship between U.S. values, with gold priced per ounce, which clearly shows the inverse price relationship.
MetalMiner recently caught up with Americas Silver Corporation President and CEO Darren Blasutti regarding underlying gold and silver price trends.
Blasutti explained the transition away from oil supports gold’s bullishness. Once that happens, the rationale for holding U.S. dollars weakens greatly, while currency diversification, including precious metal purchases, will continue to make sense.
Whereas industrial metals have shown more price volatility during certain periods, gold prices have stayed relatively more stable, according to Blasutti, therefore making it more attractive for mining companies.
Source: MetalMiner data from MetalMiner IndX(™)
Gold prices have enjoyed some price support during the past year or so, but still remain lower than in the recent past. Still, prices are trading in a fairly stable sideways band and have done so, more or less, since 2013.
Historical Roots in Silver
Prior to moving into gold mining, as most other major silver companies have done to date, Americas Silver Corporation mined a mixed market basket including silver, zinc and lead.
With prices for silver quite low in the recent past, it’s difficult to justify mining the metal from a cost perspective. As a result of falling silver prices following the acquisition of two key silver projects, Americas Silver Corp. transitioned from predominantly silver mining toward lead and zinc.
Over time, the mining strategy shifted toward higher grades of lead and zinc and lower silver quality. It made more sense to take advantage of higher zinc and lead prices, while silver prices suffered a lengthy slump.
Into the foreseeable future, while silver prices remain lower, the company continues to focus on mining its lower grade silver, leaving the higher grades in the ground because the company remains bullish on long-term silver prices.
“When silver does come back, we can increase ounces quite dramatically on the silver side,” Blasutti said.
The company’s acquisition and startup of the Relief Canyon Mine, located in Pershing County, Nevada, for gold mining will transition the company from a base metals mining company back into a precious metals mining company.
“Part of the impetus to get back to precious metals was to get a commodity that we thought had less volatility,” Blasutti said. “Gold has shown to have less volatility in the last period, much more than the base metals. Base metals traded in a range and gold has traded in a range, but the range hasn’t been severe [for gold].”
Source: MetalMiner data from MetalMiner IndX(™)
So far, even with the trade war at hand, silver prices remain low.
Source: MetalMiner data from MetalMiner IndX(™)
As shown in the chart above, the gold-to-silver price ratio continues to increase toward gold.
But as pointed out by Blasutti, those remaining silver companies stand to win big once prices for the metal turn around. He pointed out the last time prices stood at around this ratio (90.3:1), silver came back.
Given projections for the reduction of oil use in the long-term as stricter emissions standards come into effect, demand for the dollar could decline into the future.
As demand for the dollar weakens, we can expect gold prices to rise. Once gold reaches higher prices, silver may finally follow suit, with the gold-to-silver ratio finally dropping back from current highs that strongly favor gold mine production.
We have reported earlier about the rising appetite for gold in the form of ETFs and physical metal, but investors’ enthusiasm was spurred this week by dovish comments made by the Federal Reserve on Wednesday regarding interest rates.
Where previously the Fed has indicated patience and a watch-and-see policy, this week it signaled a possible interest rate cut as soon as next month.
The Fed is apparently worried about a deteriorating domestic and global economic backdrop, according to Reuters. A combination of damaging trade wars and slowing growth in all the major trading blocs, set against a backdrop of a potential end of a bull market cycle, is getting not just central banks but investors worried, too.
CNBC cited more technical issues around the movement of longer-dated treasuries as a major stimulus to gold buying (at least this week). The article states the 10-year Treasury yield slipped below 2% for the first time since November 2016, breaching an important psychological level, adding that the surge in gold prices was likely driven by the declines in yields of shorter-duration Treasuries ranging between three months and two years. The yield on the three-month Treasury note trickled lower to 2.146%, while the two-year note dropped to 1.716%.
Whether the Fed will cut rates next month will be driven by a number of factors, not least of which will be the impact of a strong dollar on U.S. exporters. The European Central Bank and the Reserve Bank of Australian have both signaled they intend to cut rates.
The Fed’s news this week has taken the edge off the dollar. Relatively speaking, however, other trading blocs appear ahead of the Fed in easing monetary policy. There is talk of quantitative easing returning in Europe, a move that could spark trade tensions between the U.S. and the E.U. as the Euro weakens further (which will be the subject of an upcoming followup piece on MetalMiner).
So when the United States removed tariffs on imported steel and aluminum from Canada and Mexico last month, you would have expected the resulting flood of lower-priced aluminum would have driven down the Midwest Premium.
No such luck.
Despite a minor blip, it has remained stubbornly elevated at over USD $400 per ton, raising howls of protest from consumers (particularly in the beverage can market).
But before we accuse primary mills of gouging the market, let’s consider some points made by Andy Home in a Reuters article this week.
First, some context supporting the consumers’ position. Canada accounted for some 51% of aluminum supply to the U.S. market in 2018, with Australia, Argentina (who were exempted from the start) and now Mexico making up another 8%, so that nearly 60% of supply is now duty-exempt.
Yet prices have not really shifted despite jumping from $0.10/lb before the tariffs were announced to over $0.22/lb now – well above the 10% (about $0.08-$0.09/lb) that could reasonably be attributed to the tariff.
That raises the question as to what is really going on: if elevated Midwest Premiums are not really reflecting the 232 10% import tariff as many have maintained, then why do they remain elevated? Does their persistence after the tariff removal mean they may be a long-term feature of the market?
Technically the Midwest Premium has generally been explained as the cost of delivery to a U.S. consumer, largely reflecting haulage costs.
But while it is a reflection of that, it is also much more, Home suggests.
The CME contract traded volumes equivalent to almost 2.5 million tons last year, not just from trade hedging but as a market in its own right. The U.S. market remains incredibly tight. Prices aside, the loss of some 350,000 tons of supply from the Becancour smelter in Canada due to a lockout has not even begun to be replaced by domestic U.S. restarts amounting to only some 90,000 tons.
The market has continued to grow, but supply is constrained – surely that should be reflected in the LME price, you may ask?
Yes, in a fully functioning market it should be. The U.S. isn’t a market isolated from the rest of the world — so what are premiums doing elsewhere?
Rotterdam P1020 duty-unpaid premiums rose to about U.S. $100 per metric ton this month, up from $90-$95 per metric ton late last month. However, duty-paid premiums in less-traded and lower-volume Mediterranean markets, like Spain, eased slightly to U.S. $350-$360 per metric ton from a shade higher last month (not far off Midwest Premium levels, according to AluminiumInsider).
Premiums in South America are even higher, reaching U.S. $500 per ton in Brazil. The premiums are not reflecting the scarcity of metal, per se, so much as the scarcity of metal in a particular location.
But if some justification for the premium can be made, what about the elevated prices being paid by consumers despite a declining LME? Home has some thoughts for us on that, pointing to the revenue earned by suppliers in this elevated market, noting the U.S. government collected only around $50 million in tariffs.
Some of the difference, an estimated $27 million, went to U.S. primary aluminum smelters. The bigger part, $173 million, went to U.S. rolling mills. The latter, according to the article, have been pricing their can stock to include the 10% tariff, even though primary metal only accounts for around 30% of the input (the rest is scrap).
The beverage market is far from alone in this. For those consumers who do not break down the raw material, delivery premium and value-add elements of their pricing, mills have managed to push through price increases in excess of 10% on the back of less than 10% cost increases.
What they do about it in the face of a still tight market for many grades is tough, but breaking out base metal, premium and gaining as much transparency as possible into the value-add is a big first step. It provides data for negotiation and a structure for analyzing price changes with greater power in the hands of the buyer.
In a difficult market, consumers need all the tools they can lay their hands on.