Germany

Germany’s federal environment minister has pledged €55 million ($65 million) towards ArcelorMittal Hamburg’s planned construction of a demonstrator directed reduced iron (DRI) plant, which will eventually use green hydrogen, the Luxembourg-headquartered group stated.

Svenja Schulze pledged the government’s support Sept. 7 while visiting the Hamburg plant, ArcelorMittal noted.

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Germany to offer half of funding for new ArcelorMittal plant

ArcelorMittal sign in Ontario

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That amount represents half of the projected €110 million ($130 million) cost for the plant, ArcelorMittal said. However, funding is contingent on European Commission approval.

A spokesman for the group declined to say when the European Commission would give its approval. The spokesman expressed hope that approval would come “soon.”

The demonstrator plant will have a DRI capacity of 100,000 metric tons per year and is due to come on stream by 2025. The spokesman noted that it would at first use grey hydrogen to produce DRI, rather than green.

“Once available in sufficient volumes and at an affordable price, green hydrogen – made from the electrolysis of water using renewable energy – will be used,” ArcelorMittal stated in its Sept. 7 announcement.

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India

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This morning in metals news: India is looking to curb its imports of copper and aluminum; Rio Tinto and Turquoise Hill reached a financing agreement for the Oyu Tolgoi underground mine project; and Germany’s steel industry needs state aid.

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India targets copper, aluminum imports

India is looking to curb its imports of copper and aluminum, Reuters reported.

Per the report, India is particularly targeting imports from China and other Asian countries. Among the proposed measures is a requirement for importers to register with the government.

Rio Tinto, Turquoise Hill reach financing deal

Miner Rio Tinto and Turquoise Hill have reached a financing deal toward the completion of the Oyu Tolgoi underground mine in Mongolia.

“The MOU agreed today with TRQ provides a clear funding pathway for the completion of the Oyu Tolgoi Underground Project,” said Arnaud Soirat, Rio Tinto’s chief executive of copper and diamonds. “We will continue working with TRQ and the Government of Mongolia to progress the underground project, which has the potential to unlock the most valuable part of the mine for the benefit of all stakeholders.”

Rio Tinto has a 50.8% stake in Turquoise Hill.

With the current development schedule, Turquoise Hill expects the massive copper-gold mine will be the world’s third-largest copper producer at peak metal production in 2025.

IG Metall head says German steelmakers need state aid

2020 has been a difficult year for Europe’s steelmakers.

Already battling imports, European steelmakers have struggled on the heels of the coronavirus pandemic and its resulting impact on demand.

In Germany, IG Metall head Joerg Hofmann said the country’s steelmakers need state aid, Reuters reported. In addition, German steelmakers need to form alliances in order the facilitate the transition to greener fuels for blast furnaces, Hofmann argued.

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The Financial Times reported the eurozone’s economy is growing at the slowest rate since the bloc’s debt crisis seven years ago, according to data published late last week.

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The Eurozone grew at a quarterly rate of 0.1% in the fourth quarter, its slowest rate of expansion since early 2013.

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Despite noting some positive developments, the International Monetary Fund (IMF), downgraded its growth projections for 2019-2021, citing a number of pressures ranging from climate change to geopolitical tensions to extant trade tensions.

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In its January 2020 World Economic Outlook, the IMF forecast growth will rise from 2.9% in 2019 to 3.3% in 2020 and 3.4% in 2021. However, the forecasts were revised downward from the IMF’s October Outlook — by 0.1% for 2019 and 2020 and by 0.2% for 2021.

“The downward revision primarily reflects negative surprises to economic activity in a few emerging market economies, notably India, which led to a reassessment of growth prospects over the next two years,” the IMF report stated. “In a few cases, this reassessment also reflects the impact of increased social unrest.”

Slowing growth

Concerns have abounded in recent years regarding the prospect of a global recession.

Growth levels in China, for example, started to level off and then decline post-2012, albeit after a period of significant growth that would’ve been unreasonable to expect to continue. In 2007, China’s annual GDP growth soared to 14.23% but fell to 9.65% the following year, according to the World Bank. Growth has continued to slide since then, reaching 6.57% in 2018.

Similarly, Germany, the manufacturing powerhouse of Europe, has seen weakening activity. According to the IHS Markit/BME Germany Manufacturing PMI, German manufacturing activity contracted once again in 2019.

“Germany’s manufacturing sector closed out 2019 with another weak performance and remains a thorn in the side of the economy,” said Phil Smith, IHS Markit’s principal economist. “Falling goods production across the fourth quarter of the year bodes ill for final growth figures, while sustained cuts to workforce numbers at factories continue to pose a threat to Germany’s so-far solid consumer spending.

“Importantly, however, the forward-looking survey measures for new orders and output expectations both give off more positive signals as we move into the new year. What’s more, the US-China ‘phase one’ trade deal and a potentially clearer path to Brexit make for a more settled backdrop on the international stage.”

Overall, Germany’s GDP has been up and down. After a significant contraction of 5.70% in 2009, growth bounced back to 4.18% in 2019 but hasn’t reached that level since; in 2018, Germany’s GDP growth hit 1.53%, according to the World Bank.

Of course, trade tensions have weighed on economies around the world and generated uncertainty. Despite a so-called “Phase One” trade deal between the U.S. and China, the U.S. maintains an overwhelming majority of its previously imposed tariffs as a bargaining chip for compliance (and for future Phase Two negotiations, if and whenever they occur).

Throw in an escalation of Middle East tensions and a paralyzed WTO Appellate Body (currently unable to make decisions for lack of judges) and it’s not surprising that economic forecasts list more reasons for pessimism than for cheery optimism.

With that said, the Phase One deal and the U.S. Senate’s recent approval of the United States-Mexico-Canada Agreement represented positive steps toward an easing of trade-related tensions; a further rollback of U.S. tariffs on China would certainly ease tensions even more and boost certainty in the global business community.

The world will be watching to see where U.S.-China negotiations go next. Given the negotiating timeline of Phase One and the significant amount of tariffs that remain on Chinese goods, the next phase is likely to be even more complicated and tense — making an agreement before this year’s U.S. presidential election seem unlikely.

Nonetheless, the IMF did point to some positive signs, even as it revised growth projections downward.

“On the positive side, market sentiment has been boosted by tentative signs that manufacturing activity and global trade are bottoming out, a broad-based shift toward accommodative monetary policy, intermittent favorable news on US-China trade negotiations, and diminished fears of a no-deal Brexit, leading to some retreat from the risk-off environment that had set in at the time of the October WEO,” the report stated. “However, few signs of turning points are yet visible in global macroeconomic data.”

Emerging markets, developing economies

As the IMF notes, subdued growth in India accounts for “the lion’s share of the downward revisions.”

The IMF estimates India’s 2019 growth at 4.8%, 5.8% in 2020 (1.2 percentage point down from the October outlook) and 6.5% in 2021 (0.9 percentage point down from the October outlook).

“The global growth trajectory reflects a sharp decline followed by a return closer to historical norms for a group of underperforming and stressed emerging market and developing economies (including Brazil, India, Mexico, Russia, and Turkey),” the report stated. “The growth profile also relies on relatively healthy emerging market economies maintaining their robust performance even as advanced economies and China continue to slow gradually toward their potential growth rates.”

Also of note, the IMF reported that without monetary easing efforts in advanced and emerging market economies, the global growth projections would be down an additional 0.5 percentage point for each year in question.

As a whole, emerging markets and developing economies are projected to experience growth of 4.4% in 2020 (up from an estimated 3.7% in 2019) and 4.6% in 2021.

“The growth profile for the group reflects a combination of projected recovery from deep downturns for stressed and underperforming emerging market economies and an ongoing structural slowdown in China,” the IMF stated.

Growth stabilizing in advanced economies

Meanwhile, in advanced economies, growth is expected to reach 1.6% in 2020-2021, down 0.1 percentage point from the IMF’s October outlook, “mostly due to downward revisions for the United States, euro area and the United Kingdom, and downgrades to other advanced economies in Asia, notably Hong Kong SAR following protests).”

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In the U.S., the IMF projected growth to fall from 2.3% to 2.0% in 2020 and 1.7% in 2021.

In the euro area, growth is expected to pick up from 1.2% to 1.3% in 2020 and 1.4% in 2021.

In the U.K., growth is expected to stabilize at 1.4% in 2020 and 1.5% in 2021, as the U.K. prepares to formally withdraw from the E.U. at the end of the month (after which attention will shift to the type of trade arrangement that can be reached between the two parties in a post-Brexit world).

As we head into not just a new year but a new decade, we could be forgiven for thinking we are in much better shape than we were a year ago.

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The British have overwhelmingly affirmed their intent to leave the European Union on Jan. 31. While the terms of any deal with Europe will not be known for another year, the firm departure date of Dec. 31, 2020 — with or without a deal — at least suggests we will not have the can-kicking of the last three-plus years.

Meanwhile, America’s trade war with China is showing some signs of thawing. A little progress has been made in terms of a phase one deal, in which the Trump administration refrained from imposing a new tranche of tariffs that was set to start in December and decided to halve its current 15% tariff rates imposed on $120 billion of Chinese products. In return, China is said to have agreed to substantially increase agricultural purchases, a move that would benefit American farmers who have been bearing the brunt of the trade war.

But according to some sources, the phase one deal will be unlikely to contribute to a sharp reduction of tension in their relations because it leaves unresolved some key issues that have been at the heart of the trade war, such as intellectual property rights and state subsidies.

According to The Times this week, America’s stock markets were buoyed in the second half of 2019 by three interest rate cuts in quick succession made by the U.S. Federal Reserve. Since September, the central bank has also injected hundreds of billions of dollars into short-term money markets to ease a squeeze on lending.

Central banks’ ability, however, to add further support in 2020 is limited.

The Fed is expected to possibly add one more rate cut. However, in Europe, rates are at rock bottom or already negative; further fiscal stimulus would have to come from governments, not central banks.

Both Europe and the U.S. would benefit from investment in infrastructure. There are some signs a loosening of the purse strings may occur in the U.K. and the Netherlands, but Germany is the kingmaker (at least in Europe). Although more conciliatory noises have been emanating from the German Federal Ministry of Finance, it seems unlikely Germany is going to boost E.U. growth by dropping its balanced budget policy, however beneficial that would be for both Germany and the rest of the E.U.

Despite comments that China’s manufacturing picked up in November, there seems little doubt growth is slowing in the world’s second-biggest economy.

An article in The Telegraph quotes Fathom Consulting predictions of a real growth rate closer to 4% in 2020, regardless of what the official figures may report. The expectation is China will add stimulus next year in order to sustain growth and avoid recession, but CRU predicts most of the fiscal aid will come from government spending (unlike in 2019, when it came from tax cuts).

In the long run, this wouldn’t be good news because China already has a debt mountain of more than 250% of GDP. Corporate and household debt have soared rapidly and, while not an immediate threat, poses a longer-term risk to the economy as the population ages and the country’s ability to fund that debt comes under strain.

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2020 holds a number of risks, but the optimist in us should suggest the November U.S. presidential elections could be a spur to achieve trade solutions with China and Europe that could see less volatility and uncertainty among the major economies.

Risks will remain, but fundamentally the global economy has more positives than negatives.

While some have been predicting an end to the bull market and a looming recession, we remain optimistic that 2020 will see continued growth.

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Not everyone agrees with the use of tariffs to achieve changes in trade relations.

However, a recent article in The New York Times article reports the threat of 25% import tariffs on the U.S.’s main automotive trading partners could prove to be spectacularly successful.

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Autos are the soft underbelly of major auto economies like Germany, Japan, South Korea and Mexico in their trade relations with the U.S. Although the first three have invested heavily in U.S. manufacturing facilities over the years, they still ship huge volumes into the U.S. from their home countries and have largely perpetuated an unfair reciprocal relationship in terms of tariff barriers.

The E.U., for example, exported $42.8 billion worth of motor vehicles to the U.S. in 2018 — more than one-fifth of the cars imported by the U.S. — at a tax rate of 2.5%. Meanwhile, the E.U. imposes a 10% tariff for cars exported in the reverse direction.

In response to the threat of 25% tariffs, the E.U. offered to scrap tariffs in both directions, a step it has resisted in all previous negotiations.

But with carmakers’ backs against the wall, the Trump administration was not about to let up with a simple scrapping of tariffs, long overdue as that may be.

The administration is in discussions with the E.U. and its carmakers about increasing their investment and employment in the U.S. The more cars foreign carmakers manufacture in the U.S., the less they will ship in from abroad, benefiting the balance of payments and creating employment stateside.

Consumers benefit from continued access to a wide range of manufacturers without the cost implications of the threatened tariffs being imposed, estimated to be between $1,400 and $7,000 per vehicle if applied at 25%, the article notes.

Even U.S. carmakers are in favor of removing all tariffs, as they see a reduction in overseas import tariffs as an opportunity worth the increased domestic competition that foreign carmakers setting up in the U.S. may pose.

The only losers, should the deal be agreed, could be said to be foreign carmakers who will lose domestic exports, an impact that Germany is expected to feel the significance of more than any other country. Germany runs the second-largest trade surplus after China, with autos making up a sizable portion of that mercantilist trade structure.

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Foreign carmakers are being asked to provide details of proposed investments and plans already in the pipeline.

The German car industry is promising to create 25,000 jobs at factories in the United States, according to The New York Times. However, the Trump administration is looking for new jobs and investments, not simply plans that were already in the pipeline before the current negotiations were started.

A deal has not yet been reached; unofficially, both sides are making encouraging noises, raising the prospects for some good trade news to lift the spirits of investors who have been disproportionately depressed by a barrage of negative media coverage on the topic in 2019.

The U.S. Department of Commerce. qingwa/Adobe Stock

This morning in metals news, the U.S. Department of Commerce announced rulings in investigations of stainless steel kegs from China and Germany, copper prices rose on labor tensions in Chile, and the UAW’s strike continues as it mulls ratification of a tentative deal with General Motors reached last week.

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DOC Makes Final Determinations on Stainless Steel Keg Imports

The U.S. Department of Commerce on Friday announced it had made affirmative final determinations in its anti-dumping and countervailing duty investigations of imports of stainless steel kegs from China and Germany.

The DOC determined the countries sold the kegs at less than fair values, ranging from 0 to 77.13% and 7.47%, respectively.

The DOC also determined that exporters from China received countervailable subsidies at rates ranging from 16.21% to 145.23%.

Copper Rises on Chile Labor Developments

LME copper reached a one-month high amid strikes at Chilean copper mines operated by Antofagasta and Teck Resources, Reuters reported.

LME three-month copper rose as much as 0.5% Monday, Reuters reported, up to $5,837.50 per ton.

GM Awaits UAW Vote on Deal

Last week, General Motors and the United Auto Workers (UAW) union announced they had reached a tentative deal that could potentially end the strike that has lingered for well over a month.

However, the strike continues, for now, as UAW members must vote on the deal.

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If the deal is approved, talks will then shift to Ford and Fiat Chrysler, the Detroit Free Press reported.

Automotive markets just about everywhere are in decline this year.

The question is: to what extent is this a cyclical downturn as opposed to a structural shift?

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The Financial Times article reported Indian passenger vehicle sales fell 31% last month from the same time a year earlier, according to the Society of Indian Automobile Manufacturers. It was the worst month since the turn of the century in a dismal spell that has seen sales fall 20% or more for four consecutive months, while sales have failed to rise for more than a year.

India’s economy is slowing, with GDP growth falling to a five-year low of 5.8% in the first quarter of 2019. In addition, a liquidity squeeze caused by a crisis in its shadow banking sector is choking off consumer demand and business expansion.

The article goes on to explain that about 40% of new car loans came from these shadow banks, making liquidity tight. Although a reduction in India’s high car taxes — the government levies a 28% goods and services tax on cars, with the effective rate including other duties rising as high as 48% for some vehicles — is a possibility, it is unlikely the new administration’s cash-strapped budget could afford it.

Significant as India’s car market is — as recently as last year, India’s motor market was thought to be on course to overtake Germany and Japan and become the world’s third-largest, the Financial Times reported – Germany’s is even larger.

Yet, declines are dramatic in Germany, too.

Source: ING Bank

Germany’s problems are more nuanced.

Domestic production has been hit by the delayed introduction of the new worldwide light vehicle test procedure, which caused severe disruption to German automotive production and shipments.

But matching the introduction of the China 6 emission standard has also caused a downturn in Germany’s largest automotive export market: China.

To underline the importance of the market, ING Bank reported that in 2018 almost one-quarter of all cars sold in China were German. BMW and Daimler recorded more than one-third of their total car sales in China. For Volkswagen, the share is even bigger (40%).

Yet new car sales in China have fallen for 13 months in a row, a slump that started in the second half of 2018 when the trade war between China and the U.S. began to heat up, according to ING.

The trade war has been a factor. U.S. customs duties on Chinese goods worth U.S. $250 billion (with U.S. $300 billion to follow Sept. 1) and Chinese customs duties on U.S. goods worth U.S. $110 billion, car and car parts from China are being taxed at 27.5% in the U.S. since July 2018. U.S. autos are subject to China’s standard tariff rate of 15%.

Given that some German car manufacturers actually export U.S.-produced cars to China, there has been a clear and direct impact of the trade conflict on the German car industry.

But that is only part of the story.

The switch to China 6 meant consumers held off buying the older models despite a major distributor push to discount old stock.

But the industry worries China could be going through a structural shift.

According to ING, China is already the largest ride-hailing market in the world, with over 459 million customers and a turnover of around U.S. $53 billion. By comparison, where it all started in the U.S. there are currently 66 million users generating U.S. $49 billion in turnover.

To put things into perspective, one-third of the Chinese population already uses alternative mobility solutions, while in the U.S. the figure is around 20% and in the E.U. it is just 18%. Further, while in the U.S. ride-hailing is used occasionally by a car owner, in China many users are not yet on the car ownership ladder; as ride-hailing becomes more widespread, those users may elect never to become car owners.

According to JustAuto, new vehicle sales in China fell by 4.3% to 1.81 million units in July from 1.89 million units a year earlier, according to wholesale data released by the China Association of Automobile Manufacturers. This includes all vehicle types, passenger vehicles and commercial vehicles, with the cumulative seven-month total at 14.13 million units – down by 11.4% from the 15.96 million units sold in the same period of last year.

Jeff Schuster, president of global forecasting at LMC Automotive, is quoted in Europe’s Autonews as saying global light-vehicle sales will decline 2.6% in 2019 to 92.2 million units. Through 2025, he doesn’t see more than 2% growth as the mature markets of western Europe, the U.S., Japan and Korea contract in volume over the next five to seven years. Only electric vehicle production as a subset — coming from a very low base — is set to rise.

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The industry’s current downturn is in part cyclical and production will recover regionally as consumer confidence and access to credit improves.

At the same time, there is a structural shift happening that will impact the industry’s long-term future and create significant challenges for global western carmakers in the years ahead.

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This morning in metals news, global aluminum production jumped in September, Germany’s steel sector warns against an abrupt withdrawal from coal-fired electricity and Tokyo Steel’s prices hold steady again.

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Aluminum Output Rises

Global aluminum output jumped 2.5% year over year in September, according to an International Aluminum Institute (IAI) report.

September output hit 5.3 million metric tons.

MetalMiner’s Take: World aluminum production rose 2.5% in September, reaching 5.3 million metric tons. January-September production for the base metal is also up by 0.3%. While both Chinese aluminum production (up by 3.6% year over year) and European production (up 0.8% year over year) are rising, North American production is down 4.3% down on a year-over-year basis.

Therefore, buying organizations may continue seeing scarcity in the North American aluminum market, which will lead to a higher U.S. Midwest premium. North American companies are currently struggling with aluminum supply, despite the increase in world production.

However, one of the great failings of “fundamental analysis,” in particular the study of supply and demand fundamentals, involves statistics such as those recently released from the IAI highlighting rising primary production on a year-over-year basis.

Yet ask any U.S. buyer of semi-finished material if they think that rise in primary production has led to or will lead to the easing of supply for semi-finished materials and rest assured you won’t find a single supporter.

MetalMiner seeks to study and analyze the specific underlying metal price trends and exchange-traded volumes — along with trends in the broader industrial and commodities markets — to assess potential price direction for underlying metals.

Rising primary production levels have little to no correlation with material availability and, in some respects, even primary aluminum ingot prices.

Not So Fast

With respect to coal-fired electricity, Germany’s steel sector is arguing against an abrupt withdrawal from the power generation method, Reuters reported.

According to Hans Juergen Kerkhoff, the head of Germany’s steel association, withdrawal from the power source would result in an increase in electricity costs for steelmakers of at least $161 million per year, per the Reuters report.

MetalMiner’s Take: The German steel sector should protest from the mountaintops about the country’s withdrawal from coal-fired electricity. With the phaseout of nuclear power by 2022, the loss of coal-fired energy will make the largest economic power in the European Union even more dependent on natural gas and oil imports.

Besides Germany’s steel-producing sector, access to competitively priced energy units goes well beyond basic steelmaking industries. The irony of Germany’s move to curtail the production of coal-fired electricity is that steel consumers will need to source finished goods like steel elsewhere —  likely to countries with even poorer environmental track records.

Tokyo Steel Holds Prices Steady

Prices of Tokyo Steel products will hold steady for the ninth straight month, Reuters reported.

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The firm last altered its prices in February, according to the report.

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This morning in metals news, German steel companies are being hit with fines over price rigging, worker contract negotiations are underway at U.S. Steel and the U.S. Senate approved a symbolic measure that served to express frustration over the Legislature’s current lack of say in the process of imposing Section 232 tariffs.

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€205M in Fines Handed Down

According to the Financial Times, German authorities have meted out a total of €205 million in fines to six German steel companies, a steel association and 10 individuals.

The fines come as a result of the exchange of sensitive information and price rigging between 2004 and 2015, according to the report.

Time to Talk

U.S. Steel and the United Steelworkers union began contract negotiations this week, working toward a new labor deal before the current deal’s Sept. 1 expiration, the Northwest Indiana Times reported.

The last contract between the union and the steel firm was negotiated in 2015, per the report.

Senates Expresses 232 Frustration

In a non-binding vote Wednesday, the Senate voted 88-11 to direct negotiators to push for giving Congress a role in making decisions vis-a-vis tariffs when national security is a concern; that is, in the application of Section 232, which President Trump has already used twice (with tariffs on steel and aluminum already in effect and potential tariffs on automobiles and automotive components pending).

Sen. Bob Corker, R-Tenn., has spearheaded the effort to divert some of the institutional power behind Section 232 from the executive (i.e., the president) to the legislative (i.e., Congress).

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“We have to rein in abuse of presidential authority and restore Congress’ constitutional authority in this regard,” Sen. Jeff Flake, R-Ariz., was quoted as saying.

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