The value of mining and metal company deals in the third quarter slowed considerably, according to a recent report by PwC.

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According to PwC’s most recent quarterly deals insight report, omnipresent concerns over global economic health — including the specter of recession — have loomed over dealmaking in the sector.

“The theme of uncertainty, which adversely impacted much of the year, has seemingly carried into the third quarter of 2019,” said Brian Kelly, PwC’s metals deals leader. “Concerns over a looming recession have the potential to exacerbate these unresolved issues and negatively influence deal activity through the remainder of 2019.”

Total deal value in the sector reached $3.2 billion in 3Q 2019, down 46% from Q2 2019. For the first nine months of the year, global deal value reached $25.6 billion, down 48% compared with the equivalent period in 2018.

A total of 147 deals were inked in Q3, down 9% compared with Q2 2019. Meanwhile, for the year to date, the 446 deals recorded marked a 15% decrease compared with the same period in 2018.

Average deal size dropped 45% to $40.8 million in Q3. For the year to date, average deal size checked in at $109.9 million, down 40% compared with last year.

The largest deal of the quarter came with Baosteel Hong Kong Investment Co. Ltd.’s acquisition of Maanshan Iron and Steel Co. Ltd. for $659 million.

“The uncertainties surrounding ongoing trade negotiations, retaliatory rounds of tariffs, and the health of the global economy have seemingly continued to hinder deal activity through Q3 2019,” the PwC report stated. “Overall, deal volume and deal value in the Metals sector declined both on the quarter-over-quarter and year-over-year basis, with deal value experiencing a severe decline.”

The report notes that although steel accounted for the largest year-to-date share of deal volume among metal subsectors, the sector faces several challenges that could weigh on the dealmaking climate.

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Struggles in the automotive sector have contributed to lagging steel demand. In No. 1 automotive market China, the country’s automotive production fell 11.4% year over year during the January-September 2019 period, according to the China Association of Automobile Manufacturers. In the U.S., the UAW strike at General Motors has impacted production; the two sides reached a tentative agreement earlier this month, but the proposed deal requires ratification by UAW members.

A recent Platts report offers a worrying picture of overcapacity in the Chinese steel market, which could have ramifications for steel prices worldwide.

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When Europe or the U.S. has an overcapacity issue, domestic producers suffer and domestic prices are depressed, but the effects rarely ripple much beyond the region’s borders.

But in part because of China’s dominance in the steel sector — producing over half the world’s steel — and in part because Chinese producers use exports to dump excess production when the country produces more than it consumes, the rest of the world feels the impact through increased exports of low-cost steel products.

China has been engaged in a multiyear program to shutter outdated, more polluting steel capacity. New additions have been authorized only on a replacement basis, but Platts’ analysis suggests plants that have been closed for some years but not pulled down have been allowed to count towards the construction of new, far more efficient steel plants.

Specifically, the report states China’s net crude steel capacity expansion will total 37.65 million mt per year over 2019-23, of which 34.88 million mt per year is due to come online in 2019. This will take China’s total crude steel capacity to around 1.2 billion mt per year by the end of this year.

In the September-October period of this year alone, China approved eight steel capacity replacement projects, Platts reports, which will see 17.18 million mt per year of pig iron and 13.56 million mt per year of crude steel capacity commissioned in the next 3-4 years.

The new projects are predicated on closures of 19.52 million mt per year of pig iron and 15.21 million mt per year of crude steel capacity (5.18 million mt per year of pig iron and 2.16 million mt per year of crude steel capacity were already closed before the end of 2018).

This means there will be just 14.39 million mt per year of pig iron and 13.04 million mt per year of crude steel capacity closed during 2020-23, resulting in a net increase of 2.79 million mt per year of pig iron and 0.51 million mt per year of crude steel capacity over the period.

The problem is further exacerbated by actual output from new facilities being even higher than headline capacity, Platts reports. The new facilities can produce up to 20% more than the stated installed capacity, possible through improved production technologies — by adding more scrap into the iron and steelmaking process — and by using higher-grade iron ore, the article states.

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Steel demand in China, at least from the construction sector, has been robust this year.

But worrying signs are appearing that supply is exceeding demand.

Rebar margins have fallen to just $29/mt during July-September from $159/mt in the same period last year.

Manufacturing is depressed, particularly in the automotive sector. The property sector is expected to weaken next year as new plants come onstream looking to run at 100% capacity to recoup investment; increased exports may be the inevitable result.

It has come as a surprise to some in the coal sector that for the third consecutive month, India’s coal imports are set to drop in October.

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News agency Reuters reported India’s seaborne imports of both thermal and coking coal were on track to be about 13.3 million tons this month, according to vessel tracking and port data compiled by Refinitiv.

The development has caught some experts off guard given the fact that India’s largest producer, Coal India, has seen industrial action in some of its operations and the flooding of a major mine.

By the end of October, analysts believe India’s import figure is likely to go up. Even if October imports do exceed the current estimate, it’s likely they will still fall short of the 15.3 million tons of September, which was down from 15.9 million tons in August.

Like their global counterparts, Indian steelmakers are dependent on coal for making steel. India is dependent on imports of coking coal, as there is not enough indigenous coal to meet domestic demand (India’s total coal reserves are about 260 billion tons).

India imports coal from countries like Australia, Canada and the U.S. The import figures through July this year were 8% higher as compared with the same seven-month period in 2018.

Because of strikes, Coal India said its output was down by 13 million tons, or 2.1%, of its annual output this financial year.

To add to the coal producer’s woes, an unusually high and largely devastating monsoon season has stopped production at a major coal mine in the Chhattisgarh province, exacerbating the overall coal production shortfall.

In the last days of September, a river here suddenly changed its course, flooding the Dipka coal mine in Korba district, Quartz India reported. Incidentally, Chhattisgarh produced the highest quantity of coal in the country in financial year 2018-19.

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Recently, India became the second-largest destination for seaborne coking coal after China, which was about 13% of global demand in the spot market.

Two features of Chinese political and industrial policy have been consistent over the years: the willingness to plan long term and deep pockets to finance those plans.

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A major state-owned steelmaker and mining company, Sinosteel, has epitomized this in western Australia.

The steelmaker has bought into the region’s lower-grade iron ore resources back in the last decade, in what was seen at the time as a potential rival to the country’s largest iron ore producing region further north at Pilbara.

A collapse in iron ore prices largely brought a halt to not just Sinosteel’s ambitions but those of joint venture partners and competitors Mitsubishi. During the five-year life of Mitsubishi’s Stage 1 operations at nearby Jack Hills, it produced and shipped around 1.8 million tons of lump and fines DSO each year.

Jack Hills, owned by Mitsubishi via its Crosslands subsidiary, was closed in 2015. Sinosteel’s Weld Range also closed, set to be a $2 billion iron ore project in the region when the Oakajee deepwater Port and 570-kilometer rail project was also shelved following cost blowouts that forced up proposed port fees, Reuters reported.

It was hoped Mitsubishi would come to the rescue when it paid A$325 million for the balance 50% stake in Oakerjee that it did not own.

But as iron ore prices continued to slide, the project was shelved — until now.

Following a year in which iron prices have been at their highest since 2014, Sinosteel has acquired Oakerjee and Crosslands (pretty much for free, by all accounts). Reuters reported Sinosteel will control both the port tariffs and the Weld Range mine, not to mention other iron ore assets in the region, assuming Oakajee’s port and rail assets are ever built.

Officially, there are no current plans to construct the deep-water port at Oakajee, nor the network of railways that were going to connect it to the iron ore mines at Jack Hills, Weld Range and related assets.

But documents filed with the Australian Securities and Investments Commission last week show two Sinosteel subsidiaries are the buyers, the article reports. The documents suggest the two subsidiaries paid the just $3 each for their respective 50% stakes in Oakajee Port and Rail, the company that owns the studies and intellectual property for the Oakajee railway network and deep-water port.

One of the Sinosteel subsidiaries was also said to have been transferred all shares in Crosslands Resources, the company that holds the nearby Jack Hills iron ore project. Crosslands is reliant on Oakajee Port and Rail building the port and rail infrastructure to get its product economically to market; so, without the port, the assets is essentially a dead duck.

Maybe not surprisingly, ASIC documents say Crosslands was sold for nothing.

On the face of it, it’s a huge loss for Mitsubishi, which had spent hundreds of millions buying into the related projects and investing in Jack Hills. Meanwhile, it’s a zero cost gain for Sinosteel, but it now leaves the Chinese with the need to invest the best part of A$10 billion to develop the port, rail infrastructure and mines.

With much of the local resources in the form of low-grade magnetite ore, investment will be needed to process the ore from 30-50% purity to 65-70% concentrate, an energy-intensive process that has historically made magnetite deposits largely uneconomical in western Australia.

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Sinosteel may therefore decide to sit on its asset until iron ore prices rise and/or the technology to reduce energy requirements in the concentration process makes the region’s magnetite more economical.

Fortescue appears to be making progress in that direction, Reuters reported, at its Iron Bridge property, halving the energy inputs by improved efficiencies. Even so deep pockets and a willingness to play the long game will be needed by Sinosteel if the region is ever to see its potential realized.

According to the International Aluminum Institute, global aluminum production totaled 5.16 million tons in September, down from 5.33 million tons in August and 5.30 million tons in September 2018.

Despite the decline in production, prices have not received a boost — in fact, the LME aluminum price per pound is hovering at around $0.78 per pound.

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Top producer China saw its production levels dip again last month.

Chinese aluminum production totaled an estimated 2.88 million tons, down from 2.97 million tons in August and 3.01 million tons in September 2018.

North American aluminum production reached 310,000 tons, down from 321,000 tons in August and flat compared with September 2018 production.

Asian production ex-China reached 363,000 tons, down from 374,000 tons in August and 364,000 tons in September 2018.

GCC production totaled 456,000 tons, down from 469,000 tons in August but up from the 437,000 tons produced in September 2018.

Production in eastern and central Europe totaled 344,000, down from 356,000 tons, but up from the 332,000 tons produced in September 2018.

Western European production totaled 276,000 tons, down from 286,000 tons in August and the 312,000 tons produced in September 2018.

In terms of prices, LME three-month aluminum is down 2.86% over the last month, down to $1,731/mt.

“LME aluminum prices weakened in September, despite looking stronger early on in the month,” MetalMiner’s Belinda Fuller explained earlier this month. “Less robust manufacturing and economic indicators hurt some industrial metal prices this month, including aluminum. The stronger U.S. dollar also resulted in weaker prices.

“LME prices look close to possibly dropping below yet another critical price level, $1,700/mt, after clearly breaking the $1,800/mt support level since last month.”

Chinese aluminum prices have also been on the decline of late. SHFE primary cash aluminum recently fell to 13,960 CNY per ton, down from 14,280 CNY per ton a month ago, according to MetalMiner IndX data.

LME prices have picked up slightly in recent days, but not substantially. With Chinese production now posting monthly declines for two straight months, it remains to be seen if that supply-side activity will have a supportive impact on prices.

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So far, that doesn’t seem to be the case.

Of course, the demand picture must also be figured into any industrial metal’s forecast. The IMF recently downgraded its 2019 global growth forecast to 3%, its lowest level since the financial crisis — an ill omen for demand of a wide range of goods, including industrial metals.

Automotive demand for aluminum — among other metals — is a large source of the metal’s overall demand. As the IMF’s World Economic Outlook released this month notes, a slowdown in No. 1 automotive market China has weighed on aluminum prices.

Referring to the period between February and August of this year, the IMF noted, “The price of aluminum fell by 6.6 percent because of overcapacity in China and weakening demand from the vehicle market there.”

A growing copper supply is not exactly what copper producers wanted to hear, as a new mine with a 100-year life span has been announced.

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Prices have been depressed all year, with worries about deteriorating trade and surplus supply weighing on sentiment.

Anglo American’s $5 billion copper project at Quellaveco in Peru could potentially hold enough reserves to supply a century of production, according to company CEO Mark Cutifani, as reported by the Financial Times.

The article reports the extensive ore body has so far only been defined to a depth of 400 meters. However, with ore grades at over 1%, the mine’s economics are solid.

Further drilling will be required to map the full extent, but preliminary sampling suggests mineralization could extend to 1,000 meters, the company says.

Quellaveco is due to start production in 2022. Once it reaches full capacity, it will produce an average 330,000 tons a year of copper in its first five years; in the company’s words, it will be a license to print money, the Financial Times reported.

Two adjacent mines in the same area have been in production for more than four decades at much greater depths than Quellaveco’s current boundaries, suggesting mineralization is far more extensive than current sampling has identified.

Copper demand is widely expected to rise in the coming decade due to the electrification of cars and the expansion of renewable energy. Currently, however, the market is oversupplied, with RC/TC charges at smelters depressed and little to support prices.

A recent upturn has reversed, as Antofagasta averted a labor strike, reaching a labor agreement with the union at its Los Pelambres mine. Prices subsequently resumed their weak showing, as supply fears quickly eased.

Supply from Quellaveco will not hit the market for some years, even assuming Anglo American manages to bring its project to production on time, which is by no means certain. One of its other major projects, its iron ore mine at Minas Rio, was severely delayed and horribly over budget, for example.

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The company has performed better under Cutifani. The timing for Quellaveco to reach full production in the early to mid-part of the next decade may indeed significantly improve the firm’s prospects if, as widely expected, copper prices have recovered by then.

Brazilian miner Vale recently unveiled its third-quarter production and sales figures, showing a strong quarter for the company’s iron ore operations.

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Vale’s iron ore fines production totaled 86.7 million tons in the third quarter, up 35.4% from the previous quarter. The increase was powered in part by the resumption of operations at Brucutu and the partial resumption of dry processing operations at the Vargem Grande Complex.

“Vale expects to resume the remaining production of approximately 50 Mt by 2021, as several milestones were achieved and others are ongoing, including the approval of trigger tests on the mines to resume dry processing operations and the authorization of trigger tests at the TFA Rail Terminal (Terminal Ferroviário de Andaime), an important step toward debottlenecking the Vargem Grande Complex logistics,” Vale said in its production release.

Vale expects to recover lost production stemming from the January tailings dam collapse in Brumadinho over the next two years. The miner expects to recover approximately 30 million tons of production “with 7 Mt coming from the resumption of the dry processing operations at the Vargem Grande Complex in 2019 and the remaining from Fábrica, Timbopeba dry processing operations and others.”

The remaining production is expected to return in 2021, mainly from wet processing operations at Timbopeba and Vargem Grande Complex.

Meanwhile, Vale’s pellet production reached 11.1 million tons in Q3, up 22.7% from Q2. Last month, Vale revised its pellets production guidance down to 43 million tons from previous guidance of 45 million tons.

Last month, the miner announced investment plans for the communities impacted by the fatal tailings dam collapse in January at its Corrego do Feijao mine.

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The miner announced plans to invest R$190 million in the communities of Macacos, Barão de Cocais and Itabirito.

The inevitable has happened.

For some months now, copper industry experts in India have been predicting India would become a net importer of copper during this fiscal year.

Well, that has happened.

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For the first time in 18 years, India turned into a net copper importer. The primary factor behind the shift is the permanent closure of Sterlite’s 400,000 ton per annum smelter in South India from May 2018.

Two other major players, along with Sterlite, dominated primary copper production in India: state-owned Hindustan Copper and privately held Hindalco Limited. With Sterlite gone from the picture, there is now a shortfall of almost 40% between supply and demand.

The Times of India quoted Urvisha Jagasheth, research analyst at CARE Ratings, saying in a report that domestic production of refined copper had grown at a CAGR of 9.6% during fiscal years 2014-2018. Production fell by 46.1% during FY 2019 due to the Sterlite closure.

Faced with no other option, those requiring copper, like cathode ray tube producers, turned to importing refined copper.

During the nine months in FY 2019, India imported refined copper from Japan which accounted 71% of the country’s copper imports, followed by the Democratic Republic of the Congo (7%), Singapore (6%), Chile (4%), South Africa (4%), Tanzania (3%), Switzerland (1%) and UAE (1%), the Financial Express reported.

Meanwhile, in the other direction, India exported refined copper to China (75%), Taiwan (10%), Malaysia (7%), South Korea (6%) and Bangladesh (3%) during the same period.

CARE said in an earlier report in the Business Standard that there was intense pressure from domestic buyers because of the increasing demand from the power sector, what with the Indian government’s emphasis on renewable energy. Soon, adding to this mix, manufacturers of hybrid and electric cars will also become major buyers of copper.

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“We estimate domestic refined copper demand to increase by 7-8 per cent (including consumption of scrap) by the end of FY20,” the CARE report said.

The World Steel Association forecast global steel demand will rise 3.9% in 2019 and by 1.7% in 2020.

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According to the World Steel Association’s October Short Range Outlook (SRO), global steel demand in 2019 is forecast to reach 1,775.0 million tons and 1,805.7 million tons in 2020.

As for China, Chinese steel demand is forecast to rise 7.8% in 2019 but by just 1.0% in 2020.

Saeed Al Remeithi, chairman of the World Steel Association’s Economics Committee, overviewed some of the factors at play in the global steel demand picture.

“The current SRO suggests that global steel demand will continue to grow in 2019, more than we expected in these challenging times, mainly due to China,” he said. “In the rest of the world, steel demand slowed in 2019 as uncertainty, trade tensions and geopolitical issues weighed on investment and trade. Manufacturing, particularly the auto industry, has performed poorly contracting in many countries, however in construction, despite some slowing, a positive momentum has been maintained.”

Despite trade headwinds and slowing economic growth overall, China’s steel demand is forecast to have a solid 2019, before dropping in 2020. The country’s manufacturing and automotive sectors have struggled; according to the China Association of Automobile Manufacturers (CAAM), China’s automobile production dropped 12.1% on a year-over-year basis through the first eight months of the year.

“We expect the Chinese economy to worsen in the later part of 2019 and in 2020 with the unresolved trade tensions adding further pressure,” the SRO stated. “It is unlikely that the Chinese government will reintroduce substantial stimulus measures as it continues to hold a balance between containing the slowdown and pushing forward its economic restructuring agenda. Selective mild stimuli focused on infrastructure and strengthening consumer purchasing power through tax cuts is more likely.  The auto industry could benefit from such stimulus in 2020.  China’s steel demand is expected to see growth of 1.0% in 2020.”

In the developed world, steel demand is forecast to contract slightly in 2019 after a 1.2% increase in 2018.

Meanwhile, in developing countries (ex-China), the growth picture is mixed.

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“Growth of steel demand in the emerging economies excluding China is expected to slow down to 0.4% in 2019 due to contractions in Turkey, MENA and Latin America,” the SRO states. “But the growth is expected to rebound to 4.1% in 2020 due to infrastructure investments, especially in Asia.”

Anyone who argues the U.K. has not been impacted by its decision three years ago to leave the European Union only has to look at the figures to see how wrong that argument is.

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The Financial Times reported this week that the U.K. narrowly avoided a recession this summer, as Q2’s contraction was followed by a minuscule bounceback in Q3 thanks to a pick-up in services, which grew at 0.4%.

Manufacturing, however, as anyone in the metals industry will know only too well, remained in recession, contracting by 0.7% in August compared to last year, according to the Financial Times.

Commentators put this down to uncertainty over what Brexit will look like and when it will happen, hindering plans for investment and creating an atmosphere of uncertainty and retrenchment.

Set this against a possibly more worrying trend for the U.K. and you have to ask what the longer-term prospects are for the economy.

An earlier Financial Times article this week explored the longer-term fall in productivity that has held back wealth creation since the financial crisis.

In the U.K., productivity has stagnated since the 2008 financial crisis, the Financial Times reported, failing to recover as it typically does following contractions.

Moreover, it has weakened since the 2016 Brexit referendum and contracted in the past year; productivity contracted in the second quarter at the fastest pace in five years.

According to the Financial Times, many economists and businesspeople point to the lack of business investment as a reason for deteriorating productivity. Business investment has barely expanded since the second quarter of 2016 and contracted 0.4% in the three months to June, suggesting Brexit and falling productivity are a conjoined crisis, with one supporting the other.

Businesses have preferred to hire workers than invest, so unemployment is low and that’s what grabs the headlines, but the inability to increase the value of goods and services produced per hour of work limits what companies can afford to pay their workers — so, living standards stagnate.

Utilities and construction were the only sectors that recorded a rise in productivity, while output per hour fell 1.9% in the manufacturing sector and by 0.8% in the services sector. Services account for about 80% of the U.K.’s economy.

Source: Financial Times

Nor is the U.K. simply suffering the same problem as everyone else.

Since the second quarter of 2008, the U.K.’s lack of productivity growth contrasted with an average 9% expansion in labor productivity for the 36 member countries of the OECD.

It is hard to see what will break the cycle.

Supporters of Brexit talk about the U.K. being transformed into a low-tax tiger, like Singapore, post-Brexit.

Realistically, most see that as unlikely.

Even if taxes were to be dramatically reduced, with the expected new immigration controls and low unemployment, labor could begin to get tight and wages could rise sharply. If that were not accompanied by a sharp uplift in GDP, the U.K. could be caught in a deflationary trap, with low-cost, tax-free imports causing major disruption to domestic producers.

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No wonder the issue of Brexit has the public and politicians so divided.

Unaware, as most are, of the U.K.’s low productivity growth, the long-term impact has been the very stagnation in living standards that has in part fueled the desire to leave the E.U. and search for a brighter future.

Good luck with that.