Earlier this week, the Fed announced it will consider placing a surcharge on banks with physical commodities businesses. For aluminum buying organizations closely following the LME warehouse saga (see our previous coverage here, our aluminum warehouse scheme info graphic here, and our most recent story on that here), this surcharge, if implemented, could impact aluminum prices along with load-out times, MW premiums and general aluminum supply via the LME system. We asked our own resident aluminum expert, Stuart Burns, to comment on the Fed’s most recent move:

MetalMiner: Does a Federal Reserve surcharge seem like a good solution in terms of a disincentive for banks to get involved in commodities markets?

Stuart Burns: If the object of the action is to dissuade the ex merchant banks from holding commodity assets, whether they be large positions or ownership of supply chain assets such as warehouses, then the surcharge sounds like a wonderful way to do just that. It can be dressed up as a capital reserves surcharge, a measure of the risk the banks are perceived to face by holding such assets and as such is consistent with Basel capital requirements.

FREE Download: The Monthly MMI® Report – covering the aluminum market. 

MM: It seems like the Fed would have no legal authority to levy any kind of surcharge on banks. How have central banks worked in other countries with regard to taxing schemes as a form of policy intervention?

SB: As Goldman Sachs and JP Morgan both own warehouses in Europe, I suspect the Fed serves as lead on this issue, and Europe, for example, does not have any method for taxing or controlling such activity.

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As we all know, cheap energy has played and will continue to play an important role in economic growth. US natural gas prices have fallen as shale gas deliveries started to enter the market. Prior to that, the US would have become a major importer of liquefied natural gas (LNG). However, the recent surge in US shale gas production has turned the tables, and the US may become a major LNG exporter.

MetalMiner, in conjunction with the Institute of Supply Management (ISM), is conducting a snap survey to better understand the potential impact of American LNG exports on energy prices and the manufacturing sector overall. The survey (developed into a larger study) seeks to better quantify the importance of lower natural gas prices on sourcing activities, as well as capex and a US manufacturing renaissance in broader terms.

Got two minutes to spare? Please take this survey!

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We have all had the experience of sitting in a cinema seat or on a bus or train and finding a stray coin, haven’t we?

One day when coins are replaced by plastic or inflation forces us to only use notes, the metal coin will be a thing of distant memory, but for now they remain part of everyday life and try as we might, some of them get away from us!

Well, cinema and bus cleaners may have more perks than free viewings and bus passes if a story in the BBC is anything to go by. It seems we probably lose more money every time we sit down than we thought. I know my car is periodically showered with change when I hop in too quickly and it would seem I am not alone in losing a proportion of my personal wealth every time I drive.

Here’s how the Chinese capitalize on that.

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Another casualty in the aluminum industry illustrates just what an enormous burden an aluminum smelter can be.

Montenegro, a country of just 660,000 people, is facing the closure or sell-off of KAP, Kombinat Aluminijuma Podgorica, a 120,000-metric-ton/year aluminum smelter conceived in the 1960s on the premise that local bauxite reserves would provide a resource base and commissioned in 1971 – just prior to the OPEC-inspired energy shocks of 1973.

FREE Download: The Monthly MMI® Report – covering the Aluminum market.

In its heyday, KAP was Montenegro’s largest single employer with 5,000 workers and still accounted for 30% of Montenegro’s exports last year, down from 40% in 2011, according to a Reuters report, but was being kept afloat only with mounting losses and huge state subsidies.

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One of the most interesting – and, at times, eyebrow-raising – sessions (from this writer’s point of view, at least) at Commodity/PROcurement EDGE, MetalMiner and Spend Matters’ jointly held conference last week, was Harry Moser’s presentation, To Offshore or Reshore: How to Objectively Decide.

harry moser presenting at conference

Grasping at the idea that companies may want to reshore their business to the US.

Harry Moser, as MetalMiner readers may or may not know, is the president of the Reshoring Initiative, and preaches the gospel of total cost of ownership analysis in deciding whether reshoring or nearshoring is the right way to go for a US manufacturer – and generally, Harry’s view is that TCO analysis will show that bringing jobs back to the US is a beneficial value proposition.

But the question that became clear during the session seemed to be, “What if price alone still outweighs any other TCO considerations, such as freight, intellectual property risks, etc., when working with overseas suppliers?”

FREE Download: The Monthly MMI® Report – price trends for 10 metal markets.

We’ll try to tackle that in a bit. First, let’s break down what really wakes Harry Moser up every morning.

Chinese Labor Costs

This is definitely a central impetus for manufacturing organizations to consider reshoring, from Moser’s point of view.

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What do you do when the US government shutdown prevents data releases? Start quoting Benjamin Disraeli.

That’s exactly what Bill Strauss, chief economist at the Federal Reserve Bank of Chicago, resorted to doing during his keynote speech at Day One of our conference, Commodity/PROcurement EDGE.

As Disraeli said, “there are lies, damn lies and statistics,” Strauss quipped, when talking about the labor market. Of course, national statistics are harder to come by as the federal government shutdown drags on, and agencies that usually report them are forced to take a break. That’s the case for the BLS, and the latest unemployment report, which was to come out last week and is now delayed.

Labor Outlook

Shutdown notwithstanding, looking over the last several years, 6.8 million jobs have been added since 2010 and over the past year added 2.2 million jobs over past year. By the middle of next year, there will be a new record high in US employment, which politicians will celebrate. “I will not be celebrating,” said Strauss. His take is that we’ll still be in the hole a year from now. The most recent reading was for August, a 7.3% unemployment rate, which is very misleading.

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construction industry metals price index chart october 2013

MetalMiner’s construction metals price index tapered off for our October reading, with US steel scrap prices falling for the second straight month and Chinese rebar prices turning around.

Compare with last month’s trends – here’s our free September MMI® Report.

The US construction industry on the whole got hit by the muted economic data across the sector that we reported on last month. For example, the Housing Affordability Index continues falling, and having held below the long-term trend line, makes people worry about the threat of another housing bubble.

The Main Economic Indicator? Wait and See.

“The construction spending report is delayed due to the federal budget impasse and will reported later when released.”

That was the statement posted on behalf of the US Census Bureau, which reports US construction spending figures. Evidently, this office is “nonessential,” as Obama and Congress try to hammer out a budget deal. However, based on the last available Census data, total construction spending figures improved.

According to Census data, nonresidential building construction increased 0.6% to $293.3 billion (seasonally adjusted) in July after dropping 0.6% in June, while residential construction spending rose 0.5% in July to $340.6 billion after rising 0.4% in June.

Also, the Architecture Billings Index (ABI) was up 1.1 points for the second month in a row to 53.8 from 52.7 in July, marking the 12th month out of 13 that the index has clocked in above 50, indicating a rosier trend for the commercial construction sector.

But darker issues hover overhead.

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caterpillar inc mining equipment

Cat sees it as Asian mining equipment demand = more US jobs. Cliffs sees iron ore competition.

A recent article in the FT underlines the conundrum facing legislators when they seek to provide support to one sector of industry.

Caterpillar Inc. has been among equipment makers lobbying hard for $650 million of financing to be provided to the Roy Hill Iron Ore mine in Australia. The financing is expected to come before the Export-Import Bank, whose mission is to create export-related US jobs, the FT says.

According to the bank, the funds would be used to “support the export of approximately $522 million worth of mining equipment” to the mine, which will in turn export the ore to Asian steelmakers.

FREE Download: The Monthly MMI® Report – covering the Steel/Iron Ore markets.

Caterpillar, along with other producers like Joy Global, have seen sales in the Asia-Pacific region collapse since last year, down 30% year-on-year in the case of Caterpillar and 36% in the case of Joy Global in third quarter orders. Roy Hill is not dependent on the US financing to go ahead, since it’s 70%-owned by Australia’s richest person, Gina Rinehart; they’re in the process of raising some $7 billion in financing from Asian banks.

Not everyone agrees the US loan is a good idea, however.

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forecast by digital numbers

Why is Glencore cagey in forecasting future zinc prices?

Contrary to some other reports (such as HSBC’s Quarterly Metal Review), Glencore gave a more upbeat projection for the zinc (and lead) market in 2014/15 at the Glencore-Xstrata Investor Day.

In the longer term, most analysts agree that the lack of investment in new mines, exhaustion of retiring assets and gradually recovering global economy will push the market into a pronounced deficit and apply upward pressure to prices, but as the world’s largest miner of both zinc and lead – not to mention the world’s largest zinc and lead trader – it would be fair to say Glencore probably has unique insight into the supply/demand dynamics of those markets, and its opinion is worth listening to.

FREE Download: The latest Monthly MMI® Report – price trends for 10 metal markets.

During Glencore-Xstrata’s Investor Day this week, the firm’s team laid out their case for a market moving into pronounced deficit earlier than many think, and why the world could need up to 2 million tons of new mine capacity as soon as 2016.

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