This morning in metals news, customers reportedly are set to avoid Rusal during a crucial upcoming industry gathering in Berlin, Tata Steel announces a new sustainable steelmaking procedure and NAFTA negotiations pick up again today after a long Wednesday night of talks.
According to a Reuters report, customers plan to avoid Rusal during an upcoming industry gathering in Berlin, during which firms lock up 2019 aluminum supply deals.
The Russian aluminum giant was hit with U.S. sanctions in April, which sent the aluminum market into shock and yielded skyrocketing prices.
Prices came back down when the U.S. Treasury Department extended the deadline for firms to unwind business with Rusal by Oct. 23.
However, according to the Reuters report, some customers aren’t optimistic that that sanctions will in fact be lifted.
Tata Steel on Thursday announced a new steelmaking process that it claims will cut carbon dioxide emissions stemming from the steelmaking process by half, the Economic Times reported.
The firm conducted testing at its Ijmuiden site in the Netherlands, according to the report.
NAFTA Talks Resume
NAFTA renegotiation efforts are set to continue today after what was reportedly a long night of talks on Wednesday.
Canadian Prime Minister Justin Trudeau recently commented that “No NAFTA is better than a bad NAFTA deal.”
Meanwhile, on Saturday President Trump tweeted: “There is no political necessity to keep Canada in the new NAFTA deal. If we don’t make a fair deal for the U.S. after decades of abuse, Canada will be out. Congress should not interfere w/ these negotiations or I will simply terminate NAFTA entirely & we will be far better off…”
The U.S. and Mexico have already reached an agreement in principle on certain provisions of NAFTA; following that, the U.S. and Canada picked up talks last week in an effort to bring the latter into the fold.
Following Russia’s military intervention in Ukraine in February 2014 — the Ukrainian crisis, as it became known as — a number of countries imposed sanctions on Russia led by the United States and Europe, but supported by many others like Canada, Australia and Japan.
The impact on Russia’s economy was significant, but by early 2016 many countries, even within the previously united E.U., were calling for sanctions to be lifted (or at least revised).
By that stage, the Russian economy had recovered from the initial shock and, despite the restrictions, was doing rather well.
But this time last year, it all began to go downhill (again, this despite a very pro-Putin president being in the White House).
Initiated by President Barack Obama, Congress passed the Countering America’s Adversaries Through Sanctions Act, which imposed new sanctions on Russia for interference in the 2016 elections and its involvement in Ukraine and Syria.
Then, in March of this year, President Donald Trump imposed financial sanctions under the Act on the 13 Russian government hackers and front organizations that had been indicted by Mueller’s investigation into Russian interference in the 2016 U.S. elections.
This was followed in April by further economic sanctions on seven Russian oligarchs and 12 companies under their control. Among these was Oleg Deripaska, a move that sent such severe shock waves through the aluminum market that the administration hastily backpedaled and gave a stay of imposition until October “to allow the market to adjust.”
Many expected a permanent exception to be made for Rusal or for some fudge of ownership to be manufactured such that Deripaska was no longer deemed to be the controlling entity in holding company En+ or Rusal.
But as the date looms ever closer, questions are being raised about whether this will be how it plays out in practice.
More, rather than fewer, sanctions keep getting added to the list. A recent Economist article reports that in August alone, the U.S. has: slapped penalties on Russian shipping firms accused of trading oil with North Korea; imposed restrictions on the arms trade in connection with the poisoning of ex-Russian spy Sergei Skripal in Salisbury; and began congressional hearings on the two new pieces of legislation designed to punish Russia for its interference in elections.
The Economist report goes on to say the greatest threat to Russia’s economy comes from two proposed bills: the Defending Elections from Threats by Establishing Redlines Act of 2018 (DETER) and the Defending American Security from Kremlin Aggression Act (DASKA).
Sen. Lindsey Graham, one of DASKA’s six bipartisan co-sponsors, is quoted as saying it is the “sanctions bill from Hell.” When details of its contents made their way into the Russian press in early August, the rouble slid to two-year lows and the share prices of Russian state banks began falling, according to the Economist reported.
Source: Thomson Reuters
Russia has been taking active steps to mitigate the effects, funneling rising oil revenues into its National Welfare Fund and building up reserves.
However, despite a weaker rouble helping exporters, the economy is suffering.
The uncertainty around sanctions, their impact and the possibility of further measures is having a dire impact on inward investment. Compared with a year earlier, foreign direct investment fell by more than 50% in the first half of 2018, The Economist reported.
Coming as they do on top of the 10% U.S. import tariff on foreign-sourced aluminum, we will see considerable volatility and disruption to the aluminum markets this autumn if sanctions are applied to Deripaska, not to mention other oligarchs on the sanctions list. Shipments out of Russia for any metals – steel, aluminum, and other base and specialty metals – are already being severely delayed as banks scrabble to run compliance checks on the shareholdings and involvement of already sanctioned parties in those producers.
Delays of a month in paying bills normally processed in an hour are now common, which is disrupting supply chains and work flow. For the first time, the market is asking what will be the impact of a total ban on Russian metal supplies (never mind just Rusal’s aluminum).
Your supplier may not be Rusal, but your supplier’s supplier may be (or even his or her supplier’s supplier). The elevated conversion premiums we have seen this summer among European extruders is a reflection of this anxiety and will only get worse if further sanctions disruption ensues.
This uncertainty should be prompting all U.S. metal importers to explore the supply chain of their suppliers in order to understand the potential risks they face and, if necessary, take appropriate steps to safeguard supplies.
For those consumers thinking they only buy domestically and are therefore not affected — think again. You may be buying foreign made metal via a distributor and are potentially still exposed. Even if you are not, domestic prices will rise if there is any significant disruption to foreign supplies.
On the news of U.S. sanctions targeting Russian companies and their owners — including Russian aluminum giant Rusal, the second-biggest aluminum producer in the world — prices spiked on fears of Rusal’s supply being pulled from the market.
LME aluminum shot up to $2,597.50 per ton on April 19, marking its highest point since late July 2011.
However, the U.S. Treasury announced an extension, allowing businesses until Oct. 23 to unwind their business activities with Rusal (among others).
As a result, the price has come steadily down since then.
Since that April peak, the price has dropped 22.2% as of Aug. 23.
Exemptions and Escalations
As we noted last week, Turkey has sought consultations with the U.S., via the WTO’s dispute settlement system, in response to the U.S.’s doubling of both the steel and aluminum tariffs against Turkey (bringing them to 50% and 20%, respectively).
Turkey has argued the escalation goes against provisions of the Agreement on Safeguards and the General Agreement on Tariffs and Trade (GATT) 1994.
According to the report, countries that have so far won exemptions from the tariff were able to do so on the condition that they will limit their exports to the U.S., which goes against Israeli export policy.
Israeli aluminum exports are valued at $25 million annually, according to the report.
Companies on the Tariff Effect
Unsurprisingly, a number of U.S. companies have noted the effect of the tariff on their bottom lines.
“Clearly, it’s disruptive for us. It’s disruptive for our customers,” CEO James Quincey was quoted as saying during the company’s Q2 earnings call. “But I think the conversations have been about how is this going to work for each and every customer.”
Meanwhile, automakers have also cited the tariffs’ impact on their bottom line.
However, during its FY 2018 Q1 — the three-month period ending June 30 — earnings call in July, Nissan Corporate Vice President Joji Tagawa said the Section 232 tariffs had a limited impact during Q1; going forward, the impact will depend on how much the tariffs will continue, citing the uncertainty of the situation.
He added the company will be operating under the mindset of localization.
“Globally, we have been promoting localization,” said Tagawa, adding they would like to “pursue localization [and] increase local content.”
Commerce Secretary Visits Century Aluminum
Bolstering the domestic steel and aluminum industries, particularly in light of rising imports, has been a stated goal of the Trump administration even since launching a Section 232 investigation on the matter back in April 2017.
In this vein, U.S. Steel’s twin announcements this year regarding the restarting of blast furnaces at its steelworks in Granite City, Illinois, was touted as a victory for the administration.
On the aluminum side, Century Aluminum’s recent announcement that it would invest $150 million to double its output was also seized upon by the administration as a victory, an affirmation of its tariff strategy.
“And while U.S. production has steadily declined since 2000, China’s output of aluminum has increased by 1,390 percent, from 2.4 million metric tons in 2000 to a whopping 36.2 million metric tons in 2017,” Ross said during an event celebrating the restarting of a smelter. “China’s output last year was 49 times higher than U.S. production, and almost all of it was sub-standard, and subsidized — produced by state-owned enterprises.
“For the first time in decades, we are changing the trajectory of the industry. Many have painted our efforts to create a level playing field and ensure the continued viability of the aluminum industry as the starting of a trade war. But you have been engaged in this fight for a long time.”
This morning in metals news, miners in the Philippines are calling for an end to the country’s ban on new large-scale projects, President Donald Trump tweeted his administration is finishing a study regarding potential tariffs on imported cars, and Russia’s prime minister called for retaliation against the U.S.’s steel and aluminum tariffs.
“We are finishing our study of Tariffs on cars from the E.U. in that they have long taken advantage of the U.S. in the form of Trade Barriers and Tariffs. In the end it will all even out – and it won’t take very long!” the president wrote in a tweet.
Russian PM Says Country Should Retaliate Again U.S. Tariffs
Russian Prime Minister Dmitry Medvedev asked the country’s Ministry of Development to come up with proposals for potential retaliatory tariffs on U.S. goods in response to its steel and aluminum tariffs, CBS News and the Associated Press reported.
We could love reading these murky tales about Russian businessmen and their dealings if the reality was not that some of them at least are rather too close to the truth and rather too close to home, (many of them living, as they do, at least part of their time in Western capitals).
Donald Trump’s latest round of sanctions against Russian oligarchs has again thrown a spotlight on those closest to the throne in Moscow. With so much disinformation around, it is impossible to sift fact from fiction.
Caught up in the latest list identified for sanctions is Oleg Derispaska, boss and major shareholder in Basic Element, owner of Rusal (among other power and metals businesses).
In and of itself, that may not be tectonic for the metals markets, were it not for the cloud it casts over the trade and consumption of Rusal’s aluminum when its boss is on a sanctions list.
Derispaska has stepped back from Rusal recently, a move that predated the sanctions but now looks timely as the firm seeks to keeps its brand acceptable to banks and foreign authorities.
This morning in metals news, China filed a complaint at the World Trade Organization (WTO) over the U.S. steel and aluminum tariffs, the president of the China Baowu Steel Group says the tariffs would have a limited impact on Chinese exports and LME aluminum prices jumped more than 7% after the U.S. sanctions on Russian individuals and businesses.
LME copper closed Dec. 1 at $6,733 and closed Dec. 29 at $7,156.50 (a rise of 6.3%). In the new year, however, the metal has tracked back, hitting $7,022 as of Wednesday morning, according to MetalMiner IndX data.
So, an analysis in the Financial Times entitled “Five things to watch as Brent crude oil nears $70” makes a refreshingly simplified but no less comprehensive summary of the key issues currently driving the oil price.
The crude oil price rise has been relentlessly rising for the last 3-4 months and while plenty of opinion has been espoused — in these columns too, I should add — about the moderating effect of U.S. shale oil on global supply (and hence, prices), the reality is so far the impact has been minimal. Prices have continued to show stubborn resistance to any such moderation.
Iran has certainly been a factor. Opinions differ as to how much impact unrest in the region has contributed to price rises. However, as the third-largest oil producer in OPEC, contributing to some 4% of global supply, civil unrest was a reminder that nothing can be taken for granted.
In practice, protests had no impact on oil output. The street protests have now subsided, but Iran remains a source of tension in the region, with an antagonistic stance towards Saudi Arabia with respect to its military intervention in Yemen providing the potential for a flare-up. Oil output in the region generally has suffered some setbacks, with output in Kurdistan dropping after Baghdad took back control of disputed oilfields in October.
Output elsewhere has remained restrained in those countries participating in the Saudi-Russian led coalition to reduce inventories, but question marks remain as to how well they will stick to the deal as the oil price remains firm in 2018. Many may believe the heavy lifting is done and treasuries now deserve replenishing.
Not so fortunate to have a choice is Venezuela, which is quietly imploding.
The 14-strong Organisation of Petroleum Exporting Countries (OPEC), along with 10 oil states outside of the cartel, has reached an agreement to limit oil output until the end of 2018. This decision comes after what has already been more than a year of production cuts, the Telegraph reports.
This new deal, wider and more inclusive than the one running since the beginning of this year, will also extend to Nigeria and Libya. Previously, these two countries were exempt from the production quotas, despite being OPEC members, because of their struggles with internal political unrest.
OPEC crucially reached an agreement despite the last-minute posturing from Russian oil minister Alexander Novak, who warned that oil prices above $60 a barrel could reignite a production boom in the U.S. shale industry.
The agreement reached by the OPEC and non-OPEC members faces several serious challenges in achieving its objective of stabilising oil prices. The first is that one of its core members, Russia, does not appear to share the same objectives. They may be saying the right things, but according to Georgi Slavov, head of research at broker Marex Spectron, Russia’s cooperation is mostly “in words.”
“In reality Russia has been pumping oil like crazy and this will likely continue. As prices rise the incentive to cheat will too. Others may join the party,” Slavov said. “It is astonishing that the entire market is ignoring this. The market’s fixation is currently on what could happen. However, it is not paying attention to what is actually happening.”
A later article throws further light on the Kremlin’s position, saying Russia has a higher tolerance for depressed prices since the floating rouble cushions their budget.
Russia aims to balance the books at oil prices of $44 by 2021 under its fiscal plan, compared to $113 four years ago. Supported by ultra-low production costs, Russia is loath to cede market share and worried that prices above $60 a barrel will re-ignite significant U.S. shale activity, bringing prices down and reducing everyone’s market share as the same time. Read more