Russia

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This morning in metals news, the U.S. Department of Commerce launched an anti-dumping and anti-subsidy probe into Chinese aluminum imports, oil prices rise above $60/barrel and copper prices fall for a third consecutive day.

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Commerce Dept. Launches Aluminum Probe

On Tuesday, the U.S. Department of Commerce launched an anti-subsidy and anti-dumping probe of imported Chinese aluminum alloy sheet, Reuters reports. Beijing is less than happy about the investigation and released a strongly-worded statement on Wednesday, arguing that the move 10would harm both countries.

What sets this probe apart is that it was initiated by the Commerce Department itself, whereas usually these investigations are requested by companies and industries claiming harm from imports. The last time the Commerce Department initiated an anti-subsidy probe was in 1991, on Canadian softwood lumber.

If the probe proceeds, preliminary anti-subsidy and anti-dumping duties could be issued in February and April 2018, respectively.

The End of the Global Oil Oversupply?

Is it the beginning of better days for oil exporters? OPEC and Russia’s agreement last year on oil production cuts has helped prices recover. Brent crude oil reached $64 a barrel this week, the New York Times reports, and some analysts are expecting prices to top $70 next week. Read more

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You would think that a stiffening of Washington’s backbone when it comes to Russia would be welcomed by Europe. After all, it was Germany’s Angela Markel that has led the tough stand taken against Moscow following the Russian-sponsored uprising in eastern Ukraine and annexation of Crimea.

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But on the contrary, cross-party support in the U.S. House of Representatives led to a 419 to 3 vote in favor of new financial sanctions against Russia this week, a move that has faced fierce criticism from Bonn and considerable debate about the wider implications.

The EU probably does not care about the inclusion of North Korea in the proposed sanctions, although it has taken a distinctly different and more tolerant line on Iran (the third regime included in the action).

But it is Russia that is really raising the hackles in Bonn according to Carnegie Europe, a Brussels-based think tank.

Impact on Europe

A post on the site reports the action could not only severely impact many European companies who have already invested heavily in projects, particularly in the oil and gas sector, but that it could also precipitate a political divide among Europe’s partners. Seen in the context of this development, President Donald Trump’s focus on Poland during his recent visit to the continent for the G-20 summit takes on a more sinister slant — at least, that is the view many Europeans are taking.

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Anxiety is rising among Europe’s steelmakers that a potential U.S. plan to levy steel tariffs, on national security grounds, could have a disastrous impact on the region’s sales into the market.

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Reuters reported that the European steel association Eurofer is worried that “….measures potentially stemming from the U.S. section 232 investigation may lead to a proliferation of disastrous global trade flow distortions.”

Eurofer is worried on two counts. First, it is worried that with China largely already cut out of the U.S. market by anti-dumping legislation, the axe will fall on imports from other regions, of which Europe is a major supplier. Many European countries are already experiencing steep declines in sales to the U.S. between 2015 and 2016 — in some cases of 50% — but the largest, Germany, remains the fifth-largest external supplier to the U.S. of flat-rolled products, according to International Trade Administration data.

The second worry is that should the investigation support bans or large duties, suppliers in the affected countries will look for alternative mature, high-value markets for their products, namely the EU. This would potentially flood an already overcrowded market with more low-priced material.

Having championed free trade in recent statements, Europe may have to eat its own words if it is forced to find ways to counter such a flood. Reuters reports that moves are already afoot, at the G20 summit in Germany last weekend, leaders from the world’s 20 leading economies set an August deadline for an OECD-led global forum to compile information about steel overcapacity. That also includes a report on potential solutions, due in November, which could result in the region acting of its own.

In reality, Europe may not be the primary target of the president’s 232 action. Supplies from Canada, Brazil, Mexico, South Korea, Japan and Russia dwarf those from Europe, but that will not necessarily stop the region from suffering considerable collateral damage.

The move would come at an unfortunate time for the European steel industry.

After prices rose nearly 50% last year, they have since fallen back some 10% this year, according to Reuters. Demand, however, is recovering with a 1.9% rise forecast for this year, according to Eurofer, suggesting prices could stabilize (although demand growth is expected to ease again next year, with only 1% growth forecast).

EU Strikes Back?

However, The Guardian reports Europe is also looking at retaliatory measures, should they suffer exclusion or tariffs because of the 232 action. The paper quotes the European Commission president, Jean-Claude Juncker, who is reported to have said that if the U.S. took measures against Germany and China’s steel industries, the EU would “react with counter-measures.”

The article says one industry in the Europeans’ crosshairs is Kentucky bourbon, worth $166 million to the state last year and directly employing some 17,500.

Kentucky was staunchly supportive of Trump during his campaign, with 62.5% of the electorate voting for him.

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“I am telling you this in the hope that all of this won’t be necessary,” Juncker said during the G20 summit. “But we are in an elevated battle mood.”

Bellicose talk, indeed.

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It isn’t an idle question. Oil prices are a proxy for energy prices, and a rising oil price can be supportive for energy intensive metals like aluminum.

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A rising oil price is also taken as a proxy for rising industrial demand – a bullish indicator that global growth is strong. A falling price, on the other hand, should be good for consumer spending as it keeps more money in drivers’ pockets and lowers the cost of goods sold for companies far and wide – but particularly for those in the transportation or more energy intensive sectors.

But despite rising last year following the agreement on the parts of OPEC and major non-OPEC oil producers to limit output, the price has since fallen back so consumers are not surprisingly wondering where it goes from here.

Just this month the two architects and key players in last year’s agreement, Saudi Arabia and Russia, announced they would continue with the agreement, set to shortly expire, until March 2018 and indeed will accelerate cuts to reduce near record inventories. It should be said the announcement still must be officially agreed at next week’s meeting of OPEC ministers in Vienna.

While initially slow to contribute, Russia has stepped up cut backs of late and combined non OPEC cuts are said to be some 255,000 b/d in April, but others such as Brazil and Canada are expected to increase output in Q2 and the USA has added substantially since last year. According to Oilprice.com, U.S. oil production has risen to approximately 9.3 million barrels a day and is projected by the EIA to reach 10 million barrels a day by 2018. Read more

Following Russia’s military success in their support the Syrian regime, you could be excused for thinking Western sanctions, applied in 2014 in response to Russia’s annexation of Crimea, have had little or no effect on the country.

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Certainly, they seem to have had little impact in altering or encouraging a change in behavior but there are examples in which the sanctions have had quite a profound effect on the economy and particularly on certain industries.

A recent article in the Financial Times explores the challenges Gazprom Neft is facing in trying to exploit Russia’s vast shale gas reserves without the benefit of Western partners. Following the imposition of sanctions Western oil and gas companies withdrew support from any projects to exploit shale reserves requiring fracking technology, and as a result firms like Gazprom Neft, the oil division of state-controlled Gazprom, have been forced to go it alone in developing the technologies and practices necessary to exploit shale rock containing oil and gas resources.

Source: Financial Times

Progress has been slow, in spite of the huge potential. As Russia’s hydrocarbon resources dwindle from their peak in Soviet days, the country is sitting on vast shale resources rivaling the U.S. Read more

President-elect Donald Trump isn’t even in the White House yet, but he has managed to shake up America’s foreign policy more severely in the last few weeks then many presidents that have served a full-term.

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His choice of Rex Tillerson, the chief executive of ExxonMobil, for the position of Secretary of State has rattled not just Democrats but many Republicans. Tillerson is accused of being too close to Russia and too friendly with Vladimir Putin following years of interaction between the world’s largest oil company and the Russian regime. Specifically, some accuse him of having a conflict of interest due to ExxonMobil’s investments in the Russian Federation.

Rex and Vlad: Best Buds?

ExxonMobil has a profitable operation at Sakhalin Island in eastern Russia and had begun a drilling program in the Arctic Kara Sea. The firm had agreed to explore shale oil areas of western Siberia and in deep waters of the Black Sea if sanctions are lifted. According to the Washington Post, deciding whether to lift economic sanctions on Russia will be one of the first priorities if Tillerson secures his position as Secretary of State. Read more

So, an unprecedented coming together of the Organization of Petroleum Exporting Countries and non-OPEC oil producers has finally created the circumstances in which oil’s price decline has been reversed and sustainable higher prices assured.

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According to Oilprice.com, NOPEC producers have agreed to cut 558,000 barrels a day and OPEC producers will cut 1.2 million bpd. Saudi Arabia will take the biggest hit, cutting 486,000 bpd. Russia will contribute 300,000 bpd to the total NOPEC production cut.

All this amounts to is 2% of global supply, the article reports. Azerbaijan, Oman and Mexico will also contribute, reducing production by 35,000, 40,000 and 100,000 bpd respectively, although it should be said Mexico is suffering a slow and steady decline due to reservoir depletion and would struggle to maintain current output next year anyway.

We should all, therefore, be expecting higher oil prices in 2017, right? Maybe not. We have, after all, been here before.

Agreements signed in the early 2000’s collapsed due to the inability of OPEC members to keep to their commitments. There is a growing anxiety that if this agreement does not result in higher oil prices and the global stockpile does not reduce, then Saudi Arabia and Russia, in particular, could revert to full production.

The oil price.com article quotes former Saudi oil minister Ali al-Naimi who commented at a recent Washington symposium that OPEC members “tend to cheat” and therefore any tangible results from this latest agreement “remain to be seen.” With severe pressure on fiscal budgets, both Saudi Arabia and Russia would be tempted to cheat if they did not see tangible benefit, that is a rising price, resulting from their respective cutbacks.

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Source: Oilprice.com.

Over the last month, the price has risen strongly as the prospects of the deal have improved but, after the initial euphoria, prices eased back a little this week as anxiety grew over whether the participants would stick to the deal.

Inventory continues to build at Cushing and the Energy Information Administration’s short-term energy Outlook released last month is not supportive for continued price rises during the next year, saying. “EIA forecasts Brent crude oil prices to average $43 per barrel (b) in 2016 and $52/b in 2017. West Texas Intermediate (WTI) crude oil prices are forecast to average about $1/b less than Brent prices in 2017. The values of futures and options contracts indicate significant uncertainty in the price outlook.”

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So, the short answer seems to be a continued rise in the oil price off the back of this agreement is dependent on the price of oil continuing to rise all by itself. The extent to which consumers feel the need to hedge their exposure into 2017 will depend on the level of that exposure and the nature of their business, but just because OPEC and NOPEC producers have managed to reach an agreement with the aim of supporting prices, it does not automatically follow that they will continue to rise much above current levels during next year.

The battle has intensified between the European Union and low-cost steel suppliers to the region. Specifically, the E.U. is taking action against China and Russia by imposing more anti-dumping duties on steel products from those regions, and for the first time applied them retroactively, according to the Financial Times.

Duties on Foreign Steel

The FT said the duties on cold-rolled steel range up to 22.1% for Chinese imports and up to 36.1% for Russian imports. The rates are a little higher than the provisional penalties in place since February.

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Using a different calculation method, the U.S. imposed tariffs in excess of 500% on similar cold-rolled steel materials from China earlier this year and the E.U. Commission is said to be planning further measures that would allow it to impose U.S.-style tariffs against steel that is believed to be dumped at particularly low prices or is subsidized. Read more

This week, the market heard some words of wisdom from Norilsk Nickel’s vice president Pavel Fedorov.

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Very unusual for a metals producer, instead of talking up the market, Fedorov gave a very candid assessment, reported by the Financial Times, of metals markets in general and the nickel market in particular.

Until producers begin to behave rationally, he said, prices will remain depressed for the foreseeable future. Pointing to the state of demand in the world’s largest nickel consumer, China, Fedorov said about a third of current Chinese stainless steel capacity was unsustainable due to a slowdown in real estate demand while Macquarie Bank is quoted as saying Chinese stainless steel demand is likely to fall a further 7% in the first quarter of this year from the same period a year earlier and that demand is not going to come back.

No Shutdowns Yet

The only rational reaction to reduced demand is to cut supply, if producers want prices to recover, which will bring with it profitability and a return for shareholders. In part, producers are recognizing this new reality and assets are being written down.

Glencore wrote down its nickel assets last year contributing to a $5 billion loss, but in spite of writedowns Glencore and fellow Australian miner BHP Billiton have said no more than they “may” close capacity at Murrin Murrin and Nickel West, respectively, even though they are losing money at current prices.

Yet Norilsk is Still Profitable

Indeed, Norilsk’s comments are all the more interesting because the company is not suffering losses as a result of the low prices, just loss of better profits. The world’s largest miner has a cost of production currently below $8,630 per metric ton price levels, aided and abetted by co-mined minerals and the depreciation of the Russian Ruble.

Almost in provocation, Fedorov is quoted as saying that due to the value of its Talnakh deposit in the Russian Arctic — which contains some of the world’s largest concentrations of platinum, palladium, gold, copper and silver — the company could “theoretically stockpile nickel and still make money.”

Betting on the long term, Norilsk is moving ahead with the development of new projects despite current prices. Last year it is said to have sold a 13.3% stake in its Bystrinsky copper mine in Siberia near the Chinese border to a group of Chinese private equity and other investors. The project is expected to cost $1 billion, the company has said. That’s before it starts production in 2017, adding pressure to the 70% of global capacity that, in Norilsk’s estimation, is losing money at current prices.

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Nickel is not an isolated case. Across the metals spectrum there are plenty of examples of oversupply where prices are depressed and unlikely to recover in the face of weaker demand and excess supply. We are into a new normal but many producers are unable or unwilling to face up to the the implications.

And not just European steel producers but their respective governments, too, are finally taking steel anti-dumping measures seriously.

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Ministers from seven steel-producing member states — Germany, Italy, the UK, France, Poland, Belgium and Luxembourg — essentially all the major European steel producers — have put their names to a letter urging the European Commission in Brussels to take greater action to tackle unfair trade practices by Russia and China.

Provisional Anti-Dumping Duties

The pressure group asked the European Commission to expand on actions announced last week to impose provisional duties later this month of up to 16% on China, and of up to 26% on Russia, following its investigation into alleged dumping by the two countries. Reuters reported that provisional duties on cold-rolled flat steel were announced Feb. 14 and definitive duties could be imposed at the conclusion of the investigation, by Aug. 12. Such duties would typically apply for five years.

Import duties on cold-rolled steel could hamper China and Russia's imports to the European Union.

Import duties on cold-rolled steel could hamper China and Russia’s imports to the European Union.

China’s Ministry of Commerce retorted saying “the European Commission will strictly abide by World Trade Organization (WTO) rules, show prudence and restraint and use trade remedy tools in accordance with the law,” the MOFCOM said in a notice posted on its website. Read more

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