Strong stimuli, first in the West then in the East
It is almost as if the head and the board of the US Federal Reserve read the last edition of the Oryx News, as there was a major interest rate move (“double bang”). As hoped, for the first time since 2020, the Federal Reserve (Fed) cut the key interest rate by 0.5 percent. The chairman of the Fed, Jerome Powell, described the step as a “recalibration”. The stimulation had been expected for some time, but the markets were divided on just how far the political decision makers would go. A cut by 0.25, 0.50 or even 0.75 percent? A consumer or producer orientated stimulus? These were the questions being asked before the announcement.
In the wake of this, China did not want to lag behind and announced extensive measures to stimulate the economy and in particular to revive the crisis ridden real estate sector. There had already been attempts here at stimulating the de facto almost non-existent demand for properties through private property purchases. This was, however, so far seen as being far too tentative in view of the severity of the crisis. According to reports, however, this must now be a major move, with which the Chinese government is once again making the attainment of growth targets a main priority. The People’s Bank of China (PBoC) lowered the key interest rate, announced a more generous lending practice and started a share buyback.
The mood in the financial markets has certainly improved accordingly. The stock markets immediately reacted with significant price rises. The S&P 500 and the DAX reached new highs as a result of the Fed’s easing, while the Chinese CSI 300 Index rose by 4.3% after the PBoC’s announcement at the end of September. A higher level of growth in the global economy has also led to a greater demand in commodities however, resulting in prices for industrial metals also sharply increasing over the last few days. For example, on the London Metal Exchange (LME) nickel climbed from a low in mid September of just over USD 15,700.00/mt to a high of around USD 18,200.00/mt and is currently trading at USD 17,840.00/mt. Copper in the meantime could break through the USD 10,000.00/mt mark and aluminium is trading at over USD 2,650.00/mt.
Many speculative investors have recently been more pessimistic due to the faltering economies of the USA, Europe and China, and had therefore positioned themselves significantly short in the market. They have now been caught wrong footed and have had to buy back the positions (desperately), which probably caused prices to rise even more quickly over the last few days. However, the currently escalating geopolitical situation appears to have been completely ignored in these movements, which – despite the tragedy of the events – could be due to the essentially minor economic significance of the powers involved for global economic development.
While the actions of both the biggest global economies may be described as aggressive, other decision makers are more cautious. The European Central Bank will probably follow the Fed while the Bank of England and Japan have not undertaken any changes. In addition, further interest rate cuts of 50 basis points in total are expected by the end of the year. It does, however, seem clear that Jerome Powell and the Fed will not make such a big interest move a second time in order to support the economy.
LME week as a forum of opinions
Looking at the broader perspective of the situation, it is quite appropriate that the traditional LME week took place in London, the venue for the stakeholders of the London Metal Exchange from all over the world. As well as the festive highlight of the event, the LME Dinner, the format also offers lots of space for meetings and events held by banks and brokers, where analysis and exchange of ideas on market developments and the macro-economic environment can take place. However, because of the relative short-term nature of the measures, the interest rate cut in the USA and the far-reaching economic actions in China did not really play a big part in the analysis presentations at the various events. But in the corridors and foyers there were the numerous opportunities between events to discuss and exchange thoughts about the latest news.
Participants put the mood in the total context as being somewhere between “not good, but also not a catastrophe”. These may be only individual subjective impressions, but a recent article by Bloomberg shares similar thoughts. According to the likewise assessments there, it would seem that the Western representatives in particular are most cautious. The stimuli in the USA and China should not be overestimated. On the other hand, according to the Bloomberg reporters, the representatives from China appear to have a much more optimistic view. Measures taken, particularly those by China, are seen as actual “game changers” for further developments.
Despite the negative mood, this would seem like a piece of good news and should be taken seriously, considering China accounts for the vast majority of raw materials demand and stainless steel production. Its share of global production and consumption is at 50% and more. Should the economy in China therefore grow stronger again, the stimulus could have major positive repercussions in the region and in the rest of the world. It is, however, still too early to judge if the said measures are already reflected in the economic data. The improved sentiment has to first lead to a higher demand.
It is worth pointing out that Bloomberg’s article is, however, confined to certain indicators – as proof of the change in sentiment – such as the sale on one day of 21.4 million railway tickets for the beginning of the Golden Week holiday – a record figure. Patience is thereforestill necessary. But the development of share prices and commodity prices seems to have already anticipated this expectation. The next publications of the purchasing managers’ index, especially the expectation components, will certainly be highly interesting.
In addition, should not only speculators on the stock and commodity markets, but also the stock holders, traders and consumers of steel and stainless steel become active and gain confidence, then perhaps nothing stands in the way of an earlier than expected recovery in the real economy. The weakening so far in commodities, including oil and metals, reflected the surplus in supply and the lack of end consumer demand which could now act as another positive catalyst for an improvement of economic conditions and more interest rate cuts. The reduction of input costs could reduce the pressure of inflation. For example, Drewry’s ocean freight index has also fallen by more than 30% in the meantime (even though the index has risen year on year by more than 160%).
Overall there is the justified hope that the strong impetus from the USA and China are enough to make a sustained change in sentiment.
Indonesia: a new phase on the way to nickel
In the discourse on economic growth and mineral extraction it is important to maintain a balanced perspective – especially if the rapidly growing nickel industry in Indonesia is considered. Nickel is an important driver of Indonesia’s economic development, but critics point out that the comparative (cost) advantage of the country in nickel production is based on sometimes unsustainable practices. This includes a strong dependence on coal energy and less stringent environmental standards.
It is, however, too simple and also not very effective to criticise emerging countries for a lack of sustainability without recognising at the same time that industrial nations, with strict environmental regulations nowadays, have in the past made numerous ecological mistakes and failures on the way to prosperity, even in recent times. This fact is actually not a basic excuse for environmental pollution, species extinction and excessive carbon emissions, but if improvements are desired (perhaps also collectively and soon), it is important to have a nuanced and constructive discussion.
When talking about the Indonesian nickel sector, the focus is often on the associated environmental problems, and rightly so. However, the discussion must also include and acknowledge the efforts and gradual improvements the country is making in the right direction. Ultimately, the goal is to ensure continued economic growth, while at the same time not losing focus on the improvement of the environmental situation, social standards, and compliance.
In order to create a sensible balance between sustainability and economic growth, Indonesia has started a number of initiatives for the next phase in the development of the nickel sector. In our last newsletter, we reported about SIMBARA, for example, which is an initiative of the Indonesian government to improve supervision and control to reduce illegal mining activities. Indonesia also intends to increase the domestic value chain of nickel and so create long-term value, instead of allowing a short-term exploitation of existing unprocessed ore. In July, Hyundai and LG Energy Solution opened the first battery factory in Indonesia (and South East Asia) – also a symbolic departure from the high dependence on Chinese companies as the country is also looking for other partners in the metallurgy, manufacturing and refining sectors.
The desire to extend trade relations beyond China could meanwhile speed up Indonesia’s adaptation to a more sustainable economy, to also include the nickel sector. Unlike the opportunistic Chinese commodity policy and procurement, the Asian, European and US-American markets expect compliance with environmental standards, which could lead to natural, market-driven improvements, which are not politically-driven. On the one hand, such initiatives require large upfront investments, more bureaucracy and other related costs, but on the other hand, a premium on the final price should be realised, not like what is the case now with Indonesian nickel pig iron (NPI), which is traded with a considerable discount to LME nickel due to the sometimes dubious ESG specifications.
The Indonesian government has, in addition, pledged to reduce emissions by using alternative regenerative, and therefore, more sustainable energy sources. The aim to reduce greenhouse gases by 32-41% by 2030 is for an emerging industrial nation optimistic, but the increasing domestic and international pressure, and the wish for an expansion of the trade horizon, could lead to major changes. These efforts should also be recognised and honoured by foreign governments so that in the future production could become even more sustainable, which, by the way, would also benefit the people of the country as well as the prosperity of Indonesia. Of course, it will and has to increase the cost of the Indonesian nickel production.
Revision of the Waste Shipment Regulation – once again more bureaucracy
At the end of February, the European Parliament approved the revised Waste Shipment Regulation (WSR). With a clear vote, parliamentary members approved the version which had been agreed with the European council at the end of 2023. This must also now formally give its approval once again. In three years, in 2027, the changes set out in the WSR will come into effect which will also include restrictions on foreign trade. This affects all waste, and also that which is not considered as hazardous on the so-called green list, such as metals and metal alloys, including iron and steel scrap.
The new version of the WSR is another outcome of the European Circular Economy Action Plan. The goal: to reduce the dependence on primary raw materials and to increase the use of recycling. To achieve this, waste should remain within the EU as much as possible. For export to countries outside the EU, the commission wants to ensure that the waste material has been treated and processed in an environmentally friendly way. In order for this to be guaranteed, in accordance with the new regulation, the recycling facilities must each be assessed by third-party independent auditors. This is the regulation for third countries which are OECD member states.
Exports to plants in third countries which are not OECD members have more difficult hurdles to overcome. In order for a trade to initially even take place, each non-OECD member state must submit an application to the EU Commission with proof that the import material will be treated in a responsible and environmentally friendly way.
Neither of these is per se an explicit export ban, which had been reported in the press when the new regulation was being negotiated in 2021. However, it does present a considerable restriction and at the same time much more bureaucracy which will certainly be noticeable. A look at the top iron and steel scrap export destinations shows: four of the five biggest export destinations are not OECD member states: Egypt, India, Pakistan and Bangladesh. In 2022, 25% of European iron and steel scrap exports went to these four countries. Turkey, which accounted for 60% of European exports in 2022, is an OECD member state, but the new regulation also applies here for the related audits.
The European Union is, along with the USA, one of the biggest scrap export regions; the EU and the USA each accounted for around 18% of the global trade of around 100 million tonnes per year. This makes the EU a major player in the global market segment. This is not because the recycling raw materials are being kept from the domestic market, but it is more the case that because of technical reasons, the furnace infrastructure cannot deal with the total amount of scrap or the preference is to use dirty primary raw materials for economic reasons.
Unfortunately it must be feared that the new WSR with all the associated changes for exports will have an impact on the global flow of goods. This is fundamental as the exports from the EU, as described above, stem from a structural net export surplus. This means that scrap processed in the EU cannot be used in the EU and by domestic steel producers as the existing processing capacities are not sufficient. International trade is therefore a fundamental, existential component for the European recycling industry, mainly characterised by medium-sized business.
And another point: trade in a recycled raw material such as steel scrap is active environmental protection: it makes a significant contribution in reducing the carbon footprint of the respective steel production, regardless of where it is used.
LME (London Metal Exchange)
LME Official Close (3 month) | ||||
October 8, 2024 | ||||
Nickel (Ni) | Copper (Cu) | Aluminium (Al) | ||
Official Close 3 Mon. Ask |
17,675.00 USD/mt |
9,775.00 USD/mt |
2,585.50 USD/mt |
LME stocks in mt | ||||
September 10, 2024 | October 8, 2024 | Delta in mt | Delta in % | |
Nickel (Ni) | 122,214 | 131,850 | + 9,636 | + 7.88% |
Copper (Cu) | 316,175 | 296,275 | – 19,900 | – 6.29% |
Aluminium (Al) | 831,350 | 777,775 | – 53,575 | – 6.44% |