China: Growth without added value?

The London nickel price, after highs of over USD 12,000.00/mt at the beginning of September followed by a period of consolidation, could then settle down, as expected, and traded at around USD 11,000.00/mt. This price relates to primary nickel delivered in three months, called the 3 months future price, which in turn reflects both market depth and liquidity, and so represents the measure of all things. Shortly after this, there was a further attempt at breaking the psychological marker of USD 12,000.00/mt on the upside, which however, up to time of writing has failed. The highest nickel price reached was USD 11,930.00/mt. Although this does show quite positive signs.

Looking at the situation on the stock markets, such as the German DAX share index, then the signs are that this segment is well supported and ready for price increases. At the same time, the mountain of debt of China, comprising of state, business and private individuals, is almost 280 percent of the gross domestic product, but this does not seem to bother investors in their assessment of the global economy. The much maligned state of Greece seems almost modest in contrast to this. But then again, we are talking about China and not about Greece. But if a correlation is made between the rate of growth in China on the one hand, and the increase in size of its debt in the last fifteen years on the other, then a certain amount of scepticism could be allowed. Growth, which has been financed by debt, depending on sector and future orientation of the investments, does not necessarily have a very high value.

And relatively unproductive real estate plays a big role in growth. If the steel industry could be taken as an example, it can be seen to what extent dumping prices have been and still are being offered for steel from China, so it should certainly be questioned, just what has happened to the creation of value; or, in other words, to the cash-flow, which, according to all teachings, is what recoups profit on investments and pays off debt.

But the picture should not be painted too black, as there are none too few economists who are of the firm opinion that there are other important economies, for example the United States, which, for many decades now, have been “holding their head above water” only by the creation of bubbles in various sectors. And they seem to have accomplished this quite well, at least if the average affluence in the USA is taken. And as long as not too many people are disturbed by this very stable phenomenon then it will continue without interference. And this should indeed be the case, because no one has really any true interest in “black swans”, demagogues or painful losses. And, as long as the mass media do not pick up on this topic, then there is also no great danger.

After all, the media does indeed boast about being in a prominent position in the modern democratic societies of today. It likes to look at itself as the fourth power in the State, putting itself alongside the widely acknowledged triad of legislature (law making), executive (government) and judiciary (jurisdiction). It considers itself to be necessary in order to correct mistakes inherent in the system of the powers of separation, as just described, and as opponents of established structures which tend towards inefficiency and lack of transparency. This is certainly not a very modest self-opinion and theffectiveness as being the correct instrument also leaves many doubts.

There are non-too few observers and analysts of the recent election for the German Federal Parliament who have made their opinions known that a certain type of media hype may have contributed towards the success of the populist right-wing party, the Alternative for Germany (AfD), which has left every liberal minded citizen feeling very uncomfortable. Would it not basically have been more honest if the media in question had committed to their own economic business models? But then it is all about sales and circulation figures, whether analogue or digital. From this viewpoint, the AfD Party is perhaps a more interesting topic than the same old news about the “Merkel Rhombus”.

But the impression should not be given here that it is the media alone, in regard to honesty, which stands in a bad light. Other industries are no better. Without naming names, readers will be able to think of examples in the automobile and pharmaceutical industries which could be part of the debate. But these two branches in the economy are certainly not something unusual, and are not exceptions. Probably, it should be humbly acknowledged that, despite all attempts to improve and with all references to ethics and morals, efforts must continue as the goal has unfortunately not been reached.

Apparently it would seem, people always fall back into their genetically socially programmed behavioural pattern. In other words, whether it be the media, manufacturing industry, the scrap and commodity trade, banks and gaming operators or the gastronomy industry: none can claim to be perfect or to be better than the other. Even the unsuspicious Nobel Foundation has now been accused by Non-Government Organisations (NGO’s) of investing foundation funds in unethical investments, which, for example, could damage the environment. Although at the same time, the conduct and actual motives of some NGO’s has to be queried.

This brings the philosophical excursions to a close and a return to something more tangible:

An important reference value for the chrome price (European charge and high-carbon ferro-chrome benchmark), which is published by the South African ferro-chrome producer, Merafe, on the Johannesburg Exchange, has risen from the 3rd quarter and is now at USD 1.39/lb. Just to point out, South Africa, together with India and Kazakhstan, are the only important chrome ore producing countries on the planet.

Just recently, a situation has been developing which has been good to see, and which actually has been expected in logical terms. We are talking about how the public is being informed more by news reports about the employment of sustainable commodities in the production of steel. Not just within the framework of Corporate Social Responsibility (CSR) considerations, which are becoming more and more concrete on the regulation side, there is no dispute about the numerous advantages of secondary commodities, such as stainless steel scrap (and of course best by using quality material with Oryx Stainless as origin). It must, however, be also said that the scandals about diesel motors and the effects of higher particulate and CO2 emissions in this connection have contributed to a higher level of sensitisation, just as the continuing efforts of steel producers have towards creating a good image. It does not seem completely coincidental that news reports are becoming more frequent that, quite rightly, the position of steel producers and scrap consumers are more open and more positive about the qualities of scrap as a commodity.

At the Metal Bulletin Stainless Steel Conference in Ljubljana, Slovenia, the well-known market analyst, Markus Moll, said that “Scrap, under the aspect of sustainability, is the best way to produce stainless steel rust proof and that European politicians have to support its usage.” At least more and more steel consumers are beginning to view their supply chain under the aspect of their carbon footprint. According to Moll, there has already been one automobile supplier who stipulated in its purchase specifications for stainless steel that this had not to have been produced by using nickel pig iron (NPI).

Even in an article published in the 18/2017 edition of the specialist journal Stainless Steel Focus (Focus Rostfrei) sustainability in stainless steel production is discussed. The aim is to reduce the greenhouse gas emissions. Under the umbrella of the UN Global Compact, the initiative Science Based Targets has been launched. Included amongst the 262 businesses which are taking part are players from the stainless steel industry. When dealing with efficient energy and goals for CO2 emissions, then there is no alternative to the highest possible usage of stainless steel scrap. With all the known advantages for consumer and for the environment, the scrap branch is certainly then allowed to ask the question of why, in general, lower prices are still being paid for this commodity, which is ideal for sustainability and resource efficiency, as compared to prices for those primary commodities which are weighed down with heavy ecological burdens. The opposite should actually be the case, especially looking at the negative external effects. But at the moment, it is what it is, and is probably just a question of time until the consumer changes and is prepared to pay more for clean and green steel. Or there will be regulatory measures when finally, the CO2 savings made by the usage of stainless steel scrap will be credited to the individual steel producers in their CO2 budget.

This gives a big chance for European steel producers who traditionally use a high quota of scrap. This would mean that competition with the Chinese steel industry would be put on a fairer level, as these, first and foremost, put more emphasis on the usage of primary commodities, and so, per se, are “dirtier” or in other words, not as sustainable.