Does the ketchup effect help the hawks?

Nickel prices on the London Metal Exchange (LME) have been able to firm up more since the beginning of December 2017. A renewed attempt by the markets to tackle USD 13,000.00/mt was undertaken, important for the continuance of the upwards trend. But again without resounding success.  The brief high of USD 13,200.00/mt could not be held. The “disappointment” in the market was reflected in a correction down to USD 12,190.00/mt. Looking at the technical chart, a head and shoulder pattern has formed which could provide for more consolidation. But then again, only “could”, as the market, naturally, does not always perform according to certain set chart patterns. Otherwise all forecasts would be simple. At the moment prices are higher again, around about USD 12,500.00/mt.

Strong economic data from nearly all parts of the world and the significant weakened US-dollar against other currencies have contributed to the renewed run on the resistance zone of USD 13,000.00 – 13,200.00/mt. The lower dollar means that commodities, priced in US-dollars, are cheaper when converted into other currencies, which should trigger higher demand. It is, however, surely also a deciding factor that stainless steel production, by all accounts, has started the new business year of 2018 in a good way, especially following the short term insecurities of new orders after the considerable nickel corrections of November and beginning of December when prices fell to USD 10,740.00/mt. The continuing increase of nickel containing ore exports from Indonesia could have a weakening influence on prices.

Looking at the macroeconomic state of affairs, a rise in interest rates has to be taken more and more into account. And certainly in the Eurozone this is valid above all for the “long end” – long term loan maturities. In the meantime, the yield on 10 year German government bonds has risen by 0.8%, from an all-time low of minus 0.2% in July 2016, to plus 0.6%. This is still, unquestionably, not a high interest rate, but the direction has certainly been indicated, and in addition to this, inflation is rising. The first prognosis of the German Federal Statistical Office shows an inflation rate of 1.8% for 2017. Perhaps this is a practical example of the “ketchup effect”, a term coined by some theorists and reviewers. The inflation rate is firstly at nil, then the perceived inflation is higher than the official inflation rate, then a 1 is pushed in front of the decimal point, then quickly a 2 and so forth. Just like a ketchup bottle, when at first nothing comes out when shaken just the once, but then, after a massive shake, all comes surging out at once.

The European Central Bank (ECB) has to react on the “short end” (short credit periods) and also on the base interest rate increases elsewhere (USA, Canada and Great Britain to name just a few examples) in order to stabilise inflation. It would seem that most analysts, for 2018, expect three further interest rate increases to be made by the US Federal Reserve Bank, if not even four. Hawkish sounds are also increasingly being heard in the ECB. As a short reminder: The “Hawks” basically stand for a restrictive monetary policy and interest rate increase. In opposition to these are the “Doves”, who, rightly guessed, stand for expansive money policy and low interest rates. Even if interest rate increases are not very likely under the present ECB President, Mario Draghi, the prospects of such are certainly no longer impossible. Loss of face from Mr Draghi or not, at the moment he is clearing more or less all available corporate bonds out of the market. He is further flooding the markets with money.

But it should slowly be possible now for the start of a turnaround in interest rates in the Eurozone. One should, of course, be prepared for the strong economic developments of the last few years to be taking a break, when lowering  interest rates might be needed to give a stimulus . This is, however, certainly not the case at the moment with the present base rate of 0 percent and penalty interest rates for banks for short-term deposits with the Central Bank at minus 0.4 percent. The monetary policy instruments would be without effect. Neither a further decrease of interest rates would have an effect, nor could the money supply be increased significantly.

Finally, if the difference between deposit rates of 0 to minus 0.4 percent and an inflation rate of 1.8 percent is taken, then it is clear just what the political aim is: the successive reduction of state debt via the inflation rate with a simultaneous expropriation of savers. Unfortunately, this phrase, very often used in a populistic way, is even economically sound. The strategy, after the financial and state debt crisis, of socialising the losses has been proven right, yet worse has also been avoided. But now is the time for politics and central banks to make sure that the difference between inflation and interest rates does not become too big, as otherwise the next universal crisis is just around the corner, that of poverty in old age.

In November, we reported about the cost increases in graphite electrodes, an important component in the electro-steel production. In 2017, for various reasons, prices had climbed up to USD 40,000.00/mt, compared to USD 2,000.00/mt in 2016, making for what seems a gigantic development. Even if, in the last few months, there has been a certain weakening of the price, higher prices are reckoned with for 2018.

The price for needle coke is an important factor here. Despite an improved availability and lower needle coke prices towards the year end of 2017, according to Metal Bulletin, prices auctioned for the first quarter of 2018 were USD 15,000.00/mt. It must also be said, that the graphite electrode market is a very concentrated one. The three biggest producers, Graftech, SGL Group and Showa Denko in 2016 accounted for more than half of the total capacity of 502,000 tons. And this concentration has been increased further by the takeover of the SGL Group by Showa Denko.

The clean European steel industry needs 226,000 tons alone, whereby production costs of the EU producers have increased significantly, albeit understandably. According to information from the Bureau of International Recycling (BIR), worldwide in 2016, 406 million tons steel or 24.3% were produced using the electric arc furnace (EAF) method. In comparison, about 1.2 billion tons by blast furnace. Outside of China, stainless steels are produced to almost 100% by the effective EAF way. In the next years, this share should also significantly increase.

In the context of commodity and steel production discussions concerning sustainability, to add to what has already been reported, it can be noted that, increasingly, the financial world is turning to the topic of sustainability. One of the big international banks, Société Générale is holding a one day conference on 22nd March 2018 in Frankfurt under the heading “ESG (Environmental, Social, Governance) – Fashion trend to investment standard: Scope, consequences and possibilities for corporations and investors”. It is about sustainable financing and investments, which today should be on the agenda of every responsible company and investor.

That it is the world of banking which is setting the trend of this development is, however, not really very surprising, as it has a lot of work to do to regain lost trust since the financial crisis. The conference will be opened by the CEO of Société Générale which shows the value put upon this topic. Whether the extremely sustainable scrap market and processing is also one of the topics of the conference could not be ascertained.

Commerzbank, in its capital market preview for 2018 and in its long-term view for 2018-2024 for private investors, also turns attention to the commodity markets. A little more differentiated than in some other comparable publications, it arrives at the estimation that the development for 2018 is expected to be inconsistent. According to the analysis, whilst oil is more likely to be subjected to price risks, price corrections with nickel, copper and aluminium will be seen as purchasing opportunities. This means that commodities are not just seen as being reduced to one index, such as the GSCI commodity index. This is indeed correct, as the various commodities, even within one commodity class, have different dynamics as well as differing supply and demand parameters. Commodities are just not one uniform asset class.

It is pretty obvious that food stuffs, energy resources, industrial metals and precious metals cannot easily be compared to one another, and therefore all cannot be put together in the one pot. And so the slowdown in growth in China (controlled in some sectors) will, naturally, have consequences for commodity demand. But whilst iron and carbon steel, because of reduced construction and infrastructure activity, may possibly see lower demand and so may development on a weaker scale, for the “commodity of prosperity”, stainless steel and its related raw materials, a golden age may be just beginning, even in China. And all the hype about electromobility is doing the rest.

Donald Trump, the President of the world power USA, economically, militarily, and intellectually, has, according to media reports, made some very derogatory remarks about states from where a lot of immigrants have been coming from. Deutschlandfunk has also reported that Trump, in a meeting about immigration policy with senators in the White House, actually used the term “shithole countries”. It is really very surprising that such a proud nation as the USA can tolerate this. Or perhaps the words of the statesman, Joseph Marie, Comte de Maistre (1st April 1753 in Chambéry; † 26th February 1821 in Turin), Savoyard writer and political philosopher, are valid: “Every country has the government it deserves!”. To be fair, it must be said that M. Marie, during the French Revolution, was an opponent of enlightenment. And it would appear that it is enlightenment which is missing here.