“Double whammy”

Bad news is good news
It seems somewhat apocalyptical when stock markets and other markets react at the moment to bad news with price increases. This phenomenon is called “bad news is good news”, which shows how far many markets have distanced themselves from the real economy and are used more as investment instruments. The background to this type of action is, above all, that investors expect that bad news could force central banks to a more moderate and slow interest rate increase policy. For it was the almost limitless flooding of the markets with cheap money, as a consequence of the financial and sovereign debt crisis of 2008/2009, which led to an almost continuous soaring of the stock markets.

Because of low or even negative returns on fixed-income products, large and small investors were enticed into this form of investment (stocks/equities), which has led to many years of bull markets. Many beneficiaries are reluctant now to take leave of this boom. Therefore, bad news, which could put the brakes on the inflation-fighting drive of monetary authorities, is perceived with relief by these circles. However, this view has little to do with a sustainable economic positioning of markets and economies.

In such an environment of economic depravity, it is hardly surprising that the German Chancellor, Olaf Scholz, spoke publicly about a “double whammy” on the announcement of the so far most comprehensive measures to battle the energy price explosion, a gas price brake and economic stabilisation fund while at the same time abolishing the gas levy which had never even come into effect. It is certainly not worthy to speak in such infantile terms about such an important matter, and obviously shows what the Chancellor thinks of the people.

Economists under-represented in the world of politics and media
Even if the media loves sensationalist catchphrases, appropriate communication with intelligent people should be made. People are not stupid even if this is perhaps the thinking in the political bubble of the government capital of Berlin and also in none too few state capitals. It is interesting in this context of current challenges in the energy markets to observe just how little economic expertise there is in politics and the wider media. No sooner does a topic require a sound background in business or economics that all sorts of strange statements and views regarding appropriate measures come to the fore.

This is also probably the reason why the representatives of non-economic disciplines, who are in the majority, are more likely to move softly in politics and reporting, where everyone can get involved and have an opinion. The so-called value discussions are particularly suited for this. This logic is to be found at the working level of normal Parliamentary members or editors as well as at the very top. For example, the lawyer, Christine Lagarde, as President of the European Central Bank, is trying to make the fight against climate change an important task of the central bank, while it is obviously a bit stuck in the fight against inflation.

And the extremely likeable Economic and Climate Change Minister, Robert Habeck, does not tire of underlining his always open ear and quick learning in the energy crisis, but did recently lose some of the praise he had received. The position of the Minister for Economics is not a position for a trainee. This does not at all mean to say that non-specialists cannot fill such an office sensibly and successfully, but this does require a very collegial manner with the subordinate specialists and experts. Party lines and also visible displays of power must be left out of this exchange.

However, restraint and a more cooperative use of power is just rather alien to these party-political leaders (and to some business leaders too). After all, it was the continuing process of enhancement and concentration of power over many years, indeed sometimes decades, which has led to such a responsibility. In this respect, continued resistance to consultation and a lack of plurality is probably an inherent characteristic of our political process.

“Most market failures are none at all”
The above context suits the analysis of the former head of the economics editorial department in a column in the New Zürcher Newspaper (NZZ). Here the author comes to the conclusion that the term “market failure” is misleading. It would suggest that the market does not fulfil its obligation in coordinating supply and demand. This is, however, very seldom the case. In many cases there are no market situations at all, or it is wanted that the results of the markets, under other categories such as social or cultural policy, are discredited as undesirable.

Similarly, but in more detail, Dr. Christoph Maurer, Managing Director of Consentec GmbH in Aachen, wrote already in April in the blog political economy which is run by the Economic Forum of the SPD e.V.: “There is no evidence at all for market failure in the electricity markets. In particular, the orientation of prices to the marginal costs of production is not an expression of a failure in market design, but an efficient signal and result of a rational economic behaviour which also appears in other markets.”

In other words, the electricity market is functioning, but there is just the problem unfortunately that electricity is also produced from gas and there is a fundamental shortage, specifically for gas which has been produced in Russia. In addition, the dilapidated state of the French nuclear power plants plays a part. In this respect it makes little sense to intervene in the electricity market, as this is functioning, but the State should and must intervene in the gas market, since this is disrupted through war and it endangers the national economy existentially. However, the price-induced savings and substitution incentives should not be impaired.

It remains to be seen whether the measures which have now been agreed, will suit Germany in the detail. It is good that action has been quickly taken, even if it could perhaps have been somewhat quicker. The fact that mistakes can be made by quick action and it may not always work out, has unfortunately to also be tolerated. In the long term, however, relief will only come if either the supply can be increased and/or the demand can be reduced. For this a joint and certainly coordinated effort is necessary in order for this goal to be reached in the medium term. Market prices can be a help here, because they there have a certain steering effect.

As far as the nickel market on the London Metal Exchange (LME) is concerned, prices are based on the marginal costs of nickel production and also on nickel availability, also in non-exchange traded qualities, even if some consumers do not want to believe this. The simple wish for lower prices is not enough. Since a high of USD 25,000.00/mt on the 21st September 2022, there had been a significant correction, which led to a level of just over USD 21,000.00/mt at month end. Since the beginning of October, it has been going up again so that at the moment the 3 months future for nickel is trading at around USD 22,500.00/mt.

Correlation between GDP per capita and metal consumption
Commodity experts at Macquarie recently published a study which analysed metal demand of a country or a region in relation to the level of economic development. Basically, the consumption is highest when the gross domestic product (GDP) per inhabitant is between 20,000 and 25,000 USD. It has been seen that the maximum per capita consumption of a metal is 700kg for steel, 23 kg for aluminium and 1.5 kg for nickel.

The authors point out exceptions to the rule in their study. For example, South Korea had a clearly higher consumption than other countries at the same level of development, with 1,200 kg steel per inhabitant and 19 kg copper per inhabitant at 22,000 and 25,000 USD. A similar phenomenon has been observed in China: The current GDP per capita may only be at USD 11,000, yet according to statistics, 28 kg of aluminium is consumed per inhabitant, which is many times higher than in comparable countries. The discrepancy is explained by the study team that in China (and also in South Korea) many metals are consumed, but are subsequently exported again as part of finished products. Therefore, these results might show a trend, but individual results should be viewed critically.

With regard to India, the authors dare to make a prognosis. The world’s largest populous country has currently a GDP per capita of only USD 2,000 and, logically, a relatively manageable metal consumption accordingly. Should India have a similar growth story like China, then the multi-ethic state should generate a gigantic metal demand over the next decades. This prognosis is also subject to some uncertainties, like global trends for example, which are influenced by such as the energy change or the transition to a service society.

LME plays out the scenario of a ban on Russian metal
At the beginning of October the London Metal Exchange (LME) published a discussion paper in which it broached the subject of the possibilities and consequences of a ban on Russian metal deliveries. The publication made waves in the media as Russia is a major supplier of raw materials on the world market.

The publication highlights the role of physical deliveries in particular. This mechanism ensures that the contracts traded on the LME have the actual equivalent of a physical delivery at maturity, i.e. the buyer or seller of a contract is entitled to either physically take the traded amount out of the exchange or to physically deliver it to the exchange. On the metals market the LME likes to refer itself as the last resort, where the purchase of goods in times of undersupply and delivery in times of oversupply is guaranteed. Of course, only certain types of purity grades for metals, certified by the LME, can be delivered to the warehouses which have been approved by the LME.

In the last few months, numerous companies have announced their (voluntary) withdrawal from Russia as a result of the attack on the Ukraine and the sanctions taken or expected. With this in the background, the LME fears that companies could refuse metals of Russian origin, without there being a legal obligation to do so. Since the LME, as last resort, only looks at certification and not origin, then the LME warehouses could become a safe haven for Russian suppliers. This could lead to LME warehouses filling up with Russian metal as Russian producers do not find enough buyers on the world markets. The discussion paper even sees the theoretical danger of a possible discount for Russian goods, although these are qualitatively equal to metals of other origin. In an extreme scenario, the relevant LME contract could have a lesser value than the equivalent from another origin.

With the exception of copper, the LME has not seen any significant increase of Russian goods in its own depots. At the moment, 63% of copper in LME warehouses are of Russian origin. In the summer months there was even 80% from Russia, after about 25-30% in the first quarter of 2022. This amount is not yet a cause for concern for the LME, since in the past the Russian share in copper was very volatile: In the 3rd quarter 2021 there had been already 95% of copper in the LME warehouses from Russia. The share of Russian nickel in the warehouses is less than 5% (Russia has a world market share of about 9% of nickel production). In addition, Russian metal continues to be taken out and also received, which indicates that market participants do not yet have any reserves about buying Russian metals in terms of metal demand.

For this reason, the LME does not currently anticipate that Russian stocks give cause for concern. But the LME is concerned about new supply contracts in the real economy for 2023, when Russian metal will be excluded from supply. This clause could lead to an influx of Russian metal into the LME warehouses.

Therefore, in its discussion paper, the LME plays out possible scenarios on how possible risks to the LME and the metals market can be prevented. The suggested alternatives range from no action, to a quota system for Russian metal in the warehouses, to excluding Russian metal from the LME entirely. Market participants may comment on the paper in the coming weeks.

Analysts already assume that China, Turkey and other countries could step in as buyers, which has already happened in a similar way on the oil market. There will certainly continue to be a high demand for raw materials, since future investments, such as the decarbonisation of the economy, are still being made. Any sanctions for Russian companies could, however, create difficulties for exports.

Analysis sees a possible recession after inflation in the USA
In August the chairman of the Federal Reserve Bank, Jerome Powell, made a clear commitment to curb inflation and warned the public that he expects the Fed to continue raising interest rates that would hurt the US economy in some ways. Already in March this year the Fed named a few examples from the time after the second World War when the Bank got inflation under control with hard interest rate moves without the economy falling into a recession.

Analysts of the Investment Bank Macquarie, on the other hand, see only four examples since the second World War where there was a low unemployment rate parallel to a high inflation rate. In the examples named by the Fed, there were other issues involved.

The Fed may have been able to control inflation every time in the past, but usually a recession has followed in consequence of the measures taken. During the Korean War in the early 1950’s inflation reached 9.4% in almost full employment. After a sharp increase in interest rates the economy fell into a brief, but deep recession with an increase in unemployment figures, which it did, however, quickly recover from.

Stellantis agrees partnership for future supplies of nickel and cobalt sulphate
After reporting in previous issues about strategic partnerships with Volkswagen and Tesla with nickel suppliers, the list can now be continued.

The car company Stellantis, which owns brands such as Chrysler, Fiat, Opel, Citroën and Alfa Romeo, recently announced the signing of a non-binding letter of intent with the Australian exploration and development company GME Resources Limited. The cooperation envisages the future supply of nickel and cobalt sulphate in battery quality for the car company. The project should eventually produce about 90,000 tons nickel and cobalt sulphate in battery quality annually, according to Stellantis in its press release. GME Resources Limited holds a 100% interest in the nickel-cobalt project NiWest, which is considered to be one of the biggest undeveloped nickel cobalt deposits in Australia.