Episode 9: In the stranglehold of powers remote from markets

Sometimes things happen very differently to expectations. So the ice cream did finally melt for this editor as his expectation that the nickel price was well supported was wrong after all (cf. last news). What remains are sticky fingers and “new prognosis, new fortune.” Against all expectations generally, commodity prices all around made significant moves on the downside. On the London Metal Exchange (LME) nickel prices even dipped briefly below the USD 9,000 mark, to then recover up towards USD 9,300.00/mt. The reason for this is, allegedly, the withdrawal of financial investors who, after the recent somewhat disappointing purchasing manager index see the demand for commodities in China more sceptically.

In addition, in the Philippines the declination of the designated environmental minister, Regina Lopez, has perhaps given more emphasis on a renewed increase in nickel ore supply. But, oddly enough, analogous to the move, aluminium and copper prices as well as oil and other prices, all fell quite heavily, but then had similar parallel recoveries. So it could be that these explanations are actually a little far-fetched. Commodities and the real economy continue to be (unfortunately) in the stranglehold of powers remote from the markets. And since we have now reached the point of conspiracy theory terminology, which borders more on Star Wars than financial and commodity markets, we have not to forget yet another alternative reason for the fall in prices.

There are reports from the financial centre of London that since Brexit, with all the rhetoric involved, has been formally triggered, the big investment banking sector has been taking steps towards its implementation of an exit strategy. If unconfirmed rumours are to be believed, this would involve banks liquidating their commodity positions in very significant amounts, so that they can effectively be built up again outside of Great Britain. However, it does not really seem very plausible that the liquidation of positions is absolutely necessary to move positions across the market. What is more certain, however, is that individual big banks and other financial players, could bring turmoil into these already tight commodity markets.

At any rate, any indicators of this, should they accumulate, will be keenly followed as it would mean that should financial investors return to the market, a strong upwards movement would be the logical and analogous consequence. But, however, after promising export and growth figures for the first quarter in China, the situation there seems to be now somewhat in a lull. In addition, the state of affairs in the overheated real estate market continues to bubble along with no solution in sight. China is such a fundamental heavyweight in global stainless steel production, with a market share of around 55%, so it is of no little surprise that domestic economic influences also have a real global impact. Certainly, with such production figures, China can be considered as one of the biggest nickel buyers and consumers worldwide.

Elections to the State Parliament in North Rhine-Westphalia have just taken place. This is one of the most populous but unfortunately no longer very economically successful large Federal States of the German Federal Republic. The old governing body of the Minister President, Hannelore Kraft, and the coalition of the SPD and the Green Party have been voted out. Independent of the result, there has been no politician in NRW, neither from losers nor winners, who said such things as “We got that wrong” or “the ice-cream melted in my hands”, ”this leaves me with egg on my face”. A certain infallibility seems to be a widely spread personality trait. This is a shame, for even if today most of the important political decisions are made either in Brussels or Berlin, one aspect of policies, for whatever reasons, remains on the Federal State level, even though it plays an extremely important part in the future of the economy: education policy. This was perhaps even decisive in the election in NRW.

And the jurisdiction of the German Federal States retaliates by producing a patchwork of the most different, and certainly uncoordinated entities specific to each state, so that even a move from one state to another creates huge challenges for both teachers and families with school age children. The differences are mostly ideological and are based more on dogma than common sense. A chance meeting has now led to a confirmation of the fears which previously in public had only been whispered off the record. There is an extremely high number of students who do not complete their studies and drop out of education. Extensive scientific studies do not seem to be able to provide reasons for this, and in any case would not be especially flattering for the rhetoric behind the movement “Baccalaureate and Study for all”.

Now we are confronted with a shambles. Frustrated student dropouts on the one hand and a lack of qualified applicants for teaching posts on the other. This is the consequence of an education policy which has tried to reach out equally to all, even though this type of equality does not exist. Now a so-called dual education system is supposed to resolve the situation, which combines studying and traineeship so to speak. It could also be said that this is a compromise to save face. Why is it so hard to recognise that people have different strengths and qualities and are therefore more suitable to different paths in life, regardless of their social background? A student from a privileged background, but totally lacking in any qualities whatsoever does not belong, perhaps even in their own interest, in a school of higher education, but a talented person, no matter how much underprivileged, should definitely be able to make use of the higher education system.

An adequate education system has to be secured for both, if resources are neither to be wasted nor incorrectly assigned in a future educated society. By coining the phrase “Baccalaureate for all” some people will have perhaps been flattered, but no favours have been made as the amount of dropouts shows. At the same time though, all other established education institutions, along with grammar schools and higher education facilities have lost value.  It can only be wished that governments, not only in NRW or even just in Germany take up this subject, for, as sombre as it might sound, to say education is the future is absolutely correct. And just in times when so much is spoken about digitisation, totally new concepts are needed in education and social policy, so that people who are becoming redundant through increasing robotic automation will, in the future still have a financial livelihood and also a fulfilling occupation. A good thing is that in Germany such infrastructure and administration is already present to enable a concentrated and quick transition. What is, however, lacking is the direction and more than this the prioritisation, also with regard to funding and human resources.

While making research for this publication, articles are, more often than not, stumbled on in reputable specialised press. It is, however, obvious that in a lot of cases more emphasis is placed on the production of words than on useful content. Readers may be inundated with data and information without actually being given a better insight. Or to put it another way: the reading matter does not help the reader. Unfortunately this seems to be a sign of the times in our modern information society. A constructive filter of information and data would appear to be increasingly important, but because of the sheer mass is also becoming much harder.

One magazine, under the heading “Has the aspired goal for scrap demand in China finally been reached?” reports that a higher scrap usage has a high priority within China’s “green” development goals. At first glance, this should be taken as a piece of good news. Although, the goal, with an aspired 220 kg or 22% per produced ton, is low in international comparison, it is, however, double the amount of scrap usage in 2015, which was only 104 kg. This has been calculated by the China Association of Metal Scrap Utilization (CAMU). This editor would also like to point out that ten years ago, scrap usage was much higher, being then at the level of 176 kg. Should the goal of a 22% scrap usage quota become a reality, then this would mean an absolute scrap requirement of 187 million tons, which would, based on global scrap requirements, be 20% more than is currently required. The report goes on to say that the previous reluctance of China to use scrap had been due to economic reasons in particular. Only recently has scrap become undeniably more attractive price wise than the complementary primary commodities which have been predominantly used. And here is the end of the “analysis”.

The criticism here is not that any incorrect statements have been made, but that the so-called analysis just scratches the surface at the very most, without shedding light on the actual important aspects. This should be rectified here. First of all, when fundamentally considering the usage of scrap, the view should not really start from the requirements side. Scrap is, in the short term, just as much a scarce commodity as the primary commodities. Therefore, demand can be as high as it wants. It cannot be employed more than what is available. And there are no stockpiles which can provide amounts to cover an increased demand. Indeed, the possibilities are determined by the short supply which in turn is dependent on the metal production of today coupled with any production residues. It is also dependent on the amount of historically used metals and the life span of metal products until they are discarded, and also the commodity price levels. For, the higher the commodity prices, then the more amounts of scrap offered.

With the amazingly huge amount of steel production in China, and the comparison to Europe in a relatively short period of an extensive and comprehensive steel usage, then a goal of 220 kg must appear to be somewhat ambitious. If goals are to be realistic they must, therefore, keep in line with the availability of scrap. Even if so desired, it would hardly be possible, based on the global average, to reach more than 50%. In the short term, there is just no more scrap available. Despite this though, the absolute scrap usage will of course clearly rise. Secondly, the quota will be determined by technical realities. It has to be made clear that China belongs to those countries with the least share of electrical steel production. And it is just this type of production which has been developed and is predestined for a maximum scrap usage of up to 100%. In China, steel is mainly produced via the blast furnace route and, due to technical reasons, can only employ a maximum amount of scrap of about between 20 – 30%. This has also to be considered in the analysis of real and aspired scrap usage quotas. Thirdly, taking an economic viewpoint, qualitative aspects have to be taken into account.

In a closer study it becomes clear that over a long period in China existing cost advantages for primary commodities as opposed to scrap have led, above all, to distortions in the market. At the cost of working conditions, pollution and exploitation of ore delivering countries, prices for primary commodities in China have been systematically and artificially kept low in order to subsidise the local steel industry. This has gone hand in hand with protectionist export trade restrictions with regard to commodity exports.