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Merafe Resources Limited, after a long delay, announced the ferrochrome benchmark price for the 2nd quarter 2020. Availability of stainless scrap is very restricted. What is happening to demand in commodities?

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Black or white swan is the question here. Nassim Taleb has an opinion on this in reference to the corona crisis. Warnings of pandemic go unheeded. Preparation and foresight: not in evidence.

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Political and public debates becoming increasingly like dogmatic disputes which are far below the belt. Who are the good guys, who are the bad guys? That would be a disservice to the matter.

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What has Argentinean beef to do with Indonesian nickel ore? Market interventions in both places. After export ban, now a minimum price as well. What will be next? Always an improvement?

Stainless steel commodities remain stable in a slight upwards trend
On the 22nd April, after considerable delay, the South African chrome producer Merafe Resources Limited announced the European bench mark price for ferrochrome for the 2nd quarter of 2020. The reference price rose from USD 1.01/lb in the previous quarter to now USD 1.14/lb. This is a rise of 13 US-cents or 12.9%. Despite this strengthening of price, availability of stainless steel scrap remains low, with certainly firm buying interest in Europe. In so far, effects of Covid-19 have been predominantly seen on the procurement side. Logistics have played at best a minor role in this.

Whether, when and for how long sales will be affected also depends on the speed of the restart and recovery of global economies. We are also approaching the summer months, so that, independent of the pandemic, there is also an expectation of a certain transitory seasonal weakness. The London nickel price has proven to be volatile in the last few weeks, but within quite a tight range. The 3 months future has been trading consistently between USD 11,800.00/mt on the downside and up to USD 12,500.00/mt on the upside of the price corridor. At the moment, the price for a ton of pure LME brand nickel is at about USD 12,200.00/mt. In view of the real economic background and the experience of slightly comparable phases, it could be said that waters are calm.

Little substance in having feathers ruffled
Taking up the theme of waters, in a precious publication, considerations were made about whether the corona virus could be a purported black swan. Perhaps the author has to revise his opinion, but please read this and form your own opinion. An article in the New Zurich Newspaper (Neuer Zürcher Zeitung, NZZ) on the 26th April 2020 stated that we are not dealing with a black swan, according to the definition made by the creator Nassim Taleb. The phenomenon describes events in a networked world which are practically unpredictable, removed of nearly all planning capability and which have not been previously experienced. But on the basis of his own criteria, Taleb inevitably draws the conclusion that the corona pandemic does not fit this description.

Quite the opposite, as it is a purported white swan, which, in one form or another makes a regular appearance. Pandemics and epidemics have been occurring for thousands of years and which will keep on recurring and are, therefore, not part of a new experience. Even at the risk of having to shamefully revise the view already expressed, something can be learned from the reasoning of Mr. Taleb. Apart from the timing of the outbreak, nothing was actually unknown.

Warnings had been given by scientists, and plans of action in certain scenarios were lying overlooked in the filing cabinets of governments. Therefore, whether it is a black or a white swan, governments, especially those in the so-called highly developed countries, have had their feathers ruffled with everything except glory and foresight. And it is only a matter of time until their feathers are cut and even plucked.

Conflict of objectives in trying to control the crisis
The investment bank, J.P.Morgan, in its Metals Market update of the 12th May 2020 made an interesting statement which so far could not have been expressed any better. It states that political decision makers are not only confronted with a dilemma, but also at the moment with a short-term trilemma. In economics science a magical triangle is also discussed when, for example, talking about financial investments. The authors at J.P.Morgan state that now during the Covid-19 pandemic, in trying to achieve the prevailing political goals of keeping the number of infections and mortalities down, of possibly restarting the economy in the short-term and of protecting data and personal freedom, one goal has to be sacrificed in order to achieve the other goals.

Whilst some Asian economies have, in the near-term, been successful with the first two goals, other countries cannot and do not want to follow suit. Medium to long-term, the situation looks even more complex, as a lockdown which is too short can be just as disastrous as a shutdown of the economy which goes on for too long. And also those who are fearful and anxious about a renewed worsening of the situation can be affected even more. Also, a constant stop and start can additionally impede and even hinder business activities.

Premature denouncements are ruining discourse
At the moment everything seems to have something to do with triads, for example, as already mentioned, the trilemma and the magical triangle. Ultimately there have also been three big challenges which have led to a huge polarisation in society: refugees, climate change and now corona. And these huge issues, quite interestingly, each have one face: Angela Merkel, Greta Thunberg and the virus (perhaps including the virologists).

On occasion, aggressive confrontations have been seen about the importance and in defence of unshakeable positions taken. So, all methods appear to be necessary, such as the controlled communication of data and information on the one side, and conspiracy theories from sometimes dubious sources on the other. Seemingly, it is all about finding an objective answer to the question of who is good or bad.

All too willingly and quickly, even respected personalities are being labelled as racist, climate change deniers or corona deniers by politicians and the leading media if their opinions differ from the mainstream. Statements and arguments are not usually looked at in much detail. According to Bernhard Pörsken, a media scientist from Tübingen university, in an interview with Deutschlandfunk, this is a big failure of the ruling political class, which has already caused a lot of damage to debating culture on the issue of migration.

Of course, there are red lines and questionable practices, but independent of personal opinion, the exchange and reflection of other properly presented views, certainly in a democracy, should not be stigmatised. The mistakes in the debate today are, according to Pörksen, that the government had suppressed the exit debate for too long and the assessment carried out of health protection and collateral damage to the population has not been made clear enough.

In fact, the measures adopted were mandated as having no alternative and not presented as the rational conclusion of a detailed analysis. Now the media scientist is, however, of the opinion that the biggest majority of people are in agreement with the policies of government, since they would understand the background thanks to the help of serious media. This must, however, be disputed, as how can the public have an understanding of matters when, in the nature of things, neither politicians nor science have a complete understanding. Even the last mentioned, science, does not say it is itself infallible, even if this is often overlooked by the public.

And when talking about serious news reporting, we scrap dealers can only think of the honest real estate agent. It looks more likely that up to now, it has been fear and anxiety which has held the masses together on one course. Therefore, now with fear decreasing and more relaxation, and above all more access to data and facts, it will naturally be more difficult to keep hold of the same storyline. This is, presumably, the reason why debate is, at times, met with such verbal brutality, as the government, wherever it may lead, fears a reversal.

No respect for the guardian of the constitution
And it is not just the conspiracy theorists, esoterics and anti-vaxxers who are sweepingly and brutally pounced upon, even the dignified German Federal Constitutional Court (BVerfG) has not been left out. Ever since this court, the highest in Germany, voiced a different opinion to the European Court of Justice in regard to the bond purchasing policy of the European Central Bank, criticism from the qualified and the not so qualified has not stopped. We are neither pope nor world champions anymore, but, for a change, we are now constitutional judges. For example, the CSU European Parliament member, Markus Ferber, in the Deutschlandfunk made the following criticism: “The Judges would have given a dangerous verdict without any economic expertise,…..” Furthermore, he also accused the Federal Constitutional Court of giving grades to the European Court of Justice, and that this is inacceptable.

Now it has to be known that Mr. Ferber has a degree in electrical engineering from the Technical University of Munich. Presumably, his judgement is swayed by a political or a general perception. But this does not exactly recommend him to be a noted expert on economic and legal matters. A little more respect to the highest German Court would, therefore, be appropriate, especially as the verdict was carried with a very clear majority of seven to one votes. And, in addition, the electrical engineer should be well aware that Germany, as the biggest shareholder of the European Central Bank, could be highly concerned about debt relief for certain countries.

Since we are talking here about the vested interests of German assets, and not about a political European vision, then an amount of responsibility should certainly remain with the national German Constitutional Court. This does, of course, not mean that with the required majorities, laws and charges of the European Central Bank can just be adapted so that political wishes can be reflected in the laws. Then a constitutional state would be judged differently. But sometimes people’s fuses can be too short a little prematurely.

Indonesia sets a price floor for unrefined nickel ores
Regularly at this point we report about the planned intentions of the Indonesian government to transform domestic nickel mining assets into higher quality products, such as nickel pig iron (NPI), car batteries and stainless steel. To this end, at the beginning of 2019, a renewed strict export ban for unrefined nickel ore had been implemented. But, since the domestic market did not have enough buyers for nickel ore, the excess in supply led to a fall in price for the ore.

Now the government is working to turn this around. To the delight of mine operators, since the middle of May 2020, a price floor has been set for nickel ore, which can only be undercut by a maximum of 3%. A speaker for the Ministry of Energy and Resources explained that this step should create a fair price for mine operators. The reference price will be determined on a monthly basis and will be aligned to various world market prices (amongst others, also including the LME). This code of practice is not new to Indonesia. For some time now a monthly reference is already being set for many metal ores and coal.

In order to cushion the effects of the corona crisis in the Indonesian nickel industry, it was recommended, at the end of April 2020 by the association of Indonesian nickel operating companies, to completely lift the export ban. Ultimately, other activities were also being cross subsidised by the profits from mining activities. The government immediately refused the recommendation, referring to the export statistics. According to Macquarie Commodities Strategy, NPI production, the next higher quality gained from nickel ore, has actually risen by 62.6% in the first quarter of 2020 when seen against the quarter of the previous year. Whilst up to last year nickel ore was processed in China, now China is increasingly importing NPI from Indonesia.

At this point a ruling made in Argentina must be referred to. It is a perfect example of how state interference in market economies can sometimes even damage domestic businesses. In 2006, Argentina was the world’s third largest exporter of beef. Its reputation for beef was excellent. But then global beef prices rose to extremes so that many Argentineans themselves could not afford to buy the meat anymore. This caused the government to implement an export ban on beef in 2006.

Within a short time, beef prices, because of an excess in supply, became affordable again. It even became cheaper than bread. This led to poverty amongst many cattle owners and Gauchos who had to give up their businesses. As a consequence the excess supply was reduced. Just a few years later beef prices once again shot up, with the result that the export ban, in the long-term, did not lead to a better affluence amongst Argentineans. Even though this cannot be transferred over to all other markets, it does quite clearly show that interventions in markets should be considered very carefully indeed.

Short information about the working from home culture
Video conferencing while working from home with the whole family and all what that brings may be enjoyable. Some people have even seemingly come to terms with this hopefully temporary situation quite well. But those keen on working from home should remember that without actual turnover in the real economy, there may soon be nothing more to work at from home, or even to discuss or negotiate. There has to be demand even for intellectual efforts. A purely virtual economy is unthinkable; unless we see everything as a big business simulation game whereby our incomes are derived from debt financed state benefits. Not really a Perpetuum mobile.

LME (London Metal Exchange)

LME Official Close (3 month)
 May 14, 2020
  Nickel (Ni) Copper (Cu) Aluminium (Al)  
Official Close
3 Mon.Ask
12,157.00
USD/mt
5,186.50
USD/mt
1,469.00
USD/mt
 
LME stocks in mt
  April 16, 2020 May 14, 2020 Delta in mt Delta in %
Nickel (Ni) 230,064 233,604 + 3,540 + 1.54%
Copper (Cu) 260,825 282,675 + 21,850 + 8.38%
Aluminium (Al) 1,261,475 1,361,575 + 100,100 + 7.94%

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