(Not) learning from mistakes

Ruinous competition in China
The real economic markets are (still) in a waiting position as long as there is not any clarity in the USA trading policy and the future of global economies. There is a certain reassurance in the question of tariffs due to diverse bilateral agreements, or perhaps expressed better as “deals”, between the USA and various states and the EU. However, these arrangements have already been massively criticised. In any case, the constant disruption of the Trump administration means that the sword of Damocles of cancellation or amendment hangs over every agreement at all times. It has to be questioned if anybody can stay on top of all this confusion, even within the US government itself. After a publication by the US customs authorities, there was suddenly fury about import tariffs on gold (such as bars), which the White House could not even resolve at short notice. Everyone was simply taken by surprise and did not foresee such a consequence. Finally then after four days, Trump announced on his own news service that there would be no tariff on gold.

Some countries, on the other hand, could not yet make any agreements with the USA. For example, Switzerland has now been immediately hit by import tariffs at the flat rate of 39%. At the same time, Switzerland is the sixth biggest foreign investor in the USA. In other sectors, such as pharmaceuticals or steel, there are also still no agreements or acceptable arrangements. The planned tariffs for trade relations with China were recently delayed by a further 90 days. Either an agreement has not been made yet or the USA fears China’s reaction if tariffs are levied.

For Trump it is simple to put countries to shame, which are economically or military inferior or dependent states. With a big dragon like China and its State President Xi Jinping, however, this does not happen. The resources, and above all the readiness of China to stand up to the USA, are greater than elsewhere. And presumably Trump knows and feels this. While China can certainly be made a compliment here for its tenacity and being so consequential, there are other areas where things do not really run smoothly and above all, there have been no lessons learnt from mistakes.

Why make profits, when there is the state
In China, economic realities continue to be ignored, which perhaps also has to do with the seemingly endless resources and deep pockets of the Chinese government. But for whatever reason, regardless of which branch, economic development in China does not seem to be about a sustainable and profitable development of the sectors, but rather about first building up such large capacities that they can supply almost the entire world. Perhaps they are justifiably proud to have caught up technically with the developed countries, and would now like to prove this success to the world and its own people through massive production figures with help from subsidies and other supports.

Ultimately it is regrettable that this causes above all a ruinous competition and this can be observed as ongoing. And of course, this not only influences things in China but also has an influence on exports in most of all other countries in the world. Companies have considerable difficulties to remain competitive because their losses are not compensated by the state due to the essentially privatised economy. The recognition that even in China resources are not infinite in the long term does not really help, as they are still considerably larger than the biggest private or listed company.

In this context, solar module production can be cited. Here Germany was once a technical and production leader until China flooded the market with solar cells at dumping prices. Another example is the real estate market in China, which is still really struggling. After the collapse of Evergrande (the name in this case was not a programme) and other property companies, China South City was the first state-supported property developer to be liquidated. The property crisis is also a reason for the continuing weakness of industrial production in the People’s Republic.

And the signals coming from the electric vehicle production are not really very reassuring. As it looks at the moment, there are problems there due to immense surplus capacities and quantities produced in excess of demand. Despite slowing momentum production is still at full speed. But who is supposed to buy these vehicles. And last but not least, in China there have also been for years now considerable unprofitable excess capacities in steel production, exacerbated by the property and automobile crisis and customs tariffs.

Steel capacities should disappear. Really?
Indeed, it is surprising that nobody has really thought about this much in the centrally planned economy. But perhaps now a certain rethinking has however begun. At least there are rumours in the steel market which have been spread by Kallanish News, that in the important Chinese steel provinces Hebei and Jiangsu capacity audits have begun in order to close the so-called “Zombie” steelworks and so eliminate existing unprofitable capacities. “Zombie” steelworks are defined as companies whose capacities have been shut down for a longer period of time or whose gross yields have been below the industry average for six consecutive months.

As sensible as these measures would be, the harder it is to believe that after past experience China is really taking it seriously to begin removing excess capacities and putting a stop to dumping production. After all, nothing seems to worry companies more than the loss of market share, which is comparable to losing face and feared in the Asian world. Ultimately, the state will have to implement the cuts on a small scale, which is extremely difficult even for a strong autocratic government in a country the size of China. In addition, the provinces, like for example the federal states of Germany or regions of Italy, have special industrial interests which may not necessarily be in accord with the interests of the respective federal of state government. Therefore, the cooperation actually required for implementation is often limited.

So, all that remains for the importing countries really is to completely close the borders for Chinese (dumping) imports. For despite the ideal of free trade still existing in some places, this does not mean that the continuing destruction of own production and industry by dubious business practices can carry on undisturbed. This should definitely not be allowed to happen in the car industry and in steel in Europe. On the contrary, protectionism becomes the first government duty so that the already existing dependency on China does not become even bigger.

Although there are also profiteers from dumping imports in the importing countries, these market participants are also the first to demand state protection and corresponding financial support in the event of a supply crisis, even if they have profited for years from unsustainable prices at the expense of domestic production and manufacturers. A good example is the collapse of gas supplies from Russia after the start of the war in Ukraine. Alternative but more expensive sources of supply were not possible, even if diversification would have made absolute sense and been important.

In contrast to the back and forth with tariffs, little has changed in commodity prices and in those particularly needed for stainless steel production. On the whole the summer months in this year, after a surprisingly good third quarter in 2024, are suffering from a general weakness in demand and also from a certain seasonal sluggishness in business which producers use for works holidays and maintenance work. In recent weeks, the three months future for nickel on the London Metal Exchange (LME) has been trading in a tight range between USD 14,800.00/mt and USD 15,600.00/mt, driven above all by the prevailing strength and weakness of the very volatile US dollar on the currency markets. At the editorial deadline the alloy and battery metal was trading at USD 15,300.00/mt.

Trump tariffs and copper: Surprising turnarounds
In the July edition of the Commodity News it was already pointed out that the USA, despite its own significant copper production still had to cover about half of its needs through imports. It had already been foreseeable that US President Trump would want to put special tariffs of up to 50% on certain copper products in order to boost domestic copper production, but in view of the huge import requirements that this would be problematic. In addition, there was the threat of a market spread with permanently differing prices in the USA and global trading places such as the London Metal Exchange (LME).

Just a few weeks later it was seen how unpredictable the state of the copper market and the politics of the US government really are. At the end of July already the US government surprisingly announced that refined copper products – actually the most important import category – would not be affected by the 50% tariff which had been announced. Instead this would only apply to semi-finished copper products such as pipes and cables.

After a strong price rise, this decision then led to an historic collapse on the US copper market: In one day copper futures on the New York Comex (Commodities Exchange) fell by over 20% – the biggest collapse since the exchange contract was introduced in 1988. Market participants had, until recently, thought that the tariffs would be applied to all copper imports and, therefore, had already shipped huge amounts of the metal to the USA. Now the US market is sitting on considerable warehouse stocks which can hardly be reduced in the short term. Experts expect that this surplus will weigh on the USA copper market while global prices on the LME will be able to draw closer again.

It is noteworthy that the American government has, at the same time, reserved the right to introduce import tariffs step-by-step on refined copper products from 2027 – initially 15%, then from 2028 30%. By mid 2026 a market analysis should clarify if a comprehensive import duty would be justified. This contradictory communication is not new: In previous trade questions President Trump has frequently changed his mind or made short term adjustments which have made planning considerably more difficult for market participants. Industry representatives speak of a political environment which needs quick decisions without a clear and reliable framework.

Caught wrong footed
Even one of the leading global investment banks, Goldman Sachs has been affected by the unpredictability of the US government. Just the day before the correction was announced, Goldman advised its hedge fund customers to anticipate rising copper prices in the USA. The bank also expected there to be the full 50% tariff on all products which would have increased the price premium between Comex and the LME even more. After Trump’s surprising decision, prices fell, however, by 22% – a slap in the face for many market players. Options which favoured a price increase lost over 90% of their value. Other banks also, such as Citigroup, had also built up similar positions and were caught absolutely wrong-footed by the decision.

This does show how volatile and politically motivated the copper market is at the moment. The “spread” which had been forecast between prices in the USA and the global markets did indeed happen for a few months, but then totally collapsed. US traders now face the challenge of managing enormous warehouse stocks while international producers, such as Chile’s state-owned company Codelco can temporarily breathe out again as their most import export remains tariff free for now.

In the meantime, however, the problem has not yet gone away. Should the US government introduce comprehensive import tariffs in two years, the market situation would worsen again and a spread in price would return. The price formation on Comex could then permanently be uncoupled from the LME. The situation remains uncertain then for companies which need a stable supply chain. Not being able to plan means also a reluctance to invest, however, and unfortunately no revitalisation of the economy.

The latest developments have confirmed the predictions from July that the high tariffs would probably destabilise the markets, not make them stronger, and could cause considerable frictional losses in global trade. Even without the 50% tariff on refined copper, the announcements alone started massive trade flows – with the corresponding price distortions. It also became clear why a more extensive free trade is not only just a zero-sum game, but is also to the advantage of all market participants in the supply and value chain. This, however, is not in the school and world of thought of Donald Trump. He sees the losses of one and the profits of the other and vice versa. And who would not always want to be on the side of the winner.

The next few months will show whether it is possible to reduce the built-up warehouse stocks in an orderly way and restore price clarity. Until then the copper market will remain as a prime example how political intrusion – and the unpredictability of the US President – can cause enormous short term market movements, with winners and losers on both sides of the Atlantic.

When electricity becomes a gift – the challenge of negative electricity prices
The increase of the regenerative share in the energy mix, as already explained here, is coupled with considerable challenges. The increasing input of renewable energies is having a rather unexpected effect: negative electricity prices are appearing. If the electricity supply is higher than demand then the producers even have to pay customers to accept the extra energy. This phenomenon is happening more and more, since wind and solar energy are subject to weather dependent changes.
Contrary to oil and gas, electricity is not as easily stored, and the battery storage capacity has not yet been adjusted to the rapid increase in renewable energies. Especially at midday, or when strong winds prevail then surpluses are generated which put a burden on the grid. It is too expensive and time consuming to switch off conventional power stations, which additionally creates negative prices.

State subsidies often contribute in ensuring that renewable producers continue to feed electricity into the grid even when prices are negative. Germany, therefore, adjusts its compensation for electricity fed into the grid, in order to limit the financial benefits in such cases. Grid operators sometimes pay to switch off systems to avoid overloading – an expensive but necessary measure.

Countries with a high share of renewable energies, such as Germany, Finland, Australia and the USA are especially affected. Finland experienced a dramatic increase in negative price hours from 5 in 2021 to 725 in 2024. Texas even had negative prices during times of high demand.

For investors in renewable energies, negative prices mean decreased profits, while battery storage operators and energy traders can make profits. Some customers of dynamic electricity tariffs even receive remuneration for their consumption in times of negative prices. Customers with a set tariff, however, hardly notice any changes.

Without the expansion of storage possibilities and grid infrastructure, negative electricity prices will happen more often. A greater use of battery storage and better grid connections could help to improve the balance between supply and demand, stabilise prices and distribute excess energy more efficiently.