The centre of the universe is on the move

The announcement of tariffs on steel and aluminium imports to be implemented by the USA had hardly any real influence on nickel prices on the London Metal Exchange (LME). After a little cough, which took prices down to just above USD 13,100.00/mt, nickel, an important base metal, traded again at the present levels of around USD 13,800.00/mt and so remained, more or less, unchanged over the previous weeks. A breakthrough on the resistance level of USD 14,000.00/mt could not be sustained. The stability is even reasonable, since the quantitative needs of nickel will hardly be affected by tariffs. Donald Trump has now made true his twitter broadcast and has passed legislation for the implementation of import tariffs. He has justified this step by saying it is in the interests of national security. Rust and corrosion can hardly have been meant by stainless steels.

What can be said with certainty is that the President, by taking these steps, is harming one country above all others, and that is the United States itself. But presumably, he is not concerned with one or the other. All that concerns him is his “Make America great again!”. And yes, the USA was once great: an economic locomotive, a global sheriff, a super power, protector of democracy and so forth. And the USA could still be great, if voters just reflected on the consequences of these unbalanced politics and, at the latest, act accordingly at the next election. Just how bitter it can be to fall for the simple slogans of populists is just what the British are now experiencing. Unilever has just announced it will move its headquarters in London over to Rotterdam.

More and more, the United States of America, as also Russia before it, has to become accustomed to the fact that the centre of the universe has moved a little. In regard to population and economic importance, and also, to a certain extent, military importance, Asia has become more the one to play first fiddle. For many self-esteemed US Americans, used to success, this can be a bitter pill to swallow. So it can give great satisfaction when the President, in best cowboy style, can pass legislation – very handy as he does not have to ask or convince anyone – and can really make the world sit up and show just who is wearing the trousers. But all of this is nothing new. In the 1980’s there was a genuine Western hero who was US American President, namely Ronald Reagan. Also with a large trade deficit, he had already threatened other countries with trade tariffs and isolation in order to make existing bilateral free trade agreements more advantageous for the US economy. He did not carry this out though, as a lack of competitiveness is not helped at all by protectionist measures.

At the Handelsblatt conference “Future of Steel”, which has just finished in Dusseldorf, the import tariffs were a dominant topic, especially as the USA is an important sales market for non-too few companies. But, in the words of a big producer in Europe which has been exporting certain steel goods to customers in the USA for the past 50 years, it should be asked why this would change with tariffs imposed. A US American competitor could have emerged in these last 50 years, who might have brought such customer relations into question. On the whole, the feelings coming from industry were that an analysis could only be made when it was known which goods would be affected. Despite the seriousness, it would be an exaggeration to speak of a big panic or profound concern amongst producers caused by these import restrictions, especially as many of the conglomerates have their own sites in the USA.

A further big subject was of course the digitalisation of the value chain in the steel industry, whereby, and this became more than clear, this field cannot be left to IT experts and company advisors. These groups very often use the same standard approaches for their own vested interests. After a rhetorical, didactic and very entertaining talk by a respected IT speaker from a steel works, the question was asked what influence the digital revolution could have on commodities (primary and secondary), and which could the consequences be for the recycling industry. The answers to these justified questions, asked at a steel conference, surprisingly remained hazy and vacuous.

A serious answer could be the following: Firstly, a digitalisation, by accelerating new technologies or making then possible, will possibly lead to shifts in requirements for certain commodities. On the other hand, however, even in a digitalised world, there should still be a need, for example, for steel and stainless steel, and so also for the necessary primary and secondary commodities. Unless it would be assumed that the whole world becomes totally virtual and everyone remains dematerialised in their beds. Digitalisation will also continue to optimise and professionalise processes in the steel and recycling branches. However, there is a whole list of other industries which would be influenced in their structure and processes, leading to new paradigms, for example in the finance industry. Another big topic was the circular economy, and to a certain extent not expected by this author at the conference. The presentation by the President of the Federation of German Steel Industry (WV), Jürgen Kerkhoff, about the position and perspectives of the steel industry in Germany had many cross references, but also a part exclusively dedicated to the subject of the recycling economy.

The Chief Commercial Officer of Tata Steel, Dr. Henrik Adam, put it in a nutshell with his remark “we have to think in cycles”. The author has seldom witnessed this and is highly delighted about the fact that in the meantime, the steel industry is so easily, positively and openly analysing and discussing the subject of scrap and recycling. We have always known (of course quite unselfishly) that steel recycling is an important success factor for the future of the (European) steel industry. Following the motto “the supercycle is dead, long live the supercycle”, in analyst, financial and investor circles, it is intensively being discussed whether, after the considerable price increases of commodities in the years 2000 to 2007, it is now time for a new, that is to say, a continuation of the old supercycle. The Malaysian online newspaper “The Edge” asks the question: “A new commodity supercycle in the making?” and quotes, not very surprisingly, Jim Rogers, often called the (commodity) investment guru. It can also be read that the Bloomberg Commodity Index (BCOM) has reached its highest level since August 2015. So far, so good. This, however, as sole reason is still somewhat thin.

It becomes more interesting, when it can be read that the investment bank, Goldman Sachs, is extremely bullish for commodities in the coming months. And partially weaker stock markets also seem to support this view. As a reason for a possible boom, Goldman Sachs sees a significantly strong pickup of the global economy and the good utilisation of factories, which is generating high commodity requirements and causing existing warehouse stocks to be depleted. On top of this, Jeffrey Currie, head of commodity analysis with Goldman, says that, historically, commodities have seen good returns especially during rising interest cycles. In the USA we can surely soon be speaking of such a cycle of rising interest rates, although in Europe it will be some time yet before this happens. And even if, in the last few months, there have been a few corrections in the short term on the commodity markets, analysts, such as those also from Citigroup, have not changed their opinion.

The large HSBC bank, however, sees the situation in less general terms and also not quite as positively. The same questions were asked in a Global Commodities Webcast. But the caption on the invitation already showed the direction in which this was heading: “Better … but no new supercycle”. It is expected that there will be a gradual firming up of commodity prices caused by global economic growth, and an increasing absorption of the supply surplus. But it is doubted whether there will be a new supercycle, which must also be accompanied by considerable new inflows of investment funds. But at the same time there is the general consensus that certain commodities, such as the battery metals cobalt and lithium, are certainly suitable for developing a sustained bull market.

The Philippine Mines and Geoscience Bureau (MGB), according to Metal Bulletin, has published data about nickel ore production in the Philippines in 2017. After the export ban of unrefined ores out of Indonesia, especially to China, which in recent times have softened considerably, the Philippines had, in particular, more or less closed the supply gap by an increased production. Not only for this reason did nickel prices make a dive during the middle of 2014, as the market had actually reckoned with big gaps in supply after the Indonesian export restrictions. After the easing in Indonesia, it would now be expected that Philippine production, due to its generally lower quality of ores, has fallen in favour of Indonesia.

Numbers do, however, present an inconsistent picture. Production in 2017 is supposed to have fallen by 6% to 23.35 million metric tons, whilst in the same period the nickel content of ores is supposed to have risen by 5% to 315,528 tons. In other words, smaller amounts, but a higher quality. As the MGB reports, amounts in 2017 had been influenced by environmental measures and bad weather, which had a negative influence in the first nine months especially. From January to September the MGB has calculated a minus of 11%. It looks then highly likely that in the fourth quarter of 2017, there was at least a partial compensation for the losses made in the quarters before.