Three meals a day are sufficient

The position is difficult, but differentiated
The situation in the global economy remains complicated, but not hopeless if certain connections are understood. At present, the three big economic blocs, the USA, China and Europe, are simultaneously showing signs of weakness. Only the ASEAN region stands out positively, with a growth expectation for 2024 of around 5%. Industrial production and manufacturing are particularly affected by the recessionary tendencies. The purchasing managers’ indices do not move out of the contractive or neutral zone.

The fact that there is also a tech (shares) crisis is then really no surprise, given the previous share price increases and excessive euphoria, and must, therefore, be “sweated out”. After all, while the tech sector in the USA is important, it is not the sole backbone of the economy. For a long time, the industrial sector was even less affected than in Europe. And the always optimistic American consumer is a constant source of stable demand with his credit card.

In China there is a massive problem with the real estate sector. This is also not new and has been publicly known for a long time now. This is not the end of the Chinese economy, for the government will do everything possible to defuse the problem, since the legitimacy of the (omni) power of this autocratic system depends on a steady increase in prosperity and the competency to solve problems. After this took rather a blow with Covid-19, when the political responsibility was difficult to keep away from the President, hardly anymore mistakes can be allowed. In this respect, motivation should be as high as possible.

It can also not be forgotten that in China and other Asian countries, where Chinese developers and building contractors have real estate projects which are in difficulties, there is a very large population which strives for more wealth and prosperity. In this respect, one can be optimistic that the vacant apartments will eventually be filled, and the half-built ones will be finished. A larger real estate shark with his luck might perhaps gradually swallow up the smaller sharks, bringing their activities to an end. The continuous increase in surveillance and repression also shows how nervous and tense the government apparatus is.

Industry looks back on the golden years.
As far as global industry is concerned, it should perhaps be pointed out that in the years 2021, 2022 and in some sectors, such as the car industry even in 2023, companies had record years. Because of the change in private households’ financial budgets and spending in the purchase of durable consumer goods and also in the renovation and enhancement of houses, apartments and gardens – above all due to massive restrictions on other potential expenses such as travel and gastronomy – an unprecedented and quite long-lasting special economic boom has been created.

The announcement of a value added tax increase is not able to create such a sustainable high demand in the long term. But the effects are comparable because the corresponding private “investments” are either brought forward and also in any case only made once for a certain number of years before there is a renewed demand for replacement or upgrade. In this respect, it had and has to be clear to all companies that this additional demand can not last forever. It could even be expected all the more that investments brought forward can cause a lull at first at lower levels in the following years.

Since, however, not all households have brought forward their spending and also not all countries had such rigid corona restrictions for as long as in China and Germany, an increase in demand for durable consumer goods can certainly be expected after a certain dry spell is over. In this respect, then industry which profited from the pandemic, should actually be happy not to have been confronted with the problems of the covid-19 crisis. They have made their turnover at least once, while colleagues for sectors such as gastronomy, tourism and entertainment, can hardly recover their lost turnover, for nobody thinks that more than three meals a day makes any sense.

A broad mood change is needed urgently
If a move is made from the general view above and a more short-term perspective is taken, then it can unfortunately be confirmed that the improvement in mood, after the certainty of the start of interest rate cuts in the USA, was hardly permanent. And even if a lower interest rate cut of 0.25% in September is now considered certain, then there was just a very short upswing in commodity prices and also in nickel seen up to the end of August, of just over USD 17,100.00/mt. In the meantime, the increases have since decreased and nickel is now trading at USD 16,000.00/mt. Predominant again are the worries of a further weakening in the economies in the big economic nations and with it, a risk-off attitude among investors and capital markets.

To bring about the urgently needed change in mood, to put it in the words of the present German Chancellor, a “double bang” is necessary. Therefore, it would be desirable for the Federal Reserve (the Central Bank of the USA) to not only treat the markets with a single interest rate move of 0.25%, but better surprises with a double rate cut of 0.50%. This could brighten the outlook. According to opinion here, a somewhat higher inflation rate would be much better to take than a zero or negative growth. In fact, “greed” inflation, with prices driven up by companies, employees and unions, has a not insignificant share in the slow decline in inflation and the resulting high interest rates. Commodity and energy prices have long stabilised. But this is how it is.

Research of Commerzbank is no longer sure about the course of the interest rate cuts by the European Central Bank (ECB). Now that the key interest rate has already been cut once by 0.25% to 3.75%, the question now is what will happen next and how low the interest rate will probably fall. Analysts expect further interest moves to 2.75% by Spring 2025, but then do not see more cuts following. An explanation for this – in the opinion of Commerzbank – are structural inflation drivers which are described quite strikingly as “5D”.The “5D” in more detail are decarbonisation from energy transition, deglobalisation from the increasing defragmentation of world trade, demographic change, as well as increasing investment in defense and, last but not least, government investment promotion through the increase in public debt and deficit. If Commerzbank is right, the ECB’s monetary policy scope for further interest moves, or big jumps should be manageable.

Japan’s Central Bank against the trend
After the Japanese Central Bank has been paying negative interest, or it should be said, has been receiving interest for their debt, for half a decade, at the end of July 2024, it raised its key interest rate for the first time again, ending years of cheap financing. The loose monetary policy was primarily due to the continuing inflation, slow economic growth and demographic challenges, which Japan had been struggling with since the 1990’s. The cheap credit for Japan was, however, a double-edged sword, as it indeed boosted exports for the economy, but also led to so-called zombie companies.

Due to the lengthy low interest period the Yen is vulnerable to the carry trade. The carry trade takes advantages of discrepancies between global interest rates. Simply expressed, a low interest currency is loaned and swapped (sold) for a higher interest rated currency or a higher yielding asset, where the trader aims to capitalise from the difference between the interest rates. Low yielding currencies, such as the Japanese Yen and the Swiss Franc have been used for this type of business for a long time, especially the Japanese Yen, whose interest rate has been at -0.1% for more than five years.

When the Japanese Central Bank then raised their key interest rate, and at the same time weak US employment data was released, the Yen climbed by 11% against the US-dollar. Reuters reported that “macro funds had been caught wrong footed in this trade” and quoted Mark Dowding, Chief Investment Officer with BlueBay Asset Management. As most institutional carry traders work with a high leverage, the impact on the markets is greatly increased when margin call on their positions becomes due, which led to a broader share sell-off at the beginning of August.

Also, the purchase of Yen with the rise in the exchange rate as described above played a part in this. While the era of negative interest rates for Japan’s central bank is now over, all eyes are now on the US Federal Reserve (Fed), as discussed above. Weak economic data, which point to a recession, and corresponding corrections on the stock exchanges have prompted the market or traders to already price in the interest rate cuts in September by the Fed. The Fed has also indicated that the time is ripe.

Soft economic data from China
Since the opening of its doors to global trade, China has developed into an economic locomotive and industrial powerhouse. With an annual average growth rate of 9% since 1978, the country has proven to be impressively resilient, even weathering storms, such as the financial crisis of 2008, which is, however, not without controversy.

Critics argue that the relentless pursuit of growth is not sustainable, as the economic model is driven by government subsidies and investment. In turn, China’s local governments and industries have accumulated mountains of debt, especially in the real estate sector, and it is not certain how long this can be upheld without a correction. It is therefore worrying that the Chinese industries are signaling a slow-down.

The world’s largest steel producer China Baowu Steel Group, in its half year report, warn that the Chinese steel sector is faced with extraordinary times ahead as the current environment appears to be more difficult than the crises of 2008 and 2015. Exports from China underline this reality, since they will reach more than 100 million tonnes this year, the highest since 2016, amid very low domestic demand, according to Mysteel. The domestic demand has turned down due to cautious consumers and the faltering real estate sector, and the surplus now is reaching world markets. In this respect, it is certainly necessary and correct that other economies protect themselves against possible dumping.

Recent economic data and indicators from China also suggest that the industrial locomotive is running out of steam and the time may be ripe for a change in policy. The NBS and Caixin purchasing managers’ indices for manufacturing for August was at 49.1 and 50.4 respectively, and shows that Chinese manufacturing is in contraction area, while an important indicator for industrial activity, the Beijing Pollution Index, also fell rapidly in August this year, according to Steno Research.

Global end-user demand could also be a big obstacle in the short term for China and the other industrial nations, since consumers are cautious after a long phase of inflation with their (self-)limited budgets. This is also seen in the luxury goods sector, for example. Luxury goods companies are in a crisis, not only because the brand-loving Chinese middle and upper classes, with good purchasing power, are refraining from buying luxury handbags for example, with production costs of a few hundred US-dollars for prices of several thousand US-dollars. Lower interest rates in the USA and Europe could stimulate spending again, hopefully not just in the luxury goods sector, but it is currently difficult to estimate how strong the impact will be (see also above).

Stainless steel price increases due to EU import tariffs?
The European Commission is imposing countervailing and anti-dumping tariffs on imports of cold-rolled stainless steel from Taiwan and Vietnam, which in some cases will lead to tariff rates of almost 40%. These measures follow an investigation, which showed that the countervailing duties on Indonesian imports were being circumvented. Therefore, the tariffs have been extended to include imports from Taiwan and Vietnam.

In addition, the Indonesian anti-dumping tariff of 19.3% has also been extended to Taiwan and Vietnam, as there is evidence that companies in these countries have been evading the anti-dumping tariffs. Some stainless steel companies in those countries have been exempt from one or both tariffs, while others now face significant costs. The EU commission has suspended the current Taiwanese anti-dumping tariff of 6.8% for companies which are not exempt from the new rate in order to avoid a double levy of tariffs. In cases where the EU safeguard tariff for steel imports applies, only tariffs apply if higher than the general duty rate of 25%.

Eight companies from Taiwan and Vietnam were exempted from the new anti-dumping tariff rate of 19.3%, including Yieh United Steel, Chia Far Industrial Factory, Yuan Long Stainless Steel, Tung Mung Development, Tang Eng Iron Works, Walsin Lihwa, Posco VST and Lam Khang Joint Stock Company.

It remains to be seen to what extent the stainless steel importers adjust their supply chains and therefore import prices will rise and/or delivery times will be extended. Why look so far away, when the sustainable, European “green”, stainless steel, produced from stainless steel scrap using renewable energy, is so close.