When the tide turns…

The climb continues – new high
Similar to the picture on the international stock exchanges, the rise in nickel prices also continued on the London Metal Exchange. In the meantime a new high of USD 14,785/mt was reached. In the previous month, prices were initially below USD 13,000/mt before then firming up, without, however, reaching the USD 14,000/mt mark. This meant that the average in July for the 3 months nickel future was “only” USD 13,389/mt. Now, it would be too simple to attribute the reason for the rise in nickel prices solely to the expansionary monetary policy of the central banks and the corresponding positive investor sentiment. Of course, to a certain extent this does play a role, and in the middle of a crisis can seem astonishing, particularly in the stock market. However, increasingly more fundamental data and indicators – at least for the moment – point to the downward economic trend having been broken and is turning upwards again.

Broader database enables better assessments
At the beginning of the crisis, any assessments were fraught with great uncertainty due to lack of data and comparative periods. In his webinar of 18th August 2020, Stefan Schilbe, the chief economist of HSBC Germany, in speaking about the economic situation and prospects, was able to refer to larger data sets from the previous crisis months since the beginning of the year. This allowed for more solid statements about the situation. The global Purchasing Managers’ Index (PMI), which shows the procurement activities of companies and is therefore an important early indicator, reached its low in April 2020. July data already showed a clear improvement and largely trimmed for growth again.

Meanwhile, it is evident from economic data in China that the recovery there is V-shaped; although more recently there has been a certain slow down. However, there are considerable sectoral differences. In the USA, on the other hand, consumers remain sceptical. No surprise, when the unemployment rate of 3.5%, due to very flexible labour market laws, shot up right away to 14.7%. There has been a slight improvement of late, but the rate is still around 10%. This does not help to better the consumer’s mood, for even the gross national product (GNP), according to the expectations of HSBC, will also shrink by an historic rate of 6.4% in 2020. For 2021, a GNP growth of 3-4% is expected again, so that the pre-crisis level will not yet be reached in the coming year.

Saving rates are increasing and offsetting consumption
Almost everywhere in the world, the saving ratio of consumers has risen significantly. This will result in demand building up, which can only be released at some point later in time. In order to speed up the process of creating consumer demand, in the private sector in particular, the German government has temporarily lowered the VAT rate from 19% to 16% until year end. The picture regarding saving preference is similar throughout all the European Union. An industrial recession had already been manifesting itself for the last eight quarters before this next crash came, helped on by Covid-19, in the second quarter of 2020. According to HSBC, demand for capital goods had already been hit before corona, but was now at a low point. For the third quarter of 2020, there are, therefore, definite expectations that the recession for the industry may be over for the time being.

There are, however, considerable differences in the severity of the crisis between individual countries, not only because of the timing of the pandemic outbreak, but also due, above all, to the structure of the differing national economies. The financial and sovereign debt crisis of 2008/2009 had already shown that a healthy mix of service, commerce and industry, had, generally speaking, clearly reduced vulnerability through diversity. Despite all else during this crisis, industry could hold its own in a direct comparison, irrespective of previous comments.

Diversified economy reduces risk
In this way, the German economic slump in GNP in the second quarter of 2020 was only around 10%, while economies heavily based on the service industry were hit considerably harder, such as that of Great Britain which had a decline of about 20%. In one fell swoop, the old economy is being honoured again alongside the digital economy. This is also seen in China, where soaring industrial production and demand for raw materials is causing metal demand to increase and prices to rise. And, at attractive price levels, Chinese purchasing managers also seem to be stocking up for the future, as they have done in previous periods of weakness.

However, despite positive signs, a V-shaped recovery like in China is not expected in Germany and Europe. It is rather more likely to be a growth curve in the shape of a square root. This is a quick recovery at a low level followed by a longer period of slow growth. Therefore HSBC does not expect Germany to meet the pre-crisis level of 2019 until 2021. It also has to be seen how the temporary lifting of the obligation to file for bankruptcy affects further development, something which credit insurers are keenly keeping a watch on.

It is probably just how the top investor Warren Buffet described a situation, and now quoted by Mr. Schilbe: “Only when the tide goes out do you discover who’s been swimming naked”. Incidentally, HSBC considers the very weak US Dollar against the Euro, at the moment trading over 1.19 USD/EURO, to be exaggerated and not caused by economic differences. There are, rather, political and speculative reasons at work here which is why the USD towards year end, according to predictions, should strengthen again to 1.10 USD/EURO.

Is politics aware of the cost?
The aforesaid, basically positive, development will also please German politicians if the success can be put to good use before the upcoming parliamentary and government elections next year and they can claim this success, as usual, for themselves. But this cannot be totally relied upon just yet, as this very dynamic pandemic can all too quickly turn everything on its head, and the gigantic rescue packages, some of which were spread out using a big watering can, can have horrendous consequences, which is often hidden. This is what the future generations have to bear.

There is also a significant difference to the financial and sovereign debt crisis of 2008/2009. At that time the main focus was on stabilising the banking sector, achieved through relevant monetary policy measures by the central banks, but above all, through the assurances and confidence building by governments and central banks, and also through heavy issuing of guarantees. In retrospect, the takeover of liabilities on such a huge scale was necessary and successful. Many of these guarantees, however, once markets had calmed down and recovered, were not even needed any more, so that the costs of overcoming the crisis, in end effect, were clearly not as huge as had been originally expected. Even certain outsourced, toxic securities portfolios could be sold at a profit or at least with loss less than had been expected, favourable to tax authorities.

The whole economy is affected and seriousness is required
This is definitely different today. The economy has been hit on all sides. In June over 12 million employees in Germany were registered as working short-time. And these people do not receive guarantees, but real money. As recently reported by the media, because of difficulties caused by the crisis, 60 businesses are interested in a direct capital participation in the companies by the state, as has already been demonstrated by Lufthansa. Of these, there are already concrete checks being made on 14 companies. They also genuinely need the funds in real money. This does effectively prove that this time, we are facing problems of a different dimension and just virtual amounts of money will not suffice.

It is doubtful whether the political decision makers are actually aware of this. If the photos, which have been circulating of the “Bavarian King”, Minister President and aspiring candidate for chancellorship, Söder, with the (still) Chancellor at a mask ball á la Sissi at the Herrenchiemsee Castle, with children dressed in traditional costume etc., are anything to go by, then nothing can be a surprise anymore. But the public seems to like this so much that the trailblazer of the German corona fight is even applauded, while the blunder of possibly infected people not being informed for days of their condition goes by without question.

LME wants to offer new contracts in order to support the “Green Revolution”
The LME is continuing on its chosen path to bring about a green change to increase sustainability. In a consultation paper published mid-August 2020, the commodity exchange describes how it would like to meet the needs of global expectations in regard to ethical and ecological responsibility. The publication has, at its core, the recycling sector, since the recycling of raw materials will become central in attaining a sustainable economy.
Three new product categories are listed in detail: an aluminium scrap contract for the US-American market, in order to increase the attractiveness of can scrap, a lithium contract to offer risk management for the battery and automobile industries and then two more steel scrap contracts for India and Taiwan after steel scrap contracts had already been introduced in the USA and China. The way to a stainless steel scrap contract is not very far now.

With the new financial products the LME is also addressing new customers who could not previously hedge against their respective risks. It remains to be seen if the new hedging instruments will find market acceptance. Not all recent innovations were successful, not being able to attain the necessary exchange liquidity. In comparison to other contracts, such as the nickel future, the new products are not subject to physical delivery, but are settled solely in monetary terms based on price changes.

As early as the end of 2018, in a push for more sustainability, the LME announced that by 2022, it intended to comply with OECD guidelines to fulfil due diligence in supply chains for minerals from conflict and high risk areas. At the end of April 2019, the LME revised this target for cobalt. Too many cobalt producers felt they could not reach this target in such a short time.