Commodities Roundup: A Shaky Start, Tesla Layoffs and China’s Growth

For the buyers and category managers out there, especially those of you deep in the weeds of buying and managing commodities, here’s a quick rundown of news and thoughts from particular commodity markets.

From price movements to policy decisions, we scour the landscape for what matters. This week:

Shaky Start

MetalMiner’s Stuart Burns wrote about the shaky start to the new year, as firms are mulling whether now is the time to invest in new capacity when trade uncertainty remains high.

“2018 was a stellar year for the U.S. jobs market, but recent figures suggest part of that may have been the sugar rush of the president’s tax breaks,” he wrote.

“That effect is beginning to wane now. Investors are looking at slowing growth in China and Europe, trade wars and a shaky U.S. housing market and asking: What does 2019 hold?”

Burns explained that actions by the Federal Reserve will bear monitoring, in addition to the general state of the Chinese economy and the ongoing U.S. government shutdown.

“But all is not gloom and doom, and a recession is by no means a certainty,” he added.

“A resolution to the trade dispute with China would lift sentiment. Settlement of the U.S. government shutdown would inject funds back into government employees’ pockets, creating a welcome fillip to an otherwise depressed start to the year.”

Indian Auto Sector Investment

According to MetalMiner’s Sohrab Darabshaw, the Indian government foresees between $8 billion and $10 billion in local and foreign investment by 2023.

The sector attracted $16.5 billion in foreign direct investment from 2000-16, according to a report by the Ministry of Heavy Industries and Public Enterprises.

EU Steel Safeguards

In response to the implementation of the Trump administration’s Section 232 steel and aluminum tariffs last year, the European Union has sought to protect its own steel industry from diverted steel flooding the trading bloc.

This month, EU member states voted to implement new steel quotas lasting until 2021.

Axel Aggert, director general of the European Steel Association (EUROFER), offered a mixed reaction to the move.

“EU steel imports rose by an unprecedented 12% in 2018. For every three tons of steel blocked by the U.S.’s Section 232 tariffs, two tons have been shipped to the open EU market,” Eggert said.

“It was important that final safeguard measures be approved by the member states; these will now be implemented by 4 February 2019. While we welcome this endorsement, we are nevertheless worried that the form of the final measures may undermine their intended safeguarding function. It is therefore vital that the Commission closely monitors EU steel demand development and adjusts the generous increase of the tariff-free import quota accordingly in July 2019, if necessary.”

Steel Prices Continue to Lose Momentum

MetalMiner’s Irene Martinez Canorea touched on steel prices earlier this week, which appear to have continued to lose momentum (not including plate prices).

Both Chinese and U.S. steel prices have been on the decline since late summer 2018.

“Historically, steel prices move lower during Q3 and part of Q4. When the budgeting season starts, mills begin to raise steel prices,” she explained.

“For the past three years, steel prices have increased at the end of Q1, just a little delayed from the general Q4 increase.

“However, this year the price increase remains in hibernation.”

BHP Production

Miner BHP recently reported its production totals for the second half of 2018, during which the company suffered a $600 million negative impact due to operational difficulties at several projects.

Petroleum and copper production both fell 1% year over year, while iron ore production was up 2% year over year. However, a train derailment in November impacted volumes at Western Australia Iron Ore, and saw to a 6% year-over-year production decline in Q4 2018.

Metallurgical coal production rose 2% year over year in 2H 2018, while energy coal production fell 5% year over year.

Tesla Slashes Workforce

In a letter to staff, Tesla CEO Elon Musk outlined the company’s next step and its need to produce more affordable electric vehicles.

Tesla moved to cut its workforce by approximately 7%.

“We unfortunately have no choice but to reduce full-time employee headcount by approximately 7% (we grew by 30% last year, which is more than we can support) and retain only the most critical temps and contractors,” Musk wrote. “Tesla will need to make these cuts while increasing the Model 3 production rate and making many manufacturing engineering improvements in the coming months.”

In addition, Tesla will have to grapple with a federal tax credit for electric vehicles that has already begun the process of being phased out (as Tesla has eclipsed 200,000 in U.S. sales). Introduced in 2009, the tax credit comes in at a range of $2,500 to $7,500, but begins a phaseout period once an automaker reaches 200,000 in U.S. sales.

The Question of Growth in China

As mentioned previously, the state of the Chinese economy is a question being pondered by market watchers around the world given its integral role as a driver of growth in the global economy.

Some question the veracity of government growth figures, Burns notes.

“If Beijing’s growth numbers are being overstated, we all have a problem,” he explained. “Such is China’s size and importance now in the global economy that if the country sneezes, we all catch a cold.”

In addition, the fitful U.S.-China trade talks does not help to assuage investor concerns.

“This week’s rejection of an offer by two Chinese vice ministers to travel to the U.S. for preparatory trade talks highlights how far the two sides remain apart,” Burns added. “The proposed visit was canceled by the U.S. side because of a lack of progress on key issues, according to the Financial Times. It is difficult to quantify the impact the trade dispute is having on the Chinese economy, but it is probably widespread, impacting confidence, consumer appetite and investment.”

However, a senior China trade official is expected for talks next week in Washington, Trump officials said Thursday.

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