china

Trade Winds bimonthly update volume 39

Steel prices remain volatile, steel prices and supply remains volatile within South Africa and across the world at the moment, prices abroad are seemingly increasing per ton on a weekly basis.

Currently there are no talks of a further increase for the month of August but this could change in the coming week, if no increases are announced then the rumours from earlier in the year that the industry would settle by 3rd quarter could prove true.

Another possible contributing factor is that fuel in South Africa has increased on a month-to-month basis thus increasing charges on the logistic side of things which in turn will push up production costs.

EU steel shortages to continue throughout the remainder of the year, European steel distributors have been struggling to get the necessary volumes of finished steel from either domestic or overseas suppliers, adding that they do not expect the situation to improve any time soon.

In addition, end users are also facing problems securing steel products while also having to contend with rising steel prices.

So far, mills can get higher prices and distributors, manage to pass this rise to the end users. The impact of the price increases have yet to been seen on the relevant industries and companies.

Steel sector faces potential crisis from China, the global steel market is facing short-term headwinds due to China’s unfavourable policies to harness inflation whilst aiming to achieve net-zero carbon emissions.

China’s commitment to control steel production this year has led to price adjustments recently.

As Chinese steelmakers have seen profit decline to around breakeven level, there is limited room for further price cuts, with steel prices forming a bottom, however global steel demand remains strong, thanks to the rolling COVID-19 vaccinations easing the global health crisis together with worldwide government stimulus packages.

Steel demand from construction companies and automakers has shown no signs of subsiding but steel supply remains tight due to limited shipping capacity and labour shortages.

Based on international steel prices, as well as increases in iron ore and coking coal prices, we expect China Steel to raise prices further in the third quarter.

Level 4 announced, on the 27th of June, President Cyril Ramaphosa announced that South Africa would enter a level 4 lockdown for two weeks.

It is noted that the current level is expected to be extended by a further two weeks which has once again, become detrimental to the economy.

Currently all gatherings are prohibited within Gauteng as well as Schools, Gyms and restaurants to name a few on a national level. The sale and distribution of alcohol is also prohibited unless the use is for sanitisers. There is also a curfew in place from 21:00 – 04:00.

Border updates, no current delays or issues have been reported at the various borders within Southern and Central Africa.

Delays were experienced at Beitbridge just over a week ago, however this was due to peak times of the month where cargo movement is at its highest.

Transnet reaches wage agreement, Transnet has reached a wage agreement with its recognised labour unions, the SA Transport Allied Workers’ Union and United National Transport Union.

In terms of the agreement signed at the beginning of the month, the parties have settled on a 5% increase for the current financial year for bargaining unit employees.

The company’s main focus remains on ensuring financial sustainability and operational improvements in the business, to drive competitiveness of South Africa’s logistics system in all the segments that they operate.

Ocean rates soar, shippers are paying well over 300% more per box carried at sea, yet have to contend with the worst schedule reliability that the export-import industry has had to deal with since the advent of containerisation.

The exact year-on-year increase is as high as 332% for the majority of lines.

However, the exorbitant increase in ocean freight rates is not reflected in schedule integrity and is in fact far from it.

Transpacific traffic has recorded 401 vessels being at least 14 days late or longer so far this year. For the same period, Europe-Asia traffic had 144 vessels arriving late, also by more than two weeks or longer.

Previously, the average delays had been around four days, the new average was now at least six days.

The rising cost of ocean freight rates could see traders coming up with alternatives to the status quo.

Demurrage and detention charges are also contributing to increased rates as a recent report showed that average D&D charges across the world’s 20 biggest ports have doubled since last year with an estimated increase of +104% after two weeks.

2nd Quarter shows jump in revenue for TEU, evidence of the continued upward trajectory in carrier fortunes is prominent in the latest results released by Hong Kong-based OOCL.

In the second quarter ended June 30, total volumes were 15.4% up from the same period last year while total revenues increased by 119.0%.

Overall, the average revenue per TEU was up by 89.7% compared to Q2 last year.

Loadable capacity was up 12.4% with the overall load factor 2.2% higher.

Looking at a year-on-year comparison for the first half, total revenues went up a massive 107.6% while total volumes increased by 19.5%.

Loadable capacity increased by 13.7% and the overall load factor was 4.2% higher.

Overall average revenue per TEU increased by 73.8% compared to the second half of last year.

Air cargo on the upward, the latest air cargo results for May, reveal the sector’s continued strong growth trend.

Global demand, measured in cargo tonne-kilometres (CTKs), was up 9.4% compared to May last year. Seasonally adjusted demand rose 0.4% month-on-month in May, the 13th consecutive month of improvement.  

The pace of growth slowed slightly compared to April, which saw demand increase 11.3% against pre-Covid-19 levels. Notwithstanding, air cargo outperformed global goods trade for the fifth consecutive month.

Zimbabwe planning on curbing smugglers, Zimbabwe is drafting legislation which will compel small-scale gold miners to register their operations as the southern African nation seeks to curb gold smuggling.

Government is in the process of putting a statutory instrument for all the gold producers in an effort to stop prevent the gold from being taken out of the country, similar to what the country does under tobacco where there is a grower’s number.

Zimbabwe’s gold deliveries for the five months through May plunged 24% to 7,030 kilograms from a year earlier.

More than $1.5-billion of gold is illegally shipped out of Zimbabwe every year, depriving the cash-strapped economy of crucial foreign-exchange revenues.

Looming hunger crisis in Mozambique, over 730,000 displaced people in conflict-ridden Mozambique could face a hunger crisis unless urgent funding is secured.

Insurgents have been wrecking havoc in the gas rich region of Cabo Delgado for over four years now with attacks escalating over the past year with one of the deadliest attacks taking place earlier this year where dozens were killed and thousands had to flee.

There is currently an urgent appeal for $121 million by the UN World Food Programme to support affected people until the end of the year but there is warning that the WFP could see itself rationing or completely pulling all food assistance in August if no additional funds are raised.

“He who refuses to obey cannot command”

Trade Winds bimonthly update volume 36

As expected, a big hit to the steel sector, following on from our previous publication, it was expected that there would be a steel increase for the month of June and unfortunately the news broke last week Friday as ArcelorMittal announced another increase with prices increasing across the board in the region of 8%-10% on base product.

This, once again, is another blow to the sector and downstream players with contracts and projects continuously being re-looked at as well as critical stock levels affecting delivery times.

Following extracted from an article published by CNN 19/05/2021

China and the United States are in a race for scarce commodities to rebuild their economies after the pandemic. That’s pushing prices through the roof — and is now threatening to throw Beijing’s recovery plans off course.

The cost of everything needed for China’s post-pandemic infrastructure boom, from steel and coal to glass and cement, is soaring. The price of rebar, a type of steel used to reinforce concrete, recently hit 6,200 yuan ($965) per metric ton in Shanghai, up 40% this year, and a new record high. Iron ore, which is used to make steel, has topped 1,240 yuan per metric ton ($194) on the Dalian Futures Exchange, a 25% increase since the start of the year.

Thermal coal, glass and aluminum are hitting all-time highs in China. The price of plasterboard is rising too. The situation with steel has become so acute that China’s leaders are warning of damage to the economy. And a popular idiom for defenseless — “without an inch of steel in hand” — is now being used much more literally on social media to describe desperate buyers.

China was the only major economy to dodge a recession last year when the pandemic hit, but it launched a $500 billion infrastructure-led plan to support its recovery from the slowest rate of growth in decades.

Construction is also part of the economic recovery in the United States and may accelerate soon. President Joe Biden proposed in March a roughly $2 trillion infrastructure plan aimed at helping the nation recover from the coronavirus pandemic, and reshaping the US economy to counter China’s rise.

“Small businesses are facing even tighter cash flows, because they have less negotiation power when prices increase in their upstream sector,” wrote Luo Zhiheng, chief macro analyst for Guangzhou-based Yuekai Securities. “They either have to accept higher production costs, or cut their production and sit on the sidelines.”

Recovery efforts hit a snag

The spike in steel and iron ore prices comes down to a combination of factors. Along with construction, electric vehicle production is also fueling the rise, according to analysts at Fitch Ratings. Cars need high-strength steel that can reduce weight and improve performance, and production of electric, hybrid and fuel cell cars have been skyrocketing.

China’s efforts to reduce carbon emissions has also caused steel supply to tighten, the analysts wrote in a report this week. China produced more than half of the world’s output of steel last year, and Beijing has been pressuring the industry to reduce output in pursuit of its goal to become carbon neutral by 2060.

A bruising trade battle between China and Australia may also be inflating prices. Beijing has put up barriers to entry on several Australian exports over the last year, including coal. While one of Canberra’s most important exports, iron ore, has been spared, Beijing has been looking for ways to reduce its reliance on the country.

There are already some signs that the price hikes are hitting China’s construction sites and factories, according to Wang Jiechao, chief construction sector analyst for Pacific Securities. He wrote in a Monday report that many construction companies, foundries and small household appliance manufacturers have stopped taking orders because of production losses.

“The rapid increase in commodity prices has seriously eroded the profitability of downstream manufacturing companies,” Wang added.

A recent survey of 460 construction companies nationwide revealed that many firms are feeling the pinch. Some 56% of respondents to the survey — conducted by 100njz.com, a Chinese construction industry data provider — said that the price hikes have affected their work schedules to varying degrees. Among them, 30% said they have suspended construction to control costs, while the rest have slowed projects down.

Meanwhile, 44% of the respondents to that survey said that although they are still moving ahead with construction as planned, they have had to reduce their steel purchases, which could lead them to consider suspending work in the future.

It’s also bad news for employment, according to Luo of Yuekai Securities, who noted that small businesses are struggling with the price hikes and also account for 80% of the country’s urban jobs.

Luo pointed out that April’s unemployment rate for young people aged 16 to 24 remained high at nearly 14% and their working hours decreased, “possibly because small businesses were running below capacity under the pressure of rising costs.”

Prices are rising everywhere you look

China is still exporting a lot steel, but the government is starting to discourage that in a bid to shore up supply at home. Authorities announced in April that starting this month, they would end export tax rebates for most of the steel products. Customs officials have also cut import tariffs for some steel.

Local governments, meanwhile, have opted for harsh measures in a bid to keep prices down. Late last week, regulators in Shanghai and the steelmaking hub Tangshan summoned major steel mills and ordered them to fix their prices “at reasonable levels.” Mills could face “severe punishments” if they collude to drive up steel prices, according to government statements.

Major futures exchanges in Shanghai, Dalian, and Zhengzhou have also tightened trading rules for steel or coal contracts, and have raised trading fees to cool down the market. Three top coal index compilers even stopped publishing daily updates. The move was to “stabilize market prices,” the state-backed China Coal Transportation and Distribution Association, one of the index compilers, said last week.

Still, prices for the metals remain elevated. And some analysts have pointed out that it will be tough for China to reign in commodity prices without compromising elsewhere.

Certain areas within South Africa are again plunging into total darkness without any prior notice from Eskom as the embattled state power supplier continues to struggle to keep the lights on across the nation which in turn affects all industries within the country, adding further costs to production as producers look to other means of power supply.

South Africa’s manufacturing surges, by 3.4% month-on-month according to data received for March.

The above-average output lifted the volume index to 99.6, a level last seen in January 2020. Last year the index had dropped to 54 by April, the lowest level it had been on record.

In comparison, by March this year, the level of production was up by 4.6% year-on-year.

It is noted that the annual recovery was driven by the manufacturing of food and beverages, as well as motor vehicles and parts.

Border updates,  and the recently opened One Stop Border Post at the Kazungula Bridge between Zambia and Botswana has already resulted in a significant reduction in the time it takes hauliers to use the once-treacherous Zambezi River crossing.

Delays, especially during last year’s coronavirus outbreak which caused mass disruptions on either side of the river, were further exacerbated by heavy rains earlier this year, with at least, on average one if not two of the three pontoons frequently being out of order, the rush to make up for lost time often resulted in trucks slipping off the ageing ferries.

However, this seems to be a thing of the past now as transit times have gone from an average 40 hours in April to 22 hours since the bridge opened on May 10, operations are going smoothly with minimal teething issues.

Transporters can now rejoice as one of the region’s most notorious border crossings has been wholly transformed.

No further delays or updates have been reported at Beitbridge or Kasumbalesa.

Protests claim a life, and the South African Police Service has confirmed that a driver burned to death in his cab last night on the outskirts of Harrismith after protesters threw stones at his truck on the N5 highway.

Protests over service delivery flared up earlier in the week along the N5 and N3 highways, major pass throughs between Durban and Johannesburg.

Whilst the police have been monitoring the stretch of road during the week, unfortunately the loss of life occurred.

Record copper price not all good for Zambian miners, and copper mining companies in Zambia are at odds with the record prices of copper, which have brought them significantly higher royalty bills than previously under the country’s current tax regime.

Zambia uses a sliding scale to determine its mining royalty rate for copper, linked to the international copper price. The scale is adjusted in that royalties are paid at higher levels as the commodity price climbs and is reduced as prices fall.

Starting at the minimum threshold of 5.5% when the copper price is less than $4,500/mt, rising to 10% when the copper price is $9,000/mt or higher. Which in turn means that copper mining companies are currently paying the maximum threshold for mining royalties.

Since 2019, when the new Zambian mining tax regime came into effect, mineral royalty payments have not been treated as a deductible expense when calculating corporate income tax. Income is taxed at the rate of 30% a year for base and industrial minerals miners. The effect of this is that mining companies are paying “double tax” as the companies are taxed on income that has already been paid over as a royalty.

Zambia is highly dependent on mining as its major productive industry, with the sector contributing 10% to the country’s GDP in 2019. Zambia’s mining sector accounted for 28% of the government’s revenues and 77% of export earnings, with copper accounting for over 90% of the sector’s exports.

In 2020, large scale copper mining companies recorded an increase in total copper production of 9.7% year on year.

Kamoa-Kakula starts production ahead of schedule, the joint venture between Ivanhoe Mines and Zijin Mining has achieved production several months ahead of schedule.

Whilst the company has described this feat as a “historic achievement” President of DRC, Felix Tshisekedi has said that the country is open for business and investment.

Although this exploration journey started well over two decades ago, it is also noteworthy that the Kakula deposit itself was discovered just over five years ago, which is remarkable progress by the mining industry.

In April, the Kakula mine mined 357,000 tonnes of ore grading 5.70% copper including 121,000 tonnes grading 8.40% copper from the mine’s high-grade centre.

Kakula is anticipated to be the highest-grade major copper mine in the world with an initial mining rate of 3.8-million tonnes a year, with an expected climb to 7.6-million tonnes a year in the third quarter of 2022.

Phase 1 is expected to produce 200,000 tonnes a year of copper and phases 1 and 2 combined are forecast to produce 400,000 tonnes a year. The current copper price also allows Ivanhoe and Zijin to mull over the acceleration of the Kamoa-Kakula Phase 3 concentrator.

France, the latest nation to aid Mozambique, after meeting with the French president, President Filipe Nyusi of Mozambique has advised that France has shown “complete willingness” to provide whatever is necessary for Mozambique’s fight against terrorism in the northern province of Cabo Delgado.

France has shown support but has left sovereignty in the hands of Mozambicans.

This appears to mean that any French assistance in the fight against Islamist terrorism will take into account the lines of intervention laid down by the Mozambican government.

The two countries must advance quickly to sign the agreements which will define the type of support granted by France.

As reported in the previous publication, the Portuguese government has also stressed its readiness to assist Mozambique in the fight against terrorism.

Some Portuguese troops are already in Mozambique providing the Mozambican defence and security forces with technical assistance and training.

The aim that the Mozambican government is to build up the capacity of the country’s own military than to rather have foreign intervention.

“Rain beats the leopard’s skin but it does not wash out the spots”