EuroWire January 2019

Transatlantic cable

“Import tari s and counter-tari s are the biggest inhibitor to the expansion in [US] manufacturing” and trade strains are “restricting demand,” Mr Fiore said in an interview with Bloomberg . Of related interest . . . † With Germany’s export-driven economy at risk from US President Donald Trump’s stepped-up trade war with China, a German investment push is bringing the two countries closer together in spite of – and because of – the rising tensions prompted by Mr Trump. Bloomberg TV provided these examples of how deep and wide the commercial ties between Germany and China have already become: (“Why Germany Is Betting on Trade With China,” 11 th October) † Piling into China with Bosch drills, Mercedes-Benz cars and Siemens turbines has made the Asian country Germany’s largest business partner for the past two years † Total trade between the two reached $179 billion in 2017, double the UK level and triple that of France † Germany’s special status in China became clear in July 2018 when BASF SE announced a $10 billion plant in Guangdong province: the rst large manufacturing site in China entirely owned by a foreign chemicals maker † Now, BMW is ploughing $4.1 billion into its Chinese joint venture, taking advantage of a new policy to let foreign companies assume majority control of their local partnerships “If the Western world doesn’t get its act together in how it designs free trade,” China could snub the international system and turn Belt and Road into “the new WTO,” Joe Kaeser, CEO of German engineering giant Siemens, told Bloomberg TV . Mr Kaeser’s reference was to Chinese President Xi Jinping’s Belt and Road Initiative, intended to create an economic zone linking Asia with Europe, the Middle East and Africa, with obvious potential to eclipse theWorldTrade Organization. While German business leaders perceive a possible challenge to the post-war order, it is a chance that, Bloomberg commented,“they can hardly pass up.” † The trade war between the USA and China might have been expected to hurt President Trump’s Republican party in states vulnerable to higher tari s and Chinese retaliation. Results from the 6 th November midterm elections – occurring halfway into the president’s term in o ce – indicate that this did not happen. The Trump steel and aluminium tari s were a hot-button campaign issue in rural states and the Rust Belt, notably in the steel-producing areas of Pennsylvania and Ohio. These places have much to lose in the dispute with China, which countered with duties on an array of American exports. Yet several candidates who opposed the duties were defeated, while some who backed themwon their races. While the recapture of the House of Representatives by the opposition Democratic party will almost certainly rein Mr Trump in, the election outcome gives him not much incentive to soften his hawkish trade stance towards China. A possible turning-point was expected at the end of November, when Mr Trump was to meet Chinese President Xi Jinping at the Group of 20 summit in Argentina.

Steel

With an eye to the $900 billion global steel industry, the LME takes experimental steps – three of them

Early this year the London Metal Exchange is launching three hot rolled coil (HRC) steel futures covering Europe, North America and China. Reuters noted the view of industry sources that the reported plans of some automakers to experiment with the LME contracts “could eventually change the way the industry hedges and prices contracts.” HRC, used mainly in cars and major appliances, is typically bought by consumers on annual xed price contracts. The LME’s cash-settled contract will be settled against an industry benchmark. Reuters reporters Maytaal Angel and Pratima Desai pointed out that automakers – along with construction rms, banks, brokers, merchants and steel service centres (distributors or stockists) – traditionally have been open to steel futures. Steelmakers, in the main, have been opposed, out of concern for potential loss of pricing power. (“European Automakers BMW, Volvo to Trial New LME Steel Contracts,” 6 th November) Interest on the part of BMW, the German producer of luxury autos, and the Swedish carmaker Volvo would appear to bode well for the contracts, but the Reuters sources stressed that new contracts usually take years to gain traction. The absence of enthusiasm from steelmakers could slow the process. “During the rst six months, merchants and traders will put volumes in to get liquidity going,” a Reuters brokerage source surmised. “If that works, manufacturing companies will ask suppliers to make o ers on the basis of LME prices for new, small contracts,” and evaluate the results. † One source told Ms Angel and Ms Desai that BMW already uses iron ore derivatives as a proxy for hedging some of its steel costs, thus could move with relative ease to trading the new LME contracts. Acknowledging its pursuit of “a hedging strategy,” BMW said that its aim is to “increase planning reliability” for the company. For its part, Volvo told the Reuters reporters, “We continuously review our raw material strategies. However, no decisions have been taken on hedging.” The rumoured purchase by British Steel of a wiremaking company portends a markedly ampli ed presence in the US steel market If British Steel follows through on its acknowledged “interest” in the Pennsylvania carbon and alloy wire producer Johnstown Wire Technologies, the acquisition would, as noted by Michael Pooler of the Financial Times, tie into the British company’s strategy of acquiring downstream businesses that process basic steel into value-added products. (“British Steel Eyes Foothold in US Manufacturing,” 4 th November) Mr Pooler observed that this would be a signi cant development for British Steel, “reborn” two years ago when

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January 2019