Steeling themselves

Why Chinese steel overcapacity will continue to test global steel producers’ patienceSince 2010, Chinese demand for steel has lagged far behind production and exports (Figure 1). In spite of this, production has remained strong with steel mills taking advantage of low iron ore prices at present. These sustained levels of production have been worrying producers of the metal around the globe as China ships its excess steel abroad. China is already the world’s largest steel manufacturer, in value terms they dwarf the whole of North America and are estimated to be responsible for around 50% of global overcapacity. Steel associations outside of China argue that China is flooding markets and hence driving steel prices down.  As a result of these concerns, eight representatives of steel organisations from around the globe (North America, Latin America and Europe) have lobbied China to alter its recent Steel Adjustment Policy 2015.




Figure 1  | Chinese Steel Exports and Imports, demand and production compared, based 2010
Source | DeltaMetrics 2015


Chinese iron and steel trade is highly correlated with the value of the yuan (and with equity markets across the region). Further, its trade generally is also highly correlated with the Iron and Steel price. Through a state-controlled steel industry, China is able artificially to drive down steel prices and effectively circumvent the market forces which all other global steel industries are susceptible to. The eight steel association representatives therefore hope China will rethink its steel policy for the benefit of the free market and the future of steel trade.

Delta Economics, sees encouraging signs of China reining in its steel exports in future. Between 2010 and 2015 (to the current month), we saw a compound average growth rate (CAGR) in Chinese steel exports of 10.7%. This was compared with 5.3% growth from North America, 1.3% in Latin America and 1.5% in Europe over the same period. However, between 2015 and 2020 we are now forecasting significantly lower CAGR growth in Chinese steel exports of 6.8%. This is compared with growth in steel exports in Latin America (4.2% to 2020), North America (6.2% to 2020) and Europe (2.6% to 2020). It appears, therefore, that China may well be listening to global concerns over its steel overcapacity.

This will not be a quick or easy process, however. It will take years of adjustments to address the Chinese steel surplus. Smaller steel mills within China are most likely to bear the brunt of the readjustment policy with plant closures and redundancies. However, the larger steel mills will be slower to change. Therefore, although our forecasts are showing more encouraging signs for steel producers outside of China, the coming years are likely to severely test the industry.



Nerves of steel  |  Author  |  Jack Harding  |  Analyst and Publications Manager

Webcast 012 | Is Mexico the new China?

Rebecca Harding presents Carlos Sanchez Pavan and Shannon Manders to uncover the key trade drivers behind Mexico€™s strengthening supply chains. Mexico has been a strong beneficiary of re-shoring in manufacturing and the country’s strong economic and political structural changes have facilitated trade growth in automobiles, auto parts, oil and alternative energies. Delta Economics’ view is that Mexico and increasingly, the Latin American region, have growing competitive advantages over emerging markets in Asia and that China is becoming less competitive in wage and productivity terms, relative to Mexico.


Webcast 012 Author  |  Rebecca Harding  |  CEO

Even a stopped clock….?

Why economists are right to be cautious about the recovery | In a recent after-dinner speech at an Economists’ event I attended, a senior UK economist and a former external member of the Monetary Policy Committee explained why economists are cautious about stating unequivocally that the recovery in the UK and Europe has started. The argument ran something like this: first, economists generally as a profession did not predict the downturn; second, although there are plenty of individuals who will state that they knew it was coming, it was not predicted in our models and therefore we should be wary of declaring recovery – just in case everything collapses again; third, there are plenty of signs that any recovery in 2014 is weak and is unlikely lead to global “escape velocity”, as Christine Lagarde, the Head of the IMF reminded us last week.

As the World Trade Organisation (WTO) looks back into its crystal ball on the 14th April, tells us what happened to merchandise trade in 2013 and revises what it thinks will happen in 2014, it would do well to remember the humility with which all economists should treat any forecast. In a sense, its job is easy. It is revising its forecasts for 2013 and therefore 2014. It is likely to come in at a trade growth figure for 2013 around 1.9% in contrast to its forecast of 2.5% for last year. This will mean that it will also have to revise downwards its forecast for 2014 as it will be starting from a lower base but, because it is using the more optimistic assumptions modelled by the IMF of faster growth in developed countries, it will still be very optimistic on trade growth for the year.

Delta Economics’ own estimate of trade growth in 2013 suggests that trade growth has been lower than the 1.9% that the WT0 was informally predicting back in December at just 1.4% averaging out imports and export growth. Our modelling is based on the monthly IMF Direction of Trade Statistics, the United Nations Comtrade Statistics and 93 national statistics offices. The first two are the same datasets that the WTO itself uses, the third harmonises the data with national data to bring it up to date.


Figure 1 | Delta Economics Q1 2014 World Trade Forecast overview

Figure 1 Source | DeltaMetrics 2014

Given that the data is similar to that used by the WTO, it is hard to see why it would come in with a value as high as 1.9%, but estimating techniques vary and the figure of 1.5% growth in imports in 2013 without a correction for global disinflation may explain the difference.

However, what matters more is the fact that the Delta Economics forecast for world trade growth in 2014 has been falling over the past six months and will, no doubt, be several percentage points below that of the WTO’s which currently stands at 4.5% for 2014. While, like the WTO/IMF’s forecasts, we saw more buoyant conditions at the end of 2013 but even so, the moving average forecast over the past 6 months suggests that world trade growth in 2014 will be only just above 1% compared to 1.5% that we were forecasting in December.

There are several reasons why Delta Economics is cautious about predicting a rapid expansion in trade growth this year. The first is that, as Figure 1 suggests, while we are more positive about the US, Germany and the UK, we are more negative or neutral about exports from other top trading nations: China, France and Japan. Our forecasts are also more negative for other, key, economies such as Canada, Mexico, India, Saudi Arabia and the UAE. This leads us to have a generally more negative outlook for export growth in every region except Europe and for Europe we are forecasting a slightly slower contraction rather than growth.

The second reason why we are less positive about trade is because of the patterns of trade between developed and emerging economies. The main feature of the post-crisis recovery was a more rapid recovery of emerging economies in trade terms compared to developed nations, shown in Figure 2.


Figure 2 | North-North and South-South trade, June 2001-Dec 2016 (USDbn values)

Figure 2 Source | DeltaMetrics 2014

North-North trade has yet to return to its pre-crisis levels and will remain flat for the next three years according to our forecasts, but more importantly, South-South trade, which drove trade recovery after the downturn globally, will grow by just over 5% in 2014 compared to over 18% in nominal values between 2011 and 2012. And since this is predominantly accounted for by commodities, infrastructure and intermediate manufactured goods, it suggests that these economies will not be demanding the products that fuel growth for the foreseeable future. Declining export forecasts for China, India and Mexico, as well as slower forecast growth in Asia, Latin America and MENA illustrates just how the spillover effects of South-South slowdown work through to these countries.

Some of the fall in prices is because of how trade is measured. We, like the IMF and the WTO, use US Dollar nominal values to create our trends but what this does, is illustrate very clearly that if there has been downward pressure on prices this, in and for itself would explain why we are showing slower actual growth. The current price forecasts that Delta Economics models, effectively show how trade volumes will be affected if prices remain the same. On the basis of this, we are forecasting only modest growth in South-South and flat growth in North-North trade volumes.

Why this is important is because of the effect that it has on equity markets in particular. For example, the BSE Sensex is highly correlated with South-South trade (0.92) and this is illustratively presented in Figure 3.


Figure 3 | South-South trade and the Indian BSE Sensex last price monthly, June 2001-Feb 2014

Figure 3 Source | DeltaMetrics 2014

When equity prices generally fell between 2007 and the end of 2008, the subsequent lock-down in credit affected markets for trade finance with the result that South-South trade fell as well after a time-lag. The upward trend of the market and emerging world trade continues until the end of 2010 when again, a drop in the market created uncertainties, particularly about India’s trade and economic performance and again led to a drop in trade after a four month time lag.

And this matters at a global level as well. Figure 4 replicates the same diagram for the S&P 500 and world trade.


Figure 4 | S&P last price monthly and value of World trade, USD bn, June 2001-Feb 2014

Figure 4 Source | DeltaMetrics 2014

Since 2001, equity prices and trade have been highly correlated. In 2008 we saw a major drop in equity prices and the simultaneous lock-down of credit. What this did was restrict access to trade finance with the consequential 23% drop in trade that we saw in 2009. They moved together with a high positive correlation up to April 2011 reflecting general confidence in markets, but, since then, the relationship has been an equally strong negative correlation.

What this tells us is that markets have not been reacting to economic fundamentals for the last nearly 3 years but instead are reacting to sentiment and political/geo-political events. This makes them volatile, which, as our modelling demonstrates, increases uncertainty and therefore trade itself. It also suggests that there is a correction due during the course of 2014 if we are to return to the high levels of correlation up to 2011.

There is plenty to worry about in world trade at the moment. It is not like GDP in that it is directly affected by geo-political risk, which often works through trade sanctions and embargoes, and it is directly affected by economic uncertainty because this makes the trade finance environment more difficult and can restrict access to finance for exporters. This in and for itself will negatively impact GDP and economic development through trade.

Given the importance of trade to markets, trade finance and to economies generally, improving the accuracy and timeliness of trade forecasts is vital. Delta Economics is erring on the side of caution in proclaiming a recovery, not because it is insuring itself against the likelihood of a downturn but because the geo-political and deflationary downside risks globally suggest that the trade picture is more negative than is currently being predicted elsewhere. Trade, like financial markets, is internationally inter-dependent – one falls and the other falls too. It is no longer adequate to be like a stopped clock – right twice a day.

Latin America

Latin America’s export trade is growing but the drop in the forecast is a function of declines the outlook for trade in 2014 compared to 2013. In particular, the forecast for Brazil in 2014 is 7.5% compared to growth of 8.6% in 2013 and for countries like Peru the drop is even larger, from 8.5% to 6.5% growth. The region is currently prone to political instability and the slow down in exports is a function of this alongside restrictive import policies that have been followed through by some countries, like Argentina. As a result, imports are also forecast to drop. There are two drivers of Latin American trade: demand for copper and oil in emerging Asia in particular and its role in global supply chains. If China’s slowdown becomes a hard-landing, copper exports to China from Brazil and Peru in particular will be threatened and this in itself can explain the drop in the forecast. However, the uncertainty in markets, particularly recently triggered by Venezuela’s decision to halt economic relations with Panama and by Argentina’s economic mismanagement, has also caused our forecast to be downgraded rapidly over the past few months, from 7.2% in our Q4 2013 forecast to 3.6% now.

Don’t Cry for Me…

Why trade mistakes are hampering Latin American growth | In the context of the current Ukrainian crisis, the decision by Venezuela’s President, Nicolas Maduro, to suspend diplomatic and economic relations with Panama has barely registered. Trade between Panama and Venezuela is relatively small, worth an estimated US$ 1.2bn in 2013. Crude oil, which is Venezuela’s main export with a value of over US$ 2.6bn is not within the top 30 trade sectors between the two countries and therefore, on the face of it, the impact on long term policies to stabilise the Venezuelan economy may be minimal. Trade is highly volatile between Venezuela and Panama and Venezuela is more reliant on its trade with Panama for imports than it is for exports, as Figure 1 shows.



Figure 1 | Estimated exports from Venezuela to Panama and imports to Venezuela from Panama, 2001-2014

Source | DeltaMetrics 2014

(Trade data between Venezuela and Panama contain a large number of zeroes thus data must be seen as indicative)


Second, and as Figure 1 also shows, the decision to stop trade with Panama potentially hurts Panama more than it hurts Venezuela. Venezuela was Panama’s largest export partner in 2013, although the US will take over from Venezuela during 2014. This calculation is ill-advised on several counts. For example, Venezuela relies heavily on the US for its oil exports. It is the US’s third largest importer of crude oil; it’s exports to the US of crude oil are ten times higher than for the second largest export partner – Germany. With inflation running at, reportedly, above 50% and with the fiscal deficit running at 16% of GDP, the country needs stability more than anything. Any tension with Panama has the potential to spill over into relations with the US and thereby affect its oil exports. The parallels with Ukraine’s situation are not drawn idly: street protests leading to a new government and increasing tensions with the US pose a risk of sanctions and this would not help Venezuela’s quest for sustainable economic growth.

Second, Venezuela is not amongst Latin America’s top 30 trade partners, and yet it is highly dependent on the region for its trade. As Panama’s canal grows so too will its trade both with Latin America, North America, the Middle East and with Asia-Pacific. Its port-to-port trade with, say Singapore is forecast to grow by 10% in 2014 alone and with Hong Kong by 8%. Any greater political instability in Venezuela will have the effect of destabilising trade between other countries in the region. We are already forecasting substantial drops in the trade between it and many of the Latin American countries and yet it has the scope to act as a trade route through to North America if it keeps its export routes with Panama open.



Figure 2 | Venezuela’s export trade with Latin American countries (2014 values and change on 2013) compared to Panama’s extra regional growth.

Source | DeltaMetrics 2014


The fact that its largest export product through Panama is automotives demonstrates how important this trade route is potentially in integrating Latin American and North American non-oil supply chains. Before the lock-down of trade we were expecting Venezuelan exports of cars to Panama to increase by over 18% this year, albeit from a small base.

Venezuela’s exports to Argentina are forecast to grow by over 9% during 2014 but Venezuela would do well to learn from Argentina’s trade track record, especially on restricting trade with other countries. Argentina imposed punitive tariffs on importers in 2011 requiring them to export from Argentina the amount in value terms that they were importing. The effect on trade for Argentina has been to increase export and import volatility since, as illustrated in Figure 3.


Figure 3 | Argentinian exports and imports, June 2001-February 2014

Source | DeltaMetrics 2014

Since mid-2011 when the first range of additional tariffs were imposed, Argentina’s trade has experienced greater volatility in its trade and in fact, trade seems set on a downward trend. The seasonal swings in trade, which were already greater than pre-financial crisis appear to have been accentuated in the years since with a particularly severe drop in 2011-12 as the tariffs started to take effect.

While Venezuela has not introduced tariffs, it has just suspended its trade with Panama, the lessons from Argentina in terms of regional contagion cannot be understated. Figure 4 is the same chart, Argentinian exports and imports, against the value of the Brazilian Real and shows clearly that the value of the Real in relation to the USD has deteriorated over the same time period.


Figure 4 | Risk of contagion: Argentina’s trade against the Real per USD exchange rate 2001-2014

Source | DeltaMetrics 2014, Bloomberg

It would be a mistake to say that Argentinian, or even Venezuelan trade directly causes a depreciation of the Real or other regional currencies. However, what Argentina’s economic and trade strategies have done, like other countries in the region, is make markets call into question the robustness and sustainability of economic performance and therefore to make them more bearish on the overall outlook as the collapse in the Peso and its knock-on effects to other Emerging Market currencies in January showed.

Venezuela’s trade is important to the region because of the link with the US and although they are not currently through Panama itself, the risk to that trade comes from geo-politics rather than trade economics. If it continues to suspend trade, then the US may impose restrictions on its imports. This could increase the downside risks to Venezuela’s trade forecast for 2014 and there is a clear risk for further contagion across the region. Perhaps like the Ukraine, this is a crisis that may start small but escalate to something bigger, particularly in economic terms. When it does, remember the lessons from Argentina, and don’t cry for me…..