Here’s Another Sign the U.K. Is Weathering the Brexit Storm

by
Geoffrey Smith

@FortuneMagazine

August 23, 2016, 11:19 AM EDT

The U.K. economy showed more evidence of withstanding the post-Brexit shock Tuesday as a business survey showed exporters’ order books at their fullest level in two years in the month after the fateful vote.

The Confederation of British Industry’s quarterly Industrial Trends Report suggested that the 11% trade-weighted drop in the value of the pound has immediately led to higher demand for U.K. goods. Before the referendum, many economists had argued that a vote to leave the EU would generate so much uncertainty that it would nullify the classical “shock-absorber” function of a cheaper exchange rate. One equity brokerage, for example, downgraded the outlook for British makers of equipment for the oil and gas sector, on the grounds that leaving the EU could risk their product certification in big export markets like the U.S.

The CBI’s own survey of small and medium-sized businesses earlier this month had showed confidence falling sharply due to just such concerns.

U.K. exports have languished in the last couple of years, due partly to the low price of oil, and partly to sluggish demand from the Eurozone, which—when view en bloc—is Britain’s biggest single export destination. While North Sea oil production is still fundamentally challenged by low prices, the Eurozone is now eking out halfway decent growth figures, appearing to have overcome last year’s existential crises with Greece and migrants. The Eurozone economy grew by a respectable, if unspectacular, 0.3% in the second quarter.

What that means is that the balance of British exporters still say their export order books are below normal (27%, compared to 21% who say they’re running above normal). Tellingly, though, the negative balance of -6% is the smallest in two years.

In addition, of the 505 firms surveyed, 34% reported rising output volume, while 23% reported falling ones; importantly, 30% of companies expect output to rise over the next three months, while only 19% expect it to fall. The threat of an immediate recession, threatened by the establishment’s prophets of doom, appears to be receding, and may recede further if the CBI’s survey of distributive trades on Thursday rebounds significantly.

Martin Beck, an analyst with Oxford Economics, points out that 60% of U.K. GDP is domestic consumption, whereas only 15% comes from the EU. With unemployment at a historic low, and with the Bank of England’s latest interest rate cut supporting disposable incomes, the immediate risks to consumption also appear limited, he argues.

The pound’s reaction to the news also suggested that markets are paring back some of their more pessimistic forecasts. Sterling traded above $1.32 for the first time in three weeks on the data, although it’s still more than 10% below where it was against the dollar immediately before the referendum. Beck sees the pound weakening as far as $1.26 but that, he says, is more due to the likelihood of the Federal Reserve raising U.S. interest rates than any intrinsic weakness in Britain.

None of this removes the longer-term threat to the U.K. economy from a badly-managed divorce with Europe. However, together with the decent economic data from the Eurozone, it does suggest that the first discussions about that divorce settlement won’t be overshadowed by an actual economic shock.

Japan’s Exports Sink at Its Fastest Rate Since the Financial Crisis

@FortuneMagazine

August 18, 2016, 6:35 AM EDT

Japan‘s exports tumbled in July at the fastest pace since the global financial crisis with a resurgent yen adding to the challenge of weak external markets – leaving the economy and the government more reliant on shaky domestic demand to drive growth.

The yen edged toward a seven-week high versus the dollar, prompting bureaucrats from the Finance Ministry, the Bank of Japan and the financial regulator to hold an emergency meeting to examine the current state of the market.

Japan‘s top currency tsar reiterated a veiled threat to intervene in response to speculative moves, but traders say few options are available because it could be considered competitive devaluation, something the Group of Seven frowns on.

“We are constantly watching for speculative moves and will respond with the necessary steps if needed,” Vice Finance Minister for International Affairs Masatsugu Asakawa said after the meeting.

Policymakers are in a bind.

Japan‘s exports have now fallen for 10 consecutive months, the longest losing streak since losses on U.S. subprime mortgages sparked a global financial crisis that crippled the U.S. financial system.

Still, intervention may be unable to stop the yen’s rise as long as investors pare back expectations for U.S. interest rate hikes amid a run of spotty economic data and mixed signals from Federal Reserve officials.

In July exports fell an annual 14%, which matched the median estimate in a Reuters poll of economists and was the fastest decline since October 2009.

Economists say there is a growing risk that weakness in exports will persist as global economic uncertainty shows little sign of receding, which could undermine Japanese policymakers’ efforts to re-energise the economy.

“Exports do not have the strength required to lead Japan‘s economy,” said Norio Miyagawa, senior economist at Mizuho Securities. “This is a clear message that we need to support domestic demand. Government stimulus will help, but only in the short term. There could be more talk of additional monetary easing.”

Exports in July fell due to lower shipments of cars to the United States, ships to Central America and steel to Italy, the data showed.

Exports to China – Japan‘s largest trading partner – fell an annual 12.7% in July, extending the 10% decline seen in June.

U.S.-bound shipments fell 11.8% year-on-year, versus a 6.5% annual decline in the previous month.

Real exports fell 3.2% in July from the previous month, the fastest decline in 14 months, separate data from the Bank of Japan showed. Real imports fell 1.1%, the first decline in three months, the data showed.

For more on trade, watch Fortune’s video:

The yen has risen around 20% versus the dollar so far this year and further gains would cut deeply into exporters’ earnings and increase deflationary pressure by lowering import prices.

The volume of Japan‘s imports of oil and kerosene fell 8.5% in July, the first decline in three months, finance ministry data showed.

Recent weakness in industrial output and second-quarter data showing the economy ground to a halt suggests Japan‘s demand for commodities could potentially weaken further.

See also: Japan’s Emperor Akihito Hints at Abdication in Rare Public Address

The BOJ said it will conduct a “comprehensive review” of its quantitative easing and negative interest rate policy at its meeting next month after repeatedly pushing back the timing for its 2% inflation target.

Some economists say the BOJ could use the review to ease monetary policy, potentially weakening the yen if bond yields decline further.

Prime Minister Shinzo Abe’s cabinet approved fiscal measures worth 13.5 trillion yen earlier this month in an effort to revive the flagging economy and breathe new life into his economic agenda.

China’s July Exports and Imports Fall More Than Expected

by
Geoffrey Smith

@FortuneMagazine

August 8, 2016, 2:36 AM EDT

China’s exports and imports fell more than expected in July in a rocky start to the third quarter, suggesting global demand remains weak in the aftermath of Britain’s decision to leave the EU.

Exports fell 4.4% from a year earlier, the General Administration of Customs said on Monday, while adding that it expects pressure on exports is likely to ease at the beginning of the fourth quarter.

Imports fell 12.5% from a year earlier, the biggest decline since February, suggesting domestic demand remains sluggish despite a flurry of measures to stimulate growth.

That resulted in a trade surplus of $52.31 billion in July, versus a $47.6 billion forecast and June’s $48.11 billion.

Economists polled by Reuters had expected trade to remain weak but show some signs of moderating.

July exports had been expected to fall 3%, compared with a 4.8% decline in June, while imports were seen falling 7%, following June’s drop of 8.4%.

China’s exports underwhelmed despite still-strong shipments of steel and oil products. China has come under fire from major trading partners accusing the country of dumping its excess industrial capacity in global markets.

U.S. Navy Chief Warns of Costlier Boeing Jets if No Foreign Sales

by
Geoffrey Smith

@FortuneMagazine

June 19, 2016, 1:41 PM EDT

The U.S. could see the cost of new Boeing Co F/A-18E/F Super Hornets rise unless the government approves foreign sales of the jets soon, U.S. Navy Secretary Ray Mabus said on Sunday.

Mabus, in Germany for a NATO exercise in the Baltic Sea, told Reuters he was frustrated by delays in approving the sale of the Boeing jets to a close U.S. ally, warning that this could affect the cost of jets the U.S. Navy still wants to buy.

U.S. Navy and other defence officials have said they support the sale of 28 Boeing F/A-18E/F jets to Kuwait for an estimated cost of $3 billion, but this has stalled for nearly a year pending final White House approval.

Mabus said the delays could have an impact on the Navy’s budget plans, since the foreign order was needed to augment U.S. Navy purchases and keep the production line running efficiently.

Iran Finalised the Deal to Buy 100 Boeing Airliners

The U.S. Congress is expected to approve funding for as many as 16 Boeing F/A-18 jets as part of the Navy’s budget request for fiscal 2017, which begins Oct. 1, but that would give Boeing less than the two jets a month it says needs for economical production. The Kuwaiti order would have filled this gap.

“I’m frustrated. A lot of people are frustrated,” Mabus said. “The process is too long, too onerous in terms of getting weapons systems to our friends and to our allies.”

Mabus said Boeing could likely continue F/A-18 production for some time without the foreign sales, but dropping below optimal production rates could affect future pricing.

The Navy had requested funding for two F/A-18 jets in its fiscal 2017 budget request and 14 more as part of its “unfunded priorities list”. It also said it expected to buy a larger number of Super Hornets in fiscal 2018 to bridge a gap in its fleet until the newer and more advanced Lockheed Martin Corp F-35 fighter jet enters service in coming years.

Mabus welcomed possible moves by Congress to add jets to the fiscal 2017 budget, but said those orders alone would not keep production at the Boeing facility running at optimal rates.

For more on Boeing, watch:

“The line wouldn’t be operating as well as it should, and the price probably would go up for us because there aren’t as many planes coming through,” he said.

Boeing welcomed the secretary’s remarks.

“Boeing appreciates the continuing engagement of Secretary Mabus, and agrees that a Kuwaiti order is an important element in continuing a production rate of two per month to keep prices optimal,” Boeing spokeswoman Caroline Hutcheson said.

The company needs to maintain production to remain competitive in bidding for other F/A-18 orders from other countries as it is now spending “hundreds of millions of dollars” to buy long-lead materials such as titanium to prepare for new orders from the Navy and Kuwait.

Iran Finalised the Deal to Buy 100 Boeing Airliners

by
Geoffrey Smith

@FortuneMagazine

June 19, 2016, 10:36 AM EDT

Iran has reached a deal to buy 100 planes from U.S. planemaker Boeing, and the two sides are awaiting approval by U.S. Treasury authorities, the head of Iran’s Civil Aviation Organisation said in remarks published by state media on Sunday.

So far, Boeing BA has only been granted permission to present its products to IranAir and a handful of other airlines as it tries to catch up with Europe’s Airbus, which won a provisional deal earlier this year for 118 jets worth $27 billion.

Reuters reported on June 6 that Iran was edging towards a historic agreement to buy jetliners from Boeing for the first time since the 1979 Islamic Revolution and that a deal for more than 100 aircraft could be reached fairly soon.

Boeing Mulls Larger Engine for Biggest 737 MAX

“Of the 250 (passenger) planes in Iran, 230 have to be replaced,” Ali Abedzadeh, the head of Iran’s Civil Aviation Organisation, told the state-run daily newspaper Iran, adding that a written agreement had been signed with Boeing to buy 100 aircraft.

Abedzadeh said that no precise timeline could be given for the implementation of the deal before an authorisation is issued by the U.S. Treasury Department.

He said Boeing had submitted an official request to the U.S. Treasury for a final permit for the plane sales and “the final contract is to be signed between the two sides after the license has been obtained.”

For more on Boeing, watch:

In January, IranAir agreed in to buy 118 jets worth $27 billion at list prices from Airbus. The deal was conditional on U.S. export licenses because of the quantity of U.S.-built parts.

In comments about the Airbus purchases, Abedzadeh told the Iran newspaper “The final obstacle in this area are only the permits from the U.S. Treasury Department.”

GE’s Immelt Signals End To 7 Decades of Globalization

by
Geoffrey Smith

@FortuneMagazine

May 20, 2016, 6:22 PM EDT

General Electric CEO Jeffrey Immelt, in a speech that may signal an end to seven decades of globalization, said his company is making a “bold pivot” in strategy as a response to rising protectionist political pressures.

Immelt told graduates at New York University’s Stern School of Business on Friday that they are “entering a volatile global economy, the most uncertain I have ever seen.” In particular, he said, “globalization is being attacked as never before.”

“In the face of a protectionist global environment, companies must navigate the world on their own,” he said. “We must level the playing field, without government engagement. This requires dramatic transformation.”

As a response, he said, GE “will localize.”

“In the future, sustainable growth will require a local capability inside a global footprint. GE has 420 factories around the world giving us tremendous flexibility,” Immelt said. “We used to have one site to make locomotives; now we have multiple global sites that give us market access. A localization strategy can’t be shut down by protectionist policies.”

While GE ge will remain “a strong American manufacturer” and “produce for the U.S. in the U.S.,” he added, “our exports may decline.”

For more about Jeff Immelt, watch:

Immelt didn’t mention either Donald Trump or Hillary Clinton by name in his speech, but he did refer to the “raucous Presidential election…where every candidate is a protectionist. Globalization is being blamed for unemployment and wage inequality; there is a general sense that this must be somebody else’s fault; and improving competitiveness is not an option.”

He dismissed political criticisms aimed at his and other global companies, saying “I don’t listen to people who have no global context, never been in a factory or don’t want to compete.”

The full text of the speech is reprinted below:

The World I See

Thank you, Peter. What a privilege to be here at the Garden with all of you, on a day you’ll always remember. My thanks as well to all the NYU leadership and Stern faculty with us today. Because of you, I’m center stage, live from Madison Square Garden, or at least as close as I’ll ever get.

You’ve probably heard that Dean Henry just joined the GE Board, so that makes him my boss. Which doesn’t concern me in the least, because I know how to handle my superiors. Peter, is there anything you would like before I get started … a glass of water, pillow, anything at all?

You’ve earned a degree from a business school as fine as they come. Thirty-two of you did so after serving in the United States military – and for that you have our thanks. This class is truly global with members from 59 countries. What a great chance to learn from each other about the world.

You are entering a volatile global economy, the most uncertain I have ever seen. This is a world that needs better leaders, with new skill sets. The playbook from the past won’t cut it today. My advice for you as you enter this world is to be flexible, be bold, and don’t fear criticism. Today, I want to discuss how these lessons can be used to navigate the seismic transformation underway in globalization.

I built my career in a time when productivity, innovation and globalization were essential to success, the way to win. Now they are reviled, particularly globalization. There were a few things I thought that I knew: companies that gave people good jobs, made good products, and contributed to their communities would be valued; governments would at least try to nurture growth and address big problems; above all, global integration was a force for good and would continue to grow.

In the past two decades, we have halved the number of people living in extreme poverty. The global economy has tripled in size. Income inequality at the global level has been substantially reduced. Innovation delivered better and more accessible health care, cheaper energy and connected people across the world like never before.

America was at the center of globalization – quite consciously. American companies that invested in global operations were a source of pride, of jobs, of overseas influence.

We became woven into the global economy. I joined GE in 1982 and 80% of our revenue was in the U.S.; this year, 70% of our revenue will be global. GE has customers in more than 180 countries and exports over $20 billion worth of goods to the world each year. Our U.S. workers earn high wages because they make leadership products that can be sold around the world. Being global has helped us become more efficient, more competitive.

These bonds have fractured. Today: big companies are distrusted; governments and global institutions are failing to address the world’s challenges; globalization is being attacked as never before. This is not just true for the U.S., but everywhere. These sentiments have traction in Europe and Latin America, on both the right and the left. The future of the EU, is an open question. Protectionist barriers are rising in Asia and Africa. China is repositioning its economy to be more sustainable and inclusive.

Many people feel left behind. The global economy is growing too slowly. Some workers have been displaced by outsourcing, the middle class has been squeezed and income inequality has risen to unacceptable levels. As technology and globalization race forward, people understandably fear their impact on jobs and incomes, and distrust the motives of companies and government.

Where does the fault lie? In part, with business. Business is complicated. It is always important that the power of our innovation is evident, not just constraints. Productivity growth has slowed to a crawl. At a time of massive liquidity and low interest rates, capital investment is declining. Financing is more difficult to get, particularly for small business and infrastructure projects. Investment is required for productivity which, in turn, supports higher wages.

Part of the fault lies with technology. Innovation has driven growth but also leads to greater instability. The internet can connect people, but doesn’t necessarily give them jobs. Technology has raised the competitive requirements for companies and people. This exacerbates economic insecurity.

Part of the fault lies with Government. Government has failed to promote growth in almost every corner of the world. In the U.S., regulation has expanded while infrastructure has lagged. Education has failed to keep up with the need for modern skills. Small business creation, the engine of growth, has trailed previous times.

Our politics make it impossible to reform old systems: our tax code is 30-years old; our immigration system is broken; and a huge structural deficit clouds the future.

Many other places are worse. While I believe in the European Union, it is tough to see Brussels driving growth. It has added bureaucracy without the ability to solve problems.

The growth of China has impacted global dynamics. Their focus on exports has stirred populist fears in the West. China is extremely skilled at connecting economic development with geopolitical influence.

While U.S. companies can win globally, the U.S. doesn’t engage effectively enough on the world economic scene. With just 5% of the world’s population and 25% of the GDP, we have a lot to gain, but are looking inward. Our trade deals are languishing in Congress, and we remain the only developed country in the world without a functioning Export Bank. Industrial exports are not a priority for the U.S.

In the face of this headwind, we are having a raucous Presidential election, one where every candidate is protectionist. Globalization is being blamed for unemployment and wage inequality; there is a general sense that this must be somebody else’s fault; and improving competitiveness is not an option. Even though all of these trends hurt small companies more than big ones, it is difficult to achieve a productive global game plan between business and government.

Flexible thinking is required. Going forward, it is safe to say that trade deals will be very difficult without U.S. leadership. Every country wants more jobs and will seek their own advantage. The anti-free trade sentiment will not be solved by one election or in one country or with one leader. So the globalization I grew up with – based on trade and global integration – is changing.

As a business leader, it is difficult to decide when to defend the old way (what you were taught) or when to change based on what you see.

With globalization, it is time for a bold pivot. GE has $80B of revenue outside the U.S., so global growth is critical to our success. In the face of a protectionist global environment, companies must navigate the world on their own.

We must level the playing field, without government engagement. This requires dramatic transformation. Going forward:

We will localize. In the future, sustainable growth will require a local capability inside a global footprint. GE has 420 factories around the world giving us tremendous flexibility. We used to have one site to make locomotives; now we have multiple global sites that give us market access. A localization strategy can’t be shut down by protectionist politics.

We will always be a strong American manufacturer. But, we also have built factories all around the world. We have learned to manage through extended supply chains and developing small business. For every GE job, there are eight in the supply chain. We are not pursuing low wages; we are using a manufacturing strategy to open markets.

We will produce for the U.S. in the U.S., but our exports may decline. At the same time, we will localize production in big end-use markets like Saudi Arabia. And countries with effective export banks, like Canada, will be more attractive for investment.

Our competitive advantage is digital productivity. In the past, productivity could be achieved only through low-cost labor in large factories. In the future, manufacturing will be driven by new materials, additive techniques and digitized plants. Factories will be smaller and more flexible. Our goal is to make what we want, where we want. Workers will be more productive and more valuable.

Meanwhile, the digitization of assets also facilitates global productivity, through what we call the Industrial Internet. The combination of physical and analytical will improve infrastructure productivity. In Pakistan, we are using analytics to improve energy efficiency and expand capacity. In India, we can use the internet to deliver healthcare to remote regions. In China, engine analytics are improving airline productivity.

Every industrial company must also be a digital leader. This is the next wave of competitiveness.

We can accelerate growth by solving local problems. In the past, every solution was viewed as a “global solution,” where one size fits all. In the future, companies will impact the way the world works by innovating to solve problems with local capability. To that end, we have built unique solutions for clean energy and healthcare access. We have built local teams to deliver outcomes in markets like India and Brazil and Africa. Today, solutions from the developing world improve outcome in developed markets.

Businesses can also have a unique impact on society. Two years ago we opened a business process outsourcing center in Saudi Arabia that will employ 3,000 women and is led by a woman. Our vision was to tap into a pool of talented Saudi women to execute process support for our activities in 50 countries. The center is growing and competing globally. Sometimes businesses can drive change faster than governments. It is tough to hate a company that is reducing climate change and creating jobs.

Financing is the new oxygen of global growth. While global problems require local solutions, they also require capital. The financing needs for infrastructure are $1 trillion a year. One-third of the world still lacks access to electricity; this is unacceptable when we have the technologies to meet demand right now. Regulation has created a huge gap in infrastructure project finance. So we are taking it on, by building local infrastructure finance teams, capable of tapping global capital markets.

These teams are critical as we cannot count on the U.S. Exim Bank. One Senator has blocked the will of 70% of Congress. This reinforces my point that companies must control their own destiny globally, protecting against government dysfunction.

We have positioned GE to capitalize on investment flows from new sources. These include the Chinese governments’ “One Belt One Road” initiative. This is their attempt to build relationships in Central Asia, the Middle East and Africa leveraging their financial strength. We are supplying a Power project in Pakistan using Chinese financing.

Unlike the U.S., most countries are increasing their export financing. So we will export turbines to Asia and the Middle East, made in France supported by French financing.

Executing a new global strategy requires simpler organizations. Complex and centralized bureaucracies are obsolete. Change requires new business models … leaner, faster, more decentralized. The days of cycling global ideas through a central headquarters is over. Globalization requires pushing capability to local teams who are empowered to take risks without second guessing.

We tend to think of globalization as a philosophy, but it is much more about what you do on the ground. Success requires hundreds of little things, and decisions made with a local context. A good global leader has an appreciation for how people do their work in a local culture. They try to make a teams’ work meaningful to their country. This allows us to hire the best talent in every country where we compete.

By taking these bold actions … by pivoting … I am confident we can continue to grow. Our global sales have grown “6-fold” since 2000, and we want that to continue. I know we will be more competitive by selling and producing in more countries. I know we will be more relevant by designing local solutions and building multicultural teams.

One thing I know about globalization is that there will always be plenty of critics. It requires a long-term view to see the “win win.” Hell, to understand globalization, you actually must have a passport. You have no idea how many times I have been criticized in Washington for doing business around the world. Global leaders need thick skin.

Early in my career, I worried way too much about what people thought. Over time I realized that progress counts for more than perfection and that anything worthwhile takes persistence and resilience. Criticism has made me hungrier, tougher, sharper.

My shield consists of competency, hard work and fairness. I don’t listen to people who have no global context, never been in a factory or don’t want to compete. I run a meritocracy with the highest standards. Everyone who joins GE … Americans, Mexicans, Chinese, Nigerians … men and women … Muslims and Christians … straight and gay … know they have a future if they perform. Discrimination has no place in business — in the United States or anywhere else in the world. Similarly, our factory teams know that, while we cannot guarantee markets, we can guarantee effort; we always play to win. I believe these to be American values.

I know that these values resonate globally. By adopting this approach, we have become a better global company.

So be flexible, be bold, don’t fear criticism. We are going through a transformational change in globalization, which will require fresh, new thinking. I hope you join me. I am proud of my profession. Our goal is to build an economic ecosystem that is the most competitive in the world. To create great jobs through private enterprise and ingenuity. To give back competency and innovation directed at solving the world’s toughest problems.

There is nothing elitist, or establishment, about this task. Giving speeches about jobs doesn’t create jobs. Only by being in the arena can you create work for others. Whether you are going to a start-up, or a company on Wall Street, your work matters in a vibrant economy.

The discord we see in the U.S. today is primarily due to slow growth and the wealth discrepancy it creates. This problem will not be solved by any bureaucracy. It requires new leaders who see the world as it is and are willing to drive change.

Two weeks ago I gave the commencement speech at Clemson. I tell seniors in college not to be too bummed out. They can still party a bit and their jobs won’t be too intense. For MBA students … like you … there is no comfort. It is time to go to work and pay off your loans! We need you now, and there are some amazing days ahead.

U.S. overtakes France to become Germany’s top trading partner

by
Geoffrey Smith

@FortuneMagazine

February 20, 2016, 10:20 AM EDT

The United States became the top destination for German exports last year, overtaking France for the first time since 1961 thanks to an upturn in the U.S. economy and a weaker euro, data from Germany’s Statistics Office showed on Saturday.

Exports to the United States rose by 19 percent to 114 billion euros ($127 billion) in 2015, compared with an increase in French purchases of 2.5 percent to 103 billion euros.

It was the first time in more than half a century that France was not Germany’s biggest trading partner and economists said the picture was unlikely to change any time soon.

“This is more of a long-term trend,” said Simon Juncker, an expert at Germany’s DIW economic institute.

He said solid U.S. growth rates were partly responsible for the rising demand for German goods.

The world’s biggest economy grew by 2.4 percent last year and the Organisation for Economic Cooperation and Development (OECD) expects U.S. gross domestic product (GDP) to increase by 2.0 percent this year.

France’s GDP, on the other hand, rose 1.1 percent in 2015 and the OECD is forecasting growth of 1.2 percent this year.

“The American economy is currently experiencing a stable economic upturn, which benefits German companies,” said Bernhard Mattes, head of the American Chamber of Commerce in Germany.

“This also includes low energy prices, a comparatively low U.S. wage level and the weak external value of the euro.”

Since mid-2014, the euro has depreciated by nearly a fifth against the dollar, following expansionary monetary policies by the European Central Bank.

“This exchange rate effect has boosted foreign demand quite markedly,” said DIW’s Juncker.

As a member of the euro itself, France wasn’t able to benefit from that depreciation in its trade with Germany.

($1 = 0.8984 euros)

Iran Looking to Ramp Up More Than Just Oil Production

by
Geoffrey Smith

@FortuneMagazine

February 3, 2016, 11:28 AM EDT

This piece originally appeared on oilprice.com.

As the oil markets remain focused on the re-emergence of Iran as a major oil producer following the recent lifting of sanctions, another oversupply storm is brewing as the Islamic Republic appears keen to start mining its substantial metals reserves.

On January 17 Iran emerged from years of economic isolation as world powers lifted sanctions in return for curbs on its nuclear weapons ambitions. The controversial deal, stickhandled by U.S. President Obama, will free up tens of billions of assets and allow foreign firms to do business with a country once (and still by its enemies) considered an international pariah.

The addition of 500,000 barrels of oil a day could further depress the price of crude oil which is struggling to break through a resistance level in the low-$30s, although there have been rumblings lately that Iran may increase output more gradually than initially thought, in order to prevent adding downward pressure on prices.

Iran relies heavily on petrodollars for its foreign exchange; the drop in oil prices has hit its treasury especially hard, with losses in the billions. That has led President Hassan Rouhani and other members of his government to focus on non-oil exports, including minerals, which up to now have been underutilized.

According to various sources, including the U.S. and British Geological Surveys, Iran is among the top 15 minerals-rich countries, with over 700 billion tonnes of potential reserves — about 7 percent of the world’s total — worth over $700 billion. Among its mostly untapped deposits (less than a tenth of the country has been surveyed) containing 68 types of minerals, the most important are zinc, iron ore, coal, copper, lead, bauxite (aluminum) and uranium. There are an estimated 3,000 mines, which are around 90 percent state-owned. Iran is the fourth-biggest supplier of iron ore to China and has the world’s ninth largest reserves of copper at 32.5 million tonnes. The country is also a major Middle Eastern steel producer.

Yet despite its metal riches, mining has up to now contributed less than one percent to Iran’s gross domestic product. One of the biggest barriers is technology. Deprived of foreign investment due to sanctions, Iran has not been able to attract specialists in mineral extraction and processing, nor update its equipment. A lot of mining machinery in Iran is decades-old. Limited railway capacity, low volumes at mining facilities, and high interest rates are further brakes on industrial development.

However with the end of sanctions, foreign firms are lining up to capitalize on the potential. In September executives of Kobe Steel Ltd, Japan’s fourth-largest steelmaker, and state-run Japan, Oil, Gas and Metals National Corp (JOGMEC) met officials in Tehran to discuss cooperation in mining. The meeting was part of a plan to attract some $29 billion in foreign investment to the sector.

Last week, Iranian trade minister Mehdi Karbasian said the country hopes to finalize $5.4 billion in investment plans during President Rohani’s visit to Italy. Potential deals include investments in steel production in southern Iran.

While the lifting of sanctions could certainly lead to greater mining potential, in a way it couldn’t come at a worse time, with prices for most of the commodities hiding under Iranian soil at multi-year lows. The slump in iron ore prices in particular has killed off a significant amount of export tonnage, especially since so much Iranian ore goes to China, whose growth has slowed. Reuters reported in September that Iran’s iron ore exports fell by almost a half during the first eight months of 2015. To compete in the global iron ore market, Iran must be cost-competitive with the two largest and lowest-cost iron producers—Brazil and Australia.

On a volume basis, Iran has a long way to go. According to the International Steel Statistics Bureau, the country exported 22 million tonnes of iron ore in 2014, compared to top shipper Australia at 754 million tonnes.

But does Iran really want or need to compete? According to the Iron Ore Producers and Exporters Association of Iran (IROPEX), Iran’s iron ore shipments will likely drop from 15-16 million tonnes in 2015 to under 10 million tonnes by 2017, as it seeks to lift domestic steel output from 16 million tonnes in 2015 to 25 million tonnes in 2025. To reach that goal, Iran would need to bump up its iron ore production from 45 million tonnes in 2014 to 159 million tonnes. With those ambitious goals, will there be enough excess iron ore to export?

Unless there is an imminent bull market for metals again, which seems improbable given that most commentators consider the China-driven supercycle for commodities to be over, there is unlikely to be a dramatic impact on metals markets from Iran’s return to mining. This is especially true given the country’s desire to use its production of iron ore for domestic consumption in steelmaking.

On the other hand, the fact that Iran is now considered open for business will definitely pique the interest of foreign mining companies, both major and junior miners, to conduct exploration activities. As more mines are permitted, this could result in more business for mining equipment manufacturers and suppliers. Al-Monitor points out that efforts are being made to cut red tape by streamlining the permitting process into a “single window system” whereby potential investors do not have to go through different government bodies to obtain licenses.

The 2002 Foreign Investment Promotion and Investment Act gives foreigners ownership rights, the opportunity to transfer profits out of the country in foreign currencies and, importantly for international mining companies sensitive to political risk, “guarantees that the government will pay compensation for any investments in projects that are nationalized or expropriated,” according to Al-Monitor.

Why China’s Stock Market Crash Could Spark a Trade War

by
Geoffrey Smith

@FortuneMagazine

January 7, 2016, 5:31 PM EDT

For the second day in one week, China’s regulators shut down trading on its stock markets after sharp declines triggered automatic “circuit breakers” aimed at promoting financial stability in the country.

The reasons for China’s stock market troubles are many, but most analysts pointed to a move by the central bank to weaken China’s currency—the renminbi—as the primary cause for the decline. As my colleague Scott Cendrowski wrote Thursday, “China’s central bank lowered the yuan’s so-called reference rate, its trading peg to the U.S. dollar, by the largest margin since August, when the yuan dropped a couple percentage points over two days. That created a fear that China’s leaders are using a weaker currency to spark growth for an economy that is struggling more than expected.”

China’s management of its currency has been fascination for American observers for decades, as economists have long suspected that China undervalued its currency in order to subsidize its manufacturing and export industry. But those fears subsided in recent years, as the Chinese government allowed its currency to appreciate as part of a broader effort to rebalance its economy away from relying on investment and exports to one reliant more on domestic consumption.

But the sharp slowdown in the Chinese economy this year, paired with big losses in its equity markets, has thrown that analysis into question. And the fact that China’s currency is falling now is a sign that the transition the economy was supposed to be making towards the consumer is in trouble.

Earlier this year, China allowed its currency, the renminbi, to trade within a wider band around the value of the dollar, to which its value is pegged. But instead of rising in value, the renminbi fell against the dollar, and on Thursday the Chinese government allowed (or forced, depending on whom you ask) its currency to go down again, to its lowest value against the dollar in five years.

For some, this smacks of rank currency wars, with China fighting its quickly weakening economy with a cheaper currency to boost exports. Others argue that with the dollar stronger today than it has been in decades, it only makes sense to allow the yuan to weaken in response to this.

But wherever you come down on China’s motivations for its devaluation, it’s clear that a cheaper renminbi will send ripple effects through the global economy. And that’s likely why stocks in the U.S. and elsewhere plunged on Thursday.

The biggest fear is a deepening of a trade war that is being fought between the world’s economies over a very limited supply of global demand. One of China’s main competitors in the region, Vietnam, has moved three separate times this year to devalue its currency, with the last coming in August. “The policy action today is positive in its promptness in response to China’s devaluation,” Eugenia Fabon Victorino and Irene Cheung, analysts at Australia & New Zealand Banking Group Ltd., said in a research note at the time.

Meanwhile, other big exporters like Japan and Korea, have been watching the moves in the renminbi closely. Korea’s won hit a three year low earlier this year, while the Japanese central bank has been engaged in massive monetary stimulus in recent years. The Japanese government argues that this is purely to stimulate domestic demand, but economists like Robert Scott of the Economic Policy Institute have argued that Japan’s tactics are different than, for instance, the Federal Reserve’s quantitative easing, and that currency manipulation on the part of Japan has cost the U.S. hundreds of thousands of jobs per year.

As economist and China expert Michael Pettis has argued, what China’s troubles today underscore is the dearth of demand in the global economy. There are virtually no economies on earth today that are growing quickly as the result of rising incomes. Instead China’s rapid growth, until recently, has mostly been the product of a government policy that encourages excessive investment and keeps wages low in order to boost exports and employment. The few large economies that run trade deficits, though, like the United States and the U.K., don’t have the capacity to buy everything that China and the rest of the world’s exporters are trying to sell.

And therefore, it’s likely we’ll continue to see exporters fighting for every scrap of slow growing demand. Only time will tell whether China can ween itself off its dependency on exports. But what is certain is that the longer China waits to make the necessary reforms, the less stable the world’s second largest economy will be in the long run.

The 40-Year Ban on Oil Exports Could Be Lifted

by
Geoffrey Smith

@FortuneMagazine

December 15, 2015, 11:37 AM EDT

Democrats in the House are reportedly open to removing a long-time ban on crude-oil exports as part of their negotiations with Republicans, according to Bloomberg. For 40 years, there’s been a ban on exporting oil from the U.S.

Oil producers have been lobbying Congress to lift the ban, which was adopted in the 1970s when there were gas shortages, Bloomberg notes. The U.S. is now the largest oil and gas producer in the world.

The Senate is already close to an agreement, and Democrats in the House are reportedly are using this issue to negotiate other concessions from Republicans. Allowing exports is expected to bump up the price of American oil, which has gone down along with global oil prices in recent years.

For more on the potential shift in policy, head to Bloomberg.

Pages:
1
2
3
«

Want the Full Story?