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Industrial minerals in the new Trump era

By IM Staff
Published: Friday, 11 November 2016

IM takes a first look at how the US presidency of Republican Donald Trump could shape key sectors of the economy, domestic and internationally.

By Kasia Patel, Davide Ghilotti, Myles McCormick and Albert Li

"We have to be unpredictable. And we have to be unpredictable starting now," Donald Trump told supporters at a campaign speech back in April.

Seven months later, fresh from his victory in the race to become the 45th president of the US, that sentence aptly encapsulates the sentiment that is sweeping through the US public and the international community alike.

Trump’s win over Democratic candidate Hillary Clinton brought about a storm of uncertainty over what this may mean for the US and, indeed, the world.

During a year of campaigning, Trump promised to do everything and the opposite of everything. His political programme has been described as evanescent at best, unrealistic and populist at worst.

In the coming months, IM will be closely monitoring how the choices of the new presidency will come to affect the industrial minerals markets we cover. In the meantime, here is a first run-through a number of key sectors that could be re-shaped by Trump’s political imprint.

Trade: wars or no wars

The news that Trump had defeated Clinton had an immediate effect on a number of commodity markets. Copper closed on a high yesterday and is on track to reach a three-decade record today. The US dollar had a short-lived dive as the results were announced, but quickly rebounded upwards.

The copper bubble and investors’ trust in the value of the US currency are mainly linked to Trump’s bold proposals, which he reiterated during his campaign, to pour money into domestic spending for infrastructure projects across the country.

The outlook is less clear when it comes to international trade, particularly for trade flows into the US. Citing his willingness to prompt trade wars, Trump repeatedly attacked existing trade deals such as Nafta and the Trans-Pacific Partnership, and stated he would impose a 45% duty on goods imported from China, to safeguard local productions.

The consequences of such changes would be hard to assess. A number of contacts active in minerals supply, however, questioned the actual ability of the new president to go about the stark trade plans.

One US-based lithium buyer told IM he did not foresee the new president having any major impact on the country’s ability to import raw materials: "There is so much unknown [but] a lot of it is hot air and rhetoric."

He said his sense was that the Chinese seemed less concerned than the Europeans: "Most of the Asians think he’s a pragmatic businessman (...) He’s going to do what’s right for business."

A Chinese graphite exporter agreed with this sentiment. He told IM he did not believe Trump would follow through with his threat of adding heavy duties to Chinese imports "because Trump is a businessman".

Strongly taxing imports of all raw materials from China would be impossible, he added, as the US does not have enough of its own supply to be self-sufficient.

He conceded that increased taxes on end products, like steel or photovoltaics, may become a reality. But even if they did, that should not affect raw material producers.

In Britain, the country’s ceramic industries are keen to maintain trade ties open with the US, particularly in a post-Brexit scenario, were the UK to leave the European single market.

"The US is an important export market for UK ceramics manufacturers," Laura Cohen, chief executive of the British Ceramic Confederation, told IM. "Members are keen to understand more about the president-elect’s trade policies. It is important we continue to look to influence a more beneficial trade relationship for after the UK leaves the EU."

US Capitol_wikimedia 
 The US Capitol Building.

Fossil fuels

Trump has shown time and again to be an inveterate supporter of fossil fuels and has claimed he would support exploration and drilling activity on US soil for oil and gas resources.

This may spell good news for the sluggish oil and gas sector in the country, where drilling activity has plunged on the back of falling energy prices.

In his acceptance speech, Trump talked about US farmers being "harassed by the EPA [Environmental Protection Agency]" and mentioned timber workers and coal workers, who will now have "relief coming".

While Hillary Clinton had outlined her plans for the environment on her campaign website, which she said would have a focus on developing clean energy, environmental plans were not listed under any of Trump’s political guidelines.

Responding to what the election of Trump means for the Dakota Access pipeline, environmental campaign group Greenpeace said that Obama still has the ultimate say on whether or not the pipeline moves forward.

"There is no doubt that Donald Trump poses an immediate threat to our climate and will try to fast track this and other fossil fuel projects across the country. This is all the more reason for president Obama to step in immediately to stop the pipeline once and for all," the organisation outlined.

"We will not allow Donald Trump to set back all of the progress we have made on climate," Greenpeace added.

While oilfield services companies Halliburton Inc. and Baker Hughes declined to comment on what the election might mean for the unconventional oil and gas business, the American Petroleum Institute was optimistic in terms of the future of the sector.

"We look forward to working with the new administration on smart energy policies that protect the US as the global leader in oil and natural gas production, development and refining, as well as in reduction carbon emissions," API said in a statement to IM.

"We are second to no one and we can build on this success by joining together with policies that embrace our nation’s energy renaissance including increased energy production and infrastructure development while rejecting policies that could potentially harm job creation or raise costs on American consumers and businesses," it added.

Citing a voter poll conducted on election night, API said that 80% of voters support increased development of US oil and natural gas resources including 71% of Democrats, 94% of Republicans and 76% of Independents.

The institute outlined that the US leads the world in reduction of carbon emissions, with clean-burning natural gas driving down emissions in the sector to 25 year lows. However it added that the sector is currently over-regulated.

"With the oil and natural gas industry facing 145 regulations or other policy-setting activities that could discourage production, preventing regulatory overreach should be a top priority," API said. "A combination of industry innovation, market forces and existing standards have proven effective for keeping hydraulic fracturing safe and reducing emissions of ozone, methane and carbon."

In response to the election results, shares in mining equipment provider Caterpillar rose over 7% on Wednesday, while shares for leading coal trader Glencore Plc increased more than 5%.

Outlined are also plans to open onshore and offshore leasing on federal lands, eliminate moratoria on coal leasing and open shale energy deposits, in addition to becoming and staying independent of imported energy from "the OPEC cartel or any nations hostile to our interests".

Onshore drilling is a major end market for industrial minerals like silica (frac) sand, barite (barytes) and bentonite, but the US market has been hit by declining oil and gas prices and oversupply in the sector. Onshore activity fell 30% in 2015 and a further 20% in 2016 with rig count dropping to a low of 417.

Trump_Gage Skidmore
 Donald Trump.

Fracking: more than just politics

The political support that Trump could lend drilling may give the sector the boost it needs to drag itself out of the mud.

At the same time, the decline in drilling has primarily been due to rock-bottom oil prices, rather than lack of political support. Brent crude is trading today at just below $45/bbl, but its price must steadily be above $60/bbl for fracking to be economically worthwhile, IM sources said.

With this in mind, political backing alone would not be enough to turn the US fossil fuel market around and, with it, oilfield minerals.

Earlier this year, research and consultancy firm Douglas-Westwood (DW) predicted that a turnaround in oil and gas industry investments is unlikely to materialise before 2018 as demand growth over the next year is likely to be outweighed by supply growth.

In both onshore and offshore drilling, the industry has seen a 45% reduction globally since 2014. "It’s not just a downturn localised in America. We’ve seen the hit in China as well," Matt Cook, the author of DW’s World Drilling and Production Market Forecast, outlined.

Third quarter 2016 drilled and completed wells contracted only 2.7% compared to an average of 17.3% in quarterly declines over the last year and a half, according to API.

The API’s statistics department director, Hazem Arafa, said that the figures indicate "that the consistent decline in oil and natural gas drilling could be coming to an end".

For its part, oilfield service provide Baker Hughes managed to reduce its loss by 44% in Q3 this year, following a dismal series of results in 2015.

Revenue for Baker Hughes’ North American segment increased 1% sequentially to $674m owing to an increase in US onshore activity and a seasonal uplift in Canada.

However, Karl Rabago, executive director of the Pace Energy and Climate Center questioned Trump’s strategy of lowering prices and increasing production in the current market environment.

"Would you drill another well in today’s natural gas markets? Only if you were carrying a huge portfolio of production loans and no revenues to pay them back," Rabago told IM.

He added that "there is no value in debating the merits and impacts of extreme and poorly conceived policies" as these lend credibility to ideas that do not merit serious discussions, and move the conversation away from real issues.

"Overall, the good news is that markets are powerful and mostly, over the long term, somewhat rational," Rabago said.

The end of coal

The renewable energy sector is also a major consumer of industrial minerals.

In 2015, solar energy applications absorbed 200m square metres of flat glass, a figure which is expected to triple by 2020 according to the World Flat Glass report produced by US-based market research agency The Freedonia Group in September. Its production uses feedstocks such as silica sand, graphite, feldspar, fluorspar, kaolin clay and soda ash.

In contrast with the shares of energy and coal firms, shares of renewable energy companies dropped following Trump’s election, with Vestas Wind Systems A/S falling 13%, First Solar dropping 6% and SunPower dropping 17%.

At the same time, the movement in shares is not a likely indicator of the future, according to Rabago.

"Short-term volatility is an opportunity for short-term traders. It is not an indicator of the soundness of under-developed energy policy notions," he told IM.

While Rabago emphasises that coal workers have suffered and deserve compassion, he said the coal industry itself merits no relief, questioning whether the fundamentals in the sector had changed: "Are coal stocks going to recover from what has happened to them over the past several years?"

Albany Wind Farm_Lawrence Murray  
 Wind farms.
"This is not the auto industry. No bailout is appropriate, in my opinion, and it would cost us dearly (…) their communities deserve our best efforts in support of transitioning away from the dying industry to which their fates have been tied," Rabago said.

Renewing renewables

Previous statements by Trump indicating he would "rip up" the Paris Climate Change agreement - which he has said is set to "give foreign bureaucrats control over (...) our energy and how much we use" have made investors in the sector skittish.

Many states still back renewable energy, while the decline of coal – which cannot compete with natural gas and some renewables – is down to economics and a changing energy scenario.

Referring to the Paris Agreement as a "wise and reasonable measure", Rabago said that it remains to be seen whether the US will take the lead in transitioning economies away from climate-adverse activity, or whether it will become dependent on other countries.

"Nations gather around responsible leadership – if we do not offer it they will find it elsewhere," he said.

In terms of the the shift towards electrification of the automotive industry, Chris Berry, founder of New York-based House Mountain Partners LLC, a resource investment advisory firm, told IM that this should remain on course regardless of Trump’s policies.

The adoption of electric vehicles - whose batteries are a source of demand for lithium, graphite and cobalt - is driven, in Berry’s view, by two distinct tailwinds - economic and regulatory.

Fears that Trump might dismantle incentives towards vehicle electrification and clean energy generally are widespread, based on his past comments.

He has previously described global warming as a hoax invented by the Chinese to make US manufacturing non-competitive, and the man leading his EPA transition team is also a climate change skeptic.

But even were Trump to remove all government incentives in this regard, the economic case should still stand on its own, said Berry.

"Putting anti-clean energy people in place will not derail it. It may slow it down. But it won’t derail it," he added, noting that it may be more important to watch state-level legislation than federal-level in this regard.

In terms of the US mining industry more broadly, Berry said the Trump presidency may be beneficial. Adding the caveat that "it’s still too early to tell", Berry said: "It looks as though Trump will be a friend to the extraction industry in the US."

While the focus of this is likely to be in the areas of coal, oil and gas, the mining industry generally is likely to see gains, he added.

The country’s National Mining Association (NMA) said in a statement sent to IM that it looks forward to working with the new president "on a wide range of issues of mutual interest".

"A new administration and a new congress means a new beginning," the association added.



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