NACM Industries to Watch: Non-Energy Natural Resources/Raw Materials

Extraction of resources for energy production continues to grab headlines as there are companies perennially facing solvency challenges in this new era of increased supply and dropping prices. However, natural resources and raw materials used for non-energy purposes are falling under increasing pressure of late, as illustrated by another bankruptcy filing in the sphere this week.

Birmingham-based Walter Energy, Inc., a metallurgical coal producer for the global steel industry, and its U.S. subsidiaries have filed in the Bankruptcy Court for the Northern District of Alabama. The company pre-negotiated a restructuring agreement with certain senior lenders in a case pertaining to its U.S. operations. Those in Canada and the United Kingdom were not included in the filings.

"In the face of ongoing depressed conditions in the market for met coal, we must do what is necessary to adapt to the new reality in our industry," said Walt Scheller, Walter Energy CEO. The firm said it has sufficient cash to assure that vendors, suppliers and other business partners will be paid in full for goods and services that they provide during the reorganization process.

One of the problems facing the industry stems from the fact that non-energy commodities (iron ore, steel, aluminum, etc.) are traded in U.S. dollars, now a stronger currency than in many years. However, most of the manufacturing takes place in countries where the dollar is not the dominant currency, said Martin Zorn, CEO and president of Kamakura Corporation, which analyzes and reports monthly on corporate credit quality and solvency risk. This can lead to a host of foreign exchange problems, as a number of publicly traded companies in various industries have noted surprisingly disappointing earnings this year.

Weakness for domestic producers isn't the only, or perhaps even most significant, headwind damaging the industry. The much-discussed slowing of the Chinese growth rate in the last couple of years means drastically reduced global demand for iron ore, steel and aluminum, among other commodities. Slower Chinese importing is becoming an increasing financial issue for resource-rich countries in South America, Canada and especially Australia where more than one-third of all exports are destined for China. No industry is more important to that country's GDP than mining, according to Coface's 2015 Country Risk Report.

"Australia's mining sector is very much tied to the Chinese economy," Zorn told NACM this week. "We're going to continue to see a lot of pressure on natural resources companies there." If problems escalate into insolvency or even just the brink of it in many cases, many other sectors could face financial problems in Australia, one of the top destinations for business among NACM members' companies.

 

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Export-Import Bank's Fate to Become Clear by Month's End

More than three weeks after Congress allowed the charter of the Export-Import Bank of the U.S. (Ex-Im) to expire, shuttering the trade-facilitating agency, moderate federal policymakers are renewing pressure to reopen its doors. And that could occur sooner than later, according to political sources in the District of Columbia including Jim Wise, NACM's lobbyist and managing partner at Pace LLC.

In a scene reminiscent of the pursuit of trade promotion authority authorization earlier this summer, President Barack Obama and congressional moderates began revisiting the issue of reauthorizing Ex-Im, which many businesses depend on to help arrange financing they otherwise could not obtain through private sources to sell business and services to foreign-based buyers. Ex-Im, which saw its charter expire at the end of June, remains dormant primarily because of opposition from the most fiscally conservative lawmakers of the Republican Party, notably Rep. Jeb Hensarling (R-TX).

The only chance for reauthorization in the short term, in Wise's estimation, is attaching reauthorization language into unrelated legislation already heading to full House and Senate votes. A sweeping highway legislative proposal appears to be the best hope at present. There is virtually "no chance" of Ex-Im reauthorization passing as a standalone bill, Wise noted.

"There is a deep ideological divide with those in the Tea Party versus moderates who think we need to help make our companies more competitive globally," he said.

A number of conservatives have argued that it isn't the government's place to offer Ex-Im what, in their view, amounts to a form of corporate welfare for the nation's largest companies to do business abroad. Supporters of the agency are concerned that companies may need to move some manufacturing operations outside of the U.S. if Ex-Im remains closed, as reported by a number of media outlets as well as NACM and FCIB in recent weeks. Analysts have argued that its closure would actually benefit some foreign producers overseas and would result in the loss of domestic exports and, thus, manufacturing activity and jobs at home. In addition, several economists have characterized arguments from Ex-Im opponents as based on incorrect statistics and misleading analysis or, in some cases, "fabrications" inspired solely by perceived political gain.

Ex-Im, through the fees it charges, typically generates a taxpayer-neutral result or more frequently a surplus. It has not relied on taxpayer money to cover its activity at any point this decade. The last time multiple annual losses of any significance at Ex-Im occurred were during a couple of brief spells in the 1980s and 1990s.

 

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Global Business Confidence Pessimistic on U.S. Overreliance, Ongoing Greece Debacle

Corporate optimism is on the decline as more companies across the globe are anticipating a drop in business for the year ahead, according to July's Markit Global Business Outlook Survey, which studies expectations from 6,500 companies. Emerging markets also reported negative findings due to weaker economies in China, India and Brazil.

"The downturn in business confidence about the year ahead highlights how numerous headwinds are acting as drags on the global economy and hitting the emerging markets in particular," said Chris Williamson, chief economist at Markit.

Lower business confidence was reported in the United States, which Markit credits as "a major driver of the global economic recovery in recent years." While the U.S. service sector showed some increase, the manufacturing sector fell. "A key concern is that the U.S. is playing a reduced role as the main global growth engine," Williamson said. "U.S. companies have failed to revive from the weak levels of optimism seen at the start of the year, suggesting the U.S. economy remains in a slower growth phase in 2015."

Some of largest emerging markets, however, continue to struggle. Markit reports that optimism in China is low, with the country's service sector showing deterioration and its manufacturing sector dropping to its weakest rate since 2011. The most pessimistic outlook is among companies in Brazil, where "the lowest degree of optimism anywhere in the world was recorded," the report states.

Confidence across companies in the eurozone was mixed, with Ireland showing strong optimism. Businesses in France reported improvement as well, while Germany, Italy and Spain saw a less positive outlook. The United Kingdom also showed an upturn in business confidence, but the survey illustrated concerns over a potential 'Brexit' and 'Grexit,' as well as high interest rates and cuts to government spending. Other European countries reported concerns over political instability in neighboring countries, a weaker euro and the uncertainty surrounding Greece's future.

"Although the Greek crisis has so far had little impact on the economies of Europe," Williamson explained, "companies are citing 'Grexit' as their greatest threat to the outlook."

 

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Ukraine on Brink of Becoming New Financial Crisis Du Jour

While the financial crisis in Greece remains firmly in the public eye, news of the Ukraine's growing economic uncertainty has not received nearly the same attention. Yet, the embattled Eastern European country could find its way to a damaging default within weeks, days or even hours.

Last week, Ukrainian officials and their creditors failed to agree on a deal to resolve the country's $70 billion debt. If an agreement is not reached, the country may default as early as Friday, according to media coverage from sources including The Financial Times.

"The world has never seemed to be able to handle more than one crisis at a time; and for the last few months, the attention has been on Greece," said NACM Economist Chris Kuehl, Ph.D. He added that, by some accounts, the situation in Ukraine has worsened of late.

Ukraine needs the financial assistance to not only help its economy, but also to compensate for the cost of conflict and political unrest with pro-Russian separatists. It has been somewhat neglected, as the Europeans remain primarily committed to Greece. This is an ongoing point made by Ukrainian Prime Minister Arseniy Yatsenyuk, Kuehl explained.

"Ukraine has four times the population of Greece and can legitimately assert that it did nothing to invite the current financial disaster and [Yatsenyuk] has a point," he said. One reason for the lack of support is the European Union has many responsibilities but lacks the means to respond to all of them.

"The EU is weak in its own right and needs the help of the IMF (International Monetary Fund) and others just to make minimal progress," Kuehl said. "The expectation had been that the U.S. would have played a bigger role, but the mood of Congress is anything but supportive." Another potential reason in Kuehl's estimation: "The Greeks are part of the EU and Ukraine is not."

 

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Dodd-Frank Turns Five, Impact on Financial Stability Questionable

Several years after the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, people continue to debate its merits. But as Congress has implemented more and more of Dodd-Frank's policies, concern is growing in many quarters because of ripple effects that are being created.

Unintended consequences are far from unusual when Congress enacts sweeping legislative policy changes, said Jim Wise, NACM's lobbyist and managing partner of Pace LLC. "Among the most acknowledged concerns of lawmakers regarding the Dodd-Frank are the implications the law has created for smaller community banks and credit unions , who are subject to much of the same level of regulation as the largest financial institutions in the country," Wise noted in late July. "To this end, there is legislation under consideration that would afford some specific relief to the smaller lending institutions for small business loans and mortgage loans that are kept in portfolio by the lender."

To mark the legislation's fifth anniversary, the House Financial Services Committee scheduled a series of full committee hearings, which combined will attempt to answer how the 2,300-page law has impacted consumers, companies, financial markets and the U.S. economy since President Barack Obama signed it into law. The series kicked off July 9 with "Dodd-Frank Five Years Later: Are We More Stable?" and will resume July 28 with "Dodd-Frank Five Years Later: Are We More Prosperous?" The final hearing has yet to be scheduled.

In his opening statement at the July 9 hearing, Committee Chairman Jeb Hensarling (R-TX) said, "What is undebatable is the fact that since the passage of Dodd-Frank, the big banks are now bigger; the small banks are now fewer. In other words, even more banking assets are now concentrated in the so-called 'too big to fail' firms."

Witness Todd Zywicki, professor of law at George Mason University and Mercatus Center Senior Scholar, testified that "the overall impact of Dodd-Frank has been to slow our economic recovery, raise prices, reduce choice and eliminate access to the financial mainstream for American families." Paul Atkins, former commissioner of the U.S. Securities and Exchange Commission, also raised faults within the law. "Five years later, we still do not know the full effects the Dodd-Frank Act will have on U.S. capital markets," Atkins said. "We do know, however, that the costs of Dodd-Frank have been borne not just by Wall Street, but by ordinary investors and businesses of all shapes and sizes."

Mark Calabria, director of Financial Regulation Studies at the Cato Institute, concluded that "although a few modest improvements have been made to increase financial stability, I believe Dodd-Frank, no net, has reduced financial stability ... [due to] a combination of both errors of commission and omission. Moral hazard has been increased by Dodd-Frank's expansion of the financial safety net and increased concentration of risk into fewer entities, while the primary 18 causes of the crisis were largely left untouched. I fear if we continue along our current path, we are almost certain to see another financial crisis sometime in the next decade."

In his testimony, Damon Silvers, policy director and special counsel to the AFL-CIO, acknowledged Dodd-Frank was a compromise. It has "resulted in a U.S. financial system, which while it continues to suffer from structural problems, is no longer as vulnerable to crisis as it was ... and has the flexibility to adopt to changing business models within financial firms and markets." Still, the full potential of its systemic risk provisions have not been realized, Silvers said.

 

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 To view past eNews issues or to visit the NACM Archives, click here.

 

 

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