RAOUL PAL: In the series so far, we've spoken to many experts about the global macro economy. And it's both the analysts and the hedge fund managers who've given us their views on whether they think we might be moving to recession or not. But to get a true picture, we need to look at the sectoral level, the micro to the macro. And that's to understand the component parts of what makes up the economy. So, in this show, I'm going to go and speak to a number of people to get their perspective on what's really happening on the ground, to really ascertain whether there is something more odious going on beneath the surface, or whether things are relatively plain sailing.
The first person I want to speak to is Mark Hansen of Concord Resources. Mark's business ships metals around the world and speaks to the world's largest customers. I think he's going to give us a really good idea of what's going on the ground.
Mark, good to get hold of you. We met in London recently, and you explained that you're in the metals business. And I just thought you'd be ideal for this program. Because I really want to pick your brain on what you saw what's going on. Give a bit of an intro of what you actually do.
MARK HANSEN: Sure. It's good to see you again, Raoul. So, I run a company in London called Concord Resources and we're a global metals merchant and trader, very active in all the markets physically and also financially across the precious metals, base metals and a little bit of energy as well. For context, we deliver 2.2 million tons of metal products and raw materials to about 400 customers in 40 countries. So, we're a very active global participant in the flow of raw materials. We purchase things like copper concentrates and concentrated alumina, and then supply that on big ships, trains and trucks all over the world every day to customers in the smelting businesses and the fabrication businesses all over the world.
RAOUL PAL: So, by definition, therefore, your business will be pretty cyclical in terms of each of the commodities and different times of the business cycle demand and that stuff?
MARK HANSEN: Yes. Yeah, we really do face the daily fluctuations, both of the microeconomic factors of various commodity markets, but then also the macroeconomic factors that drive those various markets and most of our products are directly quite industrial. So, what we're seeing and dealing with are the wholesale markets that have to deal with the smelting industries and then the fabricators that fabricate those metals, products into parts for automobiles or for them and to intermediate uses, they then go into consumer products.
RAOUL PAL: So, what do you think the end use for most of the metals are that you produce? Because I'm trying to understand the industries that really you're going to affect more than others, or you're going to see the effects of?
MARK HANSEN: So, our raw materials will touch final fabrication industries in aerospace, automobiles, housing products, sometimes chemicals, and other industrial infrastructure.
RAOUL PAL: There's two things I'm really interested in. One is the trade tariffs thing as a starter. People, with all of those global linkages, whether you're seeing people change their behavior pattern, whether it's building inventories, or running down inventories. And also whether Brexit's had some sorts of inventory build and run down as well, just at the starting level.
MARK HANSEN: So, for sure the bigger story is trade and trade tariffs. And that was an unexpected development that many, particularly industrial customers, hadn't come to appreciate I think the seriousness with which the Trump administration was approaching that topic. They had been used to the breakdown of barriers on imposition of barriers. And when the industrial rollover suddenly had to contend with in particular tariffs in China and having to deal with tariffs on Chinese fabrication products and Chinese export products, that was an unexpected change in supply chains. And I think people weren't prepared or had forecasted to deal with it all.
So, that to me has been the biggest story. When I talked to business customers and people that move goods around the world for various final fabrication, intermediate processing in different places, that to them was a major reorienting of the supply chain. They've become used to where China is a major importer and exporter of a number of commodity products, intermediate products, from electronics to steel products to auto parts and other things that touch China as a numerous amounts of goods, and all of a sudden, became quickly uneconomic and that wasn't forecasted. So, I think that was one.
The other one that has been US story, particularly in metals, which is of relevance is Trump was very quick to put steel and aluminum tariffs on when he came into office. And so what he did there was to protect domestic industry. And he put 25% on steel and 15% of aluminum. That was a boost to the US domestic industry at the expense of neighboring industries. So, it hurt Canada, it hurt production in Europe for a while, there was a few exemptions, like in Australia, for example.
But by and large, that was the first sign that Trump was going to take very seriously the idea of reshoring American manufacturing. What that did is it turbocharged an already pretty good at that time, American- I would say or even American labor market domestic manufacturing base in certain industries like that. So a real boost, which is now starting to fade a bit even with those tariff effects. So, I think people were caught off-guard in how serious he was taking that and that he was going to put a global reordering of how trade flows by almost by the pen by fiat very seriously.
RAOUL PAL: So, there's a couple of questions on that. So, in terms of the global, the Chinese tariffs, have people found the new supply chains yet? Or are they still trying to figure out how they're going to find all the source tomorrow, because China has been a big supplier of this stuff?
MARK HANSEN: China is a huge participant in those markets. But it is also very possible for people to move production reasonably quickly to alternative places. So, Vietnam is a beneficiary, the Philippines is a beneficiary. Japan is a beneficiary. These are places that companies can move either because of technology or cheaper labor or shipping ease, where they can move operations reasonably quickly. I do think so that's happened.
When you speak to some businesspeople, it's very easy for them to look at alternative sites in Asia and move away from production in China. And I do think some of that's happened in some basic industries. And I do think that's also why Trump's move to those tariffs has been arguably somewhat successful in bringing the Chinese to the table to have dialogue around a number of issues that were of importance.
RAOUL PAL: And so your roles in that is to- for your end customers, source product from different places, essentially. So, to get around the tariffs. So, that doesn't necessarily affect your business negatively, just changes some of your-
MARK HANSEN: No, for us, we were not in the processing business. So, the people that are affected negatively by that of course are the people that have plant equipment in China and then have to pay the import tariffs or export tariffs that are associated with their processing. So, those are the customers that I think will look at and have looked at alternative destinations- Mexico, Southeast Asia, Japan is another one, where you can see there are really some benefit to the local economies from that movement. Of course, to the US, it's funny, because it's not necessarily bringing jobs back to the US or manufacturing back to the US, but rather moving into an alternative location that doesn't have that tariff.
RAOUL PAL: And if you found that- you said that the US benefit fading now, do you think that- because you see the globalized world of metals and do you see that America can really compete even with tariffs? Or are you going to find that there's always going to be somebody else with cheaper metal to import into the US?
MARK HANSEN: The US economy was by far the strongest consumption economy as economic data clearly showed. But it was also true on industrial basis, where you have the market was the strongest, you had real activity again in building some infrastructure, you had the rehabilitation of certain plants and smelting, as I mentioned earlier. These were micro things we were seeing that reflected a broader and broader macro picture until the start of this year. And that meaningfully cooled, I would say late in the fourth quarter, and then certainly in first and second quarters of 2019.
The reasons for that is I think is a few but importantly, I think people began to lose confidence that these policies were going to be driving stimulative activity domestically, whereas instead, they were becoming seen as attacks. So, the cost to consumers ultimately passing along some of the increases in the supply chain changes, where the people began to feel that the momentum was fading behind any stimulus or boost that there had been in the economy driven by these reshoring efforts and other things were failing. And I think that took activity in the US quickly off what I would say had been a very brisk level last year in terms of business we did and it was really a standout market to a much more muted pace. And I wouldn't say that it's shrinking per se at the moment. But I would say that we don't see- industrial growth doesn't exist at the moment.
RAOUL PAL: So, growth is flattened out significantly in the US. And what are you seeing globally in terms of growth? Because you see the whole picture because you've got customers all around the world? How does it feel to you out there?
MARK HANSEN: Look, Europe has been consistently poor for several years now. So, there's been no real change. When you look at industrial metals demand and commodity demand, Europe centric has been poor, I would say for a number of years. But it's consistent along the level where people don't expect a meaningful pickup rate or change in that industrial activity, but rather steady flow of business that reflects normal export markets and normal consumption. That hasn't been a meaningful uptake that I can recall in the last few years in European construction or in the auto market domestically in Europe has been flat or weak for a number of years now.
That's a reflection of just what macro markets have told us for a while is that it struggled to get that traction, whereas the US since Trump's election did have a noticeable increase in consumption, people's plans, business investment, all that was real. And we did see that in a number of opportunities and business development initiatives we took, we want to share in an aluminum refinery in Louisiana, for example, where employing people for that operation, for example, was very difficult. We started to see these micro points where the labor market, for example, was very, very tight and we couldn't hire people to work in some operations we wanted to restart or where you had to increase wages to reflect that.
The US was very healthy. But I do feel that that comparative advantage seems to have faded quite a bit in the last six months. And the reasons for that, and there's probably a few but most important seems to be the people's confidence is drained from the business plans they wanted to make and they have certainty in terms of political evolutions of tariffs and other policies has become more of a drag than it is to do things.
RAOUL PAL: Yeah, I'm getting that impression as well. I just see people are putting plans on hold and also, the US aircraft manufacturing industries, there's problems there, we've got problems with the car sector as well. So, you just see demand overall just feels like it's slowing down, as you said, it's not yet in recession yet in the US, but it feels like it's slowing. And sorry, you were outside elsewhere.
MARK HANSEN: Oh, I was going to close off by saying Asia and also EM, we're going to talk broadly about- EM economies have been, from a commodity demand perspective, I would say, very volatile. Some markets have been very good some years and some markets have been very bad. A market like Turkey, for example, that previously has been a real excellent market for metals consumption and construction, fabrication fell off a cliff a few years ago with the political developments there and its currency and lack of confidence. There was a real indicator that that economy has been very important and flexed subsequently in industrial demand because we haven't seen it come back.
Southeast Asia, similar to China, has also been very quiet. And there's been some signs of that offshoring from China having effects. And smaller markets like Vietnam, Philippines in highlight, those two countries are probably better than people think simply because you've seen more business activity come from other countries- from China in particular, there for investment. South America, similarly, in southern Africa is hit or miss depending on the rate of change in consumer cycle. But certainly nothing stands out there in the Latin region certainly, the last two quarters, the last six months hasn't been anything special.
RAOUL PAL: Yeah. So, you're not really seeing growth anywhere, I guess, across the global economy. So, if I look at the chart of copper, for example, as a proxy for like industrial metals, just doesn't look good to me. It feels that prices want to fall, because, as you're saying, there's no real demand out there. You're not telling me yet, I don't think that you're seeing a full recession, but you're just seeing no real incremental demand. And that copper chart worries me that the whole metals complex can come lower.
And also, I'm worried about the dollar going higher as well, which obviously has a big impact on your business. Any thoughts on current metals prices because of demand and the currency side?
MARK HANSEN: Two most important drivers here to highlight. One is the dollar. And so, for all metals, the key driver is the direction of the US dollar. It certainly has surprised a number of market participants that the dollar has remained as firm as it is even with the receiving the end with bond market moving as it has and with the expectation for easing from the Fed as it has, that's confounded a lot of commodity market participants. At the same time, we have pretty significant short positioning across the metals markets, in copper in particular, I highlight recently is that very strong signs that the market did turn very short as part of that expectation slowdown. Yet the prices failed to make any real significant negative headway.
There's one other conundrum that I haven't quite been able to square with the slowdown we have seen in business, which is real, is the lack of increasing visible inventories on the exchange. So, logically, you would expect to see metals inventories increasing as consumption slows down, the producers are still producing, the prices are still pretty good. And you would expect to see inventory exchange grow as people deliver that unwanted metal to the exchange. That hasn't been happening in any meaningful sense across the metals, which is interesting, because- that's not something I can fully explain yet.
But it suggests that things aren't as bad as we might think in terms of metals' supply-demand balance, even though consumption is reasonably weak and the metals premiums, which are the prices that are paid over the exchange prices to deliver the goods into certain locations are also- they're poor, but they're not horrible as well. So, for the moment, I feel that we're in this zone where people expect things to get better in the next six months, therefore continuing to stock up on their products as they would expect, but not budgeting for any major increase. And therefore, we haven't seen the backend of inventory yet, which would be the clear bearish sign to look for when going short copper or another- zinc or aluminum or something like that. We haven't seen that yet.
RAOUL PAL: Yeah, it's fascinating. Because we're seeing it from speaking to a bunch of macro people about their view. Everyone's at the same point. It's like, okay, everything's now pricing in slow growth. And there's not a clear picture of whether we go into recession or not. And it's like we're waiting for the next three or four months to see that data. My view is it might be the dollar that does it. But let's see.
MARK HANSEN: It certainly could be. A meaningful move higher in dollar would pressure on commodity prices, from energy to copper to other base metals lower. There's no question. But there's an interesting flip side of this, which is if the Fed delivers, as people expect, and if that stimulus is enough to ignite some of the confidence that seems to have been lost in the last six months, I do believe that because of the situation we see in some commodity markets, where we have low visible inventory, we have reasonably balanced supply-demand balances, that creates a situation- we could actually have a fairly strong rebound in some of those prices to reflect people short-term increasing confidence.
If we continue to see data deteriorate, if we see visible inventories rise, if we see things like time spreads weaken as people don't want to hold commodities, so then you see the contango is growing in those markets, those would all be signs that actually what we're seeing is a real meaningful move towards recession and towards actual- not just no growth, but contraction.
RAOUL PAL: It feels like being long volatiles is the right answer, because one way or the other, we're probably