United States: Likely Freight Rail Strike

A potential nationwide freight rail strike is looming, threatening to cripple economy of the United States ahead of the holiday shopping season and November’s midterm elections.  

Roughly 115,000 rail workers could walk off the job as early as September 16, 2022 if they cannot agree to a new contract with railroads.  

That’s the first day workers could legally strike after a White House-appointed panel released collective bargaining recommendations aimed at ending years of contentious negotiations.  

Five of the 13 unions representing rail workers have reached tentative agreements with railroads to enact the Presidential Emergency Board (PEB) recommendations, which call for 24% pay raises, back pay and cash bonuses.

But most of the railroad workers belong to unions that haven’t yet agreed to a deal. It’s also unclear whether workers would vote to ratify PEB recommendations that don’t address their concerns about punishing hours and rigid schedules that make it difficult to take time off for any reason.  

“I would suspect that most railroad workers would love to strike, would love to get back at their employers after years of abuse while they watched the industry make record profits,” said Ron Kaminkow, an organizer at Railroad Workers United, which represents rank-and-file railroaders. 

More than 9 in 10 railroad workers would vote to reject the PEB recommendations and go on strike, according to a recent survey from the organization.  

Still, Kaminkow noted that workers could change their minds when faced with the prospect of years of back pay and the reality that Congress can take away their main source of leverage at any time. 

Federal law gives Congress the power to block or delay a railroad strike. If workers were to walk out, lawmakers could vote to enact the PEB deal or appoint arbitrators to fast-track a new contract, among a range of other options. 

The Association of American Railroads, which estimates that a national rail shutdown would cost the US at least US$2 billion a day, said that lawmakers should vote to implement the PEB recommendations in the event of a strike to instantly reward employees and reduce economic uncertainty. 

Experts say that an extended walkout would devastate industries that rely on freight to transport grain, coal, diesel, steel and motor vehicle parts. Shipping containers would pile up at ports, severely congesting supply chains and sending prices soaring ahead of the holidays.  

“The railroads are actually very critical to the nation’s economy, and also to security. There’s a lot of hazardous stuff that simply can’t go by road,” said Nicholas Little, Director of Dailway education at Michigan State University’s Center for Railway Research and Education.  

While Democrats are closely aligned with labor unions, organizers acknowledge that they likely wouldn’t allow for an extended strike just before the midterm elections. President Joe Biden, who created the PEB in July to help resolve the contract dispute, is laser focused on unclogging supply chains. 

“After the pandemic and supply chain disruptions of the past two years, now is not the time for more uncertainty and disruption,” a White House official told The Hill. “Now is the time for the parties to resolve their differences, before the nation’s economy begins responding to even the prospect of a nationwide rail stoppage.” 

While both unions and railroads say they want to avoid a strike, some see a work stoppage as the only way to win better working conditions.  Over the last six years, the top freight carriers laid off 45,000 employees, or nearly 30% of their combined workforce, according to the Surface Transportation Board. That left trains understaffed when demand picked up, leading to service disruptions and overworked crew members.   

Workers complain that they often cannot secure time off, even for scheduled doctor’s appointments or family events, and are disciplined whenever they miss a day for any reason. They say they don’t receive sufficient notice or rest before starting a days-long shift that could take them hundreds of miles from home.  

“Emotionally, you’re just drained,” Robert Hollifield, an electronics technician, said at a railroad worker town hall hosted by the AFL-CIO’s Transportation Trades Department last month. “Every time the phone rings, you go into a minor panic wondering where you’re going to have to go and how long you’re going to be gone away from your family.” 

Many workers saw this round of negotiations as a key opportunity to revamp those policies and were disappointed when the PEB recommendations largely ignored them. There’s a growing sense of resignation that even if they want to strike, Congress won’t let them.

Congress last acted to end a rail strike 30 years ago. Most of today’s lawmakers and their top aides have never dealt with the issue before and have little knowledge of the process, likely giving industry insiders more influence. 

The Brotherhood of Locomotive Engineers and Trainmen and the International Association of Sheet Metal, Air, Rail and Transportation Workers said in a Labor Day statement that railroads all but hide behind Congress in their efforts to reject workers’ demands. 

“While there are no guarantees for either side as to what Congress might do if they are involved, there is no doubt that the rail carriers expect Congress to intervene to save them from dealing fairly with their employees if there is a job action,” they said.

 

US and EU making the world a big fool

The United States and European Union have ramped up buying key industrial metals from Russia, despite logistical problems spurred by the war in Ukraine and tough talk about foreign exchange starved Moscow.

The metal shipments highlight the West's difficulty in pressuring Russia's economy, which has performed better than expected and seen its currency (rouble) surge as buoyant oil revenue has helped offset the impact of sanctions. 

The US and EU import of Russia's main base metal products, aluminium and nickel, during March-June period increased by as much as 70% shows official trade data.

The total value of US and EU imports of the two metals from March to June were reported at US$1.98 billion.

The West has imposed repeated waves of sanctions on a wide range of Russian products, people and institutions, but has largely spared the industrial metals sector.

A US State Department spokesperson said in response to a query from Reuters, "Although we don't preview our sanctions actions, nothing is off the table to increase the price on Putin's unjustified war against Ukraine."

Analysts said the United States and Europe have learned lessons after huge disruption on construction, auto and power sectors caused by sanctions imposed by former US President Donald Trump on Russian aluminium 2018. Those sanctions were lifted the following year.

Prices of both metals surged to record peaks shortly after Russia launched its invasion of Ukraine on February 24 on fears that sanctions or difficult logistics would block shipments.

But those fears were unfounded, since the data show Russian exports during March to June were relatively strong.

"Market mechanisms are working," said Julius Baer analyst Carsten Menke, referring to Russian metals shipments.

"We know from commodity traders it's mainly a question of the price. It's not so much about some politician not wanting you to buy, but is there a deal here."

Russia's Rusal is the world's largest aluminium producer outside China and accounts for about 6% of estimated world production.

During the four months following Russia's invasion of Ukraine, the EU was the biggest importer of unwrought aluminium from Russia, pulling in an average of 78,207 tons a month in March-June, 13% more than the same period last year.

Rotterdam, Europe's largest port, said in a report total volumes rose 0.8% in the first half of 2022, but "break bulk" - cargo that does not fit in containers -- rose sharply by 17.7%, driven by higher imports of metals.

A port spokesperson told Reuters that shipments of aluminium and nickel were still arriving in the port since they are not sanctioned, but declined to give any figures.

US monthly imports of Russian aluminium averaged 23,049 tons in March-June, up 21% from the same period last year.

"For the Americans, it's very important that they get as many different aluminium sources as possible," said Tom Price, Head of Commodities Strategy at Liberum.

"They're very reluctant to get any metal from China, where exports are shrinking, so Russian Rusal aluminium is very important, that is the reason they haven't shut that trade down."

Russian aluminium imports to last year's top seven destinations in March to June averaged 221,693 tons a month, 9% less than the same period last year, but 4% higher than the monthly average for all of 2021.

In nickel, Russia accounts for about 10% of global output and the country's Nornickel makes about 15%-20% of the world's battery-grade nickel. Nickel imports from Russia by the top three destinations in March-June rose 17% year-on-year. The United States saw the biggest gains, surging 70% compared to last year, while EU shipments gained 22%.

Benchmark nickel on the London Metal Exchange doubled to a record above US$100,000/ton on March 08, prompting the LME to suspend trading and cancel deals.

 

Ukrainian President rings NYSE bell, remotely

Ukrainian President, Volodymyr Zelenskiy remotely rang the opening bell at the New York Stock Exchange on Tuesday. He appealed for billions of dollars in private investment to rebuild factories and industries destroyed by Russia.

Zelenskiy's government launched a platform of over 500 projects worth US$400 billion for foreign companies and private investors to help rebuild Ukraine's economy, even as the war with Russia drags on.

Zelenskiy appeared on a video screen behind the platform overlooking the NYSE floor where the opening bell is traditionally rung. Traders applauded and whooped while a banner read: "We are free. We are strong. We are open for business."

Fresh from a roundtable with top executives from JP Morgan, Pfizer and other US companies, Zelenskiy said in English that Ukraine was already rebuilding its economy, more than six months since the Russian invasion began.

"Ukraine is the story of a future victory and a chance for you to invest now in projects worth hundreds of billions of dollars to share the victory with us," he said.

Ukraine is also appealing for some US$5 billion in international aid each month to keep its economy running, in addition to military aid from NATO alliance members.

The United States and allies in Europe and Asia have already sent billions in humanitarian aid, weapons and other security spending, and officials are watching closely for any signs domestic political support could be flagging.

"Advantage Ukraine," the investment push, focuses on 10 key sectors, including the military-industrial complex, energy, pharmaceuticals, metallurgy, woodworking, and logistics.

"It is necessary to invest in Ukraine now, and not wait for the end of the war," Economy Minister Yulia Svyrydenko said in a statement.

Advertising group WPP is leading the marketing campaign for the initiative.

Svyrydenko told Reuters last month that Ukraine's economy should stabilize over the coming year and expand by as much as 15.5% in 2023, after a likely contraction of 30-35% this year.

On Tuesday, she said Ukraine was keen to bring back foreign direct investment, which she said had reached US$6.7 billion before the war. "The Russian invasion adjusted our short-term plans, but did not force us to abandon our strategic goals," she said.

Concerns about corruption had tempered foreign investor interest in Ukraine before the invasion.

The economy ministry is also providing grants to existing businesses, and has relocated 700 businesses from the frontlines of the conflict.

 

Container spot rates start receding

According to Seatrade Maritime News, there is no longer fundamental support for the very high container spot rates seen in the market over the last 18 months as vessel utilization numbers start to normalize.

Container spot rates are starting to decline sharply from their highs and last week the Shanghai Containerized Freight Index (SCFI) dropped 9.7%WoW down 306.56 points to 2846.42 points on 2 September and is down 32%QoQ. The SCFI stood at a record high of 5,051 points in January this year.

The record high spot rates seen over the last 18 months have been driven by exceptionally high utilization rates, very close to 100%, on the main deep-sea trades, at which point Lars Jensen, CEO of Vespucci Maritime said the pricing curve become almost vertical.

 “This is the point where there is physically no more capacity at all whilst there is excess demand in the market. The data shows that it is at this point spot rates go to the historical highs we have seen over the past 18 months,” he said in report published by the Baltic Exchange.

Utilization rates on the Transpacific trade have dropped to 90% or below over the last three months, below what Jensen says is the 91 – 95% threshold on the trade that drove record high spot rate levels.

Similarly on Asia – Europe utilization has dropped to 81% or below over the last five months while the threshold is around 85% to drive a near vertical pricing curve.

 “This means that there is no structural support for the pricing dynamic where insufficient demand leads customers to overbid on pricing to ensure available space on the vessels,” Jensen said. Further weakening of spot rates going forward is expected.

A similar conclusion is drawn by Parash Jain, Head of Shipping & Ports & Asia Transport Research, HSBC Global Research. “As vessel utilization declines from 95-100%, skyrocketed spot freight rates could lose support quickly and revert back to a more normalized level,” he said in a note sent on Monday.

HSBC forecasts spot rates could fall another 58% in 2023 and 37% in 2024 on average before reaching the bottom.

Jensen noted that bottlenecks in global container trades had decreased with 9.8% of the global fleet unavailable due to delays in July compared to 13.8% in January.

Current levels are still well above the 2% seen in normal market conditions, does in effect release more capacity into the market at a time when global container volumes are falling.

What the sharp falls in spot rates will mean for long-term contract rates and container line profitability is a point of contention.

Last week HSBC’s Jain forecast an 80% drop in profitability for container lines in 2023-24.

While Blue Alpha Capital founder John McCown believes too much emphasis is being placed on spot at that while container lines maybe at or near their peak of profitability, a collapse is not imminent.

Germany revamping LNG import capacity

The German Government has signed two memoranda of understanding with the country's top gas utilities for the delivery of two floating LNG import terminals.

According to a Reuters report, the deals, with Uniper, RWE, and EnBW, will see the vessels, due to be completed this winter, delivered by March 2024.

"This is an important date in the series of steps that we have been taking since the beginning of the year, to make ourselves independent and less susceptible to blackmail from (Russian President Vladimir) Putin, and to give Germany a robust and resilient energy infrastructure, or in this case gas infrastructure," Economy Minister Robert Habeck said.

LNG has become the last resort for energy-hungry Germany when Russia reduced flows via the main artery supplying the EU's biggest economy with natural gas. Most of it comes from the United States, but Germany has no import terminals for the super-chilled fuel that needs to be re-gasified at the point of entry into the country.

Stationary LNG import terminals take years to build while floating storage and regasification are much faster to install once their construction is completed.

US LNG volumes are not large enough to fully replace Russian gas flow via pipelines due to production capacity constraints, so Germany needs alternative suppliers, too.

Chief among these could be Qatar, but negotiations between Berlin and Doha ended without a deal earlier this year as the Qataris insist on long-term contracts and a clause that would oblige Germany not to resell any gas it is not using.

Meanwhile, the head of Germany's energy regulator warned that gas consumption would have to be cut deeper than the EU-wide voluntary 15% to 20% if the country is to avoid a harsh winter of shortages.

"If we fail to reach our target of 20% gas savings then there is a serious risk that we will not have enough gas," Klaus Mueller told the Financial Times earlier this week, which would lead to gas rationing.

 

 

Can Liz Truss be another 'Iron Lady" of Britain?

According to Reuters, New British Prime Minister, Liz Truss faces a financial markets test. If she was planning big energy subsidies only, investors might not worry too much. But she plans tax cuts – and may pick a fight with the Bank of England (BoE) and trigger a trade war with the European Union (EU).

In many ways, Britain faces similar challenges to other European countries i.e. high inflation, rising interest rates, soaring energy prices and an imminent recession. Insofar as it stays in the pack, markets won’t single it out for special attention.

Britain faces extra risks. Inflation is particularly high, Brexit has damaged the economy and the country has a chronic current account deficit meaning it relies on foreign investors to pay its bills. Truss does not want to be part of any pack. She believes that bold supply-side reforms will launch the country onto a new higher-growth trajectory.

While that is not a bad ambition, she hasn’t presented a convincing strategy to deliver it. Rather, she looks like a populist prime minister who relishes confrontation.

According to media reports she is set to declare China a threat and has questioned Britain’s special relationship with the United States. She is also taking a hard line with the EU. She also wants to change the BoE’s mandate, which is to deliver price stability.

Up to now, Britain has been in the middle of the European herd on fiscal policy. Government debt was 100% of GDP at the end of the first quarter, not vastly above the EU’s 88%. Since last September Britain had allocated 1.6% of annual economic output to cushion consumers and businesses from the energy crisis, about the same as Germany and France, according to Bruegel, the Brussels-based think tank.

It’s still unclear what extra help Truss will give to support people with spiralling energy bills this winter. But it will be expensive. Just supporting households could top 50 billion pounds over the next year, or about 2% of GDP.

Helping businesses would require another mega-package. If gas prices stay high now that Russia has suspended some gas deliveries to Europe indefinitely, the government could face similar costs the following winter and beyond.

This bailout may end up being roughly in line with the rest of Europe. Germany announced a 65 billion euro energy package over the weekend.

The difference is that Truss will at the same time cut taxes on employment and reverse a planned rise in corporation tax, costing at least 30 billion pounds a year. And she does not seem to want to cut spending to compensate.

Truss is also dead set against funding her support package via windfall taxes on energy companies. This is a missed opportunity since the sector is set for excess profits of up to 170 billion pounds over the next two years, according to the Finance Ministry calculation.

High inflation might help the government by lowering the debt-to-GDP ratio. But this is not as much of a get-out-of-jail-free card as it is for some other countries, because a quarter of British government debt is linked to rising prices and just over a third has been bought by the BoE.

One area where Britain is already an outlier is that prices are rising faster than in other Group of Seven countries. Inflation jumped to 10.1% in July, and Citigroup analysts recently predicted it could reach 18.6% early next year.

As a result, the BoE will need to jack up interest rates sharply to re-establish price stability. It’s also minded to start selling government bonds later this month. These moves are unlikely to please Truss. Not only will they deepen the recession and hit her core voters; these will make it harder to fund a fiscal bonanza.

This could lead to further confrontation between Truss and the BoE. Although many investors agree that the central bank has been slow to nip inflation in the bud, the priority now is to bring prices under control. Financial markets will not appreciate anything that looks like tampering with the BoE’s independence.

Until recently investors viewed Britain part of the European pack. Both pound and the euro have fallen sharply against the US dollar this year – and government bond yields have been rising across the world. But there are now the first signs of jitters focused specifically on Britain. The yield spread between UK and German 10-year government bonds has widened by 0.3 percentage points in the past month. In the past 10 days, pond has fallen about 2% against the euro.

Turkey-Israel love affair

A Turkish warship has docked in Israel for the first such visit in more than a decade as relations between the allies of United States improve following fierce feuding over the Palestinian cause.

The frigate Kemalreis docked in Haifa on Saturday as part of NATO manoeuvres in the Mediterranean Sea, a Turkish official said. An Israeli official said Ankara had submitted a preliminary request for the crew to disembark on shore leave.

A Haifa port official said it was the first time a Turkish naval vessel had visited since at least 2010, when bilateral ties were shattered by Israel's storming of a pro-Palestinian aid convoy that tried to breach its blockade of the Gaza Strip, ten Turks were killed by Israeli marines in that incident.

For its part, Israel has voiced objections at NATO-member Turkey's hosting of members of Hamas, a Palestinian Islamist movement that is proscribed as a terrorist group in the West.

But the countries have moved to mend their relationship in recent months, with energy emerging as a key area for potential cooperation. They are expected to appoint new ambassadors soon.

It may be recalled that the Israeli charge d'affaires in Turkey had talked the re-appointment of an ambassador to Ankara, while repeating Israel's expectation that the Hamas office in Istanbul should be closed down.

In a roundtable meeting with journalists, Israel's current top representative in Ankara Irit Lillian said the process of re-appointing an ambassador to Turkey was only a matter of "when and not if."

"It's only because of elections in Israel that things might be delayed on the Israeli side but I hope it will be on time and it will be just a few more weeks and the process will be over," Lillian said, Israel will hold a general election on November 01, 2022.

Earlier, Turkey and Israel had agreed to re-appoint respective ambassadors more than four years after they were called back, marking another milestone after months of improved relations.

The two regional powers had expelled ambassadors in 2018 over the killing of 60 Palestinians by Israeli forces during protests on the Gaza border against the opening of the US Embassy in Jerusalem.

But they have been working to mend long-strained ties with energy emerging as a key area for potential cooperation.

Lillian reiterated the challenges to the ties, saying that the biggest obstacle to the "positive tendency seen throughout the year" was the existence of a Hamas office in Istanbul.

"There are plenty of challenges, but from our point of view, one of the main obstacles is the Hamas office in Istanbul," she said.

"Hamas is a terrorist organization, and it is no secret that Israel expects Turkey to close this office and send the activists there away from here," Lillian added.

A visit to Turkey by Israeli President Isaac Herzog in March, followed by visits by both foreign ministers, helped warm relations after more than a decade of tensions.

Turkish President Tayyip Erdogan and Israeli Prime Minister Yair Lapid held a phone call recently, expressing their satisfaction with the progress in ties and congratulated each other on the decision to appoint ambassadors.

Erdogan said necessary steps to appoint the ambassador would be taken as soon as possible, while Lapid said the strengthening ties would lead to achievements in commerce and tourism.