China Restricts Some Steel Production
How that will weigh on iron-ore demand.
How that will weigh on iron-ore demand.
China’s efforts to drastically reduce pollution levels could lead to lower demand for iron ore, a raw material for the steel industry, which is a big source of the nation’s harmful emissions.
It hasn’t happened yet, however. “With the Chinese economy almost fully recovered from the pandemic, demand for steel is very strong,” which means that demand for iron ore is also very strong, says John Kartsonas, a managing partner at Breakwave Advisors, the advisor for the Breakwave Dry Bulk Shipping exchange-traded fund (ticker: BDRY).
At the same time, iron-ore supply remains tight, with Brazil, a major producer of the commodity, not fully recovered from a deadly accident two years ago that hurt production, he says. In 2019, Vale halted some mining operations following a fatal dam breach in Brazil, leading to significant declines in its iron-ore output. Vale pegged its production of iron-ore fines at 300.4 million metric tons in 2020, compared with nearly 384.2 million metric tons in 2018.
Tight supplies and rising demand helped lift the most-active futures contract for 62% iron-ore fines delivered to China to US$174.94 per metric ton on March 4, the highest settlement since August 2011, based on Dow Jones Market Data reports going back to October 2010. That’s not far from the record-high settlement of US$188.88 from February 2011.
China produced more than one billion metric tons of crude steel last year, and there are “no iron-ore projects that will produce sizeable net new tons for at least five years,” says Paul Bartholomew, a metals analyst at S&P Global Platts. Expectations for further Chinese economic stimulus are also positive for steel and iron-ore demand, he says.
Iron-ore prices, however, have eased in recent days on prospects of a slowdown in demand, as China plans to reduce factory activity to cut carbon emissions. The March contract was at US$168.26 on March 16, trading 2.6% lower month to date.
Tangshan, a city in China’s Hebei province referred to as the nation’s steelmaking hub, has ordered factories to limit or halt production on days when a heavy-pollution alert is in place, to cut overall emissions by 50%, according to the South China Morning Post.
“Steelmaking is a major source of pollution in China, estimated to account for about 15% of the country’s total emissions, so it is hardly surprising investors took profits at the prospect the steel industry could be facing significant environmental controls,” says Stuart Burns, editor at large for metals analysis provider MetalMiner. “The first casualty of reduced steel production would be demand for raw materials,” he says.
Still, China might not be able to fully implement restrictions on steel production. Reducing steel output may be “difficult to achieve this year,” says Bartholomew. In the past, many facilities taken offline were already “mothballed or uneconomic,” he says. “It’s harder to close production when mills are operating and making money.”
The VanEck Vectors Steel ETF (SLX), which provides exposure to companies involved in the steel sector, has climbed about 10% this month.
Given China’s restrictions on operations of some highly pollutant steel mills, however, Breakwave’s Kartsonas says he is now “a bit more cautious” on the outlook for iron-ore prices.
Brazil has signalled an increase in iron-ore production. That, in combination with China’s pollution restrictions, could lead to “more moderate” prices in the next several months, he says. Still, if demand for construction continues to support steel, that means iron-ore prices can remain “higher than historical averages for a long time.”
Reprinted by permission of Barron’s. Copyright 2021 Dow Jones & Company. Inc. All Rights Reserved Worldwide. Original date of publication: March 18, 2021
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When will Berkshire Hathaway stop selling Bank of America stock?
Berkshire began liquidating its big stake in the banking company in mid-July—and has already unloaded about 15% of its interest. The selling has been fairly aggressive and has totaled about $6 billion. (Berkshire still holds 883 million shares, an 11.3% interest worth $35 billion based on its most recent filing on Aug. 30.)
The selling has prompted speculation about when CEO Warren Buffett, who oversees Berkshire’s $300 billion equity portfolio, will stop. The sales have depressed Bank of America stock, which has underperformed peers since Berkshire began its sell program. The stock closed down 0.9% Thursday at $40.14.
It’s possible that Berkshire will stop selling when the stake drops to 700 million shares. Taxes and history would be the reasons why.
Berkshire accumulated its Bank of America stake in two stages—and at vastly different prices. Berkshire’s initial stake came in 2017 , when it swapped $5 billion of Bank of America preferred stock for 700 million shares of common stock via warrants it received as part of the original preferred investment in 2011.
Berkshire got a sweet deal in that 2011 transaction. At the time, Bank of America was looking for a Buffett imprimatur—and the bank’s stock price was weak and under $10 a share.
Berkshire paid about $7 a share for that initial stake of 700 million common shares. The rest of the Berkshire stake, more than 300 million shares, was mostly purchased in 2018 at around $30 a share.
With Bank of America stock currently trading around $40, Berkshire faces a high tax burden from selling shares from the original stake of 700 million shares, given the low cost basis, and a much lighter tax hit from unloading the rest. Berkshire is subject to corporate taxes—an estimated 25% including local taxes—on gains on any sales of stock. The tax bite is stark.
Berkshire might own $2 to $3 a share in taxes on sales of high-cost stock and $8 a share on low-cost stock purchased for $7 a share.
New York tax expert Robert Willens says corporations, like individuals, can specify the particular lots when they sell stock with multiple cost levels.
“If stock is held in the custody of a broker, an adequate identification is made if the taxpayer specifies to the broker having custody of the stock the particular stock to be sold and, within a reasonable time thereafter, confirmation of such specification is set forth in a written document from the broker,” Willens told Barron’s in an email.
He assumes that Berkshire will identify the high-cost Bank of America stock for the recent sales to minimize its tax liability.
If sellers don’t specify, they generally are subject to “first in, first out,” or FIFO, accounting, meaning that the stock bought first would be subject to any tax on gains.
Buffett tends to be tax-averse—and that may prompt him to keep the original stake of 700 million shares. He could also mull any loyalty he may feel toward Bank of America CEO Brian Moynihan , whom Buffett has praised in the past.
Another reason for Berkshire to hold Bank of America is that it’s the company’s only big equity holding among traditional banks after selling shares of U.S. Bancorp , Bank of New York Mellon , JPMorgan Chase , and Wells Fargo in recent years.
Buffett, however, often eliminates stock holdings after he begins selling them down, as he did with the other bank stocks. Berkshire does retain a smaller stake of about $3 billion in Citigroup.
There could be a new filing on sales of Bank of America stock by Berkshire on Thursday evening. It has been three business days since the last one.
Berkshire must file within two business days of any sales of Bank of America stock since it owns more than 10%. The conglomerate will need to get its stake under about 777 million shares, about 100 million below the current level, before it can avoid the two-day filing rule.
It should be said that taxes haven’t deterred Buffett from selling over half of Berkshire’s stake in Apple this year—an estimated $85 billion or more of stock. Barron’s has estimated that Berkshire may owe $15 billion on the bulk of the sales that occurred in the second quarter.
Berkshire now holds 400 million shares of Apple and Barron’s has argued that Buffett may be finished reducing the Apple stake at that round number, which is the same number of shares that Berkshire has held in Coca-Cola for more than two decades.
Buffett may like round numbers—and 700 million could be just the right figure for Bank of America.
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