On the brink of extinction

Last ditch attempts to rescue British Steel are ongoing.

The Scunthorpe plant is the UK’s last remaining primary steelmaker and a core supplier to critical UK infrastructure.

Over the weekend, both houses of parliament were recalled for emergency sessions on Saturday and the government historically passed legislation to take control of the business and the operating plant. However, without the essential raw materials to keep the two blast furnaces running – coking coal and iron ore – the efforts might be in vain.

For once the furnaces are switched ‘off’, it is virtually impossible to make them operational again. It is believed British Steel’s former Chinese owner, Jingye, has let essential raw materials run out. In essence, ‘kill the plant,’ thereby making the UK reliant on Chinese exports of the finished product, known as virgin steel.

How have we ended up in this predicament – Trump and an unintended victim of the trade war?

In this instance, as in other sectors, the Chinese government has successfully managed to take over key industries for strategic reasons, massively subsidising domestic production and, in doing so, driving global competition out of business. Other examples include green energy (such as solar panels and wind turbines,) EVs, rare earth processing, shipbuilding, and other heavy industries.

Global consumers have benefitted hugely from the resulting low costs, but unfortunately the domination of these industries by one country also presents significant risks to a sovereign nation. Ultimately, if Scunthorpe’s furnaces do go out, then the UK’s ability to defend itself and build critical infrastructure will be considerably diminished.

This is particularly topical in the context of Donald Trump’s tariff proposals, which are much too broad in their reach, incorporating a vast array of inconsequential consumer goods, such as clothing, which have got no chance of being produced in bulk in the US anyway. However, in specific areas there is merit in actively reducing the dominance of a single country in industries where there is very little global competition and where such dominance could undermine the world order.

What have we been watching?

 Warning! By the time you read this, the situation could have changed radically, given Trump is so unpredictable!

Another roller-coaster week for global stock markets reacted to Trump’s latest outbursts. However, this is not just a “game of chicken” on tariffs, but there is also developing into one between the administration and the Federal Reserve… has the sell-off in the US Treasury market caused Trump to blink first?

Last week started badly as markets were rattled as Trump raised tariffs on China to 125% for daring to retaliate with an 84% tariff on US imports. Equity markets slumped on this development, but it was the sell-off in the US Treasury market that forced Trump to blink first. He announced a 90-day pause on imposing Liberation Day tariffs, albeit all countries will now revert to a standard 10% tariff for the time being. The one exception is China, which will keep the punitive tariff level. Trump was keen to highlight the countries that are coming to the US to negotiate a trade deal said to be between 50 and 75. Trump has also adopted a ‘carrot and stick’ approach. For example, as Japan came forward quickly, it will be prioritised compared with earlier ‘no negotiations rhetoric’. China could seemingly be isolated until it is also brought to the table. We must not forget that Trump is also still considering further sector specifics and, following steel and cars, has pharmaceuticals in his sights. This would not be helpful for the UK given the importance of pharmaceutical exports!

Towards the end of last week, markets rebounded strongly on the 90-day pause news, with NASDAQ up 12% in a day and Japan up by 8%. Whilst the 90-day pause is a welcome reprieve for markets and reduces the worst-case scenario outcome, nonetheless it still leaves many uncertainties. Those US companies which are more reliant on Asian supply chains, such as retailer Walmart, are already withdrawing earnings guidance due to tariff uncertainty. Trump is also highlighting the tariff revenue flowing into the US coffers. However, the amount is still open to question and we know that some companies, such as Nintendo and Jaguar Land Rover have stopped shipping gaming consoles and cars to the US for the time being.

Late Friday, news broke that smartphones, computers, and other electronics would be exempt from US reciprocal tariffs — including the 125% rate on China. These items make up 12% of all US imports and 20% from China, making the exemption significant. But, true to form, Trump had already begun to backtrack by Sunday evening, with expectations of new semiconductor tariffs.

So, why did US Treasuries sell off? The 10-year US Treasury yield had fallen to around 4% but then jumped to 4.5% for the biggest weekly rise since 2001. This was due to a combination of factors, from concerns about the inflationary impact of tariffs to possible selling by China, which is a very big holder and not pleased by the 125% tariff hit. Some US hedge funds were also reported to be selling to raise cash, possibly for margin calls on leverage. There are also clear signs that tariffs are starting to impact trade, with container bookings into the US having slumped by two-thirds in a week! However, does the sell-off also reflect the demise of the US in the world order due to Trump’s actions? The dollar has been the reserve currency and used to facilitate global trade over many decades. Likewise, US Treasuries have been considered the risk-free asset in the global financial system. Could this be the first sign of a breakdown in this historic belief? If so, it might be even more challenging than the reciprocal tariff war.

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The UK government has been trying to keep its head beneath the parapet but cannot avoid the global turmoil. The spike in US Treasury yields fed through into other parts of the bond market such that the cost of UK government borrowing jumped to a thirty-year high. The government is trying to help the UK car and steel industries, but the country’s third-largest export – pharmaceuticals – is now at risk from further possible Trump sector tariffs. Chancellor Rachel Reeve’s fiscal headroom has already evaporated, implying more spending cuts and tax rises are on the way.

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Brent oil continued to slide, falling below $60 on fears about US and global economic activity, before rebounding to around $63.

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One final thought before our ‘finally’ ending. Like Trump, the geopolitical situation has suddenly become a lot more unpredictable. Falling oil prices will dent Putin’s coffers for his war in Ukraine, but things have become more complicated with Zelensky claiming Chinese soldiers have been fighting for Russia in Ukraine! Could the US-China trade war force China even closer to Russia, and might it become more emboldened regarding its long-term ambitions regarding Taiwan? Gaza remains a war-zone while Trump also has to deal with Iran and its nuclear programme. How does he manage to find the time to play golf at Mar-a-Lago?

Finally, further to last week’s Alpha Bites ‘A frosty reception’ the US Commerce Secretary has defended America’s decision to impose tariffs on a group of Australian uninhabited islands, which are populated only by penguins and seals. ‘If you leave anything off the list, the countries that try to basically arbitrage America go through those countries to us. The President knows that, he’s tired of it, and he’s going to fix that.’  Sounds like the island’s future is ‘sealed.’

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Read Last Week’s Alpha Bites – A frosty reception

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Alpha Portfolio Management is a trading name of R C Brown Investment Management PLC which is authorised and regulated by the Financial Conduct Authority.