Author Archives: Raul de Frutos

The price you pay for your steel pretty much depends on two things:

  1. Prices in China, since they set the floor for international steel prices.
  2. How much of a premium U.S. mills are able to justify over that price.

 

Graphic: Raul de Frutos/MetalMiner.

Prices in China are moved by supply and demand dynamics. We’ve explained in previous posts that overall, things are setting up for Chinese prices to continue to trend higher. While demand has been better than expected, China met its 2016 capacity cuts goal and further cuts are expected to take place this year as the country tackles its pollution issues.

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However, in this post we’ll focus on the premium that U.S. customers pay. This price spread between U.S. and international prices is also very important and could make your purchases more expensive in the coming months.

Spread HRC US – HRC China. Source: MetalMiner IndX.

Spreads have fallen sharply over the past few months. The spread between U.S. and Chinese hot-rolled coil (HRC) prices is now $97/ton. To put this in context, consider that this spread was $276/ton just seven months ago. Read more

Our Stainless MMI fell by two points in December after a mixed performance.

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On the one side, surcharges for 304 and 316 stainless steel rose by 34% and 25% respectively, as the chrome portion of the benchmark jumped month-on-month. The mill-announced price increase, combined with higher surcharges, marks the largest month-on-month increase seen in recent history.

On the other hand, nickel prices retraced in December on profit-taking across the industrial metals complex. Nickel prices are now at attractive levels wherein we could see investors pushing prices back up. That will depend on upcoming news that will either boost them or send prices lower. One thing is for sure: volatility is guaranteed in the weeks ahead.

Will Indonesia Relax its Export Ban?

Indonesia banned raw ore exports in 2014 to stop mineral wealth disappearing overseas. The country was the top supplier of nickel ore to China for use in (nickel pig-iron) stainless steel before the export ban. Indonesia hoped that the band would encourage smelter investment, but investments haven’t exactly progressed as quickly as expected.

In recent months, rumors are that the Indonesian government is relaxing its export ban. In October, Luhut Pandjaitan, Indonesia’s then-acting mining minister, said that Indonesia was reviewing its mining rules and that the country could could give companies up to five more years to build smelters, and reopen exports of nickel ore banned since 2014. However, soon after he was quoted saying Indonesia would “almost definitely” keep in place a ban on nickel ore and bauxite exports. Which is it?

Many smelters were hoping that they could temporarily export ore to raise funds for downstream investment. Nobody knows what Indonesian’s final decision will be, but the consensus in the market now seems to be shifting towards Indonesia permitting some exports. This fear might explain why nickel prices haven’t really picked up like metals such as zinc or tin.

Others think that there won’t be any relaxation of exports of nickel ore and bauxite. Investors have already spent billions of dollars on smelters in Indonesia. Easing the ban would risk risk flooding the overseas market and undermining prices. Those investors wouldn’t be very happy about that, as it would contradict promises by the nation’s president.

I personally think it would be an unwise move to ease the ban but any outcome is still possible. Stainless buyers need to keep in mind that a relaxation of the ban could put downward pressure on nickel prices while Indonesia keeping the ban in place would have the opposite effect.

Filipino supply

When Indonesia introduced the ban in 2014, the Philippines ramped up production to fill the gap, but the country’s mining industry is now facing a raft of closures for environmental reasons. The Philippines and the still relatively new Duterte administration have already halted the operation of 10 mines and another 20 face suspension.

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Before the month ends, the country is expected to determine which of these 20 mines will be suspended. Last month, Environment and Natural Resources Secretary Regina Lopez was confident that more mines will be suspended.

What This Means For Metal Buyers

Nickel prices fell in December but remember that the overall sentiment in the metals complex is still bullish. If Indonesia keeps its export ban in place and The Philippines suspend more mines, investors will significantly lift prices from current levels.

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Our Raw Steels MMI fell by two points, dragged down by a sharp drop in coking coal prices. Chinese coking coal prices have been quite volatile over the past few months. But despite the recent decline, prices are still well above last year’s levels.

On the bullish side, we saw a big increase in steel flat product prices, both domestically and internationally.

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Hot-rolled coil and cold-rolled coil prices in the U.S. have risen 13% and 17% respectively since they hit bottom in mid-November.

Additionally, steel prices in China continued to climb in December. We already noted, that one of the reasons to expect higher steel prices in the U.S. was rising Chinese prices. Prices in China set the floor for international prices and the spread between U.S. and international steel prices has narrowed so much in some steel product categories, like HRC, that there isn’t much incentive for domestic steel buyers to look for import offers.

While prices in China have risen, Chinese steel exports have fallen, suggesting that the country is absorbing more steel. In November, Chinese steel exports fell 16% compared to last year. For the first eleven months, exports are down 1% compared to the corresponding period in 2015.

The real estate sector is among the world’s largest steel consumers. Total investment in real estate in China during the first eleven months of 2016 rose 6.5% compared to the same period of last year. China’s passenger car sales rose 17.2% compared to the same month last year and it’s the seventh consecutive month were car sales rise in the double digits.

China’s Steel Supply to Fall In 2017

While China’s better-than-expected demand was a key driver to higher steel prices in 2016, we believe that China’s supply might be the key to higher steel prices in 2017.

For years, Chinese cities have been choking on the smog spewing from China’s industrial production sector, but things have gotten much worse lately. In December, authorities asked 23 cities in northern China to issue red alerts as inspection teams scoured the country. The scale of the red alert measures shows that the Chinese government is taking air pollution seriously this time.

China’s energy consumption is mostly driven by its industry sector, the majority of which comes from coal consumption. Coal burning is the biggest contributor to air pollution in China. One of the principal users of coal, and therefore most polluting, is its steel industry.

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China has previously applied stricter anti-pollution rules and supply-side reforms designed to cut capacity in the coal and steel sectors, which helped push prices up. Now that the situation is getting unbearable for citizens, China has no choice but to get tough in its self-declared “war on pollution.” The result is that we could see significant supply disruptions in China’s metal production sector, particularly in steel.

What This Means For Metal Buyers

The expected boost in infrastructure spending in US will help support steel prices. However, the main driver to steel prices continues to be China. In 2017, steels buyers need to monitor if China is able to spur demand growth rates and whether its steel supply falls amid pollution issues.

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Copper prices retraced in December. After the huge price run in November we were expecting to see some profit taking as prices need to digest gains.

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So far, the decline has been limited, with prices holding above $5,500/mt. Although copper has lost some of its post-election gains, it still managed to end 2016 with decent yearly gains, suggesting that sellers are not totally in control.

Copper’s Bullish Narrative

One of the key factors supporting copper prices is the earlier-than-expected supply deficit. While most analysts were previously projecting the copper markets to move into deficit by the end of the decade, many of them are now expecting a deficit as early as this year.

Another factor supporting copper prices is higher energy prices. Oil prices, the main benchmark for energy prices, regained the $50/barrel level in December. Saudi Arabia said it could be ready to cut output more than originally agreed upon at the latest Organization of Petroleum Exporting Countries meeting. Non-OPEC countries, including Russia, also agreed to an output cut north of 500,000 barrels a day. Energy is key in the metals industry. For copper, energy can form almost 20% of the production costs.

President-elect Donald Trump’s proposed infrastructure investments are also positive for copper prices. However, in our view, the key demand driver continues to be China, by far the largest consumer of the red metal. China’s Caixin manufacturing purchasing managers’ index rose to 51.9 in December from 50.9 in November and beat market expectations. That figure marked the sixth straight month of growth and the strongest upturn in Chinese manufacturing conditions since January 2013.

What Could Add Pressure to Copper Prices

The better-than-expected demand from China explains the ongoing strength in industrial metal prices. However, there are concerns that the country’s demand growth rates could slow next year. The real estate and automotive sectors are the engine propelling this rapid growth. If the demand growth from these sectors slows, this could have strong repercussions on China’s demand for industrial metals.

Another factor to watch is the ongoing strength of the U.S. dollar. Copper is no different than other commodities that have a negative correlation to the dollar. Further appreciation of the dollar could negatively impact copper prices. Higher interest rates in the U.S. are among the factors contributing to a stronger dollar. In December, The Federal Reserve raised interest rates by a quarter point, as expected, but policymakers signaled a likelihood of three increases in 2017, up from prior expectations of two moves.

What This Means For Metal Buyers

The recent price decline in copper prices wasn’t that dramatic. So far, it seems like the bulls are still in control. A strong dollar and a possible slowdown in Chinese demand are factors that could bring prices down. Up until now, China’s demand looks strong and the dollar hasn’t had a big impact on metal prices. Therefore, we need actual reasons to turn bearish on copper.

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After surging in November, base metals fell across the board in December. That selling pressure spread into aluminum markets, limiting any upside moves into the year-end. Prices however didn’t give that much ground as aluminum’s fundamental story remains rather bullish. The drops look a lot like classic profit-taking.

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The auto industry is a key driver of aluminum demand. Auto sales in US and China (the world’s biggest car market) finished the year on a strong note. Total vehicle sales in the U.S. hit an 11-year high in December, aided by a fourth-quarter surge in demand that exceeded expectations. In China, car sales hit an all-time record in November, up 17.1% year-on-year.

Although the figures came in strong, they should be taken with a pinch of salt. In the U.S., cars were sold at an average 10% discount off the original asking price and that’s an incentive level not seen since the beginning of the financial crisis. Similarly, in Q4, China announced a 50% cut in its sales tax on automobiles with small engines. The tax cut was effective only until the end of 2016 although some analysts expect China to extend the tax cut into next year.

Chinese Supply

One of the factors supporting higher aluminum prices has been that there were fewer smelter restarts than expected smelter in China. In addition, we foresee limited additional restarts this year due to rising production costs and pollution issues in China.

First, alumina seems headed for a supply deficit this year following Chinese curtailments. Second, coal prices have surged since China reduced the hours for workers in its coal sector, supposedly in a bid to control pollution and curtail its excess industrial capacity. Truth be told, though, China really relaxed the mining day norm simply to control skyrocketing — some would say artificially high — prices. However, we expect the maneuvers will keep China’s supply of coal and aluminum in check this year.

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For years, China’s cities have been choking on the smog spewing from China’s industrial production sector but things have recently gotten much worse. Two weeks ago, authorities asked 23 cities in northern China to issue red alerts as inspection teams scoured the country. The scale of the red alert measure shows that the Chinese government is taking air pollution seriously. Given that coal burning is the biggest contributor to air pollution in China, industrial metals supply could shrink this year, particularly steel and aluminum.

What This Means For Metal Buyers

The massive existing overcapacity and questions regarding China’s ability to maintain its rate of growth are the main factors that could spoil the party for aluminum bulls. However, for the reasons explained above, it seems early to make a call on that. We still see upside potential in aluminum prices.

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China’s Caixin manufacturing purchasing managers’ index rose to 51.9 in December from 50.9 in November and beat market expectations.

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The figure marks the sixth straight month of growth and the strongest upturn in Chinese manufacturing conditions since January 2013.

China Caixin Manufacturing PMI. Source: Tradingeconomics..com.

By now it’s pretty clear that this growth has been the main driver of higher metal prices in 2016. Industrial production in China has been on an upswing for most of the year, mainly because of the surge in infrastructure spending.

China PMI Up

However, there are concerns that the country’s demand growth rates could slow next year. The real estate and automotive sectors are the engine propelling this rapid growth. If the demand growth from these sectors slows, this could have strong repercussions on China’s demand for industrial metals. Read more

We’ll remember 2016 as the year in which steel prices bottomed out thanks to higher-than-expected demand in China.

MetalMiner Price Benchmarking: Current and Historical Prices for the Metals You Buy

China, once again, increased infrastructure and property construction spending. As a result, steel prices rose.

China’s primary growth engine — and, therefore, that of industrial metals demand — was fired up one more time. Some people might think that what drove steel prices this year was the imposition of higher trade barriers. While that did help prices, the real driver sustaining the rising trend in steel prices was the aforementioned higher-than-expected demand in China.

Chinese hot-rolled coil price. Source: MetalMiner IndX.

Many analysts expect the country’s demand growth rates to slow down this year. Some Chinese cities have tightened their home purchasing rules to prevent their property markets from overheating. Also, China’s car sales could lose momentum if China doesn’t extend the tax break for small cars in 2017. Read more

As we continue to republish our top posts of 2016, we look back to April when cold-rolled coil prices hit a one-year high, an event that turned out to be a harbinger of higher steel prices later in the year.

We’ll continue to keep you informed of all movements in the steel markets in 2017. — Jeff Yoders, editor

Steel is being a different animal this year. While metals such as aluminum, copper and nickel are trading barely above multiyear lows, we are witnessing strong price momentum in domestic steel prices.

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Cold-rolled coil is a good example. Prices last week climbed above $600 per standard ton, the metal’s highest price level since April 2015.

US CRC hits 1-year high. Source: MetalMiner index

U.S. Cold-rolled coal hits one-year high. Source: MetalMiner index.

Why, in an Oversupplied Market, Did Steel Prices Get a Boost?

The duties imposed on steel products caused steel imports to taper down in a big way over the last three of months and U.S. steel mills now have the power to raise their base selling prices. U.S. aluminum markets didn’t enjoy this kind of protection. However, even if they did, which they might, aluminum prices wouldn’t get the same boost.

The reason is that aluminum (like the rest of base metals) is more global in nature than steel. U.S. steel prices can be much higher than in the rest of the world because prices are not decided on exchange-based trading unlike aluminum which is linked to London Metal Exchange reference prices. So, even if duties were imposed on aluminum products, aluminum producers couldn’t arbitrarily hike their selling prices.

Is This Rally Backed Up by Fundamentals?

In the short-to-medium term it is, whereas long-term it really isn’t since steel demand in China keeps contracting. The recent positive sentiment might help U.S. steel mills increase their spot offers even further, but we could see a revision later this year. Although there seems to be short-term scarcity of steel in U.S. markets, there is still plenty of steel overhanging in global markets. We’ll have to wait to see how much further mills can raise steel prices in Q2 before buyers turn to international suppliers for cheaper prices.

Chinese Exports Rise Sharply in March

Another factor driving global steel prices this year has been expectations of a decline in Chinese steel exports as earlier this year China committed to curtail its excess steel capacity. However, the latest data doesn’t seem to suggest that. In March, Chinese steel exports surged 30% compared to the same period last year. In Q1, Chinese steel exports are up 8% compared to the same quarter last year. That seems to suggest that rising steel prices have only ensured that Chinese steel mills produce more of the metal.

What This Means For Metal Buyers

Market dynamics are quite different for steel markets than to the rest of base metals. U.S. mills now have the power to increase their spot prices. Buyers should have, by now, locked in prices for the next one or two quarters.

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Longer-term, there are still plenty of events that could change market sentiment later this year, limiting domestic mills’ ability to raise prices. We’ll have to keep monitoring markets to watch for more clues.

Gold prices since 2013

Gold prices since 2013. Source:MetalMiner analysis of @stockcharts.com data.

Gold is the only commodity wherein physical annual demand is only a tiny fraction of total supply available and shortages of gold caused by physical demand never happen.

Therefore, China’s demand growth for metals or the potential boost in U.S. infrastructure spending are factors that aren’t really helping push gold prices higher unlike industrial commodities.

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What’s causing gold prices fall dramatically? The U.S. dollar.

Gold (in dark) vs the dollar index (in green)

Gold (in dark) vs the dollar index (in green). Source: MetalMiner analysis of @stockcharts.com.

Since mid-August the dollar started a bull run that is still in play. Three main factors are propelling the dollar’s bull run:

Markets expected the Federal Reserve to raise rates by the end of the year. In December the Fed raised interest rates by a quarter point, as expected, but policymakers signaled a likelihood of three increases in 2017, up from prior expectations for two moves. While interest rates outside the U.S. stay near zero or even in negative territory, it’s no wonder yield-seeking investors are going after the greenback.

The ongoing political tensions in Europe are causing the dollar to appreciate against the euro. The ongoing refugee crisis in Europe, Brexit, terrorist attacks and political instability are some of the events causing investors to lose their appetite for the European currency this year.

Finally, the victory of Donald Trump has added fuel to the dollar’s bull market. The new president-elect has proposed new tax policies that will potentially make multinational companies bring their foreign profits back to U.S., increasing the demand for dollars. In addition, the dollar is perceived as a stronger currency since investors expect growth in US to get a boost.

What This Means For Metal Buyers

As long as the dollar continues to rise, there is little hope for gold investors to make returns. Gold buyers should wait closely for weakness in the dollar before buying gold. For now, sentiment on the dollar continues to be quite bullish.

Over the holidays, we are republishing and revisiting some of our most well-read posts of 2016. While this one technically doesn’t fall into the 2016 (it was initially published December 14, 2015) but we are still looking back at it anyway since it deals with predictions about metal prices for the year we’re about to leave behind. It also gathered the second-most traffic of any post we published in 2016 despite predating the year by a few weeks.

At the time, my colleague Raul de Frutos wrote “Currently, some key Chinese indicators we are tracking are giving us no reason to expect higher metal prices in 2016.”

Yet, we have seen higher metal prices in 2016 and we are now in a full metals bull market. The reason we are is because of everything Raul cited in his post. He was 100% right that “the longer it takes China to clean up its mess, the later metal prices will hit bottom.”

China cleaned up its mess, hit bottom early in 2016 and turned global commodities demand around remarkably fast, all things considered. This reminds us that markets can make a turn around quickly. The future is unpredictable and we need to take the market day by day. Just four months after this post, we went from bearish to completely bullish on industrial metals.  Enjoy the second of our Best of MetalMiner in 2016 series. -Jeff Yoders

As you well know, the main cause of the commodities meltdown has been China’s slowdown. Since China makes up half of the world’s demand for commodities, the economic slowdown means lower demand which has led to a situation where a glut of materials can’t find a home.

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The role that China plays in commodity prices is so big that the future of metal prices is totally dependent on China. The longer it takes China to clean up its mess, the later metal prices will hit bottom. Currently, some key Chinese indicators we are tracking are giving us no reason to expect higher metal prices in 2016.

Trade Surplus

Imports to China dropped 8.7% to $143.14 billion in November from a year earlier, extending a slump in imports to a record 13 months, suggesting that government stimulus measures are failing to boost growth.

China Imports (millions $) Source: trading economics.com

China Imports (millions $) Source: TradingEconomics.com from Customs Administration Data.

Meanwhile, Chinese exports declined 6.8% to $197.24 billion in November from a year earlier, marking the fifth straight falling month. The fact that China is struggling to increase its exports demonstrates that global demand is weak and that China will have to find a more painful solution to balance its surplus. The trade surplus and the inability to find a home for the excess of materials flow will continue to keep a lid on China’s growth, depressing commodity prices.

China Exports (millions $). Source: tradingeconomics.com

China Exports (millions of dollars). Source: TradingEconomics.com

 Yuan Falls To Four-Year Low Against The Dollar

Chinese authorities want to see a smooth depreciation of the yuan/renminbi as China faces external pressure not to devalue its currency too quickly. A sharp depreciation would probably hurt the country’s credibility at the same time China wants to attract more foreign capital. In addition, it would raise criticisms that China is keeping its currency artificially low to encourage more exports.

Yuan versus dollar. Source: yahoo finance

Yuan versus dollar. Source: Yahoo Finance.

Recently, China’s central bank cut its reference rate to the lowest level since 2011. The yuan fell against the dollar to the lowest level since 2011. Although China has said that it has not allowed the yuan to slide to boost the economy or increase exports, it seems that the market is taking these developments as desperate actions from China’s government to help the economy, raising concerns among investors that the country’s slowdown might worsen.

China’s Equity Markets’ Slump Continues

We believe that equity markets are the best benchmark for the performance of China’s economy, or at least investors’ sentiment about China. We’ve analyzed before the link between China’s stock market and commodity prices. Currently, this link is even more noticeable.

China FXI ishares

China FXI shares continue to fall. Source: @StockCharts.com.

After the huge slump this summer, equity prices mildly recovered, but since October we see that equities are heading south again. The poor performance of Chinese stocks demonstrates that investors are still worried about the future of the country and not lured by its government actions.

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Contrary to what others are saying, we suspect that the slump in China’s stock market could continue, resulting in more fears and more sell-offs in commodities/metals markets.