Author Archives: Stuart Burns

Many investors are hoping so after funds with a focus on emerging markets have taken a battering this year.

Free Sample Report: Our Monthly Metal Buying Outlook

BlackRock’s MSCI emerging market exchange-traded fund, for example, has seen net withdrawals of $7.4 billion this year. Nor are private investors the only ones selling. Central banks and sovereign investors, particularly among oil producers, have been selling foreign assets to raise cash to plug deficits. In mature markets investment managers have a lower weighting in emerging markets than at anytime since 2008, according to the Economist.

Falling Assets

As a result, asset prices have fallen, not just on the Shanghai stock market, although falls there have been the most spectacular, but even in London and New York where investors have seen share prices of mining companies collapse in the face of falling commodity prices.

In times of strength, cheap credit has the effect of driving booms by fueling economic activity and pushing up asset prices, but as assets fall banks become less willing to lend and activity declines. That is the position we are in now. Capital flows into emerging markets have stalled according to the Economist’s Buttonwood columnist, so much so that the combination of emerging market governments selling assets and private investors dumping emerging markets and commodity stocks has combined to deliver an end to the post-financial crisis, debt-fueled party.

Searching for the Elusive Bottom

Is it overdone? Has the bottom been reached? Some hedge funds, that shorted the market when they gauged the coming China slowdown correctly (most didn’t but a few did), are said to be sitting on piles of cash waiting for that inflection point.

So far, there is no sign these funds deem it to have been reached. Both shares and commodities are inextricably linked again in today’s market – so much for the counter-cyclical bet commodities were once said to be – and they are both looking like there is more downside than upside, not just this year but next as well.

Free Download: Last Chance for the September MMI Report

In the US, corporate debt spreads are rising again after a 3-year fall. Spreads are the difference between the interest rates paid by governments and blue-chip companies and those paid by riskier borrowers and reflect the markets perception of the risk of default. Rising spreads imply that investors are getting anxious about being repaid, and while rising spreads are not a guarantee of recession, they have been a harbinger in the past.

Source: Economist

Source: The Economist

As the Economist points out, default rates on high-yield – the riskiest debt – have not been rising yet, so rising spreads are not translating into higher defaults but this is yet another sign that stresses in the financial markets are rising, undermining the prospects of a healthy rebound.

Tin producers would obviously like to think so and recent developments may suggest they have grounds for optimism in 2016.

Free Download: Last Chance for the September MMI Report

According to the World Bureau of Metal Statistics (WBMS) the global tin market recorded a deficit in the first 6 months of the year of 18,500 metric tons. Both refined Asian production and Chinese consumption were down for a number of reasons, but in spite of the deficit the price took a hammering along with the rest of the commodity sector.

The Tin Dynamics

Chief among the reasons for this battering, it would be easy to say, was a selloff across all metal categories due to the slow down in Chinese growth and fears over the state of the Chinese stock market. Yet, tin has some specific dynamics all its own that have contributed to price falls of nearly 40%.

Source: Kasbah Resources

Source: Kasbah Resources

Exchange inventory though has, at least since summer, been falling just as fast. To say this alone is a sign of a tightening market is too simplistic, especially for such a small niche market as tin, but it suggests there may be less metal around should refined supply be reduced in the future.

Tin has, arguably, been even more polarized over the years than any other metal. Supply from Indonesia and demand from China were, until recently, the beginning, middle and end of the supply demand equation, but much has changed in recent years. Not the least of which is Indonesia’s raw material export ban. Read more

An article in the London Telegraph, reporting on the collapse of Glencore’s share price, this week suggests the firm could be in danger of being wiped out by it’s debt pile. Although the FTSE 100 miner is making efforts to reduce its near £31 billion ($46.98 billion) debt pile by raising fresh equity, closing mines, selling trading inventory and canceling its dividend payment, the newspaper seems to believe it will be too little too late.

Free Sample Report: Our Monthly Metal Buying Outlook

Glencore’s shares floated back in 2011 at 530 pence ($8) giving it a market capitalization of £38 billion ($57 billion), at the time. The company used cash raised from investors, in addition to additional debt, to complete the purchase of mining giant Xstrata a year later, but that left it exposed as commodities markets collapsed this year and, in lockstep, so did the company’s share price.

Plenty of Pain to go Around

Not that Glencore is alone. Anglo-American, for example, fell in exactly the same manner as investors digested the consequences of a slowing China and overproduction in the industry.

Source Bloomberg

Source: Bloomberg News

But, as of this morning the firm has a market capitalization of a little under £11 billion ($16.5 billion) according to Bloomberg. That’s barely more than half its debt level assuming it manages to achieve the target reduction down to £2 billion ($30 billion). Glencore’s share price has certainly taken a hammering, down 85% this year to under 71 pence ($1.08) and a fraction of its listing price in 2011. Read more

Once in awhile, it is interesting to take a different view. To step back from the day to day and look at situations from a wider or longer-term perspective. This is as true of commodity markets as it is of life, so a recent Financial Times Short View report on commodity prices makes for particularly thought-provoking reading whether you agree with its conclusions or not.

Free Sample Report: Our Monthly Metal Buying Outlook

The report is presented, as most of the FT’s excellent Short View reports, in video format aided for clarity with charts that unfortunately we cannot exactly replicate here but with the assistance of Index Mundi we can provide some good examples.

Prices Through the Centuries

The report is not based on the FT’s own research, but rather on that of BCA Research who have compared a basket of commodities prices against consumer prices since 1680, and found that over time the 2 do not fundamentally diverge. Although demand for commodities do, for a variety or reasons, surge from time to time, the resulting spike in prices stimulates the market to respond in a number of ways such as investing in more mines, driving technological developments to extract metals more efficiently or more cheaply and, of course, to find alternative materials that reduce the original demand. Read more

Is Alcoa, Inc., succumbing to the next investor driven fad or is there sound logic in the aluminum giant’s move to split itself in 2?

It’s a fair question. Alcoa, as a firm, has navigated itself well through a torrid time for the aluminum industry. Sky-high physical delivery premiums, the company is in an industry both saved by and with a market massively distorted by the activity of financial players, a roller coaster primary metal price, unprecedented competition from China and a revolution in technologies such as aerospace and automotive driving robust demand.

Tacking Through Difficult Market Waters


It has not been easy and, on the whole, most would agree Alcoa has steered a well-managed course around the rocks.

Source FT

Source: Financial Times

But the shares have taken a battering in spite of many good acquisitions and investment in downstream, value-added activities. The firm has found its legacy smelting business, the company’s vertically integrated structure, to not be the advantage it once was. So, Alcoa has decided to split itself in 2 next year, one half retaining the Alcoa name to include the legacy business of bauxite mining, alumina production and primary aluminum smelting. Read more

Debate is increasing about whether we have reached peak steel. What that means is have we reached peak Chinese steel production? Because with China producing over half the world’s steel, minor rises elsewhere would be nothing compared to a significant drop in China.

Free Sample Report: Our Monthly Metal Buying Outlook

Global steel production fell by 3% in August 2015, according to the Brussels-based World Steel Association (WSA), its biggest fall this year led by a decline in China’s steel production. World steel production went down to 132 million metric tons last month, as China registered a 3.5% drop in steel output to 66.9 mmt. The global decline came in spite of number 2 producer Japan, and both Germany and India, posting double digit gains.

Global Decline

Globally, though, steel production is struggling and, more importantly, so are steel producers. The WSA said the crude steel capacity utilization ratio for the 65 countries it coordinates data from (covering 98% of global steel production) in August 2015 was just 68%. This was 3.6% lower than August last year and a decline on the month before. Read more

It doesn’t seem to matter which Emerging Market grouping you belong to and, honestly, all of them should be taken with a pinch of salt, your currency is likely to be taking a pasting at the moment. And that’s before the Federal Reserve has even raised rates, next year could be worse.

Free Sample Report: Our Monthly Metal Buying Outlook

If the Fed’s twice postponed move to raise rates goes ahead in December, the dollar is likely to strengthen further next year causing a flight from weaker EM currencies to the dollar or dollar assets.

Emerging Acronyms

Jim O’Neill’s original BRICS (Brazil, Russia, India, China and later South Africa) have not been performing of late, not as energetically as they promised in 2001 when O’Neill came up with the acronym. Indeed, Brazil, Russia and South Africa are in economic crisis, China is growing at the slowest pace in a generation and India’s growth will soon slow if it doesn’t grasp the nettle and start introducing long overdue reforms.

So, what about the CIVET(s) that came along afterwards comprising Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa again? Well that grouping, too, has fallen somewhat out of favor as the differences became more apparent than the similarities.

Can A New Group Make a MINT?

So will the latest gang do any better? The MINTs certainly sounds cool and tasty. Sorry, I couldn’t resist that. Mexico, Indonesia, Nigeria and Turkey do have some characteristics in common. They all have relatively large populations, have until recently enjoyed rapid growth, are developing a rising middle class and, according to an FT article, display entrepreneurial cultures.

So, to what extent does grouping these countries together make sense? In some ways they are very similar, at least three of them – Nigeria, Indonesia and Mexico are significant commodity exporters and therefore caught in the crossfire of the end of the super-cycle and slowing global trade growth.

Turkey may be a net importer of energy and so benefit from the falling oil price, but it has benefited greatly from globalization as well and its steel, jewellery and automotive industries have driven export-led growth.

Of the others, Mexico has cleverly hedged much of its current oil production and hence avoided the worst of the pain felt by Nigeria for whom oil and oil products make up a significant proportion of its balance of payments. Likewise Indonesia, a net oil and commodity exporter, has suffered from the falling oil price, falling coal prices, failing commodity prices and the slowdown in China.

Political instability has been an issue for some of the MINTs in the past and remains an issue for several. Mexico’s current president is polled as the least-popular in 40 years and although Nigeria managed its first successful transition of government in 55 years since independence following this year’s presidential election, it is fighting a civil war with extremist insurgency Boko Haram that is draining lives, money and political attention.

The Next Big Thing?

All 4 countries suffer from inflation, a current account deficit and falling currencies making them vulnerable to instability when the Fed raises rates. A flexible exchange rate does allow countries to adjust to external shocks and maintain competitiveness, but its also makes emerging markets such as the MINTs exposed to spiraling debts if, as they all are, they are heavily indebted in foreign currencies.

Free Download: Latest Metal Price Trends in the MMI Report

So rather than the next big thing for investors, the MINTs will be under the scrutiny of foreign lenders concerned that weakening exchange rates put their repayments at risk or place undue strain on corporate or national balance sheets.

The price funk that industrial metals are in got a little bit funkier for platinum and palladium this week as the two metals saw their prices plummet on news that Volkswagen AG has been cheating on its diesel vehicles’ emissions tests for years.

The intricate scheme puts even the New England Patriots’ best cheating efforts to shame, and that’s saying something. It centered on software in a diesel VW’s internal computer that was able to detect a testing scenario and turn its full emission control systems on. During normal driving, the automobiles would not have their emissions systems engaged. Or recall 482,000 cars in the US alone.

Free Sample Report: Our Monthly Metal Buying Outlook

Which begs the question, why not just run the full emissions control system all of the time, VW? Apparently, there’s a trade-off between performance and emissions when the control system is engaged and VW erred on the side of… performance? Such a decision programmed into software by a large, multinational automaker is shocking, especially since VW recently passed Toyota Motor Corp. as the world’s largest car company.


This innocent-looking Volkswagen Beetle TDI could have been polluting as much as 40 times beyond emissions standards.

VW’s decision has already impacted platinum prices. The funk they are in is now of “We’re An American Band” levels. Platinum fell to a 6-and-a-half-year low of $925.30 an ounce this week, after dropping 4% on Tuesday alone, its biggest one-day fall in more than 2 years. It could, eventually, be a boon for palladium, which is used as a catalyst in gasoline engines, if Europe adopts standards that make diesel engines less popular there due to the scandal but palladium is down, too, in the short term. Read more

Car shares aren’t the only commodity to fall out of favor following the revelations that German automaker Volkswagen Group has been manipulating laboratory emissions tests on its diesel cars for years.

Apparently, VW ran software on its cars that sensed when the tests were being made and released urea into the emission gas to neutralize harmful nitrogen oxide emissions and dramatically improve the results.

Free Sample Report: Our Monthly Metal Buying Outlook

So successful was the fix that the real results could be ten times worse than the recorded figures. Shares in the firm have collapsed more than 35% since the scandal hit and today CEO Martin Winterkorn resigned.

PGM Collateral Damage

But collateral damage from news of the VW scandal rolls on daily. Johnson Matthey, a refiner of platinum group metals used in catalytic converters has also seen its share price drop by 11.8% so far. Even though diesel car catalysts account for no more than 15% of Johnson Matthey’s profits.

Likewise, platinum prices have taken a pasting as their use in diesel car catalysts is such a significant part of the demand picture. Platinum fell to a 6-and-a-half year low of $925.30 an ounce this week,, after dropping 4% on Tuesday alone, its biggest one-day fall in more than 2 years.

The metal is already down more than 20% so far this year and speculators digesting the likely impact on demand will not have been encouraged by some reports suggesting this could be the end of diesel cars.

In Europe, diesel car sales make up about 50% of all new registrations so potentially the impact on new car demand and production could be catastrophic. Compared to the US, where only 2-3% of all new cars are diesel according to data in the Financial Times. Improvements in gasoline engine efficiency had already begun to have an impact of demand for diesel cars though as this from pre-scandal days graph shows

Source FT

Source: Financial Times

Read more

From being the darling of the bulls at the beginning of the year with supposedly the best fundamentals of any of the major non-ferrous metals, zinc is now the second-worst performer, kept from the bottom only by a historic fall in nickel.

Free Sample Report: Our Monthly Metal Buying Outlook

In large part, the market price is being driven by inventory changes as a raft of recent articles from Reuters and the FT underlines. First, how and where have they changed? The visible inventory changes the market is seeing are all on the London Metal Exchange and nearly all at New Orleans underlining that these have nothing to do with end-user demand and everything to do with financial and trade parties activities.

Screen Shot 2015-09-22 at 17.52.16

Source: Kitco

As zinc stocks dwindled, the market took it as a sign of constrained supply meeting rising demand. As stocks declined, prices rose at least until the big sell off in the Spring when all metals prices fell off. Read more