Author Archives: Stuart Burns

Nickel prices are, finally, on the move.

Owners of shares in nickel mines shouldn’t start popping the champagne corks just yet, it’s going to be a slow burn rise but the landscape appears to be shifting and it is because of, as usual, China. First and foremost, there is a trend among stainless producers this year, particularly in China, to produce more 300 series nickel-bearing grades than last year.

Real Demand is Up

Just as mills and consumers shifted wholesale from 300 to 400 series grades when nickel prices went through the roof in 2010-11, a prolonged period of falling prices has encouraged consumers and designers to switch back to higher-quality grades.

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Macquarie Bank is quoted by Reuters saying global nickel demand will grow by 4.4% this year, largely on the back of a predicted 4% rise in Chinese 300 series stainless production. Likewise, the INSG estimates the global market will fall into a small 600-ton deficit in Q1 of this year, although it must be said the market remains well supplied by huge global stocks. Read more

The fact the CME Group is looking to expand its warehouse network should come as no surprise, the fact it has taken it so long to do it should.

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The market has been ripe for CME to expand the physical delivery locations for the metals it trades in the wake of the last few years furor over long load-out queues at certain London Metal Exchange warehouses across the U.S. and Europe.

LMEring_550

Should the CME Group add a physical trading ring with red couches? Source: London Metal Exchange.

If the CME had a wider network with more tonnage in storage five years ago then, arguably, some of the LME warehouse operators would not have been able to game the system to the extent that they did. The recent launch of zinc and lead contracts by the CME has presumably been a spur to add more locations. Zinc was added last year and lead followed earlier this year.

Dynamic Approach

Yet, a new dynamism in the CME’s approach in recent years is also in evidence. The CME clearly has intentions to take on the older LME’s dominance of the physical trade market, particularly outside the CME’s home base of the U.S. Read more

In exactly 30 days the people of Britain will vote on whether to leave the European Union.

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For the people of the U.K., and indeed the rest of Europe their decision could be a turning point in the future of their country and the wider European community. It is no exaggeration to say Britain’s exit could spark the break-up of the E.U.

The near-miss Austria experienced yesterday in voting in a far right president illustrates how extreme tensions within the European Union have become. Only by all the opposing parties supporting pro-E.U. Green party socialist Alexander Van der Bellen were they able to beat the far-right Freedom party candidate Norbert Hofer from becoming head of state, the margin was a miniscule 31,000 votes out of an electoral return of 4.64 million.

Angry Voters

Dissatisfaction with the E.U., supported by fears of immigration destroying the social fabric and cultural heritage of societies across the continent, has played a major part in not just the U.K.’s referendum but in the rise of both far-right and far-left parties across Europe in recent years.

Anecdotal evidence can be very misleading, dependent as it is on the social mix such opinion is garnered from and the geographic location. Until recently, the decision in the U.K. seemed on something of a knife edge, particularly in the weeks following the announcement by Boris Johnson, London’s charismatic former mayor, that he was actively campaigning for the Leave vote, but in recent days the markets at least have been pricing in a Stay outcome, as evidenced by the strength of sterling.

Investment Sentiment

Indeed, a poll this week showing a late swing by older voters to maintain the status quo resulted in a sharp jump in the value of the pound as this FT graph shows.

Source: Financial Times

Source: Financial Times

Alluring as the Leave campaign’s image of a free and unrestricted future for the UK would be, most are coming to realize such an outcome is unlikely to be achievable. The least-damaging outcome in the months after leaving would be for a quick trade deal with the rest of the E.U. Read more

Anyone looking at the seaborne Asian Iron ore market? A cursory glance at China’s iron ore market and one has to ask, “what’s going on?”

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Iron ore prices have been on a roller coaster this year, yet reports abound of excess iron ore supply, excess steel production, excess steel capacity and falling property prices and, by extension, excess appetite for construction steel.

There is still mine oversupply. Source: Adobe Stock/nikitos77.

There is still mine oversupply. Source: Adobe Stock/nikitos77.

This week, reports of rising port stocks, up 1.6% to 100.45 million metric tons or five weeks of supply should have depressed prices, but the prevailing mood among traders seems to be one of cautious optimism that iron ore consumption and, hence, steel production will continue strongly this year, so much so that iron ore prices actually rose 2.7% to $54.98 per mt late last week. Read more

Business news is full of doom and gloom for the metals sector, but for consumers it really couldn’t be better.

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Goldman Sachs is reported in a recent article as saying recent price gains this year may be seen as a swansong for the sector and prices are expected to fall back later this year as the underlying fundamentals reassert themselves over the recent speculative euphoria that has driven prices higher, particularly in China.

There is still mine oversupply. Source: Adobe Stock/nikitos77.

There is still mine oversupply. Source: Adobe Stock/nikitos77.

As we have come to expect with metals prices, so much has to do with China, whether it is demand in the case of iron ore, copper, nickel or supply as in the case of steel or aluminum, China dominates the landscape and calls the shots — whether its intends to or not. Read more

Our Editor, Jeff Yoders recently reported on the launch of the CME Group’s new alloy 380 aluminum alloy contract, a product many in the domestic market have been eagerly awaiting and consider long overdue.

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Historically, consumers would have hedged their alloy ingot requirements against the London Metal Exchange contract but as the LME’s aluminum benchmark became increasingly disconnected the casting industry all but boycotted the LME’s Primary HG contract, making the case for the CME to step in even more compelling.

From a high point in 2011 the LME aluminum alloy contract has plunged in popularity with volume down year after year.

Source: LME Data

Source: LME Data

Although nearly all traded volumes are down in recent years on the LME, aluminum alloy has fallen further than most. The exact reasons for the LME’s wider decline in volumes is a subject of some debate.

The ‘Right Trades

Reuters recently reviewed several reasons, one of them is the rise of activity on the Shanghai Futures Exchange. This year the SHFE has seen an explosion in traded volumes although not of the kind the LME would have welcomed. The SHFE volumes have been driven by highly speculative trades. Worse still, much of it is retail in nature.

This has the effect of distorting real price discovery and would undermine the foundation of the LME which was set up and has operated for a century or more on the basis of price discovery for producers, processors and consumers, not what many unfamiliar with the market have on occasion alleged, to speculate.

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Increasing volumes on the CME pose more of a threat to the LME in terms of providing reliable price discovery and hedging for the trade, particularly in the North American market. Where the SHFE is so dominated by the speculative element, the CME’s cornerstone is more from trade participation… much like the LME.

Who Will Use the New Alloy Contract?

The CME’s aluminum alloy contract is not likely to garner support or participation from outside the North American market, but for consumers in the U.S. it should provide a welcome hedging and price discovery tool. Even if LME aluminum alloy volumes stabilize at current lower levels the CME, with a contract focused as it is on a specific part of the U.S. manufacturing base, has a solid role to play in the years ahead.

This week, the market heard some words of wisdom from Norilsk Nickel’s vice president Pavel Fedorov.

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Very unusual for a metals producer, instead of talking up the market, Fedorov gave a very candid assessment, reported by the Financial Times, of metals markets in general and the nickel market in particular.

Until producers begin to behave rationally, he said, prices will remain depressed for the foreseeable future. Pointing to the state of demand in the world’s largest nickel consumer, China, Fedorov said about a third of current Chinese stainless steel capacity was unsustainable due to a slowdown in real estate demand while Macquarie Bank is quoted as saying Chinese stainless steel demand is likely to fall a further 7% in the first quarter of this year from the same period a year earlier and that demand is not going to come back.

No Shutdowns Yet

The only rational reaction to reduced demand is to cut supply, if producers want prices to recover, which will bring with it profitability and a return for shareholders. In part, producers are recognizing this new reality and assets are being written down.

Glencore wrote down its nickel assets last year contributing to a $5 billion loss, but in spite of writedowns Glencore and fellow Australian miner BHP Billiton have said no more than they “may” close capacity at Murrin Murrin and Nickel West, respectively, even though they are losing money at current prices.

Yet Norilsk is Still Profitable

Indeed, Norilsk’s comments are all the more interesting because the company is not suffering losses as a result of the low prices, just loss of better profits. The world’s largest miner has a cost of production currently below $8,630 per metric ton price levels, aided and abetted by co-mined minerals and the depreciation of the Russian Ruble.

Almost in provocation, Fedorov is quoted as saying that due to the value of its Talnakh deposit in the Russian Arctic — which contains some of the world’s largest concentrations of platinum, palladium, gold, copper and silver — the company could “theoretically stockpile nickel and still make money.”

Betting on the long term, Norilsk is moving ahead with the development of new projects despite current prices. Last year it is said to have sold a 13.3% stake in its Bystrinsky copper mine in Siberia near the Chinese border to a group of Chinese private equity and other investors. The project is expected to cost $1 billion, the company has said. That’s before it starts production in 2017, adding pressure to the 70% of global capacity that, in Norilsk’s estimation, is losing money at current prices.

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Nickel is not an isolated case. Across the metals spectrum there are plenty of examples of oversupply where prices are depressed and unlikely to recover in the face of weaker demand and excess supply. We are into a new normal but many producers are unable or unwilling to face up to the the implications.

Last week, we briefly covered the decision by European Union lawmakers to vote against the application by China to be considered a market economy, a recognition China says it is due automatically by December following an agreement in 2001 set to mature this year.

We also published an in-depth look at what China market economy status would mean for U.S./E.U relationship with China.

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The European Parliament’s decision was overwhelming, 546 votes in favor and only 28 against, with 77 abstentions so, while the vote is non-binding, it raises the stakes for the European Commission, which will decide shortly whether China deserves to have its status upgraded.

Terrible Timing For Europe

For both sides the debate is at the wrong time. Europe’s steel industry is being decimated by cheap imports from China, raising the stakes for politicians otherwise inclined toward a more free-market approach. The British, in particular, find themselves (not for the first time) somewhat isolated in wanting more open engagement even though their domestic steel industry has been hit harder than most.

Chinese imports are allegedly being dumped in the EU and other foreign markets. Source: Adobe Stock.

Chinese imports are allegedly being dumped in the EU and other foreign markets. Source: iStock.

In reality, the decision is much more political than practical. Market economy status matters when it comes to deciding whether a country is “dumping,” exporting goods at below cost price. Nations deemed to be market economies can resist anti-dumping measures if they can show that domestic prices are no higher than the price at which goods are sold overseas. Read more

In a blatant case of posturing ahead of inevitable compensation negotiations, lawyers —acting on behalf of Brazil’s public prosecutors — are said to have lodged claims totaling $44 billion ($155 billion Brazilian Reais) against mining companies Vale SA and BHP Billiton for the collapse of a dam at their Samarco joint venture last year.

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Needless to say, shares in both companies promptly tanked about 6% even though the prosecutor’s office has a habit of claiming big and settling small. As a measure of just how absurd the figure is, the Financial Times states the 155 billion Reais claim is equivalent to twice Vale’s market value and, if enforced, would bankrupt the company leaving no one to clear up the environmental mess. You can bet the funds would disappear into government coffers, not for the clean-up.

Demands as Negotiation Starting Points

By comparison, the FT reports UBS analysts and others who pointed to the 2011 oil spill off the coast of Rio de Janeiro — that prompted prosecutors to claim $11 billion in damages from Chevron and its drilling partner Transocean — was eventually settled for only $42 million.

Indeed, if Brazil was to genuinely pursue the claim through to its logical settlement it would end up shooting itself in the foot. Samarco is a 50/50 joint venture and so would be the settlement costs but, where Vale is a wholly Brazilian company with 154,000 employees in the country, BHP is listed in London and Sydney with comparatively little else at risk in Brazil.

BHP has already written down its Brazilian asset from $1.2 billion to zero, meaning if it walked away it would lose nothing more, according to Reuters.

Samarco Disaster vs. BP Oil Spill

There is no disputing the dam burst was a disaster and there is widespread belief it could have been avoided. The torrent not only killed 19 people but also obliterated Bento Rodrigues, a town of 800, inundated another larger town with mud, and polluted almost 1,000 km (600 miles) of the Rio Doce.

According to Reuters, the disaster killed fish, contaminated water used for agriculture, and left at least 250,000 people without running water for weeks. It was always going to be expensive but BHP and Vale had already agreed to pay a government-estimated $5.6 billion (R20 billion Reais) over 15 years to cover and repair damages and the firms had thought that was an end to the claims process.

Comparisons have been made with claims against BP over their gulf oil spill naturally enough, but in reality there is little to link them. U.S. prosecutors had BP over a metaphorical barrel with its extensive investments in the U.S. market and could take them to the cleaners with impunity. Arguably, they would not have done the same to a U.S. company.

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Brazil would lose more in the long run doing the same to Vale than they would in ensuring the firm survives and, effectively, clears up the mess. So, while I don’t knowingly hold shares in either company I would be more likely to sell them over anxiety about the firm’s medium-term future in an oversupplied market than the damage overzealous prosecutors are likely to do their profits.

The New York Times isn’t renowned for writing depressing pieces and, to be fair, a recent analysis the paper carried out on productivity growth was intended to be, and indeed was, a well-balanced analysis.

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Unfortunately, although the newspaper presented three possible conclusions across a range of possible outcomes, the overriding conclusion remains uncomfortably depressing.

There have been a number of references in the business press over recent years about poor productivity growth, often in relation to the failure of mature markets to lift themselves out of the last recession and bounce back with stronger growth. But, in truth, falling productivity has been a feature of the U.S. economy for the last ten years. Nor does it appear to be related to recessions as this graph from the NY Times shows.

Source: NY Times

Source: New York Times.

Slow Growth or No Growth?

True the economy went through a similar decline from the mid ’60s to the early ’80s, and bounced back, but it only managed above-trend growth for a few years and the paper contends this was a result of prolonged and substantial investment in staff, equipment and information technology on the back of a rapidly expanding stock-market during the ’90s. Read more