Author Archives: Stuart Burns

You may be an investor in mining shares or you may be an investor in commodities, or you may be both, but your pension fund — if it’s any good — is almost certainly neither.

Free Download: The January 2016 MMI Report

Because, if it holds mining shares, it is nursing some heavy losses after the last 12 months.

Source: Telegraph Newspaper

Source: London Telegraph

Pension funds, thankfully, are cautious animals. They like solid dividend payers — as many in the mining sector have been for years — but they hate the combination of falling share price, high debt and low commodity prices that will almost certainly result in a cut in dividend payments this year even if mining companies are to survive the downturn. Read more

Ford Motor Company took the automotive world by storm when it announced it was going to construct the iconic F-150 pickup truck from aluminum in 2015.

Free Download: The January 2016 MMI Report

The very idea that America’s workhorse could be made from something so fragile as aluminum was a complete anathema to some people, but the resulting product on the whole has been well received.

Classic car

An aluminum-bodied Rolls? It’s more likely than you think. Source: Adobe Stock/Dimitri Surkov.

Lighter, more economical and more responsive it can be said in most quarters to have been a success; so much so that Ford has recently announced it will increase the aluminum content in 2017 models.

GM Plays Catch Up

Despite initially trashing the idea, General Motors has now said it would sink $877 million into its Flint, Mich., truck factory this year with the intention of converting many of the bodies for models such as the Chevrolet Silverado and GMC Sierra pickups into aluminum. Read more

The World Platinum Investment Council (WPIC) recently commissioned a report by Dr. David Jollie via his research vehicle Glaux Metal to look at the supply-demand fundamentals for platinum and report on the likely price direction over the next six years through to 2021.

Free Download: The January 2016 MMI Report

We are always a little wary of research commissioned by industry bodies as the pressure to produce a favorable analysis has been known in the past to overrule sound analysis, so in this instance we have compared the findings with this month’s Metals & Mining Quarterly Review by HSBC bank by way of a counter view.

The Glaux Perspective

Glaux concludes, and I quote, that the platinum market is likely to be in deficit for each of the years from 2016 through 2021 at an average annual deficit of 250,000 ounces. As a result, prices will rise over the period. Mine supply is not expected to rise significantly with older established mines declining, particularly as investment has been depressed due to low prices in recent years but also as part of a longer-term trend.

New mine production will rise with three new mines in South Africa coming onstream and modest increases forecast in Zimbabwe. Supply from recycling has been on the rise, as it is with all PGMs and this trend is expected to continue in spite of currently low prices. Supply from end of life recycling has become an increasingly important source of platinum supply with supply levels relatively unaffected by modest changes in prices.

Source WPIC

Source: WPIC

On the demand side, Glaux sees only modest growth across a range of sectors. As this graph from HSBC illustrates, platinum demand is balanced between a number of diverse and broadly uncorrelated sectors. Read more

Honestly, what is the answer to the problem of China’s steel exports destroying domestic producers around the world?

Free Download: The January 2016 MMI Report

It is no exaggeration to say the United Kingdown faces the end of its domestic steel industry. Last week, Tata Steel announced the elimination of 1,050 redundancies mainly at its giant Port Talbot plant in South Wales, adding to the more than 2,000 positions the company cut last year.

Can the UK steel industry survive? Source: Adobe Stock/Inzyx.

Can the UK steel industry survive? Source: Adobe Stock/Inzyx.

In October, SSI shut its steel plant in Redcar Teeside with 2,200 staff being made redundant, shortly after the announcement that 400 jobs were lost with the implosion of Caparo in the Midlands, the London Telegraph reported earlier.

What’s at Stake

Port Talbot is Britain’s last integrated steel works, at two-and-a-half miles long and 100 years-old it is also one of Europe’s most productive, churning out 3.5 million metric tons a year of top-quality flat-rolled steel. It has, in recent years, broken every target the company has set for efficiency, production and tonnage, yet when faced with Chinese imports priced at $34 per mt below the cost of production, according to trade body UK Steel, it is at risk of closure. Tata is losing $1 million a week and the Indian owners have been forced to write down the value of their UK steel investments by over $1.2 billion last year. Read more

India’s National Aluminum Co. (NALCO) seems to be declaring it will, indeed, join ’em.

Free Download: New! The January 2016 MMI Report

The state-owned aluminum producer is sending a team to Iran, Qatar and Oman to explore opportunities for setting up a gas-fired thermal power plant and associated aluminum smelter next month according a report in the India Times.

NALCO has been looking at a $2 billion project to set up a smelter in Iran’s Kerman province, but sanctions meant it never got beyond the feasibility stage. Now, with sanctions lifted, the firm is exploring all locations in addition to the Iranian project probably with the intent that they can show the Iranians they have other options and negotiate a better deal.

New Suitors

India is reported by the Indian Aluminum Association (IAA) to have the world’s fourth-largest thermal coal reserves at 250 billion metric tons and the fifth-largest bauxite reserves at 3.29 billion mt while also being self-sufficient in aluminum production. So, you may ask, then, why is a state-owned producer looking to invest $2 billion in a project in the Middle East?

India_Alu_consumption

Source: Indian Aluminum Association.

Globally, aluminum has probably the best growth prospects of any of the base metals, even though prices are currently desperately low for producers struggling to cover costs, but India has even better growth prospects than much of the rest of the world. Per capita consumption is only 1.8 kilograms per person compared to over 20 kg in the developed world as this chart from the IAA shows. Read more

Stock markets are officially in bear territory. At least in Europe and Japan, they are, as shares fell more than 20% below their 2015 highs last week.

The US S&P 500, the Dow Jones Industrial Average and the NASDAQ composite briefly fell more than 3% to more than 10% below their prior peaks, meaning they entered a market “correction,” before recovering slightly. What caused such widespread chaos isn’t hard to find.

Equities have been dragged down by rising concerns over China, both growth and the falling yuan, by the wider global economic growth prospects, by sliding commodity prices, particularly oil, and questions over whether central banks remain willing to act as a backstop. With so much to worry about, investors dumped shares and bought safer government debt.

Resource Producers Hit Hardest

All markets have seen falls, but the most vulnerable and most resource-focused were hit hardest.

FT_Stockmarkets

Source: Thomson-Reuters Datastream.

All share groups have been hit, but mining and commodity related shares have been hit hardest as the Bloomberg Commodity index fell to its lowest since at least 1991, and crude oil prices fell below $27 a barrel during US trading. Read more

You would be a brave investor to bet against George Soros. The billionaire investor has shown a canny knack of making the right calls over the decades. As an article in Bloomberg says he rose to fame as the hedge fund manager who broke the Bank of England in 1992, netting $1 billion with a bet that the UK would be forced to devalue the pound.

Free Download: New! The January 2016 MMI Report

He also successfully bet that Germany’s deutsche mark would rise after the collapse of the Berlin Wall in 1989 and that Japanese stocks would start to fall in the same year. Between 1969 and 2011, Soros led his hedge fund to average annual gains of about 20% before returning money back to investors in 2011. Read more

China’s annual GDP growth is 6.9%, its lowest since 1990, screams the headline. Yet China is still the engine of metals growth. Even now.

Free Sample Report: Our January Metal Buying Outlook

Indeed, the commodity markets have found little else to talk about over the last year or so except for China’s “decline.” Slow growth in China is responsible for a crash in commodity prices goes the argument, but to be more precise they should say slowing growth in China has created a sentiment that commodity demand is weak — when, in fact, it isn’t.

Record exports from China of steel, aluminum and certain other commodities — allied with a global market awash in a tide of commodities such as oil, aluminum, iron ore, coal, nickel (need I go on?) — has created a mindset among, not just investors or speculators, but the global community that we are in is a slump in terms of commodity demand when, in fact, the reverse is true.

Commodity demand has remained robust and positive. The collapse in prices is not about a lack of demand. It is, rather, self-inflicted by miners and oil producers who, for diverse reasons, are producing far too much product compared to actual demand.

Why Miners Overproduce

Carried away by record high prices and double-digit demand growth out of China, miners, in particular, invested vast amounts of shareholders’ funds in new mining ventures, which have subsequently all come to fruition at around the same time.

China is not above criticism in this. Chinese steelmakers, aluminum smelters and mining companies have been as active as western firms in investing in new plants and mines over the last decade and parts of the Chinese economy — witness steel mills — are now suffering the consequences.

But growth in China has remained positive in spite of Beijing pushing through what has probably been the fastest transition of a major economy from a manufacturing/industrial model to a consumer-led consumption and services economy in history.

China’s Transition

The process is far from complete but growth in services and consumption has been impressive even as manufacturing has suffered in some sectors, yet it hasn’t collapsed. According to the Financial Times, fixed-asset investment — which covers infrastructure and factory construction — still grew by 10% in 2015, the weakest full-year growth since 2000, true, but in an economy the size of China’s that’s still sizable growth. All sectors of the economy are growing as this graph from the FT shows.

Source FT

Source: Financial Times.

About That Strong Demand…

So is metals consumption. Imports of commodities such as copper remained higher in 2015 than 2014 and are expected to continue to rise in 2016. The fact the rate of growth is slower than five years ago should come as no surprise. Back then, the economy was smaller.

Read more

That stock markets have tanked globally is no surprise. How the Federal Reserve will react is unknown.

Most would accept that the Shanghai market was overvalued and vulnerable to a correction, particularly in view of the weakening domestic economy.

Free Sample Report: Our January Metal Buying Outlook

Stock markets in the surrounding region have understandably followed China — their biggest export market and the economy to which they are, for better or worse, tied umbilically. In the Middle East, likewise, a self-induced collapse of the oil price has severely damaged the budgets of oil producers and the entry of Iran into that mix has initiated a further rout of the Middle East stock markets this week.

But the falls in the US, while not as bad as the rest of the world, are on the face of it not as easy to justify when you consider the excellent results many firms are posting. A short video blog by the ever watchable John Auther of the Financial Times explains that, in part, this is an expression of the market fighting the Federal Reserve over perceptions of the future direction of the economy and interest rates.

Other Signs

Falling share prices are only one sign of distress in the markets, the US dollar has reacted to the long-running debate about when and how much the Fed will raise rates by gradually appreciating.

More importantly than the dollar rise against a global basket of currencies, is the rise against its nearest and largest trading partners. In the last few months the US dollar has risen by 20% against the Mexican peso and the Canadian dollar, changing the terms of trade in the region.

This will have a profound effect on the economies of the region in 2016 as Mexican and Canadian products become significantly more competitive in the US market compared to domestic producers and US exporters find it profoundly harder to compete in their neighbors’ markets.

Source: FT

Source: Financial Times.

What is the Federal Reserve’s Plan?

Part of the Fed’s drive to raise rates is the belief that it is better to act early and more gradually to combat a rise in inflation down the line that will be the inevitable result of years of near zero interest rates since the financial crisis.

Read more

I was asked recently if I thought the world was going to run out of lithium.

Free Sample Report: Our January Metal Buying Outlook

It was the type of question that illustrates the fever that is gripping this small and specialist market, much as the hype that drove rare earth elements through the roof a few years ago and briefly allowed a flood of investment to be available for the development of new mines and processing operations such as Molycorp’s Mountain Pass, only for the market to then collapse again a year or two later.

Don’t Believe the Hype?

An Economist article underlines the case regarding lithium. Much of the recent hype is due to a doubling of lithium carbonate prices imported into China in the last two months of 2015 and comments by analysts from places such as Goldman Sachs calling lithium the “new gasoline” reflecting their opinion that electric vehicles are about to take off — in sales terms, not literally.

Is the investment hype over lithium-ion batteries justified? Source: Adobe Stock/bbbastien.

Is the investment hype over lithium-ion batteries justified? Source: Adobe Stock/bbbastien.

Yet sales of lithium salts such as lithium carbonate and lithium hydroxide make up a market of only about $1 billion per year, small when you consider — like rare earth elements — their ubiquitous presence in just about every electronic gadget. All-electric cars and, increasingly, power tools and products previously powered by nickel-hydride batteries use lithium. Read more