Iron ore, steel and non-ferrous metal markets in China — and by association the London Metal Exchange after opening — dropped following a decision by futures exchanges in Dalian, Shanghai and Zhengzhou to increase trading margins and fees. The most-traded contracts were down up to 4.6% in response.
Some Commodities Are Actually in Short Supply
Not all commodities dropped. Some experienced genuine supply tightness, such as coking coal wherein many of the domestic mines and ovens closed last year due to low prices, and bucked the reversal. Coking coal continued to rise and although iron ore did fall back. The fundamentals are a little more supportive following announcements by producers that they will limit output, but, in truth, even iron ore’s price increases are more due to speculative bullishness than a genuine tightness of supply. Read more
The Financial Times wrote this week that a key driver of bullish sentiment for many asset classes, particularly emerging markets and commodities, has been the U.S. Federal Reserve lowering its estimate of policy tightening this year, but for metals the knock-on effect of that has been a weaker U.S. dollar which — as my colleague Raul De Frutos has written recently — remains a key driver of both price direction and sentiment.
Equally, if not more important, though, has been the sugar rush of China’s not-so-mini fiscal stimulus, initiated late last year which has really picked up momentum in the first quarter. Across a number of metrics, China’s economy has surged this year driving a risk on sentiment among investors, the strength of which has caught many by surprise.
Stimulus-Driven Bull Market
Chinese speculative investors have piled into the country’s commodity markets betting the upturn has the potential to boost demand for those materials. Wider sentiment has helped, according to the London Telegraph, new home sales jumped 64% in March from a year earlier. Housing prices have risen 28% in Beijing, 30% in Shanghai, and 6% in the commercial hub of Shenzhen. Read more
It would seem Iran is not the only major Middle East economy on the cusp of radical change. If the espoused wishes of deputy crown prince Mohammed bin Salman al-Saud (or MbS as the media have got into the habit of calling him) are realized, the desert kingdom is in for a period of change over the next decade that would be unprecedented in it’s recent history.
Certainly, oil has transformed the kingdom since it was first commercially extracted in 1938 but the culture of Saudi society has been carefully nurtured, protected, even shielded — one might say — from the corrupting influence of the outside world.
A group of fuel tanks in the Ras Tanura oil terminal in Saudi Arabia. If Prince Mohammad has his way, this will someday be a thing of the past in the kingdom. Source: AdobeStock/eugenesergeev.
Yet the days of a close compact between the House of Saud dynastic monarchy and the religious Wahhabi clerical establishment that, in exchange for control over education and the judiciary, has provided the rulers with legitimacy, may be seeing the beginning of its end.
The Prince’s Plan
The new King Salman’s son, Prince Mohammad, believes Saudi Arabia has been addicted to oil, an addiction that has cost it dearly in terms of economic development and progress. Trying to look into the future, he clearly feels Saudi Arabia needs to face up to the march of time before it is too late. Read more
On the one hand, popular protests due to increasing levels of pollution are an expression of growing unrest among China’s rising middle classes, all conscious of environmental issues.
Too Much Pollution
Pollution is a source of international shame that has prompted Beijing to take the drastic steps of closing down coal-fired power generation and coal-consuming heavy industry around cities hosting major events such as the Olympic games and flower festivals, so that the People’s Republic can show a clean face to the world.
On the other hand, that same coal is mined by some 5 million coal workers who have already come onto the streets to protest loudly and publicly about proposed rationalization in the industry and Beijing is nothing if not sensitive to public protest.
Coal-fired power continues to dominate Chinese power generation. Source: Adobe Stock/Snap Happy
So, what to do? close coal mines and coal-fired power stations or keep them open and suffer the atmospheric pollution and health hazards that involves?
The answer, as with so much else in China, is export it so it’s someone else’s problem. In this case, the policy appears to have been to export the pollution and hence the problem westwards and centrally to less-affluent and less-populated areas.
According to the Financial Times, pollution has decreased in Beijing and Shanghai while it has increased in the interior. Beijing’s smog has been lifting, the average concentration fine particulate pollution (PM2.5) is down 28% year-on-year in the first three months of this year. Read more
Chinese construction is up 20% last month year-on-year, Chinese loans were up 41% last month, the government is raising exchange-margin requirements from 5 to 8% to dampen rampant speculative behavior, should we go on?
Is it 2009 Again?
Turn to commodity prices, copper is up 20% this quarter, zinc is up 22%, iron ore has nearly doubled, hitting $70 per metric ton and a 16-month high according to Bloomberg. Steel mills in China, encouraged by rising prices and strong construction demand, churned out over 70 million metric tons last month, nearly equivalent to the entire U.S. annual output. Sound like the start of the supercycle to you?
Iron ore producers are trying to take credit for cutting back on expansion of iron ore mines and are indicating they would limit production to support prices, but, in reality, they are tinkering at the margins. Read more
Just a month after BMW proudly announced it was shifting its development strategy toward more all-electric vehicles (EVs) and autonomous technology in order to address a “new era” in the industry, the company was rocked by the defection of the core development team of its i3 and i8 electric vehicle lineup.
The embarrassing part is the defection isn’t to another automotive major but to Future Mobility Corp., a Chinese startup backed by Tencent Holdings, a Chinese investment company. The move underlines how established “old world” firms in the automotive sector are struggling to compete with start-ups and newcomers in the EV and hybrid market.
Who Left BMW for Future Mobility?
The WSJ reports that Carsten Breitfeld, a 20-year BMW veteran who developed the company’s i8 plug-in hybrid sports car, left the Munich-based automaker last month to become chief executive of the Chinese electric car company. Now, three key executives from the “BMW i” electric car group are following him. Dirk Abendroth, who developed electric powertrains for the i-series, Benoit Jacob, who was head of design at BMW i, and Henrik Wenders, head of BMW i product management.
BMW is betting on electric cars for its future, but Future Mobility just poached its entire i team. Source: Adobe Stock/Joel 420.
One would like to think they are not being simply lured by money, creative professionals of this caliber will be more motivated by being at the cutting edge of development and technology than euros in the pocket and BMW, for all their media hype, have failed to make a success of their electric vehicles division.
BMW Slows Electric Car Development
According to the WSJ, BMW has slowed development of future models. Last year, BMW sold 24,057 i3 models, and 5,456 i8 models, a 66% increase in BMW i division sales but paltry by the standards of a volume automaker. Read more
While one high level meeting was going on in Doha, Qatar — in an effort to control the fate of the oil price — another was going on in Brussels, Belgium, seeking to decide the fate of the steel market.
Representatives from around 30 countries including China, Japan, Germany, India, the U.K. and the U.S. met with European Union, World Trade Organization, Organization for Economic Cooperation and Development and World Steel Association representatives met in the Belgian capital in a bid to come up with a package of measures that will curb the huge overcapacity at the heart of the steel crisis, the London Telegraph reports.
Chinese Production Cuts Demanded
The E.U. and U.S. would like to see China agree to cut production and fast but China has said, “Blaming other countries is always an easy, sure-fire way for politicians to whip up a storm over domestic economic woes, but finger-pointing and protectionism are counter-productive.”
This steel plant at Port Talbot in South Wales, U.K., could close if Tata Steel can’t find a buyer. Source: Adobe Stock/Petert2
China even called such allegations a “lame and lazy excuse for protectionism.”
China Cries Protectionism
One could easily have some sympathy for the Chinese position, at least as far as the E.U. is concerned. Environmental legislation-inspired energy costs have been the dead weight dragging down all European steel producers, none more so than the U.K. which is likely to see the last major primary production facility close in coming months, leaving just one electric arc furnace plant.
Officially, the OECD said the meeting will “discuss how governments can facilitate market-driven industry restructuring and … agree on steps to reduce competition-distorting policies.”
According to OECD analysis, overcapacity in steel was above 70 million metric tons at the end of 2015, and new plants are set to add another 47 mmt by 2018. In spite of promises of good intent made in the past, China has continued to increase production. Output in March rose 2.9% over the same month last year hitting 70.76 mmt, an annual run rate of nearly 850 mmt.
On the back of this, iron ore has risen to a high for the year, up 36% since the turn of the year. China, though, is aware of the problem and while they will refuse to be bullied into closing plants they are desperate to implement a plan to cut large chunks of older and less-efficient, more-polluting plants in time.
Importer Nations Can’t Wait for Cuts
The “in time” will not be fast enough for many, though. Beijing is talking of two to three years, fearful of the impact mass layoffs could have on social unrest there. Figures of five to six million job losses are substantial, even in a population as large as China’s, particularly as they would be disproportionately concentrated in a few coal-mining and steel-producing states.
So, the Brussels summit will have little more positive outcome in the short term than the complete waste of time that was OPEC’s summit in Doha. However, rest assured that won’t stop politicians coming away claiming all kinds of goals met and agreements made. The proof will be whether global steel production is any lower as a result by the end of this year as it is today. Most projections are for it to continue rising.
The Steel Index (TSI) put this down to stronger demand from Turkish mills and a squeeze on supplies. Low steel prices have resulted in low scrap prices, particularly in major exporter the U.S. The resulting lack of supply has created a tighter market. At least for awhile.
Source: The Steel Index.
In Asia, prices have picked up in, particularly in Taiwan where imports of HMS #1&2 80:20 increased $23 a metric ton to $247 per mt at Taiwanese ports last week.
India Not Buying Increases
In India, TSI’s containerized shredded index for Indian imports rose $25/mt to finish the week at $263/mt at the CFR Nhava Sheva port. Indian buyers, though, have not committed to the market in a big way, drawing on domestic stocks in part because they do not see the price increases as sustainable.
U.S. prices, though, have been more lackluster showing just a small $2/mt uptick according to the TSI, more a reflection of increased west coast exports and lack of steel scrap arisings than any strength in the market.
Iron Ore Competition
Low iron ore prices, though, have largely replaced scrap demand in China, decimating imports of ferrous scrap.
Source: The Wall Street Journal.
Scrap inventory has built up at scrap yards in the U.S. and Europe as processors have faced weak markets. There appears little shortage of unprocessed metal, given that this could come through the system if demand and or prices picked up any significant strength in the market could ease in Q2.
The steady decline in volumes is forcing consolidation in the U.S. market and some have voiced concerns about the future of domestic recycling. With electric arc furnaces steelmaking such a dominant production route in the U.S., the supply market will, in part, be supported by vertical integration from steelmakers but recycling is a fragmented business and further mergers, rationalization and consolidation is probably inevitable as export prospects remain subdued, not just for months, but probably the next few years. Scrap prices have moved sharply in the US and remain highly correlated to HRC prices which are also now on the rise. Whether this will spur further scrap metal to come on to the market remains to be seen, in theory there is pent up supply waiting for better pricing to attract its collection and processing, some smaller scrap dealers have gone out of business but the industry has plenty of capacity to produce more, it just needs the trend of firming prices to continue, for many it can’t come soon enough.
MetalBulletin reports China has agreed to end export subsidies it provided to industries including aluminum products, titanium and specialty steel after the U.S. complained to the World Trade Organization (WTO) in February 2015. Except, according to Andy Home of Reuters, it’s not big news.
New WTO Agreement
Before we get excited that Chinese manufacturers may be forced to join the real world, Home urges some caution. United States Trade Representative (USTR) Michael Froman’s headline grabbing statement was, “Today we have signed an agreement with China to eliminate export subsidies that the United States challenged because they are prohibited under WTO rules.”
Are aluminum slabs welded together really “deep-processed extrusions?”
That actually covers a host of product areas including textiles, footwear, medical products and chemicals to name but a few. Aluminum comes a lowly third on the list and the sums involved are paltry when you consider the breadth of products effected and the time frame — the last three years. Apparently, most of the support mechanisms had already been dismantled so it will amount to so much hot air as far as the aluminum market is concerned. Read more
Well, we thought the world’s major oil producers would at least manage to agree an oil production freeze — that shouldn’t have been so very hard and was always a paper tiger anyway — the world is pumping far more oil than we need so a freeze effectively meant nothing in the short term.
The prospect of some kind of agreement, even one with no teeth like a freeze, has been supporting oil for the last few weeks in a rally that brought it to it’s year high last week. Following Sunday’s failure at the Organization of Petroleum Exporting Countries‘ sponsored meeting in Doha, Qatar yesterday prices have now gone into freefall again, falling over 7% in early trading this morning before marginally recovering.
Source: Financial Times.
Once again, it was Saudi Arabia that took the hard line, after initially courting Russia and appearing to support the prospects of an output freeze it changed tack after the first draft of an agreement had been drawn up, apparently at the insistence of the 30-year-old Saudi Defense Minister Mohammed bin Salman, the desert kingdom’s deputy crown prince and second-in-line to the throne.
He is reported to have told Bloomberg that the kingdom would not sign up without Tehran, suggesting he had decided against giving any leeway to a fierce regional rival according to the Financial Times today.
Saudis Won’t Sign Up
Iran, who did not even bother to send a representative to the talks, had maintained all along that they would not be a party to an output freeze until their production had recovered to pre-sanction levels. The International Energy Agency estimates exports of Iranian crude oil rose to 1.6 million barrels per day in March — up around 100,000 bpd from February. Before sanctions were tightened in mid-2012, Iran was selling roughly 2.2m bpd of crude on world markets.
Other oil producers such as Iraq, Venezuela and Nigeria were bitterly disappointed, with budgets ravaged by low oil prices they had been hoping and expecting Saudi Arabia would rubber stamp a deal and the price could find a floor, if not climb higher. Now the question is how far will it fall. With only a strike among Kuwaiti oil workers that started yesterday likely to effect the downside oil, energy stocks and commodity-linked currencies have all dropped sharply this morning.
Lower Prices Will Stay
The news will be a mixed blessing in the U.S., shale oil and gas producers had hoped for a rebound in prices as many face potential bankruptcy this year as hedges expire and debt obligations become increasingly tough to meet, but consumers will welcome a halt to the rise in pump prices that a reversal would bring and energy-consuming industries will be viewing 2016 with a little more confidence.
The chances of OPEC pulling together the wider oil-producing community in a repeat of this weekend’s meeting before the end of 2016 are slim. OPEC, itself, is set to meet in June but the twelve-member organization lacks the influence it once had and needs the participation of Russia, Mexico and lesser producers to have a chance of moving market sentiment. So, somewhat to our surprise it looks like we are in for more of the same: lower for longer is the order of the day for oil.