Stuart Burns

We have a problem, by we I don’t mean we in the metals markets specifically, nor we in the US or UK, nor even we in the western world.

Why Manufacturers Need to Ditch Purchase Price Variance

I mean we all have a problem: too much debt.

The International Debt Pile

“Whoa!” you say. Hold on, wasn’t the last financial crisis all about too much debt? Haven’t we learned our lessons – corporations are awash with cash, dividends and share buy-backs are at record highs, austerity measures are curbing government spending around the world, household debt — after years of recession — are under control again, what are you talking about?

Quantitative Easing (QE), started in the US by the Federal Reserve, was taken up by the Bank of England, followed by the Bank of Japan, the latest is the European Central Bank at €60 billion-a-month and even the Bank of China is talking about some form of unconventional monetary support, which we can read as QE to support flagging growth.

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When domestic markets weaken, most producers turn to export markets to sell excess capacity, but you don’t just break into export markets overnight. It’s not that easy. Sort of like one does not simply walk into Mordor.

Why Manufacturers Need to Ditch Purchase Price Variance

The tried and trusted short-term approach is to sell cheap, making it hard for buyers to refuse the low-priced product being offered.

Sell Low, Buy Even Lower

If those mills are supported by plunging raw material costs and extensive local state support gifting them a break-even price around the lowest in the world, then the intent to simply “dump” metal into export markets has few barriers.

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Zinc producers, along with investors, have been hoping for a supply crunch to materialize after repeated warning of mine closures and predictions of ore shortages, but supply has remained stubbornly robust.

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As recently as October, the International Lead and Zinc Study Group (ILZSG) was predicting a zinc deficit for this year of 366,000 tons, a figure more than halved to 151,000 tons this month, and itself still higher than a recent Reuters poll predicting a 143,000-ton deficit for the year. Overall, about a million tons of supply will eventually be taken out, Robin Bhar of Societe Generale predicts, but one unknown is how much mothballed production could come back onstream.

New Mining Coming Online

At $2,200 per metric ton most miners are operating profitably, a 10% rise (we have seen this much already over the last two months) would probably seal the case for restarts, in addition to several smaller projects already in the pipeline.

Some point to falling London Metal Exchange inventory as a sign of deficit but to what extent this is metal coming off-warrant to be moved into lower rent non-LME storage is not clear. Zinc has suffered from the same distortion as aluminum in recent years, with the stock and finance trade soaking up a percentage of production and inflating the impression of apparent demand.

The current LME forward curve does not support that trade at present, but that doesn’t negate the fact a significant percentage is still locked up in those deals.

For now there is ample ore supply, Reuters reports, as evidenced by treatment charges that have risen to $245 an mt, a 10% gain, from last year. To clear up a misconception, treatment charges rise with supplies as mining groups compete to find smelters to process their material.

Everyone Gets a Surplus

This year, the Chinese domestic zinc market is expected to be in surplus as domestic output and imports rise, while demand for the metal weakens. A slowing manufacturing sector and tightening environmental standards could also trim zinc demand sapping expectations of a rise in demand.

Against such a backdrop the rally in prices seen in recent weeks could be said to be overly bullish, fueled as it is by falling inventory and expectations of a looming supply crunch, the current market realities don’t support a near-term supply shortfall, but markets are said to trade on expectation so maybe investors’ optimism about higher prices is right, just ill-timed.

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In a surprise move, the Chinese Ministry of Finance announced this week that, effective May 1, they are scrapping export tariffs on alloyed and unalloyed aluminum bars and rods, according to Reuters.

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Along with similar changes to a host of other metals including molybdenum, tungsten and rare earth metals, Beijing has moved to support domestic aluminum producers by opening the flood gates to export markets. This will have the effect of reducing the domestic glut of metal, supporting domestic prices and depressing prices in overseas markets.

China Increases Exports

Even with tariffs in place, China has been rapidly ramping up exports, Reuters said. China’s exports of semi-finished aluminum products rose 49% year-on-year to 1.07 million metric tons in the first quarter, of which 182,257 mt were bars, rods and profiles.

With a domestic primary production capacity of 36 million metric tons and actual production last year of about 27.5 mmt Chinese producers have the ability to easily increase production without creating any shortages in their domestic market. Recent power tariff reductions by the national grid will aid smelters in controlling costs even if prices in export markets fall further.

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I always think it harsh, particularly for those of us sitting in northern Europe often under leaden skies, that the Middle East is not only blessed with vast reserves of cheap and easy to extract oil and natural gas, but even more limitless supplies of sunshine.

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When the oil runs out they will become the powerhouse of the world again, but this time generating electricity. True sandstorms in desert areas are a source of considerable maintenance and repair cost, but clearly aren’t a major hindrance as solar and wind farm investments have boomed in 2014 driven increasingly by economics, not subsidies.

Japan and China Investing in Renewables

After all the hand wringing we have done over the years about subsidies paid to wind farms, it comes as a welcome development to report that some 95 gigawatts of increasingly economic renewable generating capacity was created in 2014 at a cost of $270 billion, led by China and Japan who combined, invested $75 billion in solar power.

This is the largest level of new renewable capacity (not including hydro-electric) in one year, at least in terms of GW of capacity. The previous higher spending year, 2011, resulted in lower levels of installed capacity because costs were so much higher then.

Lower Costs

According to the Financial Times, equipment costs have fallen 75% since 2009 while large solar construction and connection costs have fallen by up to 65% in the last four years and solar panel efficiencies are rising making such projects increasingly attractive.

Thierry Lepercq, chairman of Solairedirect, a French company that has 57 solar parks built or under construction around the world said, “We’re generating power at lower prices than other energy sources in Chile, India and South Africa.”

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An exciting development in the UK heralds more widespread adoption of additive layer manufacturing, or 3D printing, from titanium powder far beyond its current limited use in the aerospace industry.

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The UK’s Aerospace Technology Institute (ATI) has agreed to invest £1.5 million ($2.3 million) in a collaborative R&D project, led by GKN Aerospace and Metalysis, the specialist metals technology company with partners Phoenix Scientific Industries Ltd. and The University of Leeds to develop the use of Metalysis’ high quality, low-cost titanium powder for use in aerospace additive manufacturing for the first time with a commercial partner.

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Barely a week passes without some snippet of news from one university or research lab hitting the media about another battery development heralding a major breakthrough in technology.

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To gauge by the number of announcements we should be enjoying unlimited storage at near-zero cost by now, but according to the journal Nature the reality is the energy density of rechargeable batteries has risen only six-fold since the early lead–nickel rechargeables of the 1900s.

Strong Lithium-Ion Batteries

Modern lithium-ion batteries are ten times cheaper than the first commercial versions sold by Sony in 1991 but, in terms of energy density, Nature says they don’t hold much more than twice as much energy for a given weight. This raises a key issue for some applications: for grid storage, density is not an issue. Capital cost, maintenance and longevity or recharging cycles are paramount.

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Maybe because of Alcoa Inc.’s involvement in the Maadan smelter in Saudi Arabia, recent attention on the Middle East has centered on that production facility, but significant as its 750,000 metric tons is, it will be but part of a much larger regional capacity that has built up in recent years.

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A report from the fourth edition of Aluminium Middle East 2015 states that last year the Gulf region produced 4.83 million metric tons of primary aluminum compared to the 53.06 mmt produced globally. Of that, the United Arab Emirates (UAE) produced 2.3 mmt making it globally the fourth-largest producer accounting for more than 50% of the region’s production.

United Aluminum Emirates

85% of the metal is exported around the world although tax breaks, local metal supply and a buoyant construction infrastructure market have encouraged fast rising local consumption. Consumption for downstream application is growing at 8.4% per year compared to a global average of 3.5% supposedly making the Middle East the fastest growing aluminum market in the world according to the report.

The Gulf has six smelters: Alba, Dubal, Emal, Qatalum, Sohar and EGA, in addition to a growing alumina refining capacity. Although the UAE is nearing production capacity — it produced 2.3 mmt of it’s 2.4 mmt theoretical capacity last year — the management are tight lipped about further expansion plans.

Expansion Beyond Current Capacity

Emirate Global Aluminium’s vice chairman is also CEO of Dubai Electricity and Water Authority, underlining the close interdependency of aluminum smelters to electricity costs and water supply. Although the UAE earns some $3.9 billion in export revenues from aluminum production, it comes at a price in the consumption of vast amounts of natural gas and fresh water.

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There are several potential sources of financial shock to markets this year but for the financial markets an exit from the Eurozone by Greece, while potentially serious, seems to have slipped from the headlines as being very unlikely of late.

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Earlier this year, the press was awash with dramatic headlines on the probability that Greece’s new leftist government, led by the Syriza party, would lead the country out of the euro in protest at the punitive terms placed on the people in return for Europe’s continued support.

Kicking the Greek Debt Problem Down The Road

The domino effect of other ClubMed countries voting in equally anti-austerity parties was raised as the nuclear result of a Greek exit. But the rounds of meetings between Greece and the Troika got so tedious and the progress so glacial that the markets began to lose interest as the problem of how Greece was to repay its debts seemed to be kicked down the road. First by weeks, then by months.

But it would be a mistake to think that the problem has gone away. Central to Greece meeting its terms is the ability of the state to raise sufficient taxes to meet debt repayments when they come due.

The country’s debt pile has risen form 154% of GDP in 2012 to 177% in 2014, that’s a staggering €317 billion (or $336 billion). Syriza’s problem could be said to be of Syriza’s making. The party came into power on a wave of public support and optimism based, in large part, on what they promised in the election campaign, backed by the threat that if the EU didn’t agree Greece would leave the euro.

Campaigning Vs. Governing

Once in office, though, they immediately reversed certain austerity steps but, more significantly, both business and the population positioned themselves for what they expected to happen next. Companies and individuals sent funds overseas in expectation that Greece may leave the euro and any funds held in Greek banks would be converted into Drachma (or whatever would replace the euro) at a much lower rate.

As a result of the cash outflow, the country’s banks are being kept alive through emergency funds (ELA) from the European Central Bank. The ECB has been forced to hike the limits on this cash on a weekly basis as capital has fled the country, a London Telegraph article reports. A further €800 million was drip-fed to banks on Tuesday to keep them solvent. What’s worse is that everyone stopped paying taxes as the money fled Greece.

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How much further do copper prices have to fall? It’s a question challenging producers, consumers and analysts alike.

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In the face of weakening demand from China, prices have slid for much of this year and if Chinese demand, alone, was the sole driver there would be little prospect of ANY support to the price in the short- to medium-term.

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