Author Archives: Stuart Burns

And we don’t mean in terms of facing closures. A report by Reuters quoting Chinese sources paints a picture of an industry on the cusp of shooting itself in the foot.

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Prices on the Shanghai Futures Exchange (SHFE) have risen from a low of CNY 9,710 per metric ton ($1,504) in November last year to CNY 11,945 today ($1,850), a 23% rise in just a few months.

In part, the rise has been due to an announcement by six Chinese smelters last December that they would stockpile one million metric tons of metal expressly to support prices. This came on the heels of wider plans to shut some 4.6 million mt of capacity or about 10% of output, a move encouraged by Beijing and, no doubt, sweetened with promises of financial assistance if they did.

Stockpiling Plan

Both steps added to sentiment, even though the stockpiling plan has yet to be implemented and it is unclear how much of the 4.6 mmt of capacity has been closed. Certainly, loss-making plants such as Chinalco’s Liancheng smelter, all of which had high production costs, were closed. Liancheng ishighly unlikely to reopen but production costs across the Chinese market vary widely.

Reuters quotes Xu Hongping, an analyst at China Merchants Futures, in saying production costs for the majority of the idled capacity are about CNY 11,000 per mt but added restart expenses would push up the breakeven mark to about CNY 12,500. The suggestion is that should the price reach about CNY 12,000 per mt, idled smelters could be encouraged to come back onstream.

The 1 mmt stockholding plan has been quietly sidelined for now. If the market is rising on the back of suggestions then the smelters probably figure they don’t need to go to the pain of actually implementing the plan.

Why Are People Speculating?

An issue not addressed in the article, though, is the speculative element in last year’s dramatic falls. The underlying fundamentals were undoubtedly dire for aluminum and that hasn’t changed markedly since the low point last November. But November’s low was plumbed to no small extent because of the actions of highly aggressive short speculators on the SHFE.

Andy Home, writing in Thomson Reuters this week about copper, noted that aluminum had also suffered mass bear raids, with volumes and open interest spiking to previously unseen levels in November. Although the spikes lasted only a few days, the action drove down prices, without which it is debatable if aluminum would have hit its CNY 9,710 per mt low.

Of course, there is nothing to stop the speculators coming back, they have taken repeated hits at copper over the last 12 months or more and the fundamentals for aluminum look no more solid than for copper. Sentiment has been helped by the rise in price on the back of mills’ stockholding plan and promises of smelter closures, but if the stockholding doesn’t happen, and a number of smelters are brought back onstream, that narrative could be fundamentally undermined.

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The most likely outcome is China’s aluminum producers are going to self-cap prices by raising production if prices move much higher. They have shown poor discipline in the past and there is nothing to suggest that has changed.

The oil price is doing rather well this week isn’t it?

Or you would think so, if you were an oil producer or resident in a net-oil-exporting country. For the rest of us, it’s a bit of pain pulling up at the gas pump only to find prices have crept up a few pence or cents since the last time we filled up.

The Organization of Petroleum Exporting Countries would have us experience a lot more of that pain if they had their way. The group of 13 oil-producing countries is meeting this Sunday in Doha Qatar to try to hammer out a deal to support prices.

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Various major oil exporters have voiced support for the idea of freezing output to support prices and, among a number of other factors, this rhetoric has had the desired effect. From a low of about $27 a barrel in January the oil price — both Brent Crude and West Texas Intermediate — have risen to 2016 highs. Brent to over $43 a barrel and WTI to over $40 a barrel. Russia and the Saudis have supposedly already agreed to freeze, at least, their output.

What’s OPEC Up To?

Not that the price rises have been solely down to OPEC talking up the market, the move higher has been mostly speculative and influenced by a number of factors such as rising automotive production in China where vehicle sales were up 8% in March.

The types of wells that built domestic driller Chesapeake Energy. Source: Adobe Stock/ W.Scott

West Texas Intermediate is up, as is Brent Crude. Source: Adobe Stock/ W.Scott

The threat of strike action by thousands of oil and gas workers in Kuwait next week and gradually falling U.S. shale oil production have added to a sense of slowing demand, plus a weaker U.S. dollar has had the impact of supporting any dollar-priced commodities. Read more

In a recent market review webinar for our subscribers, we talked at some length about the impact the oil price has had on metal prices and it made me think that, in many ways, the drop in the oil price has been a bit of a disappointment.

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Not that lower gas prices aren’t welcome, of course they are, but the expectation was that lower oil prices would be a major boost for the global economy. Not so long ago, the the International Monetary Fund calculated that every $20 per barrel fall in the oil price would increase global gross domestic product by 0.5%, rising to 1.2% if there were associated improvements in confidence.

Economists had widely predicted two effects from cheap oil. First, there would be a huge transfer of resources from oil producers to consumers, both within and between countries. And at the same time, the gains from lower oil prices would outweigh any losses from lower investment and activity in oil producing regions.

The theory went that, with their massive cash buffers, oil producers would continue social spending and infrastructure investment in spite of lower oil revenues. But maybe the extent of the fall, down almost 70% since 2014, coupled with continued anxiety about the future path of global growth has spoiled oil’s party.

Low Oil and Lower Growth

As a result of this turn of events, predictions of global growth — in large part predicated on lower oil prices — have been reduced from 3.5% to 2.5%, only marginally above the level of 2%. Anything below that and global growth is considered to be on the threshold of a recession.

Certainly, the deflationary environment in many net oil-importing countries (aided and abetted by the collapse in oil prices) has encouraged consumers to save their money rather than go out and spend the windfall.

In the US, personal savings rates rose to 5.4% in February, while spending growth was a modest half of that figure. It’s true to say consumers have responded to lower fuel costs by buying more SUVs and by driving further, a record 17.5 million vehicles in 2015 in the U.S. and 3.2 trillion miles, but it would seem that has limited impact in a country of approaching 250 million adult consumers.

Source: Financial Times

Source: Financial Times

Cheap oil is estimated to have lifted GDP by just 0.2% in the US and has probably had no more effect in Europe. Indeed, Europe has seen a deflationary environment as a result of lower oil prices actually encouraging consumers to hold off buying in the expectation prices would be lower a month later. The same effect is probably dragging on consumer spending in China, exacerbated by slowing growth and excess capacity encouraging manufacturers to slash prices as they fight for market share. Read more

You could be forgiven for asking what all the whining is about in the U.K. over the imminent closure of the last major steel production facility at Port Talbot, South Wales.

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Politicians and the media are busy blaming the Chinese for dumping steel at uneconomic levels and depressing the market price to the point where firms like Tata Steel cannot compete at any point other than high technology aerospace, automotive and oil extraction and refining grades of steel.

What Dumping Hath Wrought

Certainly the Chinese have played their part, with demand of less than 800,000 tons but capacity north of 1.1 million, the country can and does produce far more steel than it can consume putting pressure on mills to produce and export just to maintain capacity utilization. But the U.K. (and the rest of Europe) has also played its part in creating this sorry state of affairs.

The British government, in its frenzy to meet foreign aid budget promises, has lavished money on those very steel producers that are now dumping steel back into the market. One report outlines how the government via it’s Department for International Development (DFID) paid £21 million ($30 million) to fund a project aimed at turning around a number of loss-making state-owned businesses in Liaoning and Sichuan between 1999 and 2004. Liaoning is a major producer of pig iron and steel, while Sichuan is one of China’s largest producers of coal, energy, iron and steel.

Government Policy

In another report, the British government is criticized for having contributed to soft loans made by the European Investment Bank worth some £80 million ($115 million) as part of its policy to help Chinese firms lower their emissions and their power costs.

The figure includes a loan of £40million ($65 million) to one of the world’s worst “steel dumping” culprits, the Wuhan Iron & Steel Corporation, the article says. State owned Wuhan, the world’s eighth-largest steel producer is such a prolific steel dumper that it has now been especially targeted by the European Commission, which wants to slap it with 36.6% tariffs.

Just five years ago, however, EU bankers decided to lend it €50 million (£40 million or $56.9 million ) to put towards a €207million (£167million, $237.8 million ) Euro-Combined Cycle Plant, yet Tata’s Port Talbot and other plants like it in the UK are saddled with the highest power costs in Europe.

U.K. Tax Money Benefits Chinese Producers

State aid is expressly prohibited in the EU, yet another Chinese beneficiary of British tax pounds was the Shaogang Songshan plant in Guangdong which, in 2008, received €35 million ($43 million) in EIB funding in the interests of “improving energy efficiency,” all in the interests of “climate policy.”

Not surprisingly, U.S. Steel is pretty scathing in its assessment of what it sees across the pond with Mario Longhi, the head of the Pittsburgh-based steelmaker accusing the EU and U.K. of being “negligent” in their approach to the dumping of cheap steel on world markets by China, arguing in a recent Financial Times article that the crisis facing the British industry is the result of misguided policies.

One can have some sympathy with U.S. Steel’s argument. They are in a very similar position to Tata’s European operations. U.S. Steel, which lost $1.5 billion last year, has been forced to shut down plants and lay off thousands of workers as a result of the slide in global steel prices. It has also been hit hard by the oil price collapse and disappearing demand from what was once a domestic oil production boom. U.S. Steel’s production is said to be down 40% from a year ago, he said, with some plants now operating at just 20% of their capacity.

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It looks like Tata’s Port Talbot, while not the first, may not be the last major plant to close before prospects begin to improve for western steel producers. It could be a long haul.

This is part two of a series on tin and its evolving uses in the many industries that purchase it. Check out part one, if you missed it.

It has been known for nearly 200 years that that a thermal gradient formed between two dissimilar conductors can produce electricity, but it has taken researchers at Northwestern University to show that tin selenide is such a poor heat conductor that it makes a remarkably promising thermo-electric material whose unique properties can be exploited in solid-state thermo-electric devices for a variety of industries, with potentially enormous energy savings. The US wastes 50% of the energy it produces as heat.

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Two thirds of the energy in gasoline disappears out the tailpipe, imagine the reduction in generating capacity or in fuel use that could be achieved if a portion of this could be captured and used? Potential areas of application for such materials include the automobile industry, heavy manufacturing industries such as glass and brick making, refineries, coal- and gas-fired power plants, and places where large combustion engines operate continuously such as in large ships and tankers.

PV Power?

Touching back on our reference to energy storage, one of the technologies that has created the demand for storage more than most is solar panels. The cost has come down and the efficiency has gone up with silicon crystalline photovoltaic panels to the extent that they can operate without subsidy in southern states. But although costs have fallen, the smart money believes it has much further to go… and tin could be the key.

Source: ITRI

Source: International Tin Research Institute.

Research money is pouring into perovskite solar cells, which can be produced for a fraction of the cost of silicon solar cells in part because they do not need the high-tech, super -lean manufacturing environment that conventional silicon PV panels demand. Read more

While watching Donald Trump on the campaign trail makes amusing viewing, at least outside the U.S., inside I expect voters are worried by what they hear.

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I think few of us would make our investment decisions based on potential President Trump’s advice. Nevertheless, his assertion that the US was headed for a “massive recession” in an interview with The Washington Post reported by CNBC have stirred up a whirlwind of comment, opinion and argument — as was no doubt his intent.

Trump’s claims appear based largely on his belief that the U.S. stock market is a bubble waiting for some form of shock to collapse and that the underlying economy is in a much poorer state largely because employment is worse than official figures suggest. Before we accept or dismiss his claims let’s take a look if they hold any water.

Are Stocks Overvalued?

First, the stock market, it is true to say it has been on a roll since the financial crisis. CNN Money says it’s the third-longest stock market upswing in U.S. history. But, they also warn that dark clouds hover as the S&P 500 has nearly tripled (up 194% to be exact) since its low point on March 9, 2009.

The bull run is already showing signs of becoming overdone and fears of a global slowdown, mostly brought on by China, caused severe jitters earlier this year. The stock market’s run has undoubtedly been aided and abetted by cheap money, but that flow of funds will at some stage dry up as interest rates rise. That was meant to happen this year but — as we said back in December — last year’s one rise was likely to be the only for a while. There is talk from the Fed of another rise later this year but we doubt the economy will be ready much before 2017.

All the same, the days of cheap money are nearing an end and that will have consequences for all asset classes, including shares.

Real Unemployment

What about his claims on employment? Headline figures have been impressive, from over 10% in 2009 according to government statistics, unemployment has fallen to 5% now, but many of those jobs have been part time meaning wages have not risen as strongly as the unemployment figures suggest. But, Trump’s claim that the “real” figure is more like 20% have been widely disputed by everyone.

According to Reuters, a  broader measure of unemployment that includes people who want to work but have given up searching and those working part-time because they cannot find full-time employment is at 9.8%, double the headline statistic and higher than the headline number than at anytime in the past as the economy generates more part-time than full-time roles.

There are, of course, some out there that firmly believe the U.S. economy is on the verge of Armageddon. Albert Edwards, a bearish but respected analyst at the French bank Societe Generale, released a note this week highlighting that his “failsafe recession indicator” had stopped flashing amber and had turned to red, according to CNBC.

In Edwards’ opinion, corporate profits, as measured for the whole economy in terms of profits before tax and with a focus on non-financial domestic companies, are a key driver of the economic cycle. In his opinion, we do not have to wait for Fed tightening, he believes that the deep corporate profits downturn is sufficient, in itself, to push the U.S. economy overboard.

He adds that the economy will “surely be swept away by a tidal wave of corporate default.” To be fair, Edwards has been warning of the same since 2012, and it hasn’t happened yet; but any watchers of the “The Big Short” will recall a perceptive few warned of (and shorted) the market long before 2008 and were eventually proved right. Timing is everything.

The wobbles in the stock market both in the US and elsewhere last year and early this were sparked in large part by fears China would devalue its currency and the knock-on effects should that happen. Beijing has since managed to calm fears although many observers feel the currency is still seriously overvalued and an adjustment at some stage is likely. But another fear around China is debt. The rating agency Fitch is reported in the Telegraph this week as saying a “remarkable build-up in leverage across China’s economy” since the 2008 financial crisis means Beijing’s ability to meet ambitious annual growth targets of 6.5 to 7% between 2016 and 2020 looked “extremely challenging.”

The paper went on to say that while China’s public debt ratio stood at 55% of gross domestic product (GDP) at the end of last year, total credit in the world’s second-largest economy, excluding equity raising, climbed to almost 200% of GDP in 2015, from 115% in 2008, and that is based on official estimates.

Fitch said the “true figure” was likely to be closer to 250%. It expects this to climb to 260% of GDP by the end of this year as total debt continues to grow faster than the Chinese economy. A hard landing in China is still considered unlikely and Beijing has tools at its disposal to maintain positive growth, but the extent to which it will be able to engineer 6-7% growth remains to be seen, and the potential for volatility elsewhere should those numbers drop lower is considerable.

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So, we are not about to short the market or convert our assets into cash to stash under the mattress. Trump’s headline-grabbing announcements served to dilute focus on his comments about abortion and may have struck a cord with some of his less fortunate supporters but, on the whole, the chances of a U.S. recession this year or next are considered low. Growth could weaken and significant challenges remain, but an outright recession, we hope, is no more than campaign trail bluster.

New technologies can revolutionize the demand landscape for materials, just witness the demands created on lithium supply by the relentless growth of lithium-ion batteries, a trend that many believe has only just begun with the imminent advent of the mainstream electric car.

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New technological developments can also dramatically affect the demand picture for already well-established metals such as the impact automotive lightweighting has had on aluminum demand, spurring massive investment in new rolling mills and lifting annual demand by significant percentage points.

New Demand vs. Established Supply

The impact on market balance is most acute in those markets where the supply side is already constrained, so a recent presentation by the ITRI about the effect on tin demand that developments in energy-related research and development makes interesting reading, as it is widely held that tin’s recent performance has much to say about its constrained supply position. This graph from ITRI illustrates the upturn in price coupled with the dwindling stock levels.

Source: ITRI

Source: the International Tin Research Institute

Tin supply from traditional producing areas is declining, in part due to self-induced restrictions imposed as part of a wider policy to encourage more domestic refining and better environmental practices in longtime major exporter Indonesia. Also in part due to low prices that have forced miners to halt much exploration and development until such time as prices rise. Read more

This is part two of an examination of how the U.K. steel industry has come so close to becoming non-existent. Read about Tata Steel‘s plans to sell its U.K. branch from yesterday for more.

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The rest of Europe is not without it’s problems, but as we will find in the U.K., the European Union is preventing direct government aid to sustain steelmaking. The E.U. has ordered Belgium’s government to recover $239 million (€211 million) in aid given to Duferco, which operates steel mills in Wallonia. It is also investigating whether Italy acted illegally in spending €2 billion to support the Ilva steel mill in Taranto.

Possible Sale?

Tata’s massive plaint in Port Talbot, South Wales, has one last hope, really, and that’s that another India-born entrepreneur called Sanjeev Gupta, head of commodities firm Liberty House that has already bought several downstream operations from Caparo and Tata this year, and has voiced an interest in looking at Port Talbot — on the condition the British government “plays its part.” Read more

It would be easy to blame China, and certainly Chinese exports have had a severe impact on the economics of steel production in the U.K., specifically and Europe in general, but the story of Tata Steel exiting the U.K. market is much bigger.

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News last week that India’s Tata is going to close its giant Port Talbot steel plant if it cannot find a buyer would all but bring steelmaking in Britain to an end. Once supplier of 40% of the world’s steel, production in the U.K. has fallen both relative to global production and in absolute terms for a number of reasons, not just Chinese competition.

Why Buy Port Talbot in the First Place?

First, it must be said it was insanity for Tata to buy the old Corus steel assets in the first place, or if not insanity to buy them then insanity to pay the price they did. Tata paid $9.5 billion (£6.7 billion) back in 2007 for the merged British Steel of the U.K. and Hoogovens of the Netherlands company rebranded as Corus.

This steel plant at Port Talbot in South Wales, U.K., could close if Tata Steel can't find a buyer. Even as steel prices increased last week. Source: Adobe Stock/Petert2

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.

Tata will claim it couldn’t have foreseen the financial collapse of 2008 just around the corner but the company got into a bidding war with CSN of Brazil for Corus and ended up paying 50% more than it had started out with when it first mooted the deal.

Even at the time, most of us thought, “why buy aging assets in a mature market like Europe when you have an economy at home expanding three times as fast?” Read more

With the stock market in a funk and property prices rising fast in China, some Chinese investors are turning to iron ore futures trading to make a fast profit.

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The chart below, from Westpac, shows the daily traded volume of Chinese iron ore futures on the Dalian Commodities Exchange back to when the market first came into existence in late 2013.


Day traders have reached a new speculative higher on Dalian iron ore. Source: Westpac.

It’s not the first time the Chinese market was swayed more by sentiment than reality.

What’s Really Going On?

Monitoring daily price movements in the domestic Chinese market (sign up for membership in our IndX if you would like to receive daily prices) gives MetalMiner the opportunity to keep a finger on the pulse of the country’s metals market, so when our editor, Jeff Yoders, remarked on the fluctuating daily prices for iron ore and coal on the Dalian exchange last week, we thought some of our readers may likewise by intrigued to know what is going on. Read more