Author Archives: Stuart Burns

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The oil market is in a state of high excitement.

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In the space of just a week or so, analysts have gone from being pretty sanguine about the possibility of price rises — giving muted credit to OPEC and its partners in stemming the flow of excess production and stabilizing the market – to talking about Brent crude hitting $75 a barrel before the end of the year.

True, that suggestion by Bank America Merrill Lynch was a bit of an outlier, but several are talking of $70 being possible, according to the Financial Times.

So, what’s stirred the oil market?

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Industrial metals are in the grips of a bear market, various outlets report, and one of the main narratives sounds like a case of the market having its cake and eating it too.

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The FT reports that the oil price, as referenced by the Brent crude quotation, has topped $60 a barrel for the first time in two years.

The article quotes various sources suggesting that while demand is strong, the rise in prices is driven more by supply constraints than by a sudden surge in demand (which caused the China-inspired super-cycle in the last decade). This time, a combination of reduced investment in new capacity (resulting from low prices in recent years) and the OPEC-led production constraints initiated in November 2016 are gradually tightening the market. Trader Trafigura is quoted as predicting demand will outstrip supply by as much as 4 million barrels a day by the end of the decade as supply becomes under better control and the U.S. shale industry fails to make up the delta between supply and gradually rising demand.

That’s where the have the cake and eat it too part comes in.

At the same time, industrial metals are rising strongly. Copper passed $7,000 per ton last month and aluminum is knocking on the door of $2,200 per ton. The cobalt price has doubled in the last 18 months and nickel, long in the doldrums due to over-supply and poor demand from the stainless sector, has also been on the rise due to projected battery demand from electric vehicles and charging infrastructure.

On the face of it, this appears like investors are picking and choosing their good news. If electric vehicles are such a strong bet that metals demand is set to soar, then surely oil demand is set to collapse. That prospect should undermine the oil price, you may reasonably suggest.

If only it were that simple.

Even a doubling of battery production would suggest an extra 750,000 vehicles based on 2016 global electric vehicle and hybrid production of 773,600 units, according to EV-volumes.

There was modest, by global light vehicle sales, of 90 million units in 2016, just 0.86%. Yet for cobalt, it’s still significant when you consider the battery industry currently uses 42% of global cobalt production, so an ongoing rise of 42% increase in lithium ion battery demand (2016 over 2015) would be highly disruptive to cobalt demand.

Plug-in vehicle sales grew 20 times faster than the overall market, justifiably causing concern that cobalt supply could be strained by this one market application.

Worryingly for cobalt, the fastest-growing market is also the largest.

Driven by government subsidies, the Chinese market, at some 351,000 units last year, also grew at 84% over 2015. The switch to EV and PHEV cars is part of Beijing’s drive against pollution, so incentives are not likely to be relaxed anytime soon. Growth of this magnitude dwarfs the 13% and 36% growth rates in Europe and the U.S., respectively.

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No wonder cobalt prices have doubled and yet oil prices have virtually ignored the message the rise in EV sales is telling us. One is major disruption to a small, constrained and geographically, supply market, while the other is a long-term trend to a still growing vast supply and demand market that will take years to impact consumption figures.

An interesting article in The Telegraph this week explores the challenge facing the U.K.’s industrial sector in terms of power costs and the government’s competing priority of decarburizing the U.K.’s economy.

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The U.K. is not alone in this.

Much of Europe and the U.S. face a similar challenge of rising energy costs and concerns that industry is disadvantaged relative to competitors due to high energy costs and that retail consumers are being forced to pick up much of the bill for the government’s green agenda.

According to the article, British industry already pays well above the average for Europe, and Europe itself is a high-power-cost region relative to many other parts of the world.

Source: Telegraph

Only Denmark has higher industrial power costs than the U.K. Denmark generates much of its electricity from wind turbines, for which the technology is only just becoming economically viable, without subsidy and without costing in the backup generating capacity the variability of wind demands.

Decarburization and social policies, which includes subsidies for renewables but also programs to improve energy efficiency, add 20% to U.K. bills at present. But — and it’s a big “but” — they are rising fast.

Levies for such programs are estimated by Andrew Buckley, a director at the Major Energy Users Council (MEUC), to reach 40% by 2020, according to The Telegraph. Some major users, such as the steel industry, have been made a special case and the government has reluctantly granted an 85% rebate of green taxes for steelmakers. However, that makes the problem worse for firms that do not qualify; every subsidy for one is pressure to increase costs on another.

Some firms are moving off grid, investing in their own turbines, solar parks or micro gas plants, sometimes backed up by battery storage if based on renewables.

Rather than ease the problem for those left on the grid, it makes the situation worse. Funding a network with fewer consumers spreads the fixed costs over those that are left.

Of course, the U.K. is not alone in this, but policymakers create different policies in different countries depending on their priorities. Consumers, even in common markets like the EU, can therefore find themselves paying substantially more than their neighbours.

Free Sample Report: Our Annual Metal Buying Outlook

For the top ten highest energy users, the annual energy bills stands at around £120 million ($155 million). If they are paying 20% or more than their neighbor, that could equate to a £24 million disadvantage before they produce a single ton of product.

No wonder energy is becoming such a hot topic despite low oil and coal prices.

McKinsey is a highly respected firm of consultants, but we rarely report findings of its work because the material released into the public domain is often too generalist for our practitioners at the coal face of metal procurement.

Benchmark Your Current Metal Price by Grade, Shape and Alloy: See How it Stacks Up

Arguably, a recent article on the future of containerization could be said to be in the same vein, comparing as it does their findings in 1967 to today and weighing up current trends extrapolating how the industry could change over the next 50 years. Fifty years is a long time — many of us won’t even be working anymore by then — but of course changes will happen gradually over the period. Some of the developments they mention are already in process today.

Careful not to make specific predictions, McKinsey suggest the following may happen by 2067. Like cars, the firm sees ships becoming autonomous — a scary thought, but, realistically, if you can do it with trucks and cars, why not boats?

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With investors always so fixated on short-term results and today’s corporations criticized for short-term decision-making, it comes as some surprise that the media uses the long-term potential for electric cars, ride sharing and self-driving cars as a reason why an automaker’s share price should dip or rise.

Benchmark Your Current Metal Price by Grade, Shape and Alloy: See How it Stacks Up

According to Forbes, in 2016 total U.S. sales of electric vehicles (EVs) were only 159,139 vehicles. True, it’s a big jump on 2015, but still amounts to less than 1% of the U.S. automotive market.

Self-driving cars are not even out there yet and ride sharing is in its infancy, even as a well-developed concept. Not that these trends will not be major disrupters in the next decade, but in the short term we are not talking game-changers, yet.

In fact, the Detroit three are doing pretty well at the moment, despite a slowdown in car sales this year (both in the U.S. and some other parts of the world).

The U.K. has downgraded auto sales three times this year, from 2.7 million vehicles last year to 2.59 million this year. Next year has been downgraded yet again to an expected 2.51 million.

Ford has just announced its results and surprised both the wider market and analysts who had been expecting modest growth. Instead, Ford saw earnings per share at $0.43, well above expectations of $0.32, according to the Financial Times.

Apparently, Ford’s lineup of trucks have powered results this year, not EVs or hybrids, even though the firm’s Fusion Energi is one of only five EV models to have sold more than 10,000 vehicles last year.

GM has not faired as well, declaring a hefty $2.98 billion loss in the third quarter, much of which was an impairment from the sale of its European Opel brand. But yet again, GM’s adjusted earnings per share of $1.32 were well ahead of market expectations of $1.13 and supports a near 30% rise in the share price this year.

The auto industry is certainly going through challenging times. In some quarters there is an expectation the established old order will be swept away by new challengers, such as Tesla. The fact is, however, the incumbents have a huge depth of experience in supply chains, manufacturing, marketing and distribution.

After an arguably slow start, they are moving swiftly to both develop new technologies in-house and to buy smaller firms in areas they recognize they lack the skills or expertise.

Detroit is not alone in this.

Automakers in Germany, France, the U.K. and Japan also face a technological revolution and are pouring billions into their respective visions of how that future will unfold. Japan is betting big on fuel cells, Europe is going more hybrid, and the U.S. is going both hybrid and EV.

Free Download: The October 2017 MMI Report

There will be casualties, but profits now are paying for the investments made. Don’t count out Detroit just yet.

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Iran didn’t need to take a cue from its arch enemy Saudi Arabia’s success with its Alcoa joint venture Ma’aden Aluminium smelter and downstream operations — just about every Middle Eastern natural-gas producer with production to spare has invested in aluminum smelting as an easy win outlet for vast natural gas reserves.

Benchmark Your Current Metal Price by Grade, Shape and Alloy: See How it Stacks Up

Exporting natural gas as liquefied natural gas (LNG) is a profitable business, but building the infrastructure is costly. An alternative is building an aluminum smelter, which is also costly but arguably yields a higher value add.

According to AluminiumInsider, the Iranian Mines and Mining Industries Development and Renovation Organization’s (IMIDRO) Amir Sabagh told Platts the firm was in the midst of building a 300,000-metric-ton-per-annum aluminum smelter in the southern coastal province of Bushehr.

Funding is still problematic for Iranian firms, so it is no surprise the Chinese are involved, with China Nonferrous Metal Industry’s Foreign Engineering and Construction Co. largely footing the bill.

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Forecasts made by the World Steel Association in its latest October Outlook paint a relatively rosy picture for the global steel industry — not least because it’s not all about China.

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The outlook predicts that growth outside of China will be 2.6% this year and rise to 3% in 2018. China’s figures, by comparison, have been skewed by a statistical sleight of hand.

A Caveat in the Chinese Numbers

Chinese demand is forecast by the World Steel Association to grow by 12.5% in 2017. A large part of this, however, is due to the closure of Chinese induction furnaces this year, creating demand at state-owned conventional steelmakers. “Illegal” induction furnace numbers didn’t appear in the statistics, but legal, state-owned conventional steelmakers figures do.

A true figure for the underlying growth is more like 3%, with next year expected to be flat as stimulus measures fade and the economy continues to rebalance away from infrastructure investment and toward consumption.

Global Growth

The good news from the report is that the World Steel Association expects growth in both developed and emerging markets to be widely distributed and broadly positive.

The European Union is expected to see demand grow at 2.5% this year, while the other major trading blocs, such as NAFTA, should grow by 4.9% and the ASEAN region by 4.8%. Demand growth in India, the world’s No. 3 producer, continues to outstrip that of Japan, the world’s No. 2 producer. The WSA expects growth in India this year to be 4.3% compared to 2.9% for Japan. A bullish economic Times of India article suggests India is on track to overtake Japan as the world’s second-largest global steel producer within this decade.

Demand growth across the Americas has been solid this year, with the U.S. putting in a substantial 4.8% number and contributing over 69% of the NAFTA region’s 139 million tons.

China remains the world’s largest producer by a country mile — so growth, or not, here in 2018 will likely determine the overall direction of the global steel market.

Much will depend on how demand unfolds as the economy continues to cool and possibly face disruption this winter from enforced environmental closures.

After a Strong 2017 for Steel Producers, What’s Next?

Broadly, though, this year has been a good one for steel producers.

Crude steel capacity utilization jumped 2.8% to 73.5% last month, which is not fantastic but is heading in the right direction.

With the prospects of significant short-term cuts in China’s production capacity this winter, producers elsewhere must be hoping prices can rise in 2018. Much will depend on continued growth and discipline among producers.

Free Download: The October 2017 MMI Report

It will be an interesting next six months.

Having shunned London back in 2010 — opting for partial listings on the much smaller Paris Bourse and in Hong Kong — Rusal’s majority owner, En+, is finally turning to London.

Benchmark Your Current Metal Price by Grade, Shape and Alloy: See How it Stacks Up

The earlier float flopped and turnover has been low in Paris ever since, but Rusal’s prospects have revived on the back of a rising aluminum price and some ambitious plans to complete a new smelter.

Rural has steadily paid down debt, but not fast enough for Oleg Derispaska who, conscious that debt nearly bought the company down just a few years ago, probably feels the time is right to tap into a buoyant stock market to raise some cash.

Not that we are talking about a major float here, but Rusal’s parent En+ Group (owner of 48% of Rusal stock along with the hydro-electric power plants that serve the company’s smelters) is only looking to raise $1.5 billion by listing between 15.8% and 18.8% of En+ shares. Such a return would value the group at up to $10 billion, according to The Times.

The float has major shareholder Glencore’s vote of approval, as it has agreed to swap its 8.75% stake in Rusal for En+ shares after the IPO, allowing En+ stake in Rusal to rise to 56.88% as a result.

Chinese conglomerate Chinese Energy Company Limited (CEFC) is also said to be a cornerstone investor in the floatation amid a wave of enthusiasm among Chinese corporations for stakes in Russian assets. CEFC took a $9 billion stake in Russia’s Rosneft just last month.

Apart from paying down debt, En+ is said to be looking to fund the completion of major capital expansion projects.

The firm is betting rising demand and curtailments in China will provide long-term support for current prices and is looking to expand both hydro and smelter capacity. Next year should see the completion of an expansion at the Boguchansk smelter and resumption of the Taishet aluminum smelter (which was halted some years ago when the aluminum price collapsed).

After spending some $800 million getting the project to an intermediate stage, it will need about the same again to finish it. According to Reuters, the first line of the smelter, with annual capacity of 430,000 tons, will now be built by 2020.

Free Download: The October 2017 MMI Report

The En+ IPO is one of several coming to a resurgent London market and should tap into a willing investor appetite for commodity assets expected to have strong growth into the next decade.

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Chinese steel output is falling, according to The New York Times.

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Crude steel output hit 71.83 million metric tons in September, the lowest since February and down from 74.59 million tons in August, according to National Bureau of Statistics data last week. September’s average daily output was 2.39 million tons, down 0.8% from August (but still 5.3% higher than in 2016).

After a year in which mills have been cranking out every ton they can muster and prices have been booming on the back of plant closures, the recent fall in output is telling.

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Have you ever tracked a metal price and watched it peak or trough for no obvious reason? Or read of some fundamental development in the supply or demand landscape for the metal, only for the price to behave in some unexpected way?

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You are not alone. A recent article in the Financial Times suggests that in at least some situations technological developments may be influencing price behavior in ways that they would not historically have done.

The Financial Times reports that automated trading systems (or algos) account for large volumes of transactions in commodity markets, with 49% of grains and oilseed trades handled by automated trades of one sort or another, 54% of precious metals and a whopping 63% of crude oil, quoting figures from the US Commodity Futures Trading Commission.

Some automated trades are simple buy or sell orders that are executed when the price reaches a certain level, but others are the result of sophisticated Blackbox algorithms that make decisions based on a multitude of variables known only to the developers.

The article quotes Doug Duquette, an executive at Chicago-based Vertex Analytics, whose software analyses automated market orders.

“The whole notion of fundamentals on any given day, for weeks at a time, months at a time, has completely gone out the window these days,” Duquette said. “You get momentum of algos playing upon algos upon algos, and it will just drive markets to extremes that don’t seem to correlate or line up with fundamentals on any given day or time period.”

While John Saucer, vice president of research and analysis at Mobius Risk Group in Houston, is quoted as saying “It makes it more difficult to be a purely fundamental trader. In the past you had to take into account fundamental considerations, technical considerations and seasonal considerations — I do think (now) you have to take into account transactional considerations and algos.”

The article and most sources are careful not to blame automated trades with fundamentally undermining the process of price discovery, but many acknowledge that the result of their rapid rise in use has been an increase in volatility and a skewing of liquidity to short-dated futures, leaving long-dated contracts lacking liquidity. Indeed, Ernest Scalamandre of AC Investment Management is quoted as saying that by withdrawing standing offers to buy or sell when another trader tries to transact with them, automated trades create a mirage of market depth — adding volume but not liquidity, he said.

For better or worse, automated trades are here to stay. With the rapid rise of artificial intelligence, automated trades are likely to get ever more sophisticated and come to dominate markets in years to come as hedge funds, speculators and even the trade turn to AI in an effort to reduce perceived risks, or simply to get one step ahead of the market.

Free Download: The October 2017 MMI Report

Where this leaves the rest of us remains to be seen. But it does appear that long-term fundamentals are likely to have less impact on short-term volatility compared to the actions of these automated trades than they would historically have done.