Author Archives: Stuart Burns

There are certain models that economists use to explain markets or to illustrate market behaviour. Cyclical commodity markets are one such model, and the principle of swing producers is another.

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

Among metals, nickel has been a wonderful example of both in recent years, and a Financial Times article written by a team from consultancy Woods Mackenzie ably illustrates how the metal’s current poor price performance is a result of both.

Cyclical commodity markets are invariably caused by violent swings in supply and demand. In times of rising prices, miners invest in new mines. As they take time to come to fruition, they often unhelpfully come in at the end of a commodity bull run, flooding the market with oversupply just as demand falls. Prices then collapse.

In the case of nickel, as the article reported, five years of surpluses meant nickel prices have more than halved between 2011 and 2015. Having just invested in new capacity, the miners tend to be slow to adjust. But in the end, mine closures ensue, and in the case of nickel, this resulted in the loss of about 6% of global mine supply. Supply, however, has remained more than adequate with many countries competing for market share. Read more

Regular readers of The Telegraph, arguably Britain’s only remaining decent broadsheet paper, will be familiar with the writings of Ambrose Evans Prichard, the international business editor.

It has to be said that he has a slightly sensationalist reporting style, but his articles are always liberally supported with facts and figures. Even though he seems to argue more often than not that markets about to drop off the edge of a cliff, he has, at times, been right. Yet an article this week titled “Commodities slump on China tremors and OPEC failure,” while making a plausible argument based on the facts and figures presented, could equally have an alternate explanation if one looks over a slightly longer timeframe.

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

Clyde Russel of Reuters takes just such an approach in an article posted just a day or so later, which all goes to underline the challenge for buyers in interpreting fundamental supply and demand data and extrapolating workable strategies.

Source: The Telegraph

The Telegraph looks at a gradually sinking Brent oil price coupled with falling Chinese crude oil imports, and it suggests that the former is in part a result of the latter. Reuters looks at the same data, and whilst the article acknowledges that imports are down in April, it goes on to look at the last 12 months trend line.

Reuters notes that in the first four months of 2017, crude oil imports were up 12.5% from the same period last year to around 8.46 million bpd. The article goes on to point out that this is also substantially higher than the 7.6 million bpd imports averaged for 2016, suggesting that China’s appetite for crude has jumped substantially so far this year, notwithstanding the pullback in April. Read more

Earlier this decade, there was no lack of hype around electric and hybrid cars. Sales were expected to take off, driving demand for lithium, nickel, cobalt and a host of rare earth elements above supply.

That was, in part, motivation for a rare earths bubble, but demand have remained manageable as high sales of electric vehicles have failed to materialise. In reality, electric and hybrid cars have gained traction only gradually as the range of EVs grew and as hybrids struggled to make dramatic improvements in fuel efficiency resulting from advances in internal combustion, particularly diesel engine technology.

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

Sooner or later, however, a combination of improving technology and pressure from legislation forcing changes in buyer choices should result in electric vehicles merging into the mainstream. A sure sign that the day is drawing nearer would be when established main brands set targets for themselves.

Well, this week Volkswagen did just that. The Financial Times covered an announcement made by Herbert Diess, head of the VW brand (the largest part of the VW Group), that the brand would sell one million electric cars by 2025 and leapfrog Tesla as the world’s premier volume EV manufacturer. As part of VW’s central plan, the FT reports, the firm is going to sell electric cars at the price of today’s diesel models and intends the entire electric fleet to be profitable from day one. Read more

President Donald Trump has come in for a fair amount of criticism for his perceived failure to achieve many of his campaign promises in the 100-day deadline he set himself (and now denies, but that’s another issue).

Implementation of a case against China as a currency manipulator and building the U.S.-Mexico border wall has given way to the greater pragmatism of coercing China to put pressure on North Korea with both carrot and stick incentives, and of a “last minute” retraction of a supposed imminent announcement to withdraw from the North American Free Trade Agreement (NAFTA) last month as a precursor to talks down the line.

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

The Economist, as usual, gives an impartial and balanced assessment of events in two recent articles. The first reports that although the president has not been able to implement much of the headline objectives, the combination of executive orders, tweets and off-the-cuff announcements have set in motion a number of significant developments.

Pulling out of the Trans-Pacific Partnership (TPP) gave a clear message from day one that here was a president who meant what he said — that you took all the bluster as hot air at your peril. The very uncertainty in his lack of planned policy and spur-of-the-moment reaction to events has put trade partners, friends and enemies alike on uncertain ground — not a bad negotiating position to force on the other side, if you see all interaction as a negotiation.

More significantly, the U.S. has started an investigation into whether steel imports are a threat to national security and followed up with a similar probe, announced late last month, into aluminium imports. Trade negotiators at home and abroad are said to be aghast at the former leader of the rules-based trading system and a major backer of the World Trade Organization completely shunning the system it created and resorting to obscure legislation to achieve the president’s promises. Read more

Proposals based on environmental grounds to limit polluting industries in the greater Beijing area during next winter’s primary heating period (November to March) gave a boost to the aluminum market from the moment they were first mooted last year.

Beijing’s robust implementation of environmental audits and regulation of aluminum plants this year have added to a sense that the authorities are getting serious about pollution and the environmental impact of energy intensive industries like aluminum smelting. But, as Reuter’s columnist Andy Home opined, it is protectionism in the rest of the world that is going to add backbone to these trends and act as the driving force behind further action on Beijing’s part.

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

In an article this week, Home explained how the latest investigation into aluminum imports, along the same lines as an earlier steel case, has been launched under Section 232(b) of the Trade Expansion Act of 1962, which lets a president act against imports on national security grounds. The reasoning is the U.S. has but one smelter left in operation, Century’s Kentucky smelter, capable of producing the high grades required for defence and aerospace companies making combat aircraft and the like.

China supplies almost no primary aluminum to the U.S. market. Following U.S. smelter closures, surging imports are being increasingly met by Russia and the United Arab Emirates, while the bulk continues to be supplied by Canada, as the graph below from Reuters shows.

Where China has an impact is in semi-finished products, such as sheet, plate, foil, bars, tubes and sections. Here the growth of Chinese exports to the world — and U.S. imports — has been much more significant. According to Home, on that measure China has been by some margin the largest-volume supplier to the U.S. market in recent years. Read more

No one factor has led to the turnaround in the fortunes of Europe’s steelmakers. While still not spectacular, global growth is certainly broader-based and better distributed that it was a few years ago. The fortunes of the European steel industry have improved markedly since their low point in late 2015, with prices rising some 45%, according to Reuters.

As with virtually every ferrous and non-ferrous metal, China has been a key component. Responsible for over 50% of global production capacity, China’s steel industry was undoubtedly a contributor to low prices around the middle of the decade. Beijing’s decision to cut capacity while boosting infrastructure spending has certainly resulted in increased domestic demand and reduced Chinese exports.

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

China announced its intention to cut 100 to 150 million tons of steel capacity by 2020 in part to tackle pollution. It was also to address a rising tide of protectionism around the world fearful of the impact China’s excess supply was having on producers in home markets. According to Reuters, China cut 60 million tons of steel capacity last year and plans to cut another 50 million tons this year. There remains considerable debate as to how much of last year’s capacity closures really curtailed production and how much was simply the permanent closure of already mothballed or idle plants.

But either way, in conjunction with the $700-billion stimulus package targeted mostly at infrastructure and construction, Chinese steel prices jumped over 70% last year, while exports fell 3.5%. Even better news for overseas producers has been exports dropped a further 25% this year in part many would argue due to some 39 anti-dumping and anti-subsidy measures introduced in Europe over recent years of which 17 are directed at China and some 150 similar duties in place in the U.S. Read more

Few metals have as controversial a supply side as tin. Cobalt also springs to mind, largely due to the relative importance of the Democratic Republic of Congo as a supply source. But tin likewise seems to come from areas prone to military unrest, where illegal mining of the ore provides an opportunity to fund said unrest. Even in established producing countries like Indonesia, supply is hampered by extensive illegal mining, and the authorities have been engaged in a long running struggle to control illegal mining, principally to avoid environmental damage that occurs at unregulated mines.

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Tin has benefitted from a broader commodity rebound this year. Prices are rising and LME inventory is falling as demand from the electronics industry, particularly in China, remains solid. However, one of the key supply-side variables is Myanmar, China’s new source of supply. As the graph below from Thomson Reuters shows, Myanmar is the only significant global source that has been on the rise in recent years. All others by and large have remained static or fallen.

Source: Thomson Reuters

Indonesia has the potential to export more concentrate. Its drive to control illegal mining and encourage greater domestic value-added refining has limited export volumes in recent years, encouraging China to increase imports from neighbouring Myanmar.

Reuters reports that almost all Chinese tin ore and concentrate imports now come from Myanmar, following the 2013 discovery of high grade reserves at Man Maw in northeast Myanmar. Annual production is now estimated at about 33,000 tons of tin concentrate, which Reuters reports is more than 10% of the metal’s global output. Read more

You can’t accuse the aluminum market of being boring, which is exactly what most consumers don’t want to hear.

As buyers, we like nothing better than a nice steady predictable market. A little bit of price inflation is good if you are a stockist or trader, as it keeps the market turning over and encourages forward buying. But as consumers, most buyers would rather the market be flat and boring, the same next month as this and predictable for six months out. “Can’t think when it was last like that,” you will say.

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

The problem is that the most highly traded metal on the LME and the second most highly produced metal after steel is still buffeted by squalls from every quarter. Recently, talk (and let’s remember that so far it is mostly talk) of capacity closures next winter in the greater Beijing hinterland to combat pollution has helped lift the price by encouraging talk of scarcity. Beijing has shown solid intent in this direction, already denying planning approval to 2 million tons of new capacity in China’s northwest province of Xinjiang and clamping down hard on plants elsewhere that it deems to be failing environmental standards.

The next target is said to be smelters in China’s heavily industrialized provinces of Shandong and Inner Mongolia. Of China’s total illegal aluminum capacity (which, according to some sources, is between 3.7 million metric tons and 6.6 million metric tons), the clear majority of it (up to 4.3 million metric tons) is situated in Shandong, Aluminium Insider reports.

Free Sample Report: Our Annual Metal Buying Outlook

This means that the impact of proposed closures could be profound. While Beijing was being dismissed for environmental posturing just months ago, the market is now taking it at its word. The expectation is that we will be seeing more of the same, with further closures likely during this year. Combined with the potentially more serious closure of alumina refining and carbon anode production capacity removal of even 2-4 million tons out of China’s 31+ million metric tons annual primary smelting capacity would tighten the market, probably pushing it into outright deficit.

At the same time, among a flurry of 100-day directives emanating out of the White House, President Donald Trump is due to sign an executive order this week calling for the Department of Commerce to accelerate the investigation on aluminum imports in the name of national security. The allegation is that damage to the U.S. aluminum industry from imports, particularly overproduction in China driving down global prices, has implications for national security. A positive ruling on this could result in tariffs or other restrictions against the estimated 55% of current US supply that is met by imports.

Both developments could be supportive of higher prices this year. In fact, when you look at the aluminum market, set against a backdrop of solid global growth and continued above GDP growth in the use of aluminum, you must ask where negative price pressures are to come from.

Free Download: The April 2017 MMI Report

One could be a more rapid appreciation of the U.S. dollar. A stronger dollar usually has a negative impact on commodity prices, but the market is already factoring in three Fed rate rises this year, and potentially inflationary tax changes proposed by the new administration are at least a year away from implementation. Short-term profit taking aside the only medium-term cap could be a psychological one of $2,000 per ton. But once breached, that becomes a support level for further rises.

It will certainly be an interesting year for aluminum.

10 years ago, the concept of self-driving cars seemed the stuff of science-fiction. Today, self-driving cars are not an uncommon sight in some cities and the U.K. government has just approved their trial operation between London and Oxford in a bid to bring the technology more rapidly to market.

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

Companies like Google, Uber, Apple and a host of mainstream automotive giants are all investing hundreds of millions of dollars to bring the technology to reality. Over a few brief years, we as the general public have begun to accept the statistics that self-driving cars are dramatically safer than those is piloted by human beings.

Flying car!

Why don’t we have flying cars yet? They’ve been promised by science fiction for decades. Source: Adobestock/Sergeysan.

As a result, acceptance by both the public and the insurance industry is now almost a given for the probable implementation by the end of this decade. But what of flying cars? A concept equally the stuff of science fiction for 70 years or more that now thanks to the dreams and deep pockets of Silicon Valley entrepreneurs may be becoming a reality sooner than we think.

Uber has announced plans to demonstrate flying vehicles by 2020 in Dubai and in the Dallas Fort Worth area, with full scale operations by 2023 the Financial Times reports. Unlike its efforts in self driving cars where Uber has spent hundreds of millions of dollars to develop the technology in-house for flying cars the ride-hailing service is forming partnerships with established aerospace firms like Brazil’s Embraer, Bell Helicopter; Mooney, a Texas-based light aircraft manufacturer and Aurora flight sciences, a Virginia-based drone maker. Like Uber’s taxi service, the firm sees flying taxis as being initially human piloted but later autonomous as the technology and FAA approval permits. Construction of four landing pads will begin in the Dallas Fort Worth area within the next year the FT reports and as part of the Dubai Road and Transportation Network Study into flying cars, Uber expects to have a demonstration service running there to coincide with the World Expo in 2020. Read more

Gold bears have had quite a ride since the start of this year. The price spiked to $1,286 per ounce last week, a rise of 11% since the end of last year as this chart courtesy of the Financial Times shows.

Gold in 2017

Source: Financial Times

Despite a gradually improving global economic picture, geopolitical tensions have increased in recent months first with Syria and more recently with President Donald Trump’s announcement that he was prepared to take military action in North Korea.

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In Europe, investors looking to protect themselves against the political risk associated with the first round of the French presidential elections where the fear of a shock victory by the far right leader Marine Le Pen was considered a distinct possibility. During this same period, the U.S. dollar has weakened somewhat in value and with gold inversely correlated to the currency, as the dollar falls gold, and other commodity prices, rise.

Well, what a difference a week makes. North Korea has shown itself to be less capable and in the face of a tougher stance from America, less belligerent than during previous bouts of posturing.

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

In the French elections, the least bad option, Emmanuel Macron, has emerged victorious from the first round over Marine Le Pen with nearly all observers expecting he will win through in the second round of voting on May 7. Later this week we should hear President Trump’s tax policies which are widely expected to include substantial reductions in personal and corporate tax rates. On the back of solid U.S. and global economic growth, such inflationary fiscal stimulus will only hasten further U.S. Federal Reserve rate increases. Not surprisingly, Goldman Sachs is not alone in predicting further weakness in the gold price, which weakened promptly on the news of the French elections and is targeted by Goldman to fall to $1,200 per ounce this summer. While not a universal truth, Goldman Sachs predictions do tend do have an element of being self-fulfilling simply because so many investors take their advice into consideration when making investment decisions.

Gold Bears

These gold bears haven’t had as big a run as their metals brethren. Source: Haribo

Of course, there remain counter arguments as to why the gold price may yet rise. Trump’s presidential decrees are easier to make than getting legislature onto the statute book. Proclamations this week over the tax reduction will likely meet a more favorable Republican response than there was the case with healthcare but, even so, may be much delayed or watered-down before having any impact on the economy.

Likewise, U.S. growth could slow reducing the impetus for the Fed to deliver on its three expected rate increases this year. The Fed has frequently undershot rate rise expectations over recent years. Finally, our friend in Pyongyang has the ability, and no doubt inclination, to still do something stupid despite pressure being brought to bear to back down by his Chinese bankers. On balance, though, gold bears have probably had as good run this year as they are likely to get and profit-taking is now inevitable for all but long-term holders of the yellow metal.