Author Archives: Stuart Burns

Windsor/Adobe Stock

On Monday, our Irene Martinez Canorea wrote about copper prices, which have been on a bullish run. Today, Stuart Burns writes about investors’ copper positions. 

Reuters reported last week that the LME copper price reached a three-month high after a surprise rise in China’s Purchasing Managers Index (PMI).

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

Investors jumped into copper after the official Chinese PMI rose for an 11th consecutive month, to 51.7 in June. Hedge funds and other investors increased long positions by 9,531 contracts to 58,816. Reuters reported that net long copper positions are now nearly double the 29,787 contracts reported back at the beginning of May and a dramatic reversal from the net short position of 47,109 contracts just a year ago.

The jump in the LME price was short-lived, dropping back as the dollar strengthened and LME data showed copper stocks gaining, but the Reuters report went on to question whether the current bullish run for copper is likely part of a longer-term recovery or a short-term case of overexuberance.

Although Chinese PMI numbers are not an exact measure of copper demand, they have been a good indicator over time. But after nearly 12 months of positive PMI numbers, many analysts are said to be expecting weaker readings in the second half of the year.

Chinese stimulus measures have boosted growth for longer than most had expected, but cracks are beginning to show in the housing market and Beijing’s tightening of credit is impacting small- to medium-size enterprises. The performance of those enterprises are not reflected in the official PMI figures, which are focused more on the large corporate sector.

Smaller businesses are measured by the Caixin PMI, which fell to its lowest level this year in June and is now hovering around the break-even point between contraction and expansion.

With the impact of stimulus measures beginning to decline and global stocks of copper remaining plentiful, it’s hard to see a case for copper’s continued strength in the second half of the year, despite the bullish bets indicated by the increasing long positions.

Free Sample Report: Our Annual Metal Buying Outlook

If Reuters’ analysis is correct, we can probably expect an easing of copper prices, if not during the summer then into the fall.

stockquest/Adobe Stock

The announcement this week that Norwegian aluminum firm Norsk Hydro had agreed to buy the 50% of extrusion company Sapa that it did not already own from its partner Orkla probably makes good sense for all parties concerned.

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

Norsk Hydro and Orkla took on Sapa in 2013 as a joint venture, but the Norwegian consumer goods company Orkla was never an obvious fit to be owning aluminum extrusion mills. Meanwhile, Norsk Hydro, with its significant position at the primary end of the market, makes a natural buyer for downstream assets, particularly if it carries the strong brand name of an established producer like Sapa.

The $24 million deal is said by the Financial Times to value Sapa at $3.2 billion. Assuming the deal passes regulatory approval, it will make Hydro the second-largest Norwegian company, trailing only the energy group Statoil.

The markets seem to agree with the logic of the deal. Orkla’s shares rose 2.44% on the news while Hydro’s rose a more modest 0.74%. But while Hydro said it planned to make $24 million of synergies a year from the deal, analysts said it really only made sense if the Norwegian group could achieve more cost savings over time.

While Hydro is a very significant primary and flat-rolled products producer, it is only through its shareholding in Sapa that it has held any significant position in extrusions. The purchase will allow Hydro to justifiably call itself a vertically integrated aluminum producer with a broad product range rivaling the likes of Alcoa and Rusal.

No doubt a question in the minds of many Sapa employees and of their clients is whether the purchase will result in a cutback of Sapa’s global operations.

On the back of an upturn in aluminum prices, both Norsk Hydro and Sapa have been doing well lately. However, the aluminum industry faces headwinds from excess Chinese production and price pressure from resulting Chinese exports. One benefit of the purchase mentioned by the Financial Times was that of European consolidation in the face of excess Chinese supply.

With no comment from the company yet, both employees and customers may justifiably be wondering what that means for them.

Andrey Kuzmin/Adobe Stack

While we read presidential tweets, or worse, listen to megalomaniacs gloat about successful missile launches, a quiet shift has been going on in the financial markets.

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

Political risks as a driver of exchange rates have either faded into the background or have already been fully priced into non-dollar currencies. Meanwhile, the driver in currency markets has shifted back to central bank actions and the macroeconomic factors that drive them.

You only have to see the sharp reaction in Europe to recent comments made by Mario Draghi, president of the European Central Bank, concerning “reflationary pressures” at work, causing an immediate 2% spike in the Euro, to see the market’s focus is firmly back on inflation-related indicators, with wage growth in the different currency areas taking on a particularly critical role.

The Associated Press reported last month that inflation across the 19-country Eurozone held up better than anticipated in the face of waning energy prices — a sign that the region’s economic recovery is reverberating across the single-currency bloc.

Read more

Swedish carmaker Volvo is betting the farm on electric vehicles.

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

In an announcement this week, Volvo cars said beginning in 2019, it will no longer launch new car models powered only by an internal combustion engine. According to the Financial Times, pure and electric hybrid cars will be the only game in town for the Swedish carmaker.

Following hot on the heels of Tesla’s launch of its most affordable mass-produced Model 3 — which, since March last year, has taken nearly 400,000 pre-orders, a remarkable vote of confidence in what has become one of the most exciting brands in the automotive industry — does Volvo’s announcement spell the end of the internal combustion engine?

Regardless of the headlines, Volvo is not turning its back on petroleum and diesel engines just yet.

Reading between the lines, the pledge is to launch five new models between 2019 and 2021, all of which will have petrol and diesel hybrid options, plus electric vehicle EV) versions, not five new models which are EV only. Although Volvo is owned by Chinese manufacturer Geely — and as such does not have to report to shareholders on a quarterly basis, giving greater flexibility to invest today for the longer term — the Swedish carmaker is still not saying it can achieve this on its own.

Rather, Volvo’s announcement is saying to the market it is seeking cooperation among battery manufacturers and infrastructure providers to provide solutions to the two biggest challenges EVs face: limited range and limited charging infrastructure.

The first challenge, range, requires continued massive investment in research and development to drive down battery costs and increase power density. The latter challenge requires a massive investment, not just in charging points, but also in configuring electricity grids to cope with demand if EVs achieve scale.

Volvo’s Chinese ownership probably influenced these strategic goals in another way.

Read more

It is no surprise that oil prices continue to fall when you look at the rising tide of oil production around the world.

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

Source: Financial Times

The U.S. shale industry is frequently accused of being the main culprit, but tight oil is far from alone.

A recent FT article explores how investments that were started five or six years ago, when the oil price was $100 a barrel, are now coming on stream with a vengeance.

The FT quotes a forecast released by the Canadian Association of Petroleum Producers, which sees the country’s output increasing by 270,000 barrels a day this year and a further 320,000 barrels a day in 2018. The article notes that the combined two-year Canadian increase will be equal to almost a third of OPEC’s production cuts planned for this year.

Canada is home to the world’s third-largest reserves of oil and is the largest external supplier to the U.S. market, shipping in as much as the rest of the world put together. These new projects may not be making money at today’s prices, but they are making a contribution to the massive investments already incurred.

The FT quotes the Alberta Energy Regulator saying the minimum per-barrel oil price for a mining project to recover capital expenditures, operating costs, royalties, and taxes in 2016 ranged between $65-$80 a barrel. Meanwhile, the price for “in situ” plants using steam was $30-$50 per barrel. Today’s cost for oil shipped to the Cushing hub is at no more than $44 per barrel.

Costs for operational plants are lower, with estimates quoted by the FT is $22 per barrel for mining projects and as low as $11 a barrel for in situ plants. In addition, it could be that many of these new investments have hedged their forward sales at higher prices.

Source: Financial Times

That is certainly the case with the U.S. shale frackers.

A separate FT article estimates that some 40% of the industry was hedged at about $50 dollars a barrel, with some resource areas — like the Permian Basin of Texas and New Mexico — having hedging rates as high as 70-90%.

Unlike tar sands, tight oil can be turned on and off with considerable flexibility, like the hare to the oil sands’ tortoise.

Rig counts have been rising for 23 consecutive weeks, the FT notes, and with a growing stock of  drilled-but-uncompleted (DUC) wells rising by 22% to over 5,000 between December and May, there is considerable potential for output to be increased further.

As if rising production from Canadian tar sands and U.S. tight oil was not enough, OPEC is also seeing its own cartel members increase output by 336,000 barrels a day in May from April, led by big rises from Libya and Nigeria, according to FT.

Free Download: The June 2017 MMI Report

Saudi Arabia may well be ruing the day it opened the taps in order to drive down the oil in the hope of killing off “high cost” U.S. shale oil. The prospects of getting an oil price back above $100 must now look like a distant dream.

In a recent interview, Rusal Deputy CEO Oleg Mukhamedshin reaffirmed his company’s commitment to the Paris climate-change accord and indicated that it will continue investing in the research and development of lightweight aluminum alloys, both to distance itself from the commodity end of the market and to provide improved materials for lightweighting.

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

The interview with the South China Morning Post was reported by Aluminium Insider largely within the context of Rusal and Russia’s continued commitment to tackling climate change following President Donald Trump’s rejection of the process.

To what extent one takes any Russian company’s commitment to climate change is a debatable and personal point, but in one area Rusal’s stated commitment to meet 100% of its power needs from renewable power sources by 2020 has a much stronger economic argument than the simple angle of climate change.

Read more

concept w/Adobe Stock

Reports of platinum’s demise have been much exaggerated — or so this month’s report from the World Platinum Investment Council (WPIC) would argue.

Sales of diesel vehicles in some parts of Europe have taken a beating in recent months over concerns that authorities will raise costs or otherwise make living with diesel engines a less attractive proposition for owners, due to negative sentiment post-Dieselgate. Total car sales have dropped in some European markets, including the U.K.. However, where sales have held up there’s been a definite swing to gasoline vehicles rather than diesel.

The markets have read this trend as meaning platinum demand will fall — but maybe not surprisingly, the WPIC is taking a more optimistic view.

Regardless of buyers’ short-term preferences, the WPIC says the auto industry has an overarching challenge in the years ahead that will support platinum demand. Automakers will face fines if they do not meet new EU CO2 targets by 2020, but the report lists the industry’s rather limited options.

First, the industry could boost sales of battery electric vehicles (BEV). However, with a consensus expectation of BEVs taking no more than 5% of the market by 2025 due to lack of charging infrastructure, it seems unlikely BEVs are the short-term solution.

Source: World Platinum Investment Council

Second, the industry could sell a higher percentage of hybrids. Recent trends, however, suggest demand for hybrids, despite Volkswagen’s Dieselgate, is still growing too slowly. Demand is certainly not growing fast enough to reach those emissions targets, which are just 2 ½ years away.

So, the third option — and to be fair to the WPIC, probably the most likely option — is for automakers to clean up diesel. The technology already exists to meet the most stringent nitrogen oxide (NOx) targets set for 2022, but the industry needs to do more than it has done in the past to prove to the buying public the performance figures they publish can be achieved in the real world.

The WPIC points to French automaker PSA, which has undertaken to publish independently certified, real-world CO2 test results for its vehicles. PSA also recently announced it will do the same for NOx results.

It is only by automakers voluntarily — or maybe by legislation — being forced to accept third-party verification of their emission figures that they will be able to rebuild consumer trust and deflect harsher government legislation on diesel engines in the future.

Not surprisingly, the attraction of the WPIC is significantly cleaner diesel engines will require increased platinum-group metal (PGM) loadings, even as the industry shifts from the current lean NOFX trap (LNT) system to the more effective selective catalytic reduction (SCR) technology. According to ExtremeTech, when announcing Ford’s switch to SCR, it reported that SCR is more costly, but it’s also generally considered more effective than LNT.

Of course, the platinum price has more drivers than just the demand for the catalysts in the automotive market. Investor demand in the form of ETFs, physical demands in the form of jewelry, and chemical and catalyst demand from the chemicals industry are all significant drivers on the demand side.

But much of recent negative sentiment toward platinum has been due to controversy over the diesel engine’s ability to meet emission targets.

And in that sense, platinum’s fortunes will in part ride on the coattails of the auto industry’s ability to re-establish the diesel engine as an environmentally acceptable propulsion unit.

Whatever the topics that are down on their respective agendas, it seems unlikely Prime Minister Narendra Modi will enjoy the same cordial relationship that he had with previous President Barack Obama.

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

President Donald Trump has shown scant interest in international leaders unless he sees a clear short-term advantage. So, whereas Saudi Arabia and Israel received the famous presidential charm, fellow NAFTA members Canada and Mexico have been more the brunt of threats and Europe has largely been treated with disdain.

India has barely featured on Trump’s radar since coming to power, beyond garnering criticism for receiving foreign aid and allegations of stealing American jobs.

So it is to be expected there will be some prickly discussion around the new president’s plans to curtail the number of H1B visas, a move the Washington Post observes would harm big Indian outsourcing companies, such as Infosys and Wipro, and deprive Silicon Valley of much-needed imported talent.

The Trump administration is also likely to raise concerns about the U.S. trade deficit with India, following a blossoming of trade during the Obama years that has resulted in India enjoying a $30 billion trade surplus with the U.S.

But one particularly thorny subject that could make its way onto the agenda is a long-running trade dispute in which India took the U.S. to the World Trade Organization (WTO) after Washington failed to comply with the WTO settlement body’s ruling over countervailing duties imposed on Indian steel imports. The ruling back in December 2014 concerning duties on hot-rolled carbon steel flat products was deemed to be in breach of WTO rules under the agreement on subsidies and countervailing measures agreement.

The U.S. has largely ignored the ruling, so the two leaders’ meeting would be a good opportunity to kickstart a review. However, so tenuous is the relationship that it will be interesting to see whether mention of steel disputes or tariff barriers make their way into media statements or the closing statements of either party.

Under Obama, India and the U.S. moved closer together and the two countries, not least as the two largest democracies in the world, have always championed their common qualities over their differences — but Trump’s view of the world is significantly different from that of the Obama administration. Beyond tackling North Korean nuclear ambitions, Washington doesn’t seem to have a Southeast Asian policy any more.

Free Download: The June 2017 MMI Report

The leaders held a friendly joint press conference in the Rose Garden on Monday, during which Trump called himself a “true friend” to India and touted the two nations’ “shared commitment to democracy.” He also added that the bond between the two countries “has never been stronger.”

He also made remarks in reference to the U.S.’s trade deficit with India.

“I look forward to working with you Mr. Prime Minister to create jobs in our countries, to grow our economies, to create a trading relationship that is fair and reciprocal,” Trump said Monday. “It is important that barriers be removed to the export of U.S. goods into your markets and that we reduce our trade deficit with your country.”

However, quite where India fits in the new administration’s view of the world is unclear. Hopefully the leaders meeting this week will bring a little more clarity in the future.

There seems little doubt and even less debate that the tragic fire at Grenfell Tower in London was, if not caused by, then certainly greatly exacerbated by the aluminum cladding on the outside of the building.

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

The original fire was started by an exploding refrigerator on the fourth floor of the 24-story public housing block. The residents thought they had the fire under control, but the refrigerator was positioned against an external wall. Flames then escaped out of the window and ignited flammable insulation between the building’s external aluminum cladding and the original external wall.

Source: The New York Times

As the diagram shows, taken from an excellent evaluation of the tragedy in The New York Times, the highly combustible insulating polyethylene panels positioned between the old wall and the external cladding acted like a chimney, funneling heat and flames vertically.

Within a few minutes, what had started as a minor fire engulfed the whole building and incinerated the floors above.

Although the total number of dead may never be known — some of the occupants were illegal immigrants and, as such, unregistered — and is potentially even unknown to anyone outside of the flat they were occupying, it is believed about 79 people died.

Hard questions are rightly being asked: Why was cladding installed that included insulation that was known to be flammable?

What isn’t being as widely debated in the U.K. yet is the contents of that New York Times article highlighting that the use of such flammable materials is forbidden in the U.S. and many European countries — yet, for reasons that are not entirely clear, those materials are permitted in the U.K.

Lax Regulations Played a Role in Tragedy

The cladding itself does not appear to be the sole culprit.

Grenfell Tower was clad, according to The New York Times, with an aluminum product known as Reynobond PE, consisting of two sheets of aluminum sandwiching an insulating core. Reynobond PE is made by Arconic (formerly known as Alcoa). Arconic has been selling Reynobond PE in the U.K. for years, but takes a different marketing approach in the U.S. and much of Europe.

In the U.S., fire regulations insist that polyethylene sandwich Reynobond should not be used in buildings taller than about 33 feet, that being the height firefighters’ ladders can readily reach. The firm’s literature clearly states that non-flammable or fire-resistant insulating materials should be used on buildings over this height.

Yet despite repeated warnings over the years, British building regulations, rather than tightening up in this area, seem to have been relaxed.

In the case of Grenfell Tower, the installation material used between the wall and the external cladding was also made of a very similar, highly combustible plastic to that used in the panel sandwich core. When the fire from the exploding refrigerator escaped out of the window, it was able to readily access this exposed installation, allowing an inferno to rapidly establish itself between the cladding and wall, and rising up 25 stories, gutting everything above the fourth floor. In the process, the cladding also caught fire, showering burning debris on firefighters and those seeking to escape the building below.

The aluminum itself is unlikely to have reached a temperature at which it would have caught alight, but with the melting point of about 660 degrees Celsius and fire authority estimates of temperatures exceeding 1,000 degrees Celsius in the upper parts of the tower, the aluminum panels will have readily melted in the heat. Aluminum does not burn until nearly 7,000 degrees Fahrenheit, or nearly 4,000 degrees Celsius, but with the panel surfaces melting it provided no protection to prevent the flammable sandwich core from igniting along with the insulation installed in the space between the panel and the wall.

Whether aluminum cladding can survive from this disaster in the U.K. as an architectural product specified on new and existing buildings remains to be seen. Even if totally fire-resistant insulation were specified, it would be a brave architect that clad a new residential building with aluminum panels in the future.

Free Download: The June 2017 MMI Report

The tragedy is that the 79 deaths and the huge cost of upgrading some 600-plus similar high-rise buildings in the U.K. could have been avoided if the British fire regulations had drawn on experience bitterly learned from earlier fires in the U.S., Europe and elsewhere.

The facade of the Federal Reserve Bank. Aaron Kohr/Adobe Stock

Economists rarely agree on much, but the current debate on whether to raise the U.S. Federal Reserve’s base rate and to reverse quantitative easing is generating more disagreement than normal.

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

One of our favourite economic journals, the Economist, argues in an article last week that the Fed’s narrow focus on a 2% inflation rate is proving detrimental to encouraging productivity growth in the U.S. economy.

Citing numerous sources of research, the paper suggests a more relaxed, less rigid limit would allow the Fed to take its fixation off the current low level of unemployment and refrain from holding back future growth as a result of further rises in the base rate.

The headline unemployment rate of 4.3% is the lowest in 16 years, and stands at levels that in previous recoveries would already be fueling wage rises and inflation. Yet despite unprecedented levels of quantitative easing and only just off record low interest rates, inflation has remained benign (to the consternation of economists far and wide).

Having increased rates three times in the last six months, the Fed is not only intending a further rise this year, Chairman Janet Yellen indicated in a report last week that the Fed intends to begin shrinking the balance sheet caused by quantitative easing by the end of this year at the latest and possibly as soon as September.

Initially, the plan is to start asset sales at a modest $10 billion dollars a month, increasing in steps each quarter until it reaches $50 billion a month, according to a report in the Telegraph.

The combination of increasing base rates and the withdrawal of dollar liquidity through bond selling would have a profound impact global impact.

The announcement elicited a response from Ben Bernanke, Yellen’s predecessor as chairman of the Fed. He urged the Fed to allow the economy to grow gradually into the 4.4 trillion Bond portfolio and not to take the risk of reversing quantitative easing too soon. The worry is that is the pincer movement of firmer rates and withdrawal of liquidity would prompt a stall in the global recovery, potentially pushing the U.S. back into recession.

The Fed has very little room at current interest rate levels to cut rates in the event of another recession. Last time it had 4.75% plus QE — at this point it has just 1% and a full QE balance sheet. How would it cope?

Professor Tim Congdon, founder of the Institute of International monetary research, is quoted in the Telegraph as saying if the Fed really goes ahead with reversing QE there will be trouble three to six months later, and the economy could tank in 2018.

That may be a worst-case scenario, but it does illustrate the polarization of views and underlines the fact we are in uncharted territory. No central bank has ever created such a huge balance sheet as the Fed following the last financial crisis and, honestly, they have very little idea of what impact unwinding it will have.

Free Download: The June 2017 MMI Report

The law of unforeseen or unintended consequences looms large and suggests a little more flexibility around inflation may be a price worth paying to allow time to more gradually return the finances to “normal.”