Stuart Burns

My colleague Raul de Frutos often says fundamentals are not relevant when looking at short-term price direction. It is the trend you have to follow, and for those in the zinc market the last six months have been as good an example of that as any.

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The underlying fundamental narrative for zinc has been a market on the cusp of deficit for the last two years. The looming closure of major mines Brunswick and Century has fueled a bull story that the zinc market is going into a supply deficit and prices would rise as a result.As recently as January this year, HSBC was saying the market is already in deficit and will get worse as this graph from their Quarterly Metals & Mining Review illustrates.

So Where’s That Deficit?

The World Bureau of Metal Statistics said in their February report that the zinc market was in deficit by 262,000 metric tons during the January to December 2014 period, compared to a 95,000-mt surplus for 2013. Yet, the price has still declined, much to the consternation of bulls and many followers of supply-demand fundamentals who had expected the strength of the first half last year to be continued or at least held steady in the face of mounting supply shortfalls.

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A recent article in India’s Economic Times is typical of recent coverage that makes much fanfare of India’s rise to 3rd-largest steel producer in the world at the expense of the USA which slipped to 4th.

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The differences are relatively small, based on data compiled by World Steel Association (WSA) India’s production growth was the world’s highest during the January-February period at 7.6% to 14.56 million metric tons, compared to the US which slipped back to 13.52 mmt. According to the ISSB, India produced about 86.5 mmt compared to the 88.2 mmt from the the US, but the US is facing a strong dollar denting its export markets and — by way of that same strong dollar and massive global overcapacity — a tsunami of imported steel. According to the ITA in 2014, US imports of steel mill products totaled 40.2 mmt, a 37.9% increase from 29.2 mmt in 2013.

What it Means

First, should we worry about India taking 3rd place spot from the USA in steel production?

Looking at it dispassionately, no. It is inevitable that an emerging market with a population of 1.25 billion and with a projected increase in its urban population from 400 million to 600mm by the end of the decade. At the same time as it industrializes and invests in infrastructure, India is going to need to build substantial steel capacity.

The US, on the other hand, has a mature industrial landscape with a quarter of India’s population and while it has some of the most efficient and lowest-cost steel production in the world it still operates in a high-cost environment with stringent environmental and health and safety controls that inevitably have an impact on the industry’s ability to compete in overseas markets.

So 3rd spot or 4th spot is really no more than symbolism. What is more important is whether or not the change tells us anything about global steel markets. Is India’s rise achieved unfairly by subsidy or state support as China is often accused of benefiting from? Although we laid out good reasons why Indian domestic demand would stay high and rise, in fact the country exports about the same percentage of its total production as the US and the trend is growing. So, not all of that steel is being consumed domestically and the country’s steel industry has aspirations to be a regional supplier not just meet domestic demand growth.

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Richard Branson famously said “If you want to be a millionaire, start with a billion dollars and launch a new airline,” well the same statement could probably be applied to iron ore mining.

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Fortescue Metals Group Ltd., the world’s fourth-largest Iron Ore miner and once the darling of the Australian stock market has fallen from $35.8 billion in 2008 to a market value of $5.8 billion this week reports the Sydney Morning Herald. The reasons aren’t hard to find. Amid a massively oversupplied market the iron ore price has collapsed.

Erosion of Ore Prices

Benchmark 62% ore for immediate delivery into China fell $3.1, or 5.4%, to $54.50 a metric ton, according to the FT quoting Steel Index data. The iron ore price has declined 18% this year after falling almost 50% in 2014. Since the start of the month, the ore has dropped 13.5% the FT says, and Wednesday’s price was the lowest since TSI pricing records began in 2008.

As a result, Fortescue had to pull plans to raise $2.5 billion of additional debt as the yield demanded by investors proved “unfavorable” in the company’s words. Fortescue’s existing unsecured 2022 notes are quoted at 75.8 cents on the dollar, a yield of 12.08%, while the company’s existing $4.9 billion term loan maturing in 2019 fell to about 90.25 cents on the dollar from 91 on Monday and 96 on March 5. Meanwhile, Fortescue’s shares fell 5.3% to $1.865 in Sydney on Wednesday, the lowest close since January 2009.

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As someone who cut his eye teeth on a Yamaha YDS7 — yes, Google it and you’ll find they stopped making them decades ago — I have always had a soft spot for the Japanese manufacturer’s excellent two-stroke bikes.

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On the track and in terms of sales, Yamaha Motor Corp. has always played second fiddle to their bigger rival Honda Motor Co. Ltd. but that has generally been a spur to innovation rather than a limitation. After a couple of abortive attempts in the past, Yamaha is finally getting serious, they say, about evolving from two wheels to four.

Personally, I am not sure it is such a great idea but if you are going to do it this approach sounds better than the motorcycle manufacturer’s previous attempts. According to the Financial Times, Yamaha is teaming up with Gordon Murray, the former Formula One car designer, to launch a two-seater commuter vehicle in Europe as early as 2019. The design is for a two-door, two-seater similar to a concept car showcased in 2013 called the Motiv.

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Global platinum was in deficit last year to the tune of around 700 thousand ounces according to a report issued this month by the newly formed World Platinum Investment Council. Last year’s five-month strike in South Africa was expected, at its outset, to deplete reserves so much that prices would soar, but while they picked up the reality was above-ground stocks held by producers and the trade comfortably made up for the shortfall.

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Some 905 kilo-ounces are said by the WPIC to have been drawn down in South Africa against a backdrop of global platinum supply down 8% to 7.2 million ounces. As this graph from HSBC shows, the rest of the world’s production remained steady but South African supply dipped sharply.

Industrial use held broadly steady – chemical, petroleum, glass, electrical, medical and biomedical – were broadly level or up. Automotive and jewelry (particularly in Asia) grew strongly but investment was the standout retrenchment driving a decline in gross demand according to Johnson Matthey of 3% last year.

Although the market is forecast to remain in deficit this year, the lack of investment demand is expected to cap potential price increases. In spite of a reduction in above-ground inventory there is still generally reckoned to be some 2.8 million ounces available with the possibility of further supply coming out of ETFs if the market remains depressed.

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A surprise announcement by the International Energy Agency (IEA) last week could be good news for energy intensive industries worldwide.

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Firms have been investing billions in energy efficiency and emissions reduction technology yet the targets seem to be ever ratcheted lower in spite of gains made, but a report to be published on June 15 will show that for the first time in 40 years emissions of carbon dioxide did not rise last year.

According to a Financial Times article after growing at an average of 2.4% over the last decade in 2014 the global economy grew 3%, while the amount of CO2 pumped out remained at the 2013 level of 32.3 billion tons. There have only been three times in four decades when emissions fell or stopped rising, the FT quotes the EIA as saying. After the oil price shock and US recession in the early 1980s; in 1992 after the collapse of the former Soviet Union; and in 2009 during the global financial crisis.

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We don’t really need anymore examples of the economically destructive nature of authoritarian socialist regimes.

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History is littered with examples of how not to manage an economy, but the tragedy that is Venezuela, being as it is both a near neighbor and a significant aluminum producer is all the more painful to see up close. Reuters, this week, ran a short piece on an announcement by Venalum, the country’s one-time aluminum champion and Latin America’s largest, that they could no longer guarantee the purity of their primary aluminum to international standards.

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Unusually among metals Palladium’s supply – demand picture is reasonably straightforward according to HSBC in their recent Quarterly Metals & Mining Review.
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True prices softened in the second half of last year as the expected shortages following strikes in South Africa failed to materialize but substantial inventory held in Europe ahead of those strikes was significantly depleted (exact levels are very difficult to discern outside of the trade as stocks are held in producers’ hands).

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Alcoa’s latest move, as reported earlier in MetalMiner, to acquire, Pittsburgh-based RTI International Metals Inc., in a $1.5 billion stock for stock deal is a logical and sound strategic move, building on the aluminum producer’s long-term plan to invest in downstream, value-added activities and gradually move away from the lower-return primary smelting business.

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Alcoa has invested heavily in new production facilities to meet an inexorable rise in demand for automotive sheet and to capitalize on it’s position as a major player in the equally buoyant aerospace sector.

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If you can put off buying your aluminum until next month you may get a lower price than right now.

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That is what recent reports seem to be suggesting. We have written extensively on falling aluminum physical delivery premiums with the first chink in the producer’s armor showing in Europe this quarter and in negotiations for Q2 prices in Japan. As lower physical delivery premiums work their way through to product producers the price of extrusions and rolled products should ease during Q2. For the first time in years the physical delivery premium looks vulnerable.

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