Author Archives: Stuart Burns

We reported last week on the dire state of the UK steel industry and it is often and widely reported that the US industry, likewise, faces challenges from imports and weak domestic demand.

Free Sample Report: Our Annual Metal Buying Outlook

U.S. Steel has been one of the worst affected by the imports and resulting price pressure. Its shares have fallen 69% in the past 12 months and, after cutting 3,000 jobs from its North American workforce in 2014, it has warned of further redundancies this year.

Immunity to World Markets?

But we often assume Asia is more or less immune from the competition and challenges our domestic steel producers face so a recent series of articles in the Financial Times makes interesting reading.

Read more

Are you a product specialist or designer considering the next generation of your component or product, and does it include aluminum or a material that could be substituted by aluminum such as copper or plastic?

Free Sample Report: Our Annual Metal Buying Outlook

Well, if so, the words of analysts at Goldman Sachs this month may be worth considering. The investment bank is quoted in a Bloomberg article saying the aluminum market was “facing the greatest bearish fundamental shock in a generation, and perhaps in its history.”

Low Prices .. and Low Delivery Premiums

Prices have dropped 20% this year in Western markets and 30% in China to a 7-year low below $1,500 per metric ton on the London Metal Exchange. In spite of efforts by western producers such as Alcoa, Inc. to curtail production, China continues to add yet more low-cost, state-of-the art production in its northwest provinces based on low-cost coal power production.

A further 3.5 million to 4 million metric tons per year of low-cost smelting capacity is expected to come online in the next 18 months in China, according to Nicholas Snowdon, an analyst at Standard Chartered.

He expects China to have a surplus of 1.4 mmt of aluminum next year, a figure we judge to be conservative based on the levels pouring out of the country as exports. True, the Aluminum Corporation of China (Chalco), has announced the closure of a 500,000 mt per year smelter in northern Gansu, but the plant at Lianchang is said to be some 50 years old and has no captive low-cost power source, instead relying on high-cost grid power.

Producers not only have to contend with the drop in the LME price, but also the collapse of the aluminum physical delivery premium, down from $0.25 per lb this time last year to $0.07/lb today, a further $400 per metric ton fall in return on top of a $500 per metric ton fall in the LME price.

Aluminum Substitution

Goldman Sachs is not alone in thinking we are facing years of depressed aluminum prices and, as such, consumers have the opportunity to consider substituting aluminum for other materials where the supply-demand dynamics are more positive and prices are likely to be higher a year from now. The prospects for long- and short-distance power transmission will be hugely supported by the prospect of low aluminum prices, as will the already significant substitution in automotive of low-weight aluminum in the place of steel, now we have low-weight, low-cost aluminum.

Free Download: The October MMI Report

Only China can effectively put a dent in the relentless rise in metal supply and, with question marks over whether Chalco will even close this aging plant in Lianchang this coming month, it would seem the appetite to tackle the situation is just not there.

“The UK steel industry is struggling for survival in the face of extremely challenging market conditions,” said Tata Europe CEO Karl Koehler.

Free Sample Report: Our Annual Metal Buying Outlook

It certainly is. Not since the end of the ’90s when the UK steel industry went through a major restructuring and British Steel was merged with Corus of the Netherlands has it faced such an uncertain future. The very future of the UK’s steel industry is threatened by a flood of cheap imports, particularly from China, a strong pound and high electricity costs, Tata said in its statement.

Following the collapse of the Thai-owned steel company SSI last month, the Redcar steel plant was closed. That was followed, within days, by Tata’s announcement of around 1,200 job losses, about 900 in Scunthorpe and 270 in Scotland as well as a small number at other Long Products Europe sites. The closure of coke ovens, blast furnaces and plate mills at Redcar and Tata’s operations has since been added the closure of Caparo Industries‘ bar operations. Read more

China’s excess aluminum capacity and low global prices are having an impact even among state-owned aluminum producers, it would seem.

Free Sample Report: Our Annual Metal Buying Outlook

A Reuters article this week reports that Aluminum Corporation of China (Chinalco) plans to shut down it’s Liancheng smelter with a capacity of 550,000 metric tons. The plant in the northwestern province of Gansu has been losing money since at least 2011, racking up losses of $313 million making it Chinalco’s worst-performing smelter.

Read more

Officially, the Chinese economy grew faster than expected in the third quarter, according to China’s statistics bureau who said GDP rose 6.9% in the third quarter in inflation-adjusted terms, down from 7% in the first 2 quarters and 7.3% for full-year 2014.

Free Sample Report: Our Annual Metal Buying Outlook

But, Beijing’s growth figures have been the subject of considerable conjecture for years and the current gradual slowdown official figures report seem at odds with the low Purchasing Managers Index numbers reported this year.

Source: Telegraph Newspaper

Source: London Telegraph

True to say, in the detail there is strong evidence of a 2-speed economy, officially industrial output in September grew at just 5.7%, the slowest pace since 2008, while Property investment slipped to 2.6% in the first 9 months, the lowest growth since 2009. Read more

LME Week has generated nearly as many opinions on the prospects for metal prices as attendees last week and it’s little surprise that, after a dismal year for producers and an unexpectedly benign year for consumers, metal prices showed little prospect of rising. That is before some fairly substantial production cuts announced by Glencore took the market by surprise.

Free Sample Report: Our Annual Metal Buying Outlook

The loss of some 675,000 metric tons of production next year from the planned closure this year of Century mine in Australia and Lisheen in Ireland have been superseded by news that Glencore is closing 380,000 mt of capacity at Mt. Isa and McArthur in Australia, another 80,000 mt at Iscaycuz in Peru and some 40,000 tons in Kazakhstan. That’s half a million metric tons of cuts from a market that was predicted by the International Lead and Zinc Study Group (ILZSG) to be in deficit next year to the tune of 152,000 mt.

On the Demand Side…

The only 2 negatives in the equation are, first, demand-side steel production in China, the world’s largest galvanized steel producer, is said to have peaked, possibly contracting slightly this year, and is predicted to rise by only 1.4% in the 2015 to 2018 period.

More significant, still, on the supply side is Chinese-mined zinc concentrate output has risen 11% in the first 5 months of this year according to ILZSG data reported by Reuters and is predicted to rise by a further 7.8% next year. A further 10% rise, Reuters speculates, would be enough to replace all of Glencore’s cuts.

Nor is China the only source of additional supply. A continued ramp-up at McArthur River should add another 115,000 mt and Kyzyl Tashtygskoe should add about 90,000 mt. Gamsberg remains one of few large projects on the horizon, likely to be in the region of 250,000 mt of capacity but commissioning is not due until the end of 2018.

No one is officially predicting that Chinese production will wholly replace Glencore’s cuts, but it remains a major unknown. In fact added to the fall in inventories this year, producers and analysts are once again confident a supply-side squeeze will finally arrive.

Source HSBC

Source: HSBC

On the Supply Side…

Visible inventory has fallen steadily for 4 years with the recent uptick attributed to financial stock and trade players, Glencore reported to be among them, moving metal from off-market to on-market, as we reported recently. Indeed, this should be a caveat. LME and Shanghai Futures Exchange inventory has been falling but global inventory has not, the stock and trade has been storing metal below the radar and confused the picture, to what extent is difficult to say, but if that tonnage was included the fall would certainly not be as steep. Read more

This is part 2 of a series on ethical investments in mining and metals firms. See part 1 if you missed it yesterday.

A significant development in recent years has been the rise of so-called ethical investment funds. Every defined contribution pension plan has a small group of members who want their fund’s investments to reflect their own ethical values, even if no 2 investors are likely to totally agree on what constitutes ethical and what doesn’t.

Free Sample Report: Our Annual Metal Buying Outlook

Take the case of gold, there are numerous cases of environmental devastation linked to gold mining, very often linked to (but not restricted to) poisoning of water and soil with arsenic and mercury used in the extraction process.

Hello, Newmont

Yet firms such as Newmont Mining, which has been repeatedly accused of such failures still makes it onto the Dow Jones Sustainability Index. So, if the major miners like Newmont, Rio Tinto and so on cannot be considered as ethical companies in part because of their size, influence over third party certification reports and legal clout whenever a protest is raised, what about smaller, artisanal miners who single source and have to work more closely with organizations such as Fairtrade and Fairmined? Read more

Saudi Arabia is taking a massive gamble on the world oil markets. Their “pump at any price” policy has driven oil down to below $50 per barrel and, so far, appears to be having the desired effect of squeezing out marginal producers, particularly in the shale industry, unable to cover costs at that level.

Free Sample Report: Our Annual Metal Buying Outlook

Every spike above $50, as happened last week, is met by a wave of hedging from shale companies. Late last week, US producers locked in new production at north of $50 for 2016 and 2017 delivery. As prices reached about $53, any further rise was limited by sellers locking in prices. Even so only some 11% of expected 2016 production is forward sold according to HIS Energy, quoted in Reuters.

Source: FT

Source: Financial Times

The Saudis had hoped they could drive down the price enough to squeeze out higher cost upstarts like the US shale industry. Indeed, the US government is quoted in the FT reporting that after adding 1 million barrels per day per year of production in every year since 2012. Next year will see the first decline, from 9.3 million bpd to 8.9 million bpd. Read more

A recent article in the London Telegraph likened the current position commodity traders find themselves in with the downfall of Bear Stearns in 2007 which, as we are all painfully aware, eventually led on to the collapse of Lehman Brothers and the whole mortgage-backed securities house of cards: enter the great financial crisis.

Free Sample Report: Our Annual Metal Buying Outlook

Before we dismiss it as wildly overblown, let’s pause for a moment and consider a few aspects of the current market compared to 2007. Bear Stearns’ High-Grade Structured Credit Fund, relied on huge amounts of borrowing to earn small margins through holding mortgage-backed securities, and then used sophisticated trading to supposedly eliminate risk.

High Borrowing Costs, Low Margins

Today, commodity trading houses — tellingly most of the banks have exited the market — rely on huge borrowing sums to earn small margins and are suffering from unpredictable prices and falling asset prices.

Read more

A significant development in recent years has been the rise of so-called ethical investment funds. Every defined contribution pension plan has a small group of members who want their fund’s investments to reflect their own ethical values, even if no 2 investors are likely to totally agree on what constitutes ethical and what doesn’t.

Free Sample Report: Our Annual Metal Buying Outlook

As a recent Financial Times article says, the philosophy behind funds varies considerably. At one end of the spectrum is what the FT terms the Calvanistic approach: no arms, tobacco, alcohol, gambling or sex.

At the other end lie funds with sophisticated rating systems designed to identify companies that make a positive Environmental, Social and Governance (ESG) contribution. The rationale being that such firms possibly have a more enlightened management culture that could offer long-term performance gains.

For these firms, the impact of the company on its environment plays a significant role in determining their suitability as an ethical investment. The FT then goes on to pour cold water on the idea as the article pulls apart the typical major firms that make up such investment portfolios.

What’s Ethical?

Some of the largest funds typically include the same firms – HSBC and GlaxoSmithKline, for example. Firms that the FT suggests have been accused of several unethical activities including bribery and money laundering. Others, such as Shell are involved in Arctic drilling and have been accused of causing pollution in the Niger Delta, yet they still feature as significant investments in many funds.

Interestingly, many of these ethical investment funds have performed comparatively better than the FTSE All Share Index. In part, the FT says, because they specifically exclude firms like BP involved in the energy sector and mining companies whose share values have collapsed along with commodity prices.

It raised the thought: Are there any mining or metals industry companies that would make it onto the short list of the most ethical investments? Or, maybe more to the point, what constitutes an ethical metals firm or, indeed, is there an ethical metal?

Ethical Metals

Ethical investment funds do not generally invest directly in commodities of any kind, even though there was a move for the investment community to diversify into commodities as a supposed counter-cyclical hedge against stock markets.

Some would argue mining and metal refining are such polluting activities that none of them should be included but that is neither fair nor sensible. Few would argue that hybrid cars are environmentally friendly but Toyota’s Prius wouldn’t run without nickel, the mining and refining of which is often a polluting activity.

Some firms do it better than others, though. You can’t tar all miners or refiners with the same brush and, no doubt, some firms have much higher ESG credentials than others.

Free Sample Report: Our Annual Metal Buying Outlook

Although not intended for the investment community, the Conflict Minerals Dodd-Frank Consumer Protection Act seeks to ensure certain minerals are not sourced from areas of conflict such as the eastern Congo. So does gold, tantalum or tin sourced from, say, Australia, Peru or Brazil constitute an acceptable ethical source? The price premium such suppliers achieve in the market reflects more the security of supply and dependable quality than any ethical credentials.

Check back tomorrow for part 2 of this series on the existence of ethical metals companies.