Author Archives: Stuart Burns

Well for one thing it means our retirement funds will likely be worth less, at least in the short to medium term. On the plus side, our mortgage will likely stay cheaper for longer and metal prices will remain lower for longer.

Free Sample Report: Our Monthly Metal Price Outlook

Why? well if the Fed was worrying about a China slowdown in July, they must be in full-on panic mode by now. If the Federal Reserve was to raise rates next month, to stave off the possibility of inflation picking up next year, it would strengthen the dollar, making imports more attractive and making life tougher for US exporters.

China’s Deep Slowdown

The collapse of stock markets around the world has been precipitated by fears of a China slowdown becoming far deeper and more prolonged than previously thought – although why this appears to be such a surprise to investors today compared to 2-3 weeks or even 2-3 months ago I fail to see, the writing has been on the wall all year.

Traders in London

The signs that China’s economy could lose steam were there, but it still caused global stock market panic.

However, as the herd mentality sets in all those stop orders get hit and the fancy algorithms cut in selling stocks and becoming self-fulfilling as they drive prices down. Hedge funds have been aggressively shorting the market, not just for stocks but for commodities too. It would be a brave man who bet any pause was the start of a bounce back, markets could have a lot further to fall.

Back to the Fed and China: weaker demand from China will mean lower demand for commodities. For a few commodities, China has become a net exporter but across the board the world’s largest consumer is reversing what was once a one-way bet on demand. Read more

The answer as you can imagine is not a simple one, it will impact prices in a number of ways and different commodities will be impacted in different ways.

Free Sample Report: Our New Monthly Outlook

So far, it has been seen as a bearish development mostly for macro reasons – that Beijing felt the need to allow the currency, the yuan/renminbi, to fall to bolster export industries, particularly manufacturing. It is certainly true that real GDP growth is slowing and is probably already under 7%.


Oversupply of aluminum could get worse with a devalued renminbi.

Worse, most of the sub-indexes in China’s General Manufacturing Purchasing Managers’ Index have weakened this month, with output, new orders, new export orders and employment all deteriorating. Up to now, the employment prospects for China’s 10 million new entrants each year had held up well, but some indicators show the job market is weakening according to the Financial Times. Read more

Following our recent article on the seaborne iron ore market, some may assume the landlocked domestic contract supply market for iron ore and pellets is immune from the volatility found in Asia.

Free Sample Report: Our Monthly Metal Price Outlook

To some extent that’s true, there isn’t a spot or futures market in the same way as we see in Asia, but the market is far from immune to global prices and prices have fallen in North America as they have elsewhere.

That makes Essar Steel’s decision to proceed with the massive $1.9 billion development of North America’s richest iron ore deposit across 150 kilometers of Minnesota’s Mesabi Iron Range particularly brave in today’s market.

Source FT

Source: Financial Times

Essar Steel is said by the Financial Times to be ramping up construction on a $1.9 billion mining and processing facility, with a planned completion in the second quarter of 2016. It will be one of the largest construction projects in North America by capital expenditure according to the paper and Essar hopes to produce 7 million metric tons annually of high-grade iron ore pellets for 70-80 years from the resource. Read more

Just when iron ore miners thought sentiment couldn’t get much worse, Goldman Sachs Group comes out with a report predicting iron ore prices will tumble by 30% over the next 18 months according to a Bloomberg article this week.

Free Sample Report: Our Monthly Metal Price Outlook

The bank is saying the rebound seen over the last five weeks is merely a blip and that normal business will shortly resume.

Source: FT

Source: Financial Times

Supply growth is set to continue, the report states, but, and this is crucial, China has reached peak steel and from now on steel production will only contract in China.

More Inventory Than Necessary

As shipments pick up from Australia, Brazil and India, the seaborne market will become awash with inventory and prices will be further driven down. Iron ore is seen by Goldman as averaging $49 a ton this quarter, and $48 in the final three months of 2015. Before falling further next year to $46 in the first quarter and $44 the following quarter. With little or no market discipline, the bank suggests 2016 will see average prices around $44 per ton. In the words of the report’s authors “the summer of 2015 is the calm before the storm.”

Free Download: Latest Metal Price Trends in the August MMI Report

Steel consumers can, therefore, expect mills’ raw material prices to continue to weaken as seaborne prices gradually knock on to contract prices elsewhere. With demand lackluster and too much finished steel chasing too few orders, even as markets like North America and Europe show encouraging signs of GDP growth, steel prices will have little to support them this year and next. Good news for consumers, tough times for producers working with low-capacity utilization and stronger domestic currencies sucking in imports.


The US is taking its first tentative steps toward exporting oil.

Free Sample Report: Our Monthly Metal Price Outlook

No, Congress has not approved large-scale oil exports, it is not about to repeal the 1975 export ban brought in after the early ’70s OPEC inspired oil crisis. Congress is split with republicans broadly supporting a lifting of the ban but democrats against it, keen to limit further fracking on environmental grounds, according to the Financial Times. The Obama administration has, instead, given the okay to limited exports to Mexico.

Why No Blanket Repeal of the Oil Export Ban?

More to the point, neither party wants to be accused down the line, as oil prices inevitably recover, of being responsible for reduced domestic supply as the cause of higher prices. Most economists, though, suggest increased exports would lower global prices and, as a result, would mean lower domestic prices, but of course no one knows until a large-scale lifting of the ban is agreed to.

Meanwhile,the US can legally export to Canada, the only country to whom export rules do not apply. The US already shares hockey, Seth Rogen and country/western music with Canada, after all, so why not oil?

The US exported a record 586,000 barrels of crude a day in April to Canada according to Bloomberg. This was light grades needed by Canadian refineries to blend with high-viscosity heavy tar sands or for locations where US supplies are closer to a Canadian refinery than Canada’s own reserves. Read more

Contrary to so many other elements of the trade relationship between China and the rest of the world, supply chain experts had come to expect a relatively benign relationship between the yuan renminbi and the US dollar. Over the past decade, China’s central bank has either permitted the renminbi to creep slowly upward against the US dollar – at a pace considered glacial by the standards of foreign exchange markets, the FT reports in a recent article – or held it steady in times of stress, such as the global financial crisis of 2008-09.

Free Download: Latest Metal Price Trends in the August MMI Report

But this week’s flash devaluation, by as much in one week as the currencies have moved in the last year, has sent shock waves through the markets and upset the long-held and, in hindsight, somewhat complacent view that, at least in terms of that currency pairing, the renminbi was destined to rise with the dollar.

Economic Aftershocks

In many ways, the shock is greatest for China’s Asian competitors who had planned on a continued appreciation and are now faced with the possibility of a more competitive China on their doorstep.

You would expect China’s exporters to be delighted with the move but a combination of gradually appreciating currency since the dollar peg was removed in 2005 and rising inflation, particularly wage inflation, has resulted in many Chinese manufacturers finding themselves at a considerable disadvantage to competitors in Bangladesh, Vietnam, and other low-wage countries even after this modest devaluation.

Such manufacturers of low-value products, such as textiles, were looking for a renminbi devaluation in excess of 10% against the US dollar, and who is to say that that may not come about? Beijing is clearly rattled by the slide in the economy’s GDP, by some measures the real growth rate is well below the headline 7% and still falling so we should not rule out the possibility of further falls in the exchange rate.

Borrowing Boondoggle

However, Beijing will have one eye also on debt financing. To the extent that exports may be boosted by a lower exchange rate, debt financing costs are increased. Not just China but many developing countries that have borrowed heavily on the external finance markets have been fearing the impending rise in the Federal Reserve prime rate and the accompanying rise in the US dollar that will, it is widely expected, accompany the Fed’s move.

As the US dollar has risen this year against global currencies, companies and states have found their external finance costs increse. China is far from alone in this respect and is much better prepared, with huge US dollar foreign reserves, to weather such a rise, but other developing market economies are not so fortunate as this graph from the Financial Times based in BIS data illustrates the extraordinary rise in debt levels

Source: FT

Source: Financial Times

The FT uses a couple of examples to illustrate the problem at company level. Read more

Depositors may be looking forward to an increase in Federal Reserve interest rates  and the commodity bulls may be fearing it, but what about all those emerging markets that are a.) heavily exposed to commodities as their principal export and b.) heavily exposed to overseas borrowings in US dollars. For them, the fall in commodity prices has been dramatic and damaging while the rise in the US dollar has started to increase debt repayments just when they can least afford it.

Free Sample Report: Our Monthly Metal Price Outlook

Brazil and Russia are prime examples; the Brazilian real and Russian ruble have both taken a hammering as iron ore and oil, respectively, have dropped to their lowest levels since just after the financial crisis. Both economies are in recession and with the Fed set to raise rates, which will bolster the US dollar even more, debt repayments will rise while depressing commodities further.

Asia on the Brink

The Economist explores the position of Asian emerging economies like Indonesia and Malaysia, saying that four years ago a dollar fetched just over 8,500 Indonesian rupiah, and just under three Malaysian ringgit. Today, a dollar is worth nearly 14,000 rupiah and almost four ringgits. Both currencies hit 17-year lows this summer, and are still falling as this graph from the Economist illustrates.

Source: Economist

Source: The Economist

This could see their currencies back to the level of the Asian crisis in the late 1990’s, and they’re not alone. The rupiah and ringgit have fallen this year, by 8.4% and 9.8% against the dollar respectively but the Thai baht is also down 6.4% and so is the Philippine peso, although so far by only 2.2%, supported by repatriation of foreign earnings. Read more

Electric Vehicles, or EVs, — despite huge hype, state support and billions of dollars of car makers funds — still only represent a tiny proportion of total sales.

Free Sample Report: Our New Monthly Outlook

According to an Economist Intelligence Unit (EIU) article just 0.4% of an estimated 85 million cars sold worldwide last year were EVs. Numbers are rising, but at least here in Europe even free charging points, free road tax, free or discounted parking and exemption from road, tunnel and ferry charges has not been enough to boost participation.

In the UK, grants of £5,000 ($7,700) per vehicle have helped bring the initially quite high cost down to more accessible levels. Life cycle costs are almost certainly lower than gasoline cars now, yet the largest selling EV in the UK, the Nissan Leaf only just passed 10,000 units, and the Leaf commands 2/3rds of the UK EV market. Growth in percentage terms looks significant as this graph from the EIU shows, with the EU now overtaking the US as the fastest growing major EV market but it also suggests incentives play a big part in persuading buyers to choose EV.

Source: EIU

Source: EIU

Range anxiety understandably seems the most significant hurdle. Petrol-Hybrid EVs are proving more acceptable where the fall back of a petrol engine can give a respectable range of over 400 miles in some cases and new models are getting better all the time. The Mitsubishi Outlander PHEV has been popular this year taking an estimated one-fifth share of the European EV market in the first five months of the year.

It will not go on sale in the US until 2016, the article reports, maybe to give the firm a chance to iron out any bugs before the hit the potentially larger US market. Europe is waiting for Tesla’s new offering, the Model 3 that is reported to be able to cover 200 miles on one charge, compared to the Leaf that manages less than 50, in spite of claims of 100.

Clearly, the technology has some way to go before it attracts a mass market and with governments’ enthusiasm waning – incentives are in many countries being reined back – it could be mass take up remains some way off. Modern diesel engines are managing real returns of over 70 miles per imperial gallon and petrol engines of around 50 mpg, the claims for PHEVs become harder to justify. Pure EVs will still prove popular with city planners for pollution reasons, but headwinds remain for the technology.

Free Download: Latest Metal Price Trends in the August MMI Report

Rising London Metal Exchange nickel inventories have been taken as a bearish sign for the future path of refined nickel prices, while appearing to run counter to the long running narrative that says the Indonesian export ban introduced in early 2014 will eventually lead to a shortage of nickel ore for Chinese nickel-pig iron production and, hence, upward pressure on prices.

Free Sample Report: Our Monthly Metal Price Outlook

From a fundamentals point of view, nickel has been giving confusing messages of late and views vary widely on future price direction.

HSBC: The Biggest Nickel Bull

HSBC, for example, in its most recent Metals & Mining Quarterly Review forecast just last month said there would be a 53,000-metric ton deficit in the nickel market this year and prices would average $15,120 per mt this year. They are currently at $10,800 at the time of this writing. As a consequence of HSBC’s constrained supply side view, they are predicting $21,500 per mt in 2016 and $22,000 per ton in 2017.

Source HSBC

Source HSBC

A large part of the bank’s argument seems to be based on its belief that global stainless steel output will grow at a CAGR of 3.8% during 2014-18, admittedly considerably lower than the 6.5% CAGR during 2010-14, but still a hefty bet on China where concerns are growing about how robustly stainless output can continue to rise. Read more

The one thing you can say about a confusing zinc market is we can expect it to continue with conflicting signals and be overlaid with volatility this month. Along with just about all the base metals, zinc has been on a relentless slide for the last year.

Free Sample Report: Our New Monthly Metal Price Outlook

They all enjoyed a short-lived rally in the spring but normal business quite promptly resumed and the short term expectation is for little change.

Screen Shot 2015-08-07 at 14.08.08


However zinc, like aluminum, has been the subject of intense investor interest because of the strong forward curve supporting the stock and finance trade. Read more