Taras Berezowsky

Echoing Nancy Reagan circa 1988, the US House of Representatives listened to Mitch McConnell and “just said no” – to the Environmental Protection Agency (EPA)’s Clean Power Plan. Meanwhile, the US Supreme Court finally ruled on Michigan v. EPA (involving the toxic emissions rule trying to limit mercury and air toxics, aka MATS), and the outcome, just announced today […]

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Our upcoming webinar – scheduled a week from today – is sure to create some fireworks. We couldn’t resist getting some commentary on spot-market purchasing from our metals procurement specialist, Raul de Frutos, to help light the fuses. We threw a few questions at Raul, getting at what a price risk management strategy for metals buyers should start with.

Q: When is sourcing via the spot market risky?

Raul-headshotA: Basically, if you are doing one of these two things, you are taking a risk:

  1. Buying metal without knowing how much you will sell it for. If you don’t have a price fixed with your customer (or the ability to pass on any and all declines in metal prices to your customers), your risk is any price decline from the moment you buy the metal until the moment you sell it.
  2. You make a sales agreement without knowing what the cost of the metal will be by thy time you need to purchase it. In this case, your risk is any metal price increase from the moment you have a sales contract until you actually purchase the metal.

Q: Is there a way to be risk-free when buying on the spot market?

A: The only way is to always have a fixed sales contract by the time you make your metal purchases. This is almost unrealistic, since organizations almost never know their future demand with certainty, have long lead times, and are not able to agree to a fair price with customers/suppliers, etc.

Q: So if metals buyers are taking risks, does that make them traders/speculators?

A: Pretty much. The only difference is that the trader/speculator is willing to take the risk, while the metal buyer has no choice. The trader starts with no gain, and speculates the market trying for a profit. The metal buyer already starts with a gain (assuming his business is profitable) and speculates to maximize that gain.

Q: What are the key things that successful traders/speculators do to manage their risk?

A: One of the keys for successful trading is to always know your downside risk. The market is unpredictable and things can always go in the opposite direction regardless of how good your analysis is.

Successful traders always plan ahead, and they have a solid strategy with a set of rules that tells them how to react to the market. So by being disciplined to their set of rules, they always know when to enter or exit a trade. In this manner, they never get caught in mental games, avoiding big losses.

Q: What can metal buyers learn from it?

A: Buyers can’t avoid the risk implied in purchasing metals. Instead, buyers need to accept that there is a risk and then implement a solid strategy to best deal with it. By having a consistent strategy with a set of rules, metal buyers know the right time to buy and avoid making wrong decisions caused by overwhelming panics when markets behave in unpredictable ways.

Our goal at MetalMiner is exactly that: not to make predictions, but to provide buyers with the market intelligence and the set of rules to make sound purchasing decisions.

Agree or disagree agree with Raul? Leave a comment!

And don’t forget to register to hear how Lisa Reisman and Jason Busch weigh in on this next Monday, June 29, at 12 pm ET/11 am CT, for “3 Bids and an Award: Are You Speculating When You Buy on the Spot Market?

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The red metal met the Red Cross earlier this week in the kickoff post of our series on health-acquired infections (HAI) and copper's role in the war against them – but what hospital procurement officers and facilities management departments may want to know is, what's up with the copper price?

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First step in the multi-step program of "What's Up With the Copper Price?" is a look back at where prices have been: MetalMiner's monthly Copper MMI® registered a value of 75 in June, a decrease of 2.6% from 77 in May.

Copper_Chart_June-2015_FNL

The index decline was driven mainly by spot and 3-month London Metal Exchange prices, US copper producer grades 102 and 110, and Chinese copper wire.

What's Up With That?

Second step in the multi-step program of "What's Up With the Copper Price?" is knowing some of the underlying fundamentals that may have to do with its shift. For that, we turn to MetalMiner Editor-at-large Stuart Burns, who writes that:

"Analysts expect China’s copper demand to grow by 4% this year, yet that figure is based on considerable use in power grid investment and assumes government spending plans will be met. Power grid investment actually fell by 8.65% in April, according to the FT, and in the first four months of this year China completed Rmb86.6bn of grid investment, only 20% of the planned amount for the year.

Investors agree with the pessimistic outlook cutting their net long positions in copper, joining Chinese speculators who have been betting against copper all year.

A CNBC report says recent weakness is due to weak premiums, high scrap discounts and a failure of the seasonally strongest quarter for copper to translate into solid demand. China’s factories are now approaching a summer slow-down and with it lower metal consumption."

Outside China, there's always Mongolia – and the Oyu Tolgoi copper mine, from which Rio Tinto's recent bullishness is born. According to the FT, "Rio Tinto recently forecast that copper prices will recover faster than expected with demand outstripping supply within two years. This bullish forecast comes as the Anglo-Australian miner steps up talks in May with the Mongolian government aimed at finalizing a deal on a $6 billion expansion at Oyu Tolgoi, which had been stalled for months. The lack of new copper projects in the pipeline could result in a market deficit earlier than expected," the paper indicates, "but even if Rio Tinto was right, 2 years is still a long period of time where we could see further price declines."

What's Up With the Market?

For the third step in the multi-step program of "What's Up With the Copper Price?", we cast our focus onto the future by turning to our metals procurement specialist, Raul de Frutos:

"Copper prices have been rallying since February and, in the short term, they could continue doing so. For the short term, consider placing orders now for known demand. Don’t buy long-term forward, as copper is in a bearish market and we expect prices to lose steam soon and come back to lower levels."

For more comprehensive commentary and specific copper price forecast thresholds, download our FREE forecast report!
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Silver prices in Japan, India and the US all rose over the past month, as did gold prices in the same regions. Silver and gold prices in China, however, fell ever so slightly. These inputs, as well as platinum and palladium prices showing mixed movement, resulted in MetalMiner's monthly Global Precious Metals MMI® registering a value of 84 in June, holding steady at May's level.

precious metal price index chart

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The real stories that concern us, however, may reside in the PGM markets.

2015 GFMS Platinum & Palladium Survey SAYS:

Thomson Reuters recently released its GFMS Platinum & Palladium Survey 2015, and in it, noted that the platinum market to be in a deep deficit last year "(prior to inventory movements) of 1.02 million ounces, singularly owing to major strike-related production stoppages in South Africa." The 2014 deficit comes on the heels of surplus in 7 of the last 8 years; the deficit is expected to continue.

Meanwhile, palladium has been a market in deficit since 2007. The GFMS team estimates "the palladium market deficit last year at 1.58 million ounces, representing the most severe market imbalance for more than a decade."

GFMS Platinum, Palladium Price Forecast

According to the survey, the average platinum price is forecast to fall by 16% year-on-year, averaging $1,170/oz, about 5% higher than May's closing price on the MetalMiner IndX. Analysts indicate that this suggests a closing of platinum’s discount to gold. The average palladium price forecast is broadly flat year-on-year at $800/oz, not too much higher than current prices.

William Tankard, research director of mining at Thomson Reuters, is quoted as saying, “It appears to us that forward buying programs by the automotive sector are developing increasing levels of flexibility for these consumers to purchase metal when they want to, rather than need to; the sector is becoming increasingly price-sensitive. Without enduring production cuts to be achieved, by permanently closing high-cost mines, the platinum market is expected to return to surplus next year. Of course, it’s a huge challenge as a producer to make that call, incur restructuring costs and permanently close capacity, if you believe the price will recover in the short- to medium-term.”

How Does That Compare to MetalMiner's Outlook?

It roughly matches what our lead forecasting analyst, Raul de Frutos, has written recently; in short: "Recent weakness in the dollar is giving a boost to precious metals. However, these price movements have been quite shy so far. It still makes sense to be long-term bullish on the dollar and bearish on precious metals."

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The price forecast for US steel markets, much like me after contracting salmonella poisoning last week, has been quite lethargic lately.

An imminent pullout from the doldrums doesn't look all too likely due to several major factors, which we'll dive into shortly, and is supported by MetalMiner's monthly Raw Steels MMI® clocking in with a value of 59 in June, a 1.7% drop from 60 in May.

steel price index chart june 2015

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The monthly Raw Steels MMI® – a price sub-index tracking a basket of finished steel and raw material prices from all corners of the globe – has been unhealthy for quite a while, and (after undergoing a slight recalibration at the end of 2014) has hit a new all-time low this month. Why?

Today's Steel Market: Some Factoids to Consider

Here are a few elements to take into account:

  • Imports are a huge issue for the US domestic market. According to the American Iron and Steel Institute (AISI), for the first 5 months of 2015 (including May Steel Import Monitoring and Analysis and April preliminary data), total and finished steel imports were 18,636,000 net tons and 15,365,000 net tons, respectively, up 7% and 20% from the same period in 2014. China plays an outsize role in this: according to data compiled by James May of Steel-Insight.com, Chinese supply of CRC was 6% of the US market in 2014 while Chinese and Indian supply of HDG was a combined 8%. Construction markets in China have stagnated, and rather than shutter mill capacity, the Chinese just ship it out to foreign shores. Ministry of Commerce spokesman Shen Danyang has been quoted as taking a defensive line, saying the rise in steel exports is due to higher global demand and is a result of Chinese steel products having strong "export competitiveness" – but we have our doubts.
  • Therefore, capacity has been dinged. According to AISI, adjusted year-to-date steel production through May 16, 2015 was 33,210,000 net tons, at a capability utilization rate of 72.3%. That is down 7.2%from the same period last year, when the capacity utilization rate was 77%.
  • Distributors are well-stocked with inventory. Until inventories (which are nicely loaded with that imported steel we mentioned) are drawn down, it will be hard to make price increases stick in the near term.

[caption id="attachment_69511" align="alignnone" width="550"]Steel_Insight_051515_550 Carbon flat-rolled inventories. Values in millions of tons (add 000 to the end of each number on the chart). Source: MSCI, Steel-Insight. Chart courtesy of Steel-Insight.[/caption]

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Tomorrow's Steel Prices: Wild Cards to Watch

  • Anti-dumping filings may help steel prices – but "may" being the operative word, and if so, only in the short term. Filings against imported Chinese coil products may succeed in removing some of that low-priced steel from the US inventory pool, thereby helping US mill volumes, but again, from what we're hearing, that's simply a temporary "Band-Aid" solution.
  • What will happen with scrap pricing? As part of this month's Raw Steels MMI®, our shredded scrap price rose 1.6% over last month, and is in a 3-month uptrend. According to industry sources, scrap is expected to rise anywhere from $10 to as much as $30 per gross ton, depending on the region and product. We'll have to wait and see where prices end up by the end of June, as that may clue us further into where finished steel pricing is headed.
  • And a last longer-term bit of news from China...An announcement made at the recent Singapore Iron Ore Week, hailed by some as a gamechanger, indicated that steps are being taken toward international trader/broker access to Dalian iron ore. If this indeed goes down, it would signal a big move toward internationalization of China's futures markets.

Steel Price Outlook: HRC, CRC, HDG, Plate

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The US price of hot-rolled steel coil (HRC) has recently bumped up near the end of May on our IndX, which indicates more broadly that HRC, as well as CRC and HDG steel, seem to be stabilizing after falling for over a year. However, it seems early to call for a bottom. While commodity markets remain bearish and the dollar holds, we don’t expect HRC, CRC or HDG prices to make significant upside moves.

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Michael Whatley of the Clean Energy Alliance explains how the major utilities are looking at EPA’s Clean Power Plan, which aims to regulate existing power plants across the country and what it means for the US manufacturing sector. Such as singling out coal-fired electricity generating capacity, grid parity, and some ‘cap and trade’-like effects., what the “European experiment” has taught us, and, in hindsight, what kind of cost/benefit analysis would be helpful if EPA were to get a “do-over” in proposing this rule.

Check out our primer on EPA’s Clean Power Plan and its potential costs.

In this second half, we touch on how the major utilities are looking at the rule, what the “European experiment” has taught us, and, in hindsight, what kind of cost/benefit analysis would be helpful if EPA were to get a “do-over” in proposing this rule.

Utilities and EPA Clean Power Plan

MetalMiner: Let’s talk about some of the energy producers, such as Exelon, ComEd, or Duke Energy. What’s their point of view on the EPA Clean Power Plan? What types of approaches, if any, are they taking at this point?

Michael Whatley: These proposed rules are going to require a certain percent of carbon reductions or carbon intensity in each individual state. [We haven’t] seen a lot of the utilities come out and say, ‘we really like these or we really don’t like these,’ because I think that at this point in time, the vast majority of the utilities are looking at it and saying what does this mean, and how are we going to apply it, and what are we going to do? At the end of the day, if you think about the utilities, their major role, according to state law and certainly any federal overlay on it, is to be able to provide reliable electricity for the consumers. A lot of states require that the utilities not only be reliable, but also to be the most cost-efficient that they can within the various rules that are out there. At this point, there really is just a lot of data-gathering assessment that’s going on from the utility world that is looking at the proposed rule going forward.

MM: If the rule goes into effect largely as is – which is a big if – how do you think about the cost impact of this new regulation on US manufacturing? What’s the benchmark of how you measure that?

MW: Consumer Energy Alliance released a study that we put together in conjunction with a number of other groups that looked at what are the potential ramifications of the rule as proposed. And the numbers were fairly staggering. You’re talking about, nationally, a 12% to 17% increase in electricity prices, which could be as much as $41 billion dollars annually. And those are costs that are going to have to be borne by energy consumers. In terms of whether EPA wants to implement rules to ensure that there’s no new coal-fired power plants, there’s probably a way that you could do that in a cost-effective way that’s not going to cause these types of price spikes. The same thing applies with rules on existing coal-fired power plants. If you’re going to phase them out, you have to be able to give utilities and states realistic timelines and opportunities to be able to replace that electricity [capacity]. What EPA has done is come in and say, no, we’re going to have to achieve these cuts. And you’re going to have to use these mechanisms. And you’re going to have very, very tight timelines that you’re going to be able to do it. So we were not really surprised but awfully disappointed with the numbers that we saw in that study.

MM: Would the problems be solved if the timelines were all extended?

MW: I think it’s a combination of both timeline and reduction goals, because if what you’re saying is that you have to reduce carbon intensity by 5% in a state, given these timelines, that could probably work. If you’re going to say you have to reduce it by 20%, but you give companies 15 to 20 years instead of five to 10, then that can probably work. But the combination that we see in this rule of the timelines and the reductions is going to be particularly difficult … It puts the onus back on the states.

“War” on Coal?

MM: Another criticism of the plan that we’ve heard is that some feel that this rule is starting with coal. And it’s a slippery slope. Perhaps we’re going to suddenly find that these rules extend to other power sources. What are your thoughts on that?

MW: We completely agree. We work with the natural gas producers and suppliers all day, every day. The simple fact of the matter is you look at a state like Virginia, where we did a back-of-the-envelope analysis that said if you eliminate every coal-fired power plant and replace it with natural gas, you’re still probably not going to be able to hit these targets. So it really is going to be that you have to bring online new nuclear. And again, the timelines that they’ve put in place don’t allow for new nuclear. They also have a problem that in South Carolina and Georgia where you do have new nuclear facilities that are already under construction and going to be online over the next several years, those will not count towards the reduction capacity, even if they phase out coal, because they’ve already broken ground on those facilities. You have to bring online new renewables in order to get that zero generation capacity. Every state’s going to have to do its own analysis. And that certainly cannot be done on the back of the envelope when you’re talking about long-term electricity programs and plans. So we do feel that this is not just an attack on coal. It really is a program that is going to, ultimately, shake up the entire electricity generation capacity in the country. So as electricity users, that’s why we have this particular concern. There’s a lot of things [to suggest] that EPA clearly is trying to get the states to participate in cap and trade programs and to put in place statewide renewable electricity mandates, which would be the only way that they would be able to meet these goals.

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We at MetalMiner have long covered the US domestic policy front as pertains to US manufacturing industries, and time and again, we hear industry experts extolling the virtues of “all-of-the-above” strategies, rather than unilateral regulatory decrees.

So is the federal government, in conjunction with individual states, pursuing “all-of-the-above” strategies to their fullest potential when it comes to US energy policy?

As the final rule of the EPA Clean Power Plan gets closer to being finalized (word on the street: it’s happening this summer), we got an insider perspective from Michael Whatley at Consumer Energy Alliance on the issues for US manufacturers surrounding the potential effects of the final rule. Below is a condensed and edited version of our conversation.

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US plan to protect sage grouse will limit oil & gas I admit, I love birds and birding probably much more than the next guy, which is why this story is a very intriguing one. Obviously, in US manufacturers’ eyes, it’s a David-vs.-Goliath type of battle, in which the little feathered guy with the sling […]

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The American Iron and Steel Institute (AISI) 2015 General Meeting closed just yesterday here in Chicago, where steel industry folks on the producer and service center sides (to name a couple) came together to discuss key issues surrounding the US steel market landscape, while leaving a crucial issue explicitly unmentioned – but we’ll get to that in […]

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In the “news-that-may-not-be-news-to-you” department, we wanted to keep you posted on our site’s mobile-friendly interface. This indeed may not be news to you if you’ve navigated over to MetalMiner using your iPhone, iPad, Samsung Galaxy, Microsoft Surface, Kindle Fire or [insert highfalutin’ smartphone or tablet here], as MM has been mobile-friendly for quite a while now. However, […]

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