Commodities

SMU Steel Summit 2015

Meet us in Atlanta for SMU’s Steel Summit Conference!

The Steel Market Update 2015 Steel Summit Conference invades Atlanta next Tuesday and Wednesday, and the MetalMiner™ team will be there in full force.

Lisa Reisman, CEO, Azul Partners and executive editor, MetalMiner, is presenting our September steel price forecast, as part of our Monthly Buying Outlook report, which is now available with an annual subscription.

Also presenting at the event is Serafino Capoferri, London Commodity Consultant, CRU; Peter Meyers, executive vice president, Metalico; Gaurav Chhibbar, raw material manager, Cargill Metals; Timna Tanners, research analyst, Metals and Mining Bank of America Merrill Lynch; and John Anton, principal economist, Steel IHS Inc., among others.

This is the annual event for steel producers, manufacturing companies, end-users and service centers to come together and discuss the current issues affecting the metals industry.

Learn more and register today!

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After the market tumult of last week, many expected things to calm down and that China’s stock market would finally calibrate to the new, devalued yuan/renminbi while equity markets elsewhere would bounce back from Friday’s big sell. Heck, maybe even the beleaguered commodity markets might recover some of their losses, right?

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Wrong. Oil reentered a bear market on Tuesday extending the previous day’s losses, when Brent crude — the international benchmark — recorded its biggest one-day sell-off since February. After dropping more than 6% on Monday, Brent fell a further 2% in the next trading session to $55.40 a barrel. It is down more than a fifth from its year-high of $69.63 a barrel reached during intraday trading in May.

Not the Oil That Made Jed Clampett Rich

Not such a good time for oil companies but, at the very least, gas prices are down here in the US and costs for everything from construction to automobile production is down, too, right, so we must be on to step three, profit, right? Oh no, not even close. Construction material prices are down, but new construction spending isn’t exactly picking up, either. Not here and not in China, where lack of demand has led lead and zinc to five-year lows.

Jedclampett

Jed Clampett made $9.5 billion in oil and gas. That likely would not have happened with today’s prices.

Incidentally, Forbes estimated Jed’s net worth at $9.5 billion, 4th on its “Fictional 15″ list. That’s more than weapons tycoon Tony Stark (#6). Not bad for wealth based entirely on oil and gas discovered while hunting possums.

A Rebound in Stocks… Of Sorts

The Dow Jones Industrial Average has been back in positive territory, though, saving our collective retirements and paring the losses we saw last week. The Dow gained 369 points yesterday, alone, curbing the big losses from Friday and Monday. It’ll surely last, right? Ummm, no promises. While our own Stuart Burns acknowledged the rebound in western markets, he also cautioned that aftershocks from China’s economic crisis could be forthcoming.

“With (Chinese) GDP growth widely believed to be lower than the official government number of 7% it is hard to see how domestic consumption can pick up as households lick their wounds,” Burns wrote.

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

So, in short, expect more volatility as China spares the rod of economic depression while spoiling the child with purposely devalued currency.

What Does This Mean for US Buyers?

Expect to pay less for Chinese steel. We know, it’s already dirt cheap as foreign imports were up 5% in July. The job of policing foreign dumping into the US market just got tougher.

 

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Construction costs fell further in August, according to IHS Inc. and the Procurement Executives Group (PEG).

IHSPegAugust550

The current IHS PEG Engineering and Construction Cost Index (ECCI) registered 45.7 this month, down from 48.8 in July and well below the neutral mark of 50. The headline index has not indicated rising costs since December.

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The pricing environment appears to be deteriorating with the current materials/equipment index registering its lowest reading since. The underlying detail shows falling prices for nine of the 12 individual components tracked by the survey.

Prices for steel products continued to fall and showed particular weakness with the indexes for fabricated structural steel, carbon steel pipe, and shell and tube heat exchangers all indicating that prices are falling and that price declines have become more widespread.

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

“Steel is a buyers’ market and will remain so,” said John Anton, principal economist, IHS Pricing and Purchasing, “Current import prices are far cheaper – up to 40% – than domestic prices, but if you are doing public projects with Buy America requirements, you cannot use them. However, imports can drag down prices your rivals pay, putting pressure on mills to give you similar deals.”

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Lead and zinc are two metals that performed well last year.

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Both metals have a pretty neutral supply/demand story, in which production is outpacing demand but not by much. However, both metals are falling as China’s bearish momentum hasn’t changed, it’s actually gotten worse.

World Lead Production minus Usage

World lead production, minus usage. Graph: MetalMiner.

The lead market has been in surplus over the past few years. However, production versus usage has been pretty stable since 2013, which might have caused prices to remain pretty stable since 2013.

3M LME Lead since 2011

Three-month London Metal Exchange lead since 2011. Graph: MetalMiner.

However, lead broke that price range this year leading it to more declines. It seems like although the supply/demand picture hasn’t really changed over the past few years, concers about China is what’s really weighing on this metal.

Zinc’s supply/demand equation is a bit different:

World Zinc Production minus usage

World zinc production minus usage. Graph: MetalMiner.

After two years of deficit, zinc supply has outpaced demand so far this year. The reason for the main shift was China, which is now producing more and consuming less zinc. Chinese imports of refined zinc have decreased by 66.3% to 126 kilotons, according to the International Lead and Zinc Study Group.

3M LME Zinc since 2011

Three-month London Metal Exchange zinc since 2011. Graph: MetalMiner.

With this shift in demand/supply and a bearish market in China’s future, zinc prices have fallen more than 30% in less than four months, a sharper decline than lead’s. The metal is now at a five-year low and heading south.

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

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Nickel has already halved its year-to-date value after peaking in May 2014.

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This week, prices fell below the $10,000 per metric ton, a physiological resistance level. Prices are now approaching the record low of 2009 when prices hit $8,850/mt. If so, nickel would be the first industrial metal to fall below recession levels.

3M LME Nickel below $10k and approaching record lows

3-month LME Nickel below $10,000 and approaching record lows. Graph: MetalMiner.

The slump in prices made some producers cut output and we’ve heard people talking about a price spike as producers are underwater. But as you are aware, production costs do not determine prices, investors do.

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

The bearish momentum in China’s stock market and the commodities markets will keep a lid on nickel prices and, in our view, prices could keep sliding. Why not? They’re already nearing the lows of 2009.

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Based on preliminary Census Bureau data, the American Iron and Steel Institute (AISI) reported that the US imported a total of 3,243,000 net tons of steel in July.

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

This includes 2,578,000 nt of finished steel (up 4.6% and 3.7%, respectively, vs. June final data).

On the year-to-date, through seven months of 2015, total and finished steel imports are 24,964,000 and 20,440,000 nt, respectively, no change and up 10% vs. the same period in 2014. Annualized total and finished steel imports in 2015 would be 42.8 and 35.0 million nt, down 4% and up 4% respectively vs. 2014 if they continue at this pace. The finished steel import market share was an estimated 27% in July and is estimated at 31% year-to-date.

Individual Steel Product Import Increases

Key finished steel products with a significant import increase in July compared to June are reinforcing bars (rebar). up 57%; plates in coils, up 29%; sheets and strip hot-dipped galvanized, up 26%; cold-rolled sheet, up 25%; heavy structural shapes, up 12%; sheets, strip and all other metallic coatings are up 12%; and cut-length plates are up 11%.

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

Major products with significant year-to-date import increases vs. the same period last year include line pipe, up 55%; rebar, up 51%; standard pipe, up 33%: sheets and strip hot-dipped galvanized, up 22%: tin plate, up 17%; plates in coils, up 16%; cold-rolled sheets, up 14%; heavy structural shapes, up 13%; and cut-length plates, up 12%.

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Coiledsteel

Get your short- and medium-term steel forecast!

China’s economic struggles have claimed a new victim: BHP Billion Ltd., which reported a 52% drop in full-year profit due, in part, to falling commodity prices, and has thus reduced its long-term forecasts for steel production in the Far East nation.

China also happens to be BHP Billion Ltd.’s largest customer and buyer of metals and energy, but with the yuan devalued, economic instability and supply gluts forecasting the slowest growth for the nation in more than 25 years, mining companies are bound to take a hit.

“The changes that we see in China at the moment are things that we’ve foreseen for several years,” Andrew Mackenzie, CEO, BHP, told Bloomberg Business. “China’s rate of growth would slow, but we still think it will be 7 percent this year.”

The company said in a statement that crude steel production in China will fall to between 935 million metric tons and 985 mmt over the next 10 or so years.

Want to know how this will affect future steel prices? Get your 30-day forecasts for steel and 9 other metal forms in our new Monthly Metal Buying Outlook report.

Global steel news: Indian companies affected by Asian imports

Meanwhile, in India, steel companies are asking their government for safeguards to protect domestic organization from the deluge of lower-cost imports from South Korea, Japan and China.

We reported last week that state-owned Steel Authority of India (SAIL) and several private steel makers, including Tata Steel, have jointly filed a petition with the Director General of Safeguards (DGS) requesting to undertake those safeguard duties.

Safeguards are measures implemented specifically to protect local organizations that surpass the measures from anti-dumping and countervailing as designated by the World Trade Organization.

You can find a more in-depth steel price forecast, including HRC, CRC, HDG and plate, in our brand new Monthly Metal Buying Outlook report. For a short- and long-term buying strategy with specific price thresholds:

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hand holding binoculars metalminer promo

Get your short- and medium-term buying strategy for industrial metals.

This is your last chance to register for Thursday’s webinar, PREVIEW: MetalMiner Price Forecasts for September at 10 a.m. CDT, featuring Lisa Reisman, executive editor, MetalMiner™ and John Conolly, managing director, Azul Partners.

Can’t make it live? Register anyway and we’ll send a copy of the slides and recording of the webinar for you to review at your convenience.

Whether you cast, form, or machine aluminum, copper, nickel, lead, zinc, tin or the many forms of steel, you need to source it. And when you source can play a significant factor in your bottom line. This webinar will provide a behind-the-scenes look at how we formulate our short- and medium-term price forecasts for these base metals. This is a must-attend for those interested in a September metal price forecast.

Register now!

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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.

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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.

Lower prices feeding into the US market will keep inflation low and may even put the US into a deflationary situation for a short while. Does the Fed really want to be increasing interest rates against that backdrop? No. September’s long-anticipated rate hike isn’t going to happen, indeed even one before November seems very unlikely now.

What Does This Mean for Metal Buyers?

Commodity bulls, if any exist, will say producers are operating below the cost of production and that can’t last, sooner or later capacity will close and prices will rise.

In part, they are right. 17% Of copper mines are producing at a loss according to the Financial Times, but with producers aggressively doing all they can to move down the cost curve it could be some time before enough capacity is closed to impact prices.

The situation is worse for aluminum. Chinese producers are still bringing new capacity on stream and with state-of-the-art technology they have some of the lowest production costs in the world. There is no prospect of a recovery in aluminum prices anytime soon even though demand has continued to rise robustly.

What Does This Mean for Oil Users?

Nor are oil prices likely to rise unless OPEC has a dramatic change of policy. China has been a bigger contributor to oil demand growth than any other nation in the past decade, so any slowdown in the Chinese economy may spell bad news for crude consumption the FT opines. Saudi Arabia, Iraq, Russia and others are pumping oil like its going out of fashion – which, in a way, it is. Just as significantly, though, the US shale industry has been more resilient than expected, and is now on the brink of potentially exporting, adding to global supply.

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

All in all, a rise in Fed rates seems about as unlikely as a rise in commodity prices. This would all be good news if it wasn’t for the fact that what’s driving both is a fear of a global slump, and that would most certainly not be good for anyone.

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RBC Capital Markets recently released updated forecasts for the gold and silver markets. Conventional wisdom says that safety plays such as precious metals outperform during periods of stock market weakness, but, as we’ve pointed out before, general commodity weakness is dragging down even traditional hedges such as precious metals along with their base metal cousins.

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With the market volatility of the last few days, one might think that silver and gold would see a rebound as investors, at least initially, abandon stocks and put their money into something reliable such as hard currency. Gold and silver are up, but the outlook for the precious cousins is still, at best, mixed.

Could gold's hedging value by renewed by falling stock values?

Could gold’s hedging value by renewed by falling stock values?

In the report, analyst Stephen Walker lowered his price targets for both gold and silver through 2018. RBC reduced its Q4 2015 forecast for gold from $1,300 an ounce to $1,150/ounce, a 12% reduction. For silver, RBC scaled back its Q4 2015 forecast by 15%, from $18/ounce to $15.25/ounce.

RBC believes that a Federal Reserve interest rate hike in a weak inflationary environment will pressure gold and silver prices. That hike got a little less likely, at least in the near term, in the last few days as the global stock market plunge happened. Cheaper imports from China mean lower prices and deflationary pressure in the US.

All of the precious metals we track on the MetalMiner Indx were up after Friday’s market selloff and gold held firm in a tight range on Monday in London, trading above $1,155 per ounce as China’s markets continued to plummet.

According to data gathered by Commodity Futures Trading Commission, last Tuesday the COMEX gold futures and options net position of managed money turned bullish for the first time in five weeks. Silver’s net position of managed money also was bullish last week after seven bearish weeks. Treasury bonds, another safe haven, saw their yields fall, as well. The 10-year Treasury yield fell below 2% for the first time in nearly four months and traded 7.8 basis points down on the day at 1.976%, its lowest point since April 28.

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

It is too early to tell if gold and silver will see their hedge appeal restored, but the conversation has significantly changed when it comes to interest rate hikes and weary investors may see silver and gold in a different light, depending on how long China’s market rout continues.

 

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