Articles in Category: Commodities

MonthlyMetalBuyingOutlook_May2016_210This month, What appeared to be a rally led by anti-dumping actions involving several different steel products turned into something bigger as China implemented stimulus measures, boosting demand growth not only for steel, but also for the rest of the base metal complex.

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U.S. shredded scrap prices started 2015 at $350 per long ton delivered to Midwest steel mills.

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Barring a very brief rally in June, the price fell every month over the year and dropped to $170/long ton in December. Indeed, if we look at the chart, U.S. ferrous scrap prices have been in a downtrend since late 2013.

U.S. Shredded Scrap Prices ($/long ton delivered US Midwest Mill)

steel_insight_scrap_300_050116

Source: Steel-Insight.

When prices fall every month, scrap yards and steel mills reduce their purchases to the bare minimum as they expect to be able to procure material at a lower price the very next month. Read more

In a rising price steel market, every manufacturer feels the squeeze but perhaps none more than the small manufacturer sourcing semi-finished and finished components and assemblies from China.

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The Chinese have recently taken to a number of tactics with smaller manufacturers. By sharing some of these tactics, buying organizations can begin adapting their sourcing strategies. Here are some of the tactics we have recently heard of:

  1. Mills have begun demanding immediate cash payment for all open orders in which buying organizations secured lower costs previously. If the buyer does not pony up an up-front payment, the customer loses the material and must pay the inflated market price.
  2. The small manufacturer must now pay a large premium to the in-country trade price (e.g. our MetalMiner IndX HDG price). By way of example, if HDG trades at RMB 3,990/metric ton and a small manufacturer historically paid a RMB 350-500 premium to the in-country price, today that same buying organization may be paying a 1,500-1,800 RMB premium.
  3. Oddly enough, scrap prices have not risen in China and, in fact, Chinese manufacturers have begun stockpiling scrap materials until further notice because scrap prices are trading at a steep discount to what they had traded for a year ago. We will explore a possible “why” momentarily.

What do each of these tactics suggest to us? I had a brief exchange with MetalMiner Co-Founder Stuart Burns who offered plenty of insight.

In terms of payment up front for open orders, Stuart suggested mills want to limit distributors and end users from taking speculative advantage of rising prices. Although it appears extreme, Stuart tells us despite the practice not occurring in recent years, it is indeed a fairly common Chinese business practice to demand advance payment for open orders.

And the large Chinese price premiums for hot-dipped galvanized prices? This should not come as a surprise to anyone, either. Mills want to command a substantial premium for undertaking smaller volume orders, otherwise producers would rather run flat out making standard commodity product in standard sizes and volumes.

Scrap Fetching “Only” RMB 720/mt?

This is perhaps the most significant Chinese steel news event at the moment. On the one hand, much of Chinese steel production is done via basic oxygen furnace, with fewer scrap requirements vs. electric arc furnaces, but, still, scrap is needed for all steelmaking. Furthermore, iron ore, coking coal and steel prices have all risen within China. So, why hasn’t scrap? Certainly if all factories are under strict orders to stockpile scrap materials, without a corresponding price increase, we can anticipate a potential glut of material during the summer months.

Our best guess would tell us that perhaps the mills had previously stocked up on scrap and are simply de-stocking.

Finally, Chinese Construction Activity

One of the most significant macro-economic factors we look to in determining price direction involves China. And the recent Chinese stimulus programs suggest that lax lending and stimulus have, indeed, spurred a new infrastructure economic boom.

Again, Stuart believes that speculative building has started again and has sucked steel into the market largely contributing to the first two points mentioned above: prepayment on open orders and a larger premium to the traded price because of this construction boom.

JP Morgan Chase & Co. believes the demand uptick from the program will taper off by the second half of this year because China doesn’t want to create an additional property bubble. But we remain skeptical. China has shown that shot-in-the-arm stimulus programs often turn into prolonged addictive habits and, therefore, this demand uptick could last longer than many anticipate.

What This Means for Small Manufacturers?

As we say in tight supply markets, all manufacturers will do better by making themselves a desirable customer to their suppliers. The negotiation dynamics have changed. Surety of supply may become a more critical issue than cost savings. Regardless, small manufacturers will want to evaluate current global sourcing strategies, particularly for steel products coming from China.

How do interest rates impact the value of a currency? Let’s review:

Higher rates mean higher borrowing costs, which usually make a currency more attractive to investors seeking higher yields than in other currencies. That’s exactly what happened to the U.S. dollar during 2014-2015 when we saw a dollar bull market built on expectations that the Federal Reserve would raise rates domestically while central banks around the globe would keep on lowering interest rates.

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However, the Fed is not hiking rates as fast as markets had expected. On top of that, there are many questions regarding the ability of banks in Europe and Japan to lower interest rates more from here. This caused the U.S. dollar to weaken this year, having a bullish effect on commodity markets and therefore, metal prices.

Japan Holds on Rates

Japanese Yen appreciates against the dollar

The Japanese yen appreciates against the U.S. dollar. Source: Yahoo! Finance.

The Bank of Japan kept interest rates unchanged last Thursday despite coming under pressure to take further action. The yen surged more than 3% against the U.S. dollar after the announcement, its biggest one-day gain since May 2010. Read more

Markets are unpredictable. Picking a bottom is a difficult task as things can change quickly. However, for the first time since 2011, we are seeing enough positive signals to believe industrial metals might have bottomed out.

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A broad recovery might be underway and metal buyers should have a plan. “Commodity price risk” might become a highly popular Google search again.

Why is the picture turning bullish? First of all, the two main drivers of metal prices are finally giving some bullish signals for the overall metal complex.

CRB commodity index hits 5-month high

CRB commodity index hits 5-month high. Source: MetalMiner analysis of @StockCharts.com data.

The dollar has weakened since January, and it’s certainly showing no signs of strength. Second, and perhaps more importantly, the sugar rush of China’s not-so-mini fiscal stimulus, initiated late last year, has really picked up momentum in the first quarter. Read more

Details of another hack are at the heart of U.S. Steel‘s section 337 complaint, including what it calls theft of lucrative automotive alloy Dual-Phase 980. Chinese commodity futures trading volumes are hitting records despite attempts by regulators there to rein in speculation.

U.S. Steel Alleges Dual-Phase 980 Stolen by China

According to filings with the International Trade Commission, U.S. Steel claims a forensic analysis into an alleged 2011 illegal hack of its systems by culprits based in China — one that used a similar method as the confirmed 2014 hack of U.S. Steel and other companies by the Chinese military — included stealing plans for the chemistry for an automotive specialty steel alloy and its coating, the necessary temperature for heating and cooling the metal and the proper layout of its production lines.

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The automotive steel is one of U.S. Steel’s most popular products, Dual-Phase 980, that can withstand more than 140,000 lbs. per square inch, making it a light, strong metal coveted in the lucrative automotive market for its safety as well as its ability to meet government weight standards.

Two years after the 2011 hacking, China’s Baosteel Group, the world’s fourth-largest steelmaker, started selling a new line of products that included Dual-Phase 980. U.S. Steel says it can prove to the ITC that the product was stolen in the 2011 hack.

Chinese Commodity Futures Hitting Records

Commodity futures linked to China’s vast steel sector rebounded sharply on Friday, Reuters reported, led by iron ore and rebar, as robust construction demand spurred buying even as the country’s regulator ordered exchanges to rein in speculative trading.

Big bets on Chinese commodities futures this year from hedge funds, retail investors and others have driven up contracts on everything from iron ore to cotton, prompting many analysts to warn of parallels with a boom in China’s stock markets that ended in a sharp crash last summer.

Steelmaking raw materials iron ore, coking coal and coke ended April with their biggest monthly gain on record.

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Rebar, a construction steel product, also posted its biggest monthly rise ever, with volumes in the most-traded contract in Shanghai hitting a record 1.4 billion metric tons, enough to build San Francisco’s Golden Gate Bridge more than 15,000 times over.

The trigger to the recent increases in steel prices may have been a report by the World Steel Association that reasoned in its short-demand demand report that the increasing output and capacity utilization rate from February to March 2016 could be indicative of a recovery in the primary steel market’s fundamentals in both the European Union and North American Markets.

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Global investment bank Credit Suisse, in its report highlighted four “major changes” that had taken place of late, indicative of a cycle turn. It said one of them was that the inventory cycle had bottomed out globally. Given the extent of destocking and current inventory levels. Restocking could last more than the usual six-to-nine months. Any uptake in demand could further prolong restocking. Read more

As if to underline just how much of the recent froth in commodity prices has been speculative, it took nothing more than a tightening of rules to bring the market off the boil.

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Iron ore, steel and non-ferrous metal markets in China — and by association the London Metal Exchange after opening — dropped following a decision by futures exchanges in Dalian, Shanghai and Zhengzhou to increase trading margins and fees. The most-traded contracts were down up to 4.6% in response.

Some Commodities Are Actually in Short Supply

Not all commodities dropped. Some experienced genuine supply tightness, such as coking coal wherein many of the domestic mines and ovens closed last year due to low prices, and bucked the reversal. Coking coal continued to rise and although iron ore did fall back. The fundamentals are a little more supportive following announcements by producers that they will limit output, but, in truth, even iron ore’s price increases are more due to speculative bullishness than a genuine tightness of supply. Read more

Saudi Aramco released an IPO plan of sorts about how it plans to diversify from being the world’s largest energy company to being much more and the Federal Reserve, as expected, left rates unchanged.

Saudi Aramco’s New Plan

The world’s biggest energy company, Saudi Aramco, outlined financing plans on Wednesday that will support its expansion into new areas under a sweeping economic reform plan released in Riyadh this week. The reforms envisage Aramco transforming itself from an oil and gas firm into a “global industrial conglomerate” involved in many sectors and services, using its vast financial resources to create jobs and help diversify the Saudi economy beyond oil.

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The plans suggest Saudi Arabia’s state oil company, which Deputy Crown Prince Mohammed bin Salman estimated this week was worth over $2 trillion, aims to move rapidly into a new role offering diversified services such as shipbuilding and offshore rig services in the near term.

Fed, As Expected, Leaves Interest Rates Unchanged

Federal Reserve officials left interest rates unchanged and remained ambiguous about raising rates in June as mixed global economic signals and low inflation at home weighed on policy makers struggling to spark robust growth seven years after the recession’s end.

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In a statement Wednesday after a two-day meeting, the Fed stuck to its longstanding plan to move carefully on raising the benchmark federal-funds rate, which it has held between 0.25% and 0.50% since December, when it raised short-term rates after holding them near zero since 2008.

The Financial Times wrote this week that a key driver of bullish sentiment for many asset classes, particularly emerging markets and commodities, has been the U.S. Federal Reserve lowering its estimate of policy tightening this year, but for metals the knock-on effect of that has been a weaker U.S. dollar which — as my colleague Raul De Frutos has written recently — remains a key driver of both price direction and sentiment.

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Equally, if not more important, though, has been the sugar rush of China’s not-so-mini fiscal stimulus, initiated late last year which has really picked up momentum in the first quarter. Across a number of metrics, China’s economy has surged this year driving a risk on sentiment among investors, the strength of which has caught many by surprise.

Stimulus-Driven Bull Market

Chinese speculative investors have piled into the country’s commodity markets betting the upturn has the potential to boost demand for those materials. Wider sentiment has helped, according to the London Telegraph, new home sales jumped 64% in March from a year earlier. Housing prices have risen 28% in Beijing, 30% in Shanghai, and 6% in the commercial hub of Shenzhen. Read more