Articles in Category: Commodities

Domestic HRC steel prices have surged 67% since they hit a floor just six months ago.

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The duties imposed on steel products caused imports to taper down in a big way this year and U.S. steel mills now have the power to raise their base selling prices. Moreover, China’s stimulus measures boosted demand for steel in this first half, causing prices in China to rise, too.

Domestic HRC prices continue to surge

Domestic HRC prices continue to surge. Source: MetalMiner Index

Earlier this month we’ve heard many analysts say the recent steel price rally was purely speculative, without a fundamental justification for the price swings, as steel-rebar and iron-ore futures traded in China went into sharp decline in recent weeks. However, U.S. domestic prices are rising without looking back, at least for now.

Higher U.S Steel Prices: Is That What We Really Want?

Some firms have lost a ton of money in recent years as China created global oversupply, bringing global steel prices down with massive exports. In the face of rising imports, American production has dropped and U.S. steel producers are justifiably unhappy with the circumstances.

Now U.S. policymakers seem determined to follow a protectionist path because, truth to be said, it’s unfair that a company has to go out of business because of the stupidity of Chinese policymakers. These protectionism measures might or might not help the U.S. steel industry in the long-term, however, this raises another question: will this really help the broader U.S. economy?

Steel Exports, Tariff Economics

The cost of import restrictions directly equals the harm they do to manufacturers of value-added products that use steel as an input. According to Department of Commerce statistics, downstream steel manufacturers that utilize steel generate much more jobs and wealth to the U.S economy than what metal manufacturers generate.

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This subject is very controversial and, perhaps, there is not a right answer to the issue as someone is always going to get hurt. What’s true is that China is losing money in the form of subsidies to save its steel industry and keep its massive population employed, and by doing that China is actually transferring so much of its wealth into the U.S. by selling low-priced steel. Which, doesn’t sound as bad as U.S. steel producers make it sound

In exactly 30 days the people of Britain will vote on whether to leave the European Union.

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For the people of the U.K., and indeed the rest of Europe their decision could be a turning point in the future of their country and the wider European community. It is no exaggeration to say Britain’s exit could spark the break-up of the E.U.

The near-miss Austria experienced yesterday in voting in a far right president illustrates how extreme tensions within the European Union have become. Only by all the opposing parties supporting pro-E.U. Green party socialist Alexander Van der Bellen were they able to beat the far-right Freedom party candidate Norbert Hofer from becoming head of state, the margin was a miniscule 31,000 votes out of an electoral return of 4.64 million.

Angry Voters

Dissatisfaction with the E.U., supported by fears of immigration destroying the social fabric and cultural heritage of societies across the continent, has played a major part in not just the U.K.’s referendum but in the rise of both far-right and far-left parties across Europe in recent years.

Anecdotal evidence can be very misleading, dependent as it is on the social mix such opinion is garnered from and the geographic location. Until recently, the decision in the U.K. seemed on something of a knife edge, particularly in the weeks following the announcement by Boris Johnson, London’s charismatic former mayor, that he was actively campaigning for the Leave vote, but in recent days the markets at least have been pricing in a Stay outcome, as evidenced by the strength of sterling.

Investment Sentiment

Indeed, a poll this week showing a late swing by older voters to maintain the status quo resulted in a sharp jump in the value of the pound as this FT graph shows.

Source: Financial Times

Source: Financial Times

Alluring as the Leave campaign’s image of a free and unrestricted future for the UK would be, most are coming to realize such an outcome is unlikely to be achievable. The least-damaging outcome in the months after leaving would be for a quick trade deal with the rest of the E.U. Read more

12 Global steel trade associations today released a statement urging the leaders of the G7 nations to take steps to address the current global steel overcapacity situation which is negatively affecting economies, industries and workers around the world.

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The American Iron and Steel Institute, the Japan Iron and Steel Federation, Eurofer (the European Steel Association), Canadian Steel Producers Association, UK Steel, the German Steel Federation (WV-Stahl), Alliance des Minerais, Minéraux et Métaux (A3M), Federacciai (the Federation of the Italian Steel Companies), the Steel Manufacturers Association (SMA), the Committee on Pipe and Tube Imports (CPTI), the Specialty Steel Industry of North America (SSINA), and the European Steel Tube Association said:

“Government support measures and other policies have contributed to significant global excess capacity in steel, unfair trade and distortions in steel trade flows around the world. Among other things, these market-distorting government policies have prevented adequate industry adjustment in some markets in response to changes in global demand. This is an issue of concern in countries where government policies encourage steel capacity growth without regard to market signals, or where government actions sustain uneconomic or consistently loss-making steel plants that otherwise would exit the market.

“Steel producers in the G7 nations, and elsewhere around the world, highly appreciate intergovernmental attempts so far to cope with the global overcapacity issue, and urge their governments to take urgent action to address this global problem, building upon the work program outlined by high-level government representatives in Brussels in mid-April to address the overcapacity and adjustment challenges facing the steel industry,” the statement, in part, read.

“It is critical that all major steel-producing nations participate in efforts to eliminate trade-distorting policies that are contributing to the current steel crisis,” it continued. “Otherwise, as was noted at the OECD Steel Committee meeting in May 2015, ‘a failure to address or halt market distortions will result in subsidized and state-supported enterprises surviving at the expense of efficient companies operating in environments with minimal government support.’

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“In this regard, we urge the G7 summit in Japan to discuss the need to maintain effective remedial measures, consistent with their WTO rights and obligations, against exports from countries in which market economy conditions do not prevail.”

The scrapping of rare earths export quotas late last year resulted in soaring exports from China which produced 84% of total world rare earths output of 124,000 metric tons, but prices have fallen to multiyear lows in 2016 in response to low demand and oversupply.

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Oxide shipments more than doubled in Q1 2016 at 11,956 mt. March was the second best month on record. That was despite expectations that exports were expected to drop off dramatically this year after December when cargoes hit a record high of nearly 5,000 mt as users built up inventories ahead of the Chinese new year.

Exports Up, Demand Down

Exports of dysprosium surged five-fold while neodymium shipments jumped more than 300%. The Chinese government plans to complete the consolidation of its rare earth industry under six large state-owned firms — Chinalco, Northern Rare Earth, Xiamen Tungsten, China Minmetals, Southern Rare Earth and Guangdong Rare Earth — by the end of June, deputy industry and information technology minister Xin Guobin said.

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Much of the expected consolidation in China was slowed in the first two quarters by the weak market and stimulus at home that has led miners and domestic producers of smartphones and cars to increase production despite demand not moving much at all. If rare earths are to make a comeback in the second half of the year, actual end user demand will have to increase independent of government stimulus.

All industrial metals have rallied this year after they hit new lows in January.

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Some metals — such as steel, zinc and tin — have gained significantly while others such as aluminum, copper, nickel and lead haven’t made much progress yet. The price rally is not really being driven by supply cuts but by a combination of a weak dollar and the sugar rush of China’s stimulus, initiated late last year. We could be witnessing the end of this five-year-long commodity bear market, however, there is something rotten about this rally.

Chinese Stock Market Has Yet to Find Traction

China stock market ETF weakening since April

China stock market ETF weakening since April. Source: @StockCharts.com.

China’s stock market is possibly the best benchmark for China’s economy or at least investors’ sentiment on China. The slowdown in the Chinese economy (weak demand while too much capacity) explains why industrial metals peaked in 2011.

Ever since, China’s stock market has fallen with commodity prices. Earlier this year we witnessed a rally in the Chinese stock market but the rally has been shy so far and it has, indeed, weakened since mid-April amid worries that Beijing might pull back on monetary stimulus while it steps up structural and financial reforms even as the economic recovery struggles to gain traction. The stock market weakness also comes after worse-than-expected economic data for April, suggesting that the financial stimulus package unleashed in China earlier this year could be losing its impact.

Base metals ETF (in brown) rising with China stock market ETF (in blue)

Base metals ETF (in brown) rising with China stock market ETF (in blue). Source: @StockCharts.com.

In the chart above we see how China’s stock market rose as China unleashed its stimulus program back in 2009 and how metal prices surged with it.

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While overcapacity is still a problem, we’ll likely need to see China’s stimulus measures make a significant impact and that should be reflected in its stock market. A good start would be China’s stock market rising above April’s levels. Otherwise, metal bulls can only hope for a choppy market.

Business news is full of doom and gloom for the metals sector, but for consumers it really couldn’t be better.

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Goldman Sachs is reported in a recent article as saying recent price gains this year may be seen as a swansong for the sector and prices are expected to fall back later this year as the underlying fundamentals reassert themselves over the recent speculative euphoria that has driven prices higher, particularly in China.

There is still mine oversupply. Source: Adobe Stock/nikitos77.

There is still mine oversupply. Source: Adobe Stock/nikitos77.

As we have come to expect with metals prices, so much has to do with China, whether it is demand in the case of iron ore, copper, nickel or supply as in the case of steel or aluminum, China dominates the landscape and calls the shots — whether its intends to or not. Read more

As we recently reported, the West’s energy watchdog, the International Energy Agency, faces a possible legal split from its parent body, the Organization for Economic Cooperation and Development, following decades of friction and fresh disagreements over cooperation with China.

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A document seen by Reuters shows that the complexity of cooperation between China and Western organizations such as the OECD, which has a stated commitment to democracy and market economies, has created friction between the two organizations.

The IEA, whose role includes coordinated stocks releases to address global oil shortfalls, could leave the Paris-based OECD, which sent a letter to the IEA in April, proposing the split. The argument has everything to do with China and the difference between market economies and China’s planned one.

“The IEA started negotiating with China in 2016 to establish an IEA center in Beijing, without prior consultation with the OECD which, as the IEA was aware, was itself negotiating with China to create a policy center and a country office,” the document said.

Created in 1961 to stimulate economic progress and world trade, the OECD originated from the Organization for European Economic Co-operation, set up in 1948 to help administer the Marshall Plan to reconstruct Europe with U.S. financial aid.

The IEA was established in 1974 at the proposal of then U.S. Secretary of State Henry Kissinger to help industrialized nations deal with the oil crisis after the Arab embargo squeezed supplies and sent prices surging.

Since then, energy markets have changed radically. OPEC no longer has the same power and non-IEA China has overtaken the U.S. as the biggest energy user. The fight between the two organizations highlights the difficulty regulators face in attempting to work with China and account for its energy consumption using rules and regulations that were largely designed for market-based economies.

IEA Executive Director Fatih Birol made strengthening ties with emerging powers the agency’s top priority, choosing China for his first trip into the job and breaking with the practice of previous chiefs, who began their tenure by visiting an IEA country.

The OECD groups 34 of the world’s leading economies and has about 2,500 staff. The IEA has 240 employees and 29 member states, all of which are also OECD members.

Under its autonomous status, the IEA’s governing board consists of energy ministers of member countries, which contribute four fifths of its budget of around $30.74 million (27 million euros) with the rest generated from sales of publications.

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Even if OECD and IEA are able to work out their differences and continue to work together, the problem of trying to recognize China’s massive buying power while also regulating it the way that a market economy would be is one that won’t go away any time soon.

Improvements in commodity markets made copper prices hold above the lows recorded in January but investors are not yet excited enough to trigger a bull run in copper prices.

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We noticed in March that copper, aluminum and nickel were lagging badly in this year’s industrial metals rally, and they still are. Copper fell this week below $4,600 per metric ton, the lowest level in two months.

3M LME Copper hits 2-month low

Three-month London Metal Exchange Copper hits a two-month low. Source: Fastmarkets.com.

Overcapacity issues are still visible. Last December, a group of Chinese smelters announced intentions to cut refined copper output. However, recently, China’s largest copper producer,Jiangxi, said those output cuts have been offset by new capacity there.

More Expansion

Also, earlier this month, Rio Tinto Group approved a $5.3 billion expansion to more than double output at the Oyu Tolgoi copper mine in Mongolia, making it one of the world’s largest copper mines. Rio is also expanding its iron ore efforts. Even though almost everyone seems to agree that the market is oversupplied, copper producers seem quite optimistic on the long-term picture. Read more

The Commerce Department delivered final determinations in the case of Chinese cold-rolled steel this week, and while Commerce upheld the 265% duties initially placed on the imports, the agency also added 256% countervailing subsidy duties, nearly doubling the duties on Chinese cold-rolled.

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It’s safe to say the gauntlet’s been thrown down when it comes to Chinese steel imports. Doubling up the duties shows that Commerce finally isn’t kidding around and that the reforms passed by Congress last year have teeth.

Freight train with cargo containers passing by

Freight, whether by boat or by train, is being checked and inspected more vigorously by U.S. Customs and Border Protection.

Still, we wondered what effect this would have on U.S. manufacturers. Not only the ones accustomed to lower prices from foreign imports, but also the ones who export their finished goods to China. To paraphrase J.R.R. Tolkien, open trade war is upon you whether you’d risk it or not!

Chinese Response

China’s not taking it with a grain of salt, either. The Ministry of Commerce said on Saturday that it was gearing up for a legal challenge over the steel duties, most likely by opening an arbitration panel in the World Trade Organization.

The WTO is a better venue for China than Commerce or the U.S. International Trade Commission, which is likely why most Chinese steelmakers did not respond to Commerce’s requests for information in the cold-rolled case. What more might come out at the WTO is anybody’s guess.

“China will encourage and support its steel companies to defend themselves according to law, and China will safeguard the legitimate rights and interests of its steel companies using World Trade Organization rules,” the Ministry said in a statement today, less than 24 hours after Commerce announced further investigations into China’s steel industry.

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Understandable since there probably aren’t even any Chinese steel mills that can make money exporting goods to the U.S. with 522% tariffs upon entry. My colleague Katie Benchina Olsen reported this week that Customs and Border Protection is getting better at flagging trans-shipments and other tricks to avoid the duties, too.

The trade war is definitely on. Whether it ends quickly is up to the countries and companies involved.

U.S. Crude oil reserves unexpectedly jumped this week and major miners and trying to move older assets but can’t close deals because of cleanup costs.

Crude Oil Reserves Rise

U.S. crude oil stockpiles rose unexpectedly last week even as gasoline and distillate inventories fell more than expected, data from the Energy Information Administration showed on Wednesday.

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Crude inventories rose 1.3 million barrels in the week to May 13, compared with analysts’ expectations for a decrease of 2.8 million barrels and a 1.1 million-barrel drawdown reported on Tuesday by the American Petroleum Institute.

Miners Can’t Afford to Older Pits

Major miners are trying to avoid hundreds of millions of dollars in closure costs by selling off pits, as cash is tight due to a prolonged commodities price slump, but the crippling cost of environmental rehabilitation is making it tough to seal deals.

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Where mine sales have gone ahead, production is being prolonged, adding to oversupply in depressed markets, like coal.