Articles in Category: Commodities

There is widespread agreement and considerable evidence to suggest the global weather patterns of El Niño and La Niña can have a significant impact on commodity prices.

But impacting average temperatures and rainfall as these weather patterns do, the most significant impact is, not surprisingly, on agricultural commodities in the grain sector.

Benchmark Your Current Metal Price by Grade, Shape and Alloy: See How it Stacks Up

As Agriweb observes, “Dry weather conditions in the U.S. can threaten the development of corn, soybeans and wheat crops, and dry conditions in Argentina and southern Brazil can impact corn and soybeans.”

El Niño and La Niña broadly act as opposites, reflecting as they do the interaction of large areas of warm water in the Pacific with global weather patterns. We were under the influence of El Niño effects last year, but have recently moved into conditions meeting the La Niña pattern. The La Niña pattern is characterized by a shrinking of a large pool of warm water in the Pacific as a strengthening of westbound trade winds carry warm surface water from the east to west and allow an upwelling of colder waters in eastern regions. The overall temperature of surface water decreases and on the western side of the Pacific the arrival of warmer waters increases rainfall while on the western side cooler temperatures tend to reduce rainfall, resulting in drought conditions. The last La Nina year was 2011-2012 where drought conditions caused a grain prices to surge.

According to the Climate Change Centre, drawing on work by the National Oceanic and Atmospheric Administration (NOAA), NOAA’s National Weather Service, released in a recent report, “El Nino/Southern Oscillation (ENSO) Diagnostic Discussion,” La Niña conditions have a 65-75% chance of prevailing through to the February-April 2018 period.

But what impact can this have on metal markets?

Clearly, mining and metal extraction are less weather-dependent than the growing of crops. However, while a shortage of water for the irrigation of field crops can be dramatic for crop yields, it can also be significant for the generation of hydroelectric power for the mining sector and metal smelting in certain regions of the world.

As the above graph from a University of Sydney School of Economics paper last year illustrates, in La Niña years rainfall can be reduced in areas like the eastern Pacific such as Chile and Peru. The reverse can be the case in southeast Asia and Australia, where excessive rainfall has caused flooding and resulted in supply disruption for mining companies in the iron ore, tin and bauxite markets prompting price rises over short timeframes.

The paper suggests 20-30% of metal price variations at the one-to-two year horizon can be attributed to El Niño/La Niña oscillations.

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As a more frivolous aside, for anyone yet to book their winter ski vacation in North America this year, the developing La Niña would suggest the current outlook favours above-average temperatures and below-median precipitation across the southern tier of the United States, and below-average temperatures and above-median precipitation across the northern tier of the United States.

So, head to the northern Rockies for the snow and colder temperatures.

Before we head into the weekend, let’s take a look back at the week that was:

Benchmark Your Current Metal Price by Grade, Shape and Alloy: See How it Stacks Up

Free Download: The November 2017 MMI Report

The CRB index has once again breached a ceiling, signaling a strong rally.

Benchmark Your Current Metal Price by Grade, Shape and Alloy: See How it Stacks Up

The CRB index now stands just 1.5 points below its 2017 peak, which occurred at the beginning of the year.

Source: MetalMiner analysis of TradingEconomics

Oil prices have led the latest commodities rally.

Energy accounts for up to 39% of the entire commodities basket, and oil serves as one of the largest energy components of the index.

Actual output cuts from Saudi Arabia, as well as political turmoil, have led the oil price surge. Oil prices have traded sideways for a long time, and at some point in time would have changed direction.

Source: MetalMiner analysis of TradingEconomics

Industrial Metals

Contrary to commodities, industrial metals have fallen slightly this month.

The base metals bull rally has slowed down, creating price pullbacks. Price pullbacks often occur in bullish markets, especially those metals with high volatility. Furthermore, price pullbacks create buying opportunities.

Source: MetalMiner analysis of StockCharts

In rising markets, buying organizations will want to follow how commodities, industrial metals and each particular metal behaves before committing to purchases.

Free Download: The November 2017 MMI Report

To learn more about how to reduce risks when committing to long-term purchases and when to just buy as needed, check out our free Monthly Outlook trial.

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Searching for a return and shying away from an already record equities market, investors are getting back into commodities.

Benchmark Your Current Metal Price by Grade, Shape and Alloy: See How it Stacks Up

Not all commodities, it has to be said, but squeezed fundamentals and solid global GDP growth are encouraging investors to get back into oil and some metals — like copper and zinc — after several years of poor commodities performance.

The S&P has gained 82% in the last five years, while the S&P Goldman Sachs Commodity Index (GSCI) has dropped by 34% as commodities have been out of favor.

But the fundamentals are changing for many commodities this year, encouraging renewed interest in the sector among fears that equities my soon top out.

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AdobeStock/Stephen Coburn

Before we head into the weekend, let’s take a look back at the week that was.

Benchmark Your Current Metal Price by Grade, Shape and Alloy: See How it Stacks Up

Free Sample Report: Our Annual Metal Buying Outlook

AdobeStock/Stephen Coburn

The oil market is in a state of high excitement.

Benchmark Your Current Metal Price by Grade, Shape and Alloy: See How it Stacks Up

In the space of just a week or so, analysts have gone from being pretty sanguine about the possibility of price rises — giving muted credit to OPEC and its partners in stemming the flow of excess production and stabilizing the market – to talking about Brent crude hitting $75 a barrel before the end of the year.

True, that suggestion by Bank America Merrill Lynch was a bit of an outlier, but several are talking of $70 being possible, according to the Financial Times.

So, what’s stirred the oil market?

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Industrial metals are in the grips of a bear market, various outlets report, and one of the main narratives sounds like a case of the market having its cake and eating it too.

Benchmark Your Current Metal Price by Grade, Shape and Alloy: See How it Stacks Up

The FT reports that the oil price, as referenced by the Brent crude quotation, has topped $60 a barrel for the first time in two years.

The article quotes various sources suggesting that while demand is strong, the rise in prices is driven more by supply constraints than by a sudden surge in demand (which caused the China-inspired super-cycle in the last decade). This time, a combination of reduced investment in new capacity (resulting from low prices in recent years) and the OPEC-led production constraints initiated in November 2016 are gradually tightening the market. Trader Trafigura is quoted as predicting demand will outstrip supply by as much as 4 million barrels a day by the end of the decade as supply becomes under better control and the U.S. shale industry fails to make up the delta between supply and gradually rising demand.

That’s where the have the cake and eat it too part comes in.

At the same time, industrial metals are rising strongly. Copper passed $7,000 per ton last month and aluminum is knocking on the door of $2,200 per ton. The cobalt price has doubled in the last 18 months and nickel, long in the doldrums due to over-supply and poor demand from the stainless sector, has also been on the rise due to projected battery demand from electric vehicles and charging infrastructure.

On the face of it, this appears like investors are picking and choosing their good news. If electric vehicles are such a strong bet that metals demand is set to soar, then surely oil demand is set to collapse. That prospect should undermine the oil price, you may reasonably suggest.

If only it were that simple.

Even a doubling of battery production would suggest an extra 750,000 vehicles based on 2016 global electric vehicle and hybrid production of 773,600 units, according to EV-volumes.

There was modest, by global light vehicle sales, of 90 million units in 2016, just 0.86%. Yet for cobalt, it’s still significant when you consider the battery industry currently uses 42% of global cobalt production, so an ongoing rise of 42% increase in lithium ion battery demand (2016 over 2015) would be highly disruptive to cobalt demand.

Plug-in vehicle sales grew 20 times faster than the overall market, justifiably causing concern that cobalt supply could be strained by this one market application.

Worryingly for cobalt, the fastest-growing market is also the largest.

Driven by government subsidies, the Chinese market, at some 351,000 units last year, also grew at 84% over 2015. The switch to EV and PHEV cars is part of Beijing’s drive against pollution, so incentives are not likely to be relaxed anytime soon. Growth of this magnitude dwarfs the 13% and 36% growth rates in Europe and the U.S., respectively.

Free Sample Report: Our Annual Metal Buying Outlook

No wonder cobalt prices have doubled and yet oil prices have virtually ignored the message the rise in EV sales is telling us. One is major disruption to a small, constrained and geographically, supply market, while the other is a long-term trend to a still growing vast supply and demand market that will take years to impact consumption figures.

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Tin prices decreased last month with high volatility. The drop in prices appears similar to a pattern that took place in February and June.

Benchmark Your Current Metal Price by Grade, Shape and Alloy: See How it Stacks Up

Source: MetalMiner analysis of FastMarkets

Price drops of this magnitude on heavy trading volume usually point to price weakness. However, this year tin prices have recovered from similar price drops.

Before the latest price drop, tin prices increased somewhat dramatically. The price increase  occurred on heavy buying volume, and tin prices looked poised to follow other base metals for a bull run.

Readers might remember that tin outperformed many other base metals last year. Tin prices rallied throughout 2016. Tin prices began to waver only in the beginning of this year, which then pushed tin into more of a sideways trend and/or up-and-down trend.

Source: MetalMiner analysis of FastMarkets

Despite the volatile drops, tin prices appear to keep returning to the same levels throughout this year. Although price drops appear hard to predict, they often appear as buying dips for buying organizations.

What About Industrial Markets?

To understand the industrial metals complex, MetalMiner analyzes the underlying DBB index trend. Both the long- and the short-term trends still point to a bullish market.

Source: MetalMiner analysis of Stockcharts

Even if the DBB index fell in September — caused by price retracement in some base metals, such as copper or nickel — no doubt October saw a big increase. Most base metal prices increased this month, driving the DBB index to higher levels.

The CRB index (commodities) has also traded higher this month, correlating again with the DBB index. We still expect upside movements for most base metals and the DBB index.

Free Sample Report: Our Annual Metal Buying Outlook

What Does This Mean for Buying Organizations?

Tin price drops appear as buying dips. However, given current market trends, buying organizations should be watching closely as to when to commit purchases to reduce risks. At the beginning of October, MetalMiner published a long-term perspective for base metals and steel.

For those who want to reduce risks when committing purchases, MetalMiner analyzes the market each month. Readers can take a free trial now or subscribe to the Monthly Outlook. 

Antony McAulay/Adobe Stock

Iran didn’t need to take a cue from its arch enemy Saudi Arabia’s success with its Alcoa joint venture Ma’aden Aluminium smelter and downstream operations — just about every Middle Eastern natural-gas producer with production to spare has invested in aluminum smelting as an easy win outlet for vast natural gas reserves.

Benchmark Your Current Metal Price by Grade, Shape and Alloy: See How it Stacks Up

Exporting natural gas as liquefied natural gas (LNG) is a profitable business, but building the infrastructure is costly. An alternative is building an aluminum smelter, which is also costly but arguably yields a higher value add.

According to AluminiumInsider, the Iranian Mines and Mining Industries Development and Renovation Organization’s (IMIDRO) Amir Sabagh told Platts the firm was in the midst of building a 300,000-metric-ton-per-annum aluminum smelter in the southern coastal province of Bushehr.

Funding is still problematic for Iranian firms, so it is no surprise the Chinese are involved, with China Nonferrous Metal Industry’s Foreign Engineering and Construction Co. largely footing the bill.

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Before we head into the weekend, let’s take a look back at the week that was.

Benchmark Your Current Metal Price by Grade, Shape and Alloy: See How it Stacks Up

  • Holidays in India mean an uptick in gold buying — our Sohrab Darabshaw covered India’s holiday gold surge.
  • The fourth round of renegotiation talks focused on the North American Free Trade Agreement (NAFTA) concluded earlier this week. We covered the latest round of talks, which by all accounts have the three negotiating teams at an impasse.
  • As the fallout continues from Kobe Steel’s quality data falsification scandal, our Stuart Burns wrote about what exactly might have gone wrong at Japan’s third-largest steelmaker.
  • The World Steel Association’s Short Range Outlook came out this week, predicting solid, albeit moderated growth for the global steel market.
  • Precious and base metals have been behaving similarly, our Irene Martinez Canorea wrote this week.
  • The U.S. International Trade Commission launched a new Section 337 probe related to automation systems.
  • The value of the U.S. dollar has a significant impact on the fortunes of a number of metals, our Stuart Burns explained.
  • And how about palladium? Burns also touched on the rise of the platinum group metal and its leapfrogging of platinum (for the time being).
  • It’s third-quarter earnings report time. Alcoa and Nucor were among the latest companies to announce their earnings for the latest quarter.

Free Download: The October 2017 MMI Report