Articles in Category: Commodities

Gold bears have had quite a ride since the start of this year. The price spiked to $1,286 per ounce last week, a rise of 11% since the end of last year as this chart courtesy of the Financial Times shows.

Gold in 2017

Source: Financial Times

Despite a gradually improving global economic picture, geopolitical tensions have increased in recent months first with Syria and more recently with President Donald Trump’s announcement that he was prepared to take military action in North Korea.

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In Europe, investors looking to protect themselves against the political risk associated with the first round of the French presidential elections where the fear of a shock victory by the far right leader Marine Le Pen was considered a distinct possibility. During this same period, the U.S. dollar has weakened somewhat in value and with gold inversely correlated to the currency, as the dollar falls gold, and other commodity prices, rise.

Well, what a difference a week makes. North Korea has shown itself to be less capable and in the face of a tougher stance from America, less belligerent than during previous bouts of posturing.

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In the French elections, the least bad option, Emmanuel Macron, has emerged victorious from the first round over Marine Le Pen with nearly all observers expecting he will win through in the second round of voting on May 7. Later this week we should hear President Trump’s tax policies which are widely expected to include substantial reductions in personal and corporate tax rates. On the back of solid U.S. and global economic growth, such inflationary fiscal stimulus will only hasten further U.S. Federal Reserve rate increases. Not surprisingly, Goldman Sachs is not alone in predicting further weakness in the gold price, which weakened promptly on the news of the French elections and is targeted by Goldman to fall to $1,200 per ounce this summer. While not a universal truth, Goldman Sachs predictions do tend do have an element of being self-fulfilling simply because so many investors take their advice into consideration when making investment decisions.

Gold Bears

These gold bears haven’t had as big a run as their metals brethren. Source: Haribo

Of course, there remain counter arguments as to why the gold price may yet rise. Trump’s presidential decrees are easier to make than getting legislature onto the statute book. Proclamations this week over the tax reduction will likely meet a more favorable Republican response than there was the case with healthcare but, even so, may be much delayed or watered-down before having any impact on the economy.

Likewise, U.S. growth could slow reducing the impetus for the Fed to deliver on its three expected rate increases this year. The Fed has frequently undershot rate rise expectations over recent years. Finally, our friend in Pyongyang has the ability, and no doubt inclination, to still do something stupid despite pressure being brought to bear to back down by his Chinese bankers. On balance, though, gold bears have probably had as good run this year as they are likely to get and profit-taking is now inevitable for all but long-term holders of the yellow metal.

Oil prices slipped nearly 1% on Monday, extending last week’s decline, on lack of confirmation that OPEC will extend output cuts until the end of 2017 and as Russia indicated it can lift output if the deal on curbs lapses.

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Russian oil output could climb to its highest rate in 30 years if the Organization of the Petroleum Exporting Countries and non-OPEC producers do not extend a six-month supply reduction deal beyond June 30, according to comments by Russian officials and details of investment plans released by oil companies.

Freeport Gets Copper Export License

Freeport-McMoran Inc. has secured a permit to resume copper exports from Indonesia on Friday after a hiatus of more than three months, hours after a state visit by U.S. Vice President Mike Pence, who discussed the copper miner’s dispute with Jakarta.

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Indonesia’s trade ministry issued Freeport with a permit to export 1.1 million metric tons of copper concentrate up to February next year, although it was unclear how long shipments would last.

Philadelphia Energy Solutions Inc., the largest refiner on the U.S. East Coast, will not be taking any rail deliveries of North Dakota’s Bakken crude oil in June, a source familiar with delivery schedules told Reuters on Tuesday, a sign that the impending start of the Dakota Access Pipeline is upending trade flows.

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At its peak, PES would have routinely taken about three miles’ worth of trains filled with Bakken oil each day. But after the $3.8 billion Dakota Access Pipeline begins interstate crude oil delivery on May 14, it will be more lucrative for producers to transport oil to refineries in the U.S. Gulf Coast.

Alcoa Moves Headquarters Back to Pittsburgh

Alcoa Corp. announced today that the company’s expansive Pittsburgh, Pa., office will soon serve as its global headquarters again, a decade after its predecessor, Alcoa Inc., left for New York City.

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Alcoa said in a statement that its headquarters in New York would be one of seven offices in the U.S., Europe and Asia that would shut in the next 18 months in a cost-cutting initiative. Alcoa had kept its offices in Pittsburgh’s North Shore even after it moved the headquarters to Manhattan, with the bulk of its administrative functions remaining in Pittsburgh. Now, the Pittsburgh presence will once again serve as the company’s international headquarters.

As requested by Japan, the World Trade Organization (WTO) has set up a dispute settlement panel to decide the row over India’s imposition of a safeguard duty on imports of iron and steel products.

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MetalMiner has reported on this case in the past. Japan’s request was made after New Delhi imposed safeguard duties on several iron and steel products, which India claimed violated global trade rules.

India’s finance ministry imposed definitive safeguard duties on imports of hot-rolled flat products of non-alloy steel in coils to counter a surge in imports from several countries, including Japan. India’s stand has been that such cheap imports “caused injury to domestic steel industries.”

As both the nations failed to arrive at a solution, Japan petitioned the WTO for the formation of a dispute resolution panel.

Soon after the WTO announcement, though, India objected to Japan’s WTO request for a “prompt’’ resolution of its dispute against India’s duties on steel imports.

India’s contention is that there’s “no rationale” for treating the dispute any more urgently than other WTO disputes it’s involved in and the same standard should be applied to all disputes.

In December, Japan dragged India to the WTO against measures taken on imports of iron and steel products. Incidentally, Japan is the second-largest steel producer in the world.

The dispute assumes some amount of significance as both India and Japan signed a comprehensive free trade agreement, meant to avoid this type of arbitration, in 2011.

This was Japan’s second attempt to ask the WTO to set up a panel after the first was blocked by India in March. India expressed disappointment over Japan’s insistence on the WTO panel despite its “sincere efforts” to resolve the matter in a bilateral manner.

It normally takes about 20 months to settle a dispute at the WTO, but according to WTO rules, in cases of urgency, the parties to the dispute, panels and the Appellate Body make every effort to accelerate the proceedings.

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The Japanese government reportedly estimated that the tariffs could cost Japanese steel companies about $220 million through March 2018.

The safeguard duties imposed by India also gave rise to complaints from other WTO members.

This month, some of our metals reached new heights while others saw their rallies noticeably falter.

Aluminum and Raw Steels are still riding high, while complicated supply stories saw stainless and copper fall. Demand from manufacturers for almost all of the metals we track remains strong.

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17 Of the 18 manufacturing industries tracked by the Institute for Supply Management’s index of national factory activity reported growth and no industry reported a contraction last month. Buyers still might want to beware as metal markets are showing more pull-backs than we witnessed in March, despite the overall bullish behavior across the entire industrial metals complex.

The signals the U.S. is sending in the steel sector really worry Germany, so said Brigitte Zypries, German Economy Minister, according to Reuters in a recent article.

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This isn’t the first time the European Union has had a trade spat with the U.S. over steel but it is unusual for one party or the other to take the case to the World Trade Organization, claiming “accounting tricks” and “protectionism” designed to give domestic producers an “unfair competitive advantage.”

The E.U.’s position is this issue should have been addressed through bilateral negotiations giving them the opportunity to show Germany, French and Austrian steel producers are not dumping steel and are not being subsidized, but President Trump signed executive orders last Friday aimed at identifying abuses causing the huge U.S. trade deficit, and Germany is deemed one of the worst culprits.

Port Talbot steel plant

British Steel and its Port Talbot plant could be the next company in line for carbon and alloy steel plate tariffs from the U.S. Source: Adobe Stock/Petert2

However, by issuing a final finding that European and Asian producers dumped certain carbon and alloy steel cut-to-length plate in the U.S. market, the Department of Commerce says it is allowed to impose duties ranging from 3.62 to 148%, but the E.U. claims the decision has been determined on the basis of dodgy accounting estimates and the correct place to discuss them is at the negotiating table or via the WTO, not by applying duties which will then take months to address and impact trade for a year or more, essentially shutting European mills out of the U.S. market. Read more

Our monthly Global Precious Metals MMI dipped down a point in April from last month, losing 1.2% to end up at 83.

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Ultimately, most gold, silver, platinum and palladium price points from the U.S., China, Japan and India dropped off for the month, which led to the sub-index’s overall decline — but there was one price point that decided to blaze its own trail upward.

The U.S. palladium bar price rose 3.4% over the past month, the third straight month of increases on the MetalMiner IndX.

What’s Going on with Palladium?

Well, automotive sector demand for palladium, at least on a spot or short-term basis, would be a hard case to make.

As my colleague, Jeff Yoders, reported earlier this week, U.S. automakers’ sales figures for March came in below market expectations and gave early evidence that America’s long boom cycle for automotive sales may finally be losing steam.

Automakers sold 1.56 million new cars and trucks in March, a 1.6% decline compared with the same month a year ago.

For example, Ford Motor Company took the biggest hit among sales drops, seeing its March numbers fall more than 7% from February’s.

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According to a recent Seeking Alpha article, “going into 2017 the market was considering limited supply to be the primary factor supporting palladium prices,” with limited sector growth expected from the U.S. and European markets, and China being the only auto market to be counted on for buoyed sales.

The above has generally held true, while seasonality and investor interest in ETFs seemed to have been playing into palladium’s rise. This could well be the high point for palladium prices this first half of the year.

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Our Raw Steels Index rose 4.3% in March. Steel prices in the U.S. resumed their upward trend, with products like cold-rolled coil hitting a five-year high. However, not everything was bullish in March. Prices in China fell sharply. Let’s look into this U.S.-China price divergence:

Trump’s Rally

U.S. steel prices have been on a joyride since Donald Trump won the U.S. presidential election. Markets’ reaction to the election results wasn’t really surprising given the president’s stance on curbing imports and boosting domestic infrastructure.

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The Trump effect wasn’t the only factor driving this rally but it definitely helped prices to accelerate. However, markets now wonder if Trump can deliver what he pledged.

Raw Steels MMI

In March, officials said an executive order approving two pipeline projects and mandating the use of American-made steel won’t apply to the construction of the Keystone XL oil pipeline, contradicting prior statements by Trump that it would. A spokesperson for the administration said Keystone XL was grandfathered even though almost all of it has yet to even begin pre-construction.

In addition, Trump has so far failed to get his healthcare bill through Congress. After the healthcare failure, markets now question if Trump will get Congress to approve spending of large sums on the infrastructure sector, too.

China’s Prices Fall

In our view, falling Chinese steel prices are a bigger risk for U.S. steelmakers compared to the concerns over President Trump’s proposed infrastructure investments. Currently, China isn’t a major exporter to the U.S., but Chinese steel prices impact steel prices all over the world, as they put a floor under international steel prices.

Chinese hot-rolled coil (HRC) prices have fallen almost 15% since their February 2017 highs. March’s divergence has made U.S. prices expensive again relative to Chinese prices. In the case of cold-rolled coil, the price spread has now widened to $350 per ton, which is high compared to historical levels.

The conclusion is that for this rally in U.S. steel prices to continue, we would need to see rising prices in China as well. This is something we’ll be monitoring closely in the next few weeks. The biggest risk for the U.S. steel industry could be a further slide in Chinese steel prices. Even infrastructure spending may not be of much help in that case.

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Editor’s note: We have restated the March Construction MMI to 80. An error in tabulation last month caused us to under-report it at 77. MetalMiner regrets the error.

U.S. developers opened up their wallets in February and construction spending increased to the highest level of spend in nearly 11 years, led by more building of homes, highways and schools.

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Our Construction MMI remained at its corrected score of 80 this month.

Construction MMI

Construction spending rose 0.8% to $1.19 trillion in February to the highest level since April 2006, after two months of declines, the Commerce Department said. New home sales remained strong despite a rather steady supply of newly constructed houses, apartments and condominiums coming onto the market.

Spending on new home building, as well as renovations, rose nearly 10% in the final three months of 2016, the most in a year.

The biggest move, though, came from government construction projects. State and local governments spent 0.9% more on construction, driven by roads, schools and recreational buildings.

The federal government actually cut construction spending for the second straight month and has cut back 9% from a year ago but that could soon change if an infrastructure plan emerges this year in Washington, D.C. President Donald Trump has pledged to boost infrastructure spending by $1 trillion over the next decade. Trump has focused on healthcare and now, apparently, tax reform.

Meanwhile, the Institute for Supply Management said its index of national factory activity fell to a reading of 57.2 last month from 57.7 in February, which was the highest since August 2014.

Any reading above 50 still indicates an expansion in manufacturing, which accounts for about 12% of the U.S. economy and construction materials such as steel framing and rebar are counted in ISM’s factory output numbers.

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17 Of the 18 manufacturing industries reported growth and no industry reported a contraction. Comments from factories were mostly upbeat, with machinery manufacturers saying that business was up 10 to 15%.

Optimism about relaxed regulation and the generally pro-business approach of the Trump administration still seems to be buoying both construction and consumer spending but if Trump cannot implement his agenda this optimism could quickly wane. An infrastructure plan that can make it through the Congress continues to be a necessary priority for metals manufacturers and the economy at large.

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Commodities and industrial metals have always moved in tandem. However, things have changed over the past few months. Industrial metals continue to rise in price while commodity indexes struggle to hit new ground.

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What’s up with that?

CRB commodity index (in orange) vs DBB industrial metals index (in black). Source: MetalMiner analysis of @Stockcharts.com data.

Two things have caused industrial metals to outperform the rest of commodity groups (agriculture, energy, etc) this year:

First, in November industrial metals got a boost as Donald Trump won the U.S. presidential election and his republican party kept control of both houses of the Congress. Investors now hope that a Trump-led GOP government will boost domestic infrastructure, which could be a boon for industrial metals demand. In addition, the new president has stated he is willing to institute more measures to protect domestic producers.

China’s Pollution Performance

Second, and more importantly in my opinion, Industrial metals have been benefiting from a tailwind since January when China’s pollution problems got worse and authorities asked 23 cities in northern China to issue red alerts as inspection teams scoured the country. Steel and aluminum are leading this year’s rally. This is because these two are the most energy-intensive metals and China has shown a commitment to cut output. Read more