Articles in Category: Commodities

This week we covered the impact on the automotive industry of Hurricane Harvey and the likely boost to demand that will come from replacement of used and new vehicles damaged by the floods.

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Today we look at Harvey’s impact on the oil, natural gas and refining markets — not that you will need any reminding of the impact of Harvey if you have been into the gas station to refuel your car.

According to the Financial Times, the average retail price of petrol in the U.S. rose to $2.59 per gallon on Saturday, quoting to the American Automobile Association. That was up about 10% from its level the week before Harvey hit, and its highest level since August 2015 as refineries were taken out across southern Texas. Ten refineries in the region were still shut down on Saturday morning, according to the Financial Times, with a combined total of about 2.9 million barrels per day of refining capacity, representing a whopping 16% of the U.S. total, according to the Department of Energy.

The scale of the hit to U.S. supplies and the near instant spike in prices underlines just how reliant the U.S. is on the Gulf Coast for refining, refined product exports and LNG exports. Due to their location inland, primary production from shale resources in the Permian and Eagle Ford escaped damage and were back online as soon as wind speeds dropped, but lower-lying refineries were not so resilient.

This all goes to highlight a worrying exposure the U.S. has to this particular part of the world. Whether you believe in global warming, whether you accept climate change, whether you think it is all some left-wing plot is not the issue. The issue is Gulf crude production has more than doubled since 2005, leading a 75% nationwide increase, and now accounts for almost two-thirds of total U.S. crude production, up from 54% in 2005.

Yet while oil import dependency has plunged from 60% in 2005 to just 25% today, the refining of domestically produced oil has concentrated even more in the Gulf region.

Refining capacity in coastal Texas and Louisiana has, according to the Financial Times, increased by a quarter since the middle of the last decade, such that the region now handles half of all U.S. refining.

The U.S. isn’t the only one exposed to this one region. Rising total exports of refined products have left 90% of gross exports leaving from the Gulf region exposing neighbours in the region, who are reliant on U.S. supplies, to disruption in the event of a natural disaster — like a hurricane — or even a terrorist strike.

Some would argue that the flooding of southern Texas is less of a one-in-500-year occurrence than politicians would have us believe. The whole of the Mississippi delta is gradually sinking into the sea as levees built in the last century and canals built for oil extraction access prevent the river from depositing fresh silt and simultaneously allow the ingress of brackish water that kills off the vegetation once covering the area, the Economist reported last month. Storms and floods account for for almost three-fourths of weather-related disasters the Economist wrote this month and they are becoming more common.

Source: The Economist

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According to the insurer Munich Re, the Economist states that Harvey is the third 500-year flood to hit Houston since 1979. The U.S. may have little choice in the medium term than to continue its heavy reliance on Gulf-based refining and related infrastructure; if that is the case, then significant work needs to be done to better protect those facilities in the future.

Commodities and industrial metals have historically moved in tandem.

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However, recent market dynamics highlight that this correlation has started to change.

Commodities have not moved past resistance levels, and instead have continued on a downtrend. Industrial metals traded sideways at the beginning of 2017, but have shown recent strength with the latest rally.

In the graph below, the green line represents the DBB index and the blue line represents the CRB index. The analysis at the bottom is the correlation between CRB and DBB index. It should be noticed that historically it has been positive.

Source: MetalMiner Analysis of FastMarkets

Why the Divergence?

First, readers should understand what exactly the CRB index contains.

Energy accounts for 39% of the CRB index, while agriculture is 41%. Base and industrial metals make up only 13% of the mix.

Thus, oil prices (what we actually look at as a critical indicator) have an outsized impact on the CRB index. Oil prices have been down since the beginning of 2017, as have commodities.

Oil prices. Source: MetalMiner Analysis of TradingEconomics

In terms of  industrial metals, most of the base metals have rallied this month. Aluminum, copper and zinc, particularly, were the best performers of the month. Prices have increased steadily and show strength to continue rising.

Steel forms seem to have lost a little steam, but prices are still increasing. Steel prices have been in an uptrend since November 2016.

Source: MetalMiner Index

Both steel and base metals price increases have contributed to the uptrend in industrial metals, which now appears to have taken off like a rocket.

What Can Buying Organizations Expect?

Even if the source of the current lack of correlation is clear, MetalMiner believes that one of the two (commodities or industrial metals) may show a change of trend at some point soon.

One can move the other, and that is why buying organizations should track price movements in each.

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To better understand how to adapt industrial metal buying strategies based on these dynamics, take a look at our Monthly Metal Buying Outlooks.

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Hurricane Harvey touched down in Texas late last week — in the ensuing days, thousands were displaced as record rainfall of more than 50 inches blanketed some areas of Houston (the fourth-most populous city in the U.S. with a population of about 2.3 million).

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According to a USA Today report citing preliminary research from the firm AccuWeather, Harvey could become the costliest disaster relief effort in U.S. history, with a potential price tag of $160 billion.

It should of course be noted that, before anything else, the natural disaster’s human impact is of utmost importance. The New York Times reported the death toll has hit at least 30, according to Texas officials.

In addition to widespread flooding, property damage and displacement suffered by residents in the hurricane’s path, Harvey has also left an economic impact that will be felt for the foreseeable future.

Among other things, metals prices, oil prices and shipping have all been, or will be, impacted by Harvey.

Trade Impact

The Port of Houston is one of most important trading locations in the U.S. As a result of Harvey, the port was completely closed as of last Friday. According to the Port of Houston website, it will remain closed on Thursday.

“We will continue to work alongside local agencies and the USCG to determine when operations can safely resume,” an alert on the Port of Houston website read Wednesday.

According to data on the Port of Houston website, the port is ranked first in total foreign tonnage and ranks second in total tonnage. As the largest Gulf Coast container port, it handled 68% of U.S. Gulf Coast container traffic in 2016.

So, a total shutdown of the port is a big deal.

On the export side, 3% of total container volume exported last year came from steel and other metals (27,127 TEUs).

A larger percentage of total imports come in steels and other metals — 8.6%, or 76,853 TEUs, last year.

Meanwhile, the Port of Corpus Christi, the fourth-largest port in total tonnage, was also closed as of Tuesday.

The affected areas have an immediate need for supplies of all kinds, but transportation modes are at a general standstill for the moment.

Steel Stocks

Much of Houston has been hit by record rains, leading to flooding and stranding locals without food or supplies.

Although it won’t happen overnight, eventually the area will begin to rebuild in the wake of the damages caused by Harvey.

According to a report on the Nasdaq website, Houston receives between 30% and 35% of all U.S. steel imports, making it a pivotal point of access.

In the wake of Harvey, some U.S. steel companies saw their stocks rise. According to the report, shares of United States Steel Corporation jumped by over 2.5% on Tuesday, while Olympic Steel rose more than 1.5%.

Nucor and AK Steel Holding Corporation both saw their stock prices rise by over 0.5%.

However, it’s still early to determine the true damage to the steel industry caused by Harvey.

According to a Platts report, Harvey could have a similar impact to that of 2012’s Hurricane Sandy, particularly with respect to steel scrap.

Freight Service Disrupted

In addition to the disruption of port activity, rising water levels have taken a bite out of freight service.

As a result, a rise in trucking rates can be expected, according to freight analyst firm FTR Transportation Intelligence.

“Look for spot prices to jump over the next several weeks, with very strong effects in Texas and the South Central region,” said Noel Perry, a partner at FTR. “Spot pricing was already up strong, in double-digit territory. Market participants could easily add 5 percentage points to those numbers.”

According to Steel Market Update, FTR predicted 10% of freight activity will be disrupted over the next two weeks.

Gas Prices Rise

As a result of an overall glut in global production, gas prices have come down significantly since 2014, when the gas price in some metropolitan areas exceeded $4 gallon.

However, the average national gas price has increased as a result of Harvey and shutdowns of refineries in Corpus Christi and Galveston. As of Wednesday afternoon, the average national gas price stood at $2.40 gallon, up from $2.37 on Monday, according to AAA. The average price had already risen $0.04 to $2.37, which AAA said Monday was one of the largest one-week surges this summer.

According to AAA, about one-quarer of Gulf Coast refining capacity was taken offline, according to forecasts by Oil Price Information Service (OPIS), which equated to about 2.5 million barrels per day.

“Despite the country’s overall oil and gasoline inventories being at or above 5-year highs, until there is clear picture of damage and an idea when refineries can return to full operational status, gas prices will continue to increase,” said Jeanette Casselano, AAA spokesperson, in a prepared statement.

Time to Rebuild

Rescue missions continue in the Houston area, as officials move residents in flooded areas to shelters. According to the Washington Post, 32,000 people have taken refuge in 231 shelters, with many volunteers need to help clean out damaged homes.

“We expect a many-year recovery in Texas, and the federal government is in this for the long haul,” said Elaine Duke, acting secretary of the Department of Homeland Security, to the Washington Post.

The damage won’t be contained to Texas, however. According to the National Hurricane Center, Harvey touched down again, this time in southwestern Louisiana at 4 a.m. today.

More than 12,400 employees from more than 17 federal departments and agencies are working together in support of the ongoing response to damages resulting from Hurricane Harvey and subsequent flooding across Texas and Louisiana, according to the Federal Emergency Management Agency (FEMA).

When all is said and done, affected communities will have a long road to recovery. Many will eventually return to homes either damaged beyond habitability or totally destroyed.

Houston is the largest U.S. market for newly constructed homes, and demand for materials used in home construction will surge as communities transition from rescue and recovery mode to begin the arduous rebuilding process.

The question is: When will that transition happen?

For now, government agencies on the ground are prioritizing the primary disaster relief effort, and it’s unclear when resources can eventually be shifted to construction.

The pipe and tube market, in particular, is well represented in the Houston area, which offices for the multinational firm Vallourec. The Port of Houston took in nearly 40% of iron and steel pipe and tube imports through the first six months of the year, according to ustradenumbers.com.

Earlier this week, the Committee on Pipe and Tube Imports sent a letter, obtained by CNBC, to the Trump administration, urging it to move forward with trade remedies in the Section 232 investigation of steel imports. According to the letter, over 60% of current U.S. demand for pipe and tube materials is supplied by foreign producers.

The request tied into the ongoing situation in Houston.

“Based on the amount of imports flooded into America now we will not be able to help rebuild Houston,” Robert Griggs, president and CEO of Trinity Products, told CNBC.

“Not one U.S. pipe company will get a lick of work in rebuilding Houston. It will all go to China. The president needs to level the playing field and make it fair. The way it is now, American steel pipe companies will lose the opportunity to rebuild Houston.”

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Before we head into the weekend, let’s look back at some of the top stories on MetalMiner this week.

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Free Download: The August 2017 MMI Report

The U.S. Department of Commerce. qingwa/Adobe Stock

Another Tuesday, another countervailing duty (CVD) determination from the U.S. Department of Commerce.

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Two weeks after the department issued affirmative determinations in the cases of Chinese aluminum foil and silicon from Australia, Brazil and Kazakhstan, the department issued a ruling on biodiesel earlier this week.

The department announced its determination Aug. 22. The CVD investigation targeted biodiesel imports from Argentina and Indonesia.

Secretary of Commerce Wilbur Ross announced Argentina and Indonesia received countervailable subsidies of 50.29 to 64.17 percent and 41.06 to 68.28 percent, respectively.

“The U.S. values its relationships with Argentina and Indonesia, but even friendly nations must play by the rules,” Ross said in a department release. “The subsidization of goods by foreign governments is something that the Trump administration takes very seriously, and we will continue to evaluate and verify the accuracy of this preliminary determination.”

Biodiesel fuel is typically made from a diverse range of sources, including recycled cooking oil, animal fats and and soybean oil.

As in other CVD rulings, the Department of Commerce will instruct U.S. Customs and Border Protection (CBP) to collect cash deposits from importers of biodiesel from Argentina and Indonesia based on the aforementioned preliminary rates.

The petitioner in the investigation was the National Biodiesel Board (NBB) Fair Trade Coalition, which represents the biodiesel and renewable diesel industries, including producers, feedstock suppliers and fuel distributors in the U.S.

The NBB applauded the Department of Commerce’s preliminary determination.

“The Commerce Department has recognized what this industry has known all along—that foreign biodiesel producers have benefited from massive subsidies that have severely injured U.S. biodiesel producers,” said Doug Whitehead, chief operating officer of the National Biodiesel Board, in a release. “We’re grateful that the Commerce Department has taken preliminary steps that will allow our industry to compete on a level playing field.”

As with the announcements Aug. 8, the Department of Commerce continues to tout the uptick in countervailing and antidumping investigations this year compared with last year. According to the Aug. 22 release, the department has launched 56 CVD and antidumping investigations between Jan. 20 and Aug. 22 — a 27% increase from the previous year.

According to the release, 2016 imports of biodiesel from Argentina and Indonesia were valued at an estimated $1.2 billion and $268 million, respectively.

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Barring delays, the Department of Commerce is scheduled to announce its final determination in the investigation Nov. 7.

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

  • In case you missed it, our August MMI Report is out. Metals like copper and aluminum hit record highs, and nine of our 10 sub-indexes posted upward movement as a result of a strong July. Will that momentum continue? Check back next month for the September MMI report.
  • Many have predicted a decline for iron ore prices, but as our Stuart Burns wrote on Monday, reports of its demise have been greatly exaggerated. A weak U.S. dollar, combined with strong equities and global GDP, have helped keep iron ore performing well, not to mention Chinese steel and the wider metals market. Read through for Burns’ assessment of the iron ore market.
  • In India, a boom of bauxite production is expected, wrote our Sohrab Darabshaw. In fact, it is expected to more than double by 2021. How is that possible? One reason, Darabshaw writes, is “increased domestic demand for aluminium, which will largely be sourced from the quintupling of land under mining lease in the Odisha province (which has the bulk of India’s bauxite reserves).”
  • One commodity almost everyone is interested in is oil. On Tuesday, Burns wrote about the future of oil prices. But, since this is MetalMiner, after all, those prices also have an effect on metal markets.
  • Everyone loves a good M&A story, and Burns had one earlier this week on the ongoing talks between Indian steel giant Tata Steel and Germany’s ThyssenKrupp. Plus, he touches on ArcelorMittal’s takeover of Italy’s Ilva. Burns writes: “For the first time in years, steelmakers at least seem to have a plan and are actively pursuing it. Whether that plan is to the eventual benefit or detriment of consumers remains to be seen — but a healthier domestic steel industry must certainly be advantageous to all.”
  • How about zinc? Burns wrote about the metal’s rise to $3,000, and the reasons behind zinc’s price hitting its highest point since 2007.
  •  Last week was a busy one for the U.S. Department of Commerce, which handed down preliminary determinations in countervailing duty investigations for both Chinese aluminum and silicon coming from a trio of countries.
  • Back in India, steel exports are on the rise as the Indian government’s protectionist measures seem to be paying off for its domestic industry.
  • Lastly, representatives of the U.S., Canada and Mexico began talks on Wednesday regarding renegotiation of the North American Free Trade Agreement (NAFTA), the trade deal instituted in 1994. The U.S. is focused on, among other things, bringing down ballooning trade deficits with the two countries (particularly Mexico). The talks are scheduled to continue until Sunday, so check back for updates on the proceedings.

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This morning in metals news, China pressured iron ore traders not to buy from North Korea even before the newest round of U.N. sanctions were imposed, a Chilean copper company is preparing to invest in Mongolia and China produced a record amount of steel in July.

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China Puts Pressure on N. Korean Iron Ore Business

As the political situation on the Korean peninsula continues to intensify and President Donald Trump criticizes China for allegedly not doing enough to rein in North Korea, a Reuters report indicates China has taken some action against North Korean interests.

According to Reuters, China pressured its iron ore traders not to buy North Korea iron ore, pressure that even preceded the latest round of U.N. sanctions.

Per two traders Reuters spoke to, the Chinese government stopped issuing permits to bring in iron ore “several weeks ago.”

Codelco Looks to Make Investment in Mongolia

Chilean state miner Codelco is planing to make an investment in faraway Mongolia, Codelco’s chief executive told Reuters on Friday.

According to CEO Nelson Pizarro, the company is looking for medium-term investments in the country, which may have untapped copper deposits.

Chinese Steel Output Hits 74M Tons in July

Chinese steel producers had a prolific July, churning out  a record 74 millions tons, Reuters reported.

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The output bested the previous month’s then-record total of 73.23 million tons, reached in spite of government efforts to combat pollution.

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Before we dive into the weekend, let’s take a look back at the week in metals news:

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  • Our Stuart Burns started out the week with a piece on confirmation bias and how those in the media and metal-buying communities can sometimes let bias affect their interpretation of data.
  • What’s the diagnosis for the ailing U.K. steel industry? According to Burns, it’s a product of a lack of government support and global oversupply. A recent report showed that the U.K. steel industry has declined in monetary output value by 30% from 1990 to 2013.
  • In case you missed it, our July MMI report has long been in the books. You can download it here.
  • What did the recent G20 summit in Germany mean for India? Our Sohrab Darabshaw touched on the subject this week.
  • What’s up with oil prices? Unsurprisingly, as with the metal markets, prices are so low because there is just so much of the stuff out there. Burns dug deeper into oil price trends in a piece earlier this week.
  • What’s a Section 332? In short, it’s a fact-finding investigation by the United States International Trade Commission, which recently conducted a large-scale look into the competitive factors affecting the U.S. aluminum industry.
  • Another big story, the ongoing debate regarding a potential renegotiation of NAFTA, got an update this week when it was announced that the U.S., Canada and Mexico will come together for talks beginning Aug. 16.

Free Download: The July 2017 MMI Report

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Although oil and gas remain Iran’s most important exports by far, one beneficiary of the relaxation in trade embargoes has been the metals industry.

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According to an analysis by the Ministry of Industries, Mining and Trade, reported in the Financial Tribune, the data show growth in the production of crude steel, finished steel products, iron ore, coal concentrate and sheet glass in the last Iranian financial year running March 2016 to March 2017 compared to the year before, showing a significant uptick in output (much of it for export).

Coal concentrate saw the greatest increase with the rise of 10.6%, from 1.113 million tons in March 2015-16 to 1.232 million tons last year. Crude steel output had the second-largest gain, rising from 16.538 million tons to over 18 million tons (a 9% increase).

Iran holds the world’s 10th-largest reserves of iron ore. Despite dominance by Australia and Brazil, Iran still managed a 4.2% increase to 31.711 million tons, helping lift production of steel products 1.4% to 17.681 million tons.

These sound like modest increases for a country recently facing lower barriers to trade, but that may be because the benefits have yet to percolate through to the wider economy.

In the meantime, it is direct exports that have benefited the most. The Financial Tribune reported Iran’s total mineral products shipments last year registered a 17% and 38% increase in value and volume, respectively, year-on-year.

Source: Trading Economics

From a value perspective, it is difficult to make a judgement year-on-year for total exports because some 82% by value is oil and gas, for which prices have been highly volatile.

Even so, with a depressed oil price, Iran’s exports are heading back above their historical long-term trend of some $20 trillion, as the above graph from Trading Economics shows. The oil-price-induced spike of 2006-10 was an anomaly not seen before or since.

Economically, Iran would benefit enormously from a full and unfettered return to the international markets, but that is not going to happen while the autocratic mullahs remain in control. Liberal parties are dissuaded from the political process and many opposition politicians remain in jail. As in so many authoritarian regimes, those in power live well while the clear majority fail to enjoy the standard of living they could achieve based on their high standards of education and young, dynamic population.

Free Download: The July 2017 MMI Report

Even so, the country’s economic situation is trending positively. Foreign firms are showing greater confidence in returning to the Iranian market after years of sanctions.

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Despite U.S. oil stocks falling 7.6 million barrels, the biggest drop since September, a recent Financial Times article reports, quoting U.S. Energy Information Administration data, that the oil price is struggling to get back to $48 per barrel, let alone the heady heights above $50 it achieved in May.

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U.S. refineries are running flat out to meet summer demand, drawing down on U.S. stocks — but still, the price is not responding.

Meanwhile U.S. exports are booming. Rather than being constrained by OPEC cuts, global production is rising. Ironically, even Saudi Arabia is pumping above its target, reporting to the cartel that last month it raised output to 10.7 millions barrels per day, a 190,000 b/d increase on the previous month and 12,000 b/d above its own target.

The Kingdom claims it needed to increase output to meet peak electricity-generating demand experienced during the summer months, but the Saudi increase contributed to total OPEC overproduction of 393,500 b/d from last month, according to the Financial Times.

Source: Financial Times

Iraq, Nigeria and Libya are all pumping more oil than at any time this year and Iran is close to its own year’s highest output, too.

In addition, Canadian oil sands production is rising, Production is predicted to be higher still next year as new projects come on-stream (despite the low prices), making many projects marginal or even loss-making, debts must be repaid and oil sands producers are hanging in there hoping for firmer prices.

News south of the border is not encouraging, though. U.S. tight or shale oil production has continued to rise this year, although at a more gradual rate than seen over the last 12 months. Nevertheless, shale oil producers have become adept at squeezing profits out of production, even at sub-$50 per barrel prices, and show no signs of backing off at current levels.

Long-position holders are hoping OPEC may take further action to curb supplies, but members are sticking to their mantra that they expect stocks to decrease and, therefore, prices to rise, as the current restrictions bite.

But as the Financial Times notes, OPEC’s own monthly report indicates the group still faces an uphill struggle to balance output under the terms of its supply deal, what with cheating and non-OPEC production.

Free Download: The July 2017 MMI Report

A balanced oil market seems a distant dream for producers.