Articles in Category: Commodities
Crude oil (in black) diverges from industrial metals (in red)

Crude oil (in black) diverges from industrial metals (in red). Source: MetalMiner analysis of @Stockcharts.com data.

Historically, crude oil prices have moved in tandem with industrial metals. Why is that?

  1. Oil is  not just a commodity, itself, but an asset closely followed by commodity investors. Falling oil prices make investors move away from commodities and, of course, industrial metals.
  2. Oil is the main benchmark for energy prices. Lower energy prices mean lower transportation costs and lower production costs, especially for those energy-intensive metals like aluminum.

For these reasons, it’s not strange to see that the trend in industrial metals looks very similar to that of oil prices (see chart above). But since June, we are witnessing a divergence between these two trends. Oil prices have fallen while industrial metals continue to rally, for the most part.

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Just when it appeared crude oil’s oversupply was easing, a new glut of gasoline is drowning the market’s hopes for a recovery, sending crude prices sliding.

So far, oil’s price correction looks normal within this year’s bull market. It’s not strange to see profit taking following the strong rally earlier this year. However, now that prices are hovering near $40 per barrel, they should start finding support. This divergence likely won’t last too long and if oil prices continue to fall that weakness could spread out

What This Means For Metal Buyers

It’s normal to see a price correction in oil following a strong rally earlier in the year. Oil prices should start finding support near current levels; otherwise oil’s price weakness could spread out into other commodity assets, including industrial metals.

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reuters_chartoftheweek_550_072716London Metal Exchange copper edged down but held above one-week lows hit in the previous session ahead of the outcome of a Federal Reserve meeting where it held rates steady, keeping costs lower for capital-intensive commodities. Source: Reuters.

The United Steelworkers and the petitioning domestic steelmakers praised new anti-dumping tariffs against cold-rolled flat steel products, while also saying that the damage from cheap imports has already hurt their operations.

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“Today’s final duty orders by the Obama Administration expands fairer pricing conditions on cold-rolled steel products from five countries, combined with duties placed earlier this summer on the same steel import products from China and Japan,” United Steelworkers President Leo Gerard said. “We have nearly 19,000 steelworkers and iron ore miners still on extended layoff status since last year as the remaining steel trade case investigations continue to reduce huge inventories of unfairly dumped and subsidized finished steel imports that have been stockpiled before the case was initiated.”

Non-coil stainless is included in a new anti-dumping petition. Source Adobe Stock/Jovanning.

Cold-rolled steel flat products from five countries received new tariffs. Source Adobe Stock/Jovanning.

 

The cold-rolled case hit producers in Brazil and the Republic of Korea hardest — South Korea’s POSCO was hit with 64.62% combined anti-dumping and countervailing duties due to a failure to confirm key elements of its response to investigators — but tariffs have already had an effect on steel imports into the U.S. Most of them were already being collected as preliminary duties that became final last week. The initial case was filed last year.

Injury Before Remedy

“The year-long investigation and duty orders show our trade laws need a rewrite in today’s world of steel overcapacity that’s putting American manufacturing workers and miners on layoff in their our own market, while foreign producers keep shipping illegally-subsidized and dumped products,” USW International Vice President Tom Conway told the Times of Northwest Indiana. Read more

As global stocks rallied, metals saw gains with them this week. The bounce that precious metals got from Brexit has largely been sustained and lead and other base metals have come with them despite neutral fundamentals.

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Yet skulking under this prosperity lies a specter that threatens to erode prices and even affect the positive performance of those stock markets: Chinese overproduction.

This week, more tariffs came down on Chinese steel products and the American Iron and Steel Institute testified before the U.S. Senate and said steel overproduction must stop.

The European Union. went so far as to tell China to stop subsidizing unwanted steel if it wants to achieve market economy status in the World Trade Organization, only to have bilateral talks collapse. The export quotas that China maintains have also led manufacturers to substitute out rare earths metals, now the E.U. and U.S. are asking the WTO to eliminate more Chinese export quotas. The U.S. and the E.U. teamed up against Chinese export quotas on base metals.

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So, even as metal prices look like they are rising, oversupply lies in wait.

Source: Reuters/Energy Information Administration.

Source: Reuters/JKempEnergy/U.S. Energy Information Administration.

Consumption of natural gas by U.S. energy providers/utilities has steadily increased for the last decade.

American Iron and Steel Institute President and CEO Thomas Gibson said in a recent media conference call that the U.S. and other nations continue to experience economic impacts from the Chinese steel oversupply largely produced by China’s state-sponsored companies. He said policymakers must address the “root cause” of the problem.

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“We believe that the Chinese government has to get out of the steel business,” Gibson said, “and let its steel industry operate according to market principles.”

Gibson spoke July 13 on a conference call with the press.

In 2015, China’s production of crude steel fell 2.3% from 2014, according to the World Steel Association, but its share of the world’s production grew slightly to 49.5%. Gibson said China’s oversupply of steel reached 112 million metric tons in 2015 and added that some reports estimated excess production would increase this year. U.S. steel companies’ production fell 10.5% last year and approximately 10% of the workforce has been laid off.

Gibson said that nine of the 10 largest steel producers in China are state-owned. While these firms may be selling steel at a loss, China is directing state-owned banks to “continually refinance the debt” and also sweep the debts off the books and this is what’s keeping “zombie mills” open.

In an effort to address declining domestic demand, China announced that it would reduce steel production as much as 150 mmt over the next five years. Gibson said these promises are often empty as China made similar commitments in the past and “each time capacity has actually increased in China.”

Speaking a day after the press phone call to the Senate Banking Committee, Gibson said, “the surge in imports is a result of foreign government interventionist policies that have fueled global overcapacity in steel, more than half of which is located in China… While China is not the only source of the problem, the overcapacity in China is the greatest challenge facing the global steel industry today.”

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Gibson said China’s major steel firms reportedly lost more than $15.5 billion last year while still producing so much excess steel.

The Hong Kong Stock Exchange will not move forward with its planned link to the London Metal Exchange and Komatsu has bought Joy Global, Inc.

HKEx-LME Link on Hold

The U.K.’s vote to leave the European Union has prompted the Hong Kong stock exchange to put on hold a commodities clearing link with its London Metal Exchange (LME), dealing a blow to its bid to make the LME more profitable.

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Hong Kong Exchanges & Clearing Ltd. Chief Executive Charlies Li said the planned link-up would now have to wait due to the uncertainty created by the vote last month.

Komatsu Buys Joy Global for $2.9 Billion

Japan’s Komatsu Ltd. has agreed to buy U.S. mining equipment manufacturer Joy Global Inc. for about $2.9 billion, its biggest-ever acquisition.

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The Japanese manufacturer of construction and mining equipment said on Thursday that it would buy 100% of the Milwaukee, Wis.-based company for $28.30 per share, about a $20 premium to Wednesday’s closing price.

Russia won’t cooperate with OPEC on oil production cuts and U.S. architecture billings are still up in June, but just not as much as they were in May.

Russia Won’t Coordinate Oil Production Cuts

Russian Energy Minister Alexander Novak said in an interview he has ruled out possible coordination with the Organization of Petroleum Exporting Countries on oil output after a failed attempt to jointly maintain production levels earlier this year.

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“We do not discuss the issues of coordination of actions between Russia and OPEC… We can’t agree on production cuts as we don’t have such tools and mechanisms,” Novak told Reuters in interview cleared for publication on Wednesday.

Architecture Billings Down But Still Up

The Architecture Billings Index was positive in June for the fifth consecutive month. An economic indicator of construction activity, the ABI reflects an approximate nine-to-12 month lead time between architecture billings and construction spending.

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The American Institute of Architects reported the June ABI score was 52.6, down from the mark of 53.1 in May, but this score still reflects an increase in design services (any score above 50 indicates an increase in billings).

After a year of ups and downs, lead prices are finally finding their way up.

Lead prices hit a 1-year high. Source: MetalMiner analysis of fastmarkets.com data

Lead prices hit a one-year high. Source: MetalMiner analysis of Fastmarkets.com data.

Three-month London Metal Exchange lead hit a one-year high last week as prices tested $1,900 per metric ton level.

Neutral Fundamentals

Lead Production vs Usage. Source: MetalMiner analysis of ILZSG data

Lead Production vs Usage. Source: MetalMiner analysis of ILZSG data.

The latest data reported by the International Lead and Zinc Supply Group (ILZSG) indicate the world refined lead metal supply exceeded demand by 23,000 metric tons during the first four months of 2016. Reductions in Australia, China, India and the U.S. led the fall in global lead mine production of 5% compared with the first four months of 2015.

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World refined lead metal output decreased by 1.8%. excluding Chinese usage of refined lead metal rose by 4.2%, mainly because of an 8.8% increase in European demand. Chinese apparent usage, however, fell by 12.1%, and overall global demand decreased by 2.5%. Chinese imports of lead contained in lead concentrates declined by 18.9% compared with the same period in 2015. Read more

Gold and most precious metals are still gaining from the bounce they received after the U.K. voted to leave the European Union and most bankers and analysts expect that to continue. In contrast, European aluminum premiums are falling.

Poll: Gold’s Brexit Bounce Has Legs

Britain’s vote to leave the European Union has led analysts to raise their gold price forecasts again this year, after the decision shook up financial markets and sparked a rally in the precious metal to two-year highs.

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A poll of 25 analysts and traders over the last two weeks returned an average price forecast for this year of $1,280 an ounce, up from $1,209 in a similar survey in April, and nearly 15% higher than a poll at the start of the year.

European Aluminum Surcharges Keep Falling

Surcharges for physical aluminum in Europe are expected to gradually extend their recent decline due to sluggish demand as metal is released from warehouses when finance deals become less lucrative.

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The premiums, which consumers pay on top of the London Metal Exchange cash price for immediate delivery, were quoted at $115-$120 a metric ton for duty-paid metal in Rotterdam, down some $10-$15 in recent months and from $140-$150 in early February.