Even when metals prices were rising across the board in the first quarter, aluminum was the laggard as oversupply still kept investors from buying it and construction demand remained tepid. Thanks to Chinese stimulus that construction demand has shot up and aluminum prices with it.
Aluminum: Smelt All You Want!
Reuters’ Andy Home and our own Stuart Burns both noted that while Beijing is doing everything it can to clean up overproduction in its steel sector — and the resultant pollution that comes with it — there’s no such commitment from the top when it comes to aluminum, mostly because of the state-of-the-art smelters Chinese companies have invested in.
How are Chinese smelters making money? Source: Adobe Stock/Pavel Losevsky.
So, to recap, steel overproduction and pollution is bad but aluminum overproduction and, relatively, smog-free smelting? China is a-okay with that. What could possibly go wrong?
Meanwhile, things have gone significantly awry at Rio Tinto Group. The Anglo-Australian multinational miner shook up its organizational structure this week and head of iron ore commodities Andrew Harding was passed over for the CEO job by copper and coal division leader Jean-Sebastian Jacques. Jacques, a native of France, has only been there since 2011. Harding has been with Rio for 25 years and had been expected to replace departing CEO Sam Walsh this month. Read more
U.S. investors swung and missed with a lawsuit over aluminum wait times against several banks who also trade metals, but now they’ve seemingly hit paydirt with a similar lawsuit over zinc storage. Glencore‘s Pacorini warehouse operations business will have to defend the suit as there are seemingly falsified documents at the center of the gripes from customers.
Unlike our previous coverage of warehouse shenanigans, the Pacorini lawsuit has little to do with premiums. In fact, premiums have been acting remarkably normal this year. My colleague, Stuart Burns, explained howLondon Metal Exchange policies and simply better performance has reduced the queues almost everywhere.
Nope, the zinc lawsuit deals with falsified orders designed to conceal when and where metal entered the warehouse complex.
While premiums are, mercifully, now acting more normally, some unexplainable market weirdness continues. The LME warehouse in Vlissingen, Netherlands, is behaving as oddly as ever. After dropping to “just” 116 days in February it has since ballooned out again to 336 days following the cancellation from warrant of 656,000 mt in late March and April.
The advantage Ford holds, and the reason the automaker pursued aluminum for truck beds in the first place, is that their F-150 is still much lighter and conforms more easily to federal corporate average fuel economy (CAFE) standards. Perhaps Ford should break out the scales and do a fuel economy comparison to strike back at GM? Or should it just keep repeating “military grade aluminum?”
While the automakers were duking it out about who’s truck is tougher, actual steelmakers turned their attention to Beijing where the U.S.-China Strategic and Economic Dialogue took place. U.S. Treasury Secretary Jack Lew called on China to, again, cut excess steel production capacity. China said they would. Again.
The steelmakers gave that a hearty “put or show up.” Well, the American Iron and Steel Instituteused more words but that was, essentially, the gist. Our own Stuart Burns also noted that steel is just one of many things that China overproduces and there really might not be much that Beijing can actually do to rein in the wealth of tiny producers of steel and refiners of diesel fuel in its far-flung provinces.
This week saw the return of British Steel, thanks to a sale of some of its U.K. Assets by Tata Steel to Greybull Capital. British Steel is back, and it’s not just one of the greatest steel company names, but also the title of heavy metal band Judas Priest’s best-selling album.
1980’s “British Steel” brought us Rob Halford-sung anthems such as “Living After Midnight,” “Breaking the Law” and “Metal Gods.” It’s one of many albums that takes a bit of a narrow view of the musical term heavy metal in specifying steel as the metal it pays tribute to.
Greybull Capital and CBS Records should seriously get together and work on a new logo. Album Cover Image: CBS Records.
That got us at the MetalMiner week-in-review thinking: What other great heavy metal bands, albums and songs celebrate steel? Or were inspired by it? There’s certainly glam-rock tribute band Steel Panther.
Steel Towns and Heavy Metal
All of the original members of Def Leppard famously hail from the then-steel-producing town of Sheffield, England. Sweden brought us, simple and to the point, Steel.
Halford’s replacement in Judas Priest from 1996 to 2003, Chris “Ripper” Owens hails from renowned steel town Pittsburgh, Pa. ’80s Pittsburgh also brought us the story of a certain welder/dancer. Owens also played in a Judas Priest tribute band before being selected to replace Halford. The entire story was fictionalized in the Mark Wahlberg film “Rock Star.” The name of that cover band? Yep, British Steel.
I began my career at Mexico’s only stainless steel mill, Mexinox (now part of the Finnish company Outokumpu), which supplied tequila distilleries with the stainless steel used for fermentation and storage tanks. Tequila is a quintessential Mexican drink and was enjoyed by many a customer visiting the Mexinox plant (off-site, of course).
Source: Katie Benchina Olsen/MetalMiner.
After a tour of the plant, it was only appropriate that we gave our customers commemorative bottles of Mexinox-branded El Gran Viejo Tequila to bring back home to the States. I thought it would be interesting to examine just how stainless is used in tequila production.
Why is stainless steel in tequila production? Of course, stainless vats are a sanitary choice; however, stainless does not impart any additional flavors into the mixture of blue agave juice and the distinctive water called the mosto.
Tequila is distilled twice in accordance with Mexican law. Because no leeching occurs in either the fermentation or distillation process when stainless is used, the resulting tequila “blanco” is clear in color and solely the result of the fermentation of the agave juice and spring water.
The addition of proprietary yeast — and classical music in some cases, finishes out the blend.
A former colleague of mine shared that Cazadores plays classical music in the fermentation room because the sound waves create a soft stirring in the tanks that aides in the fermentation process. Many people describe the resulting tequila after two distillation processes as being light with citrus or aloe vera notes. Blanco tequila is aged less than two months in stainless barrels and then bottled. The darker colored tequilas are those that have been aged in oak barrels which means the tequila takes on the flavors of the wood and the harshness of the alcohol mellows.
Anejo or Reposado?
Reposado is aged two months to under a year, and anejo is aged from one to three years. Once the aging is complete, the tequila can then be stored in stainless tanks again until it is bottled.
Stainless steel is a neutral container that allows the natural elements of the blue agave to be fully experienced. The soil and climate have an impact on the taste of the blue agave hearts.
Tequila from the lowland blue agaves is described to have an earthy flavor whereas the highland blue agaves yield sweeter and fruitier flavors. The other factor in the taste of the finished product is the water which is combined with the blue agave juice.
Just as bourbon has a unique taste because of the limestone in the Kentucky water, tequila has a special taste because the regional water is high in mineral content. Stainless steel allows all of these factors of Mother Nature to mix together to create a unique tequila without adding any of its own character. By the way, Mother Nature had a way of bringing tequila to us, supposedly, by a farmer’s wife seeing a rabbit gnawing on a fermented agave plant, according to the Suerte website. I suppose it was luck “suerte” that brought tequila to civilization.
Even as world steel powers gathered in Brussels this week to discuss the massive overcapacity problem and exchange accusations, particularly between the U.S. and China, steel prices continued to rise globally.
In China, that means zombie steel mills are rising from the dead. While Beijing has engineered some steel capacity cuts, its efforts are being undermined by a rise in domestic steel prices that has seen mills ramp up output. Even those zombies, which had stopped production but were never officially closed down. They have clawed their way back from the grave and are producing steel again. Such is life in the people’s republic.
The zombie steel mills are back from the grave! Source: Adobe Stock/James Thew.
Steel wasn’t the only metal threatened by imports, though, this week. The United Steelworkersfiled a safeguard action against imports of aluminum, mostly from China. If found to be in violation of section 201 of U.S. trade law and impose tariffs of up to 50% on primary unwrought aluminum (read, ingots welded together to form “semi-finished products”).
Hey, maybe the zombie mills are just “semi-finished,” too! That is, shut down but never really out of business. Here in the U.S., when a company is in trouble it files for bankruptcy protection. That’s exactly what once high-flying renewable energy company SunEdison, a major supplier of solar power, did this week.
There’s simply no mechanisms to deal with losses that way for these Chinese zombie mills. Yet, China claims to be committed to changing to a market-based economy. That’s why it’s so ridiculous that the World Trade Organization and other international trade authorities are even considering market-based economy status for the evolving Chinese economy.
There’s a big meeting of the Organization of Petroleum Exporting Countries this weekend and all signs point to a continued freeze in production, at least among major producers Russia and Saudi Arabia so many speculators and market watchers are becoming bullish on oil. Oh, how quickly they turn!
Oil and Inflation
A direct knock-off of this oil mini surge is price inflation of everything that oil is used to produce, whether as a base material or for transport and production costs. What’s our favorite industrial metal that also has investment potential and is still considered so downright precious?
That’s right, silver! Despite being mined with just about every other metal in the world silver is still a precious metal and its industrial uses combined this week with investors grabbing it up to create a sweet spot for the gray metal. As of this writing it’s riding a 10-month high and looking to gain even more.
Aluminum Still Lags
However, not all metals are enjoying a healthy rebound. Alcoa, Inc. reported first quarter results this week and things weren’t so good for the aluminum smelter. How bad was it? Profits fell 92%. So, yeah, pretty bad.
Our own Stuart Burns put virtual pen to paper and explained that, thanks to Chinese overproduction and stockpiling, smelting aluminum simply isn’t a good business to be in right now. He even called it “an industry on the cusp of shooting itself in the foot.”
If there’s a better example of why Alcoa will soon split itself into two and CEO Klaus Kleinfeld will join the new aerospace, titanium and value-added products half, I haven’t seen it.
Copper Loses All its Gains
My colleague Raul de Frutos also examined why copper has underachieved this year, even amidst the Q1 base metals rally. Dr. Copper is apparently only starting on the back nine and didn’t do any real work in Q1. We’ll monitor the situation with the rest of the base metals in Q2.
This week saw metal prices, particularly hot-rolled coil and cold-rolled coil steel, rally even as major steelmaker Tata Steel announced it was abandoning the U.K. market because of regulations and low prices.
This steel plant at Port Talbot in South Wales, U.K., could close if Tata Steel can’t find a buyer. Even as steel prices increased last week. Source: Adobe Stock/Petert2.
Back here in the U.S., steelmakers are cautiously increasing prices of rebar and other products as the construction season begins in earnest in the East and Midwest, testing the waters of recent commodity price increases.
So, speculative buying, price increases despite demand levels that are still relatively flat and more supply shutdowns are all happening. Is it any wonder that Barclays is warning investors that commodities, overall, could experience a “rush for the exits?”
They’re not the only ones saying Q2 could be bad, either. Our own Raul de Frutos wrote that markets could change direction, big-time, in the next quarter.
Anti-Dumping 2: Electric Boogaloo
It also wouldn’t be a day ending on y, these days, either without mentioning dumping, dumpling. Was that too friendly? Sorry.
My colleague, Raul, explained the effects anti-dumping duties have had on hot-rolled coil, cold-rolled coil and hot-dipped galvanized steel prices here in the U.S. Another investigation into phosphorous copper from South Korea was opened this week, too.
If you wanted an eventful week in steel, you got it.
Reuters noted that it’s up a quarter of its value since hitting $27 a barrel on February 11th. While U.S. crude inventories rose to a new record of 517.98 million barrels last week, output fell for a sixth straight week to 9.08 million barrels a day, according to data from the U.S. Department of Energy’s Energy Information Administration.
The types of wells that built domestic driller Chesapeake Energy. Source: Adobe Stock/ W.Scott
So, is Brent back? If you’re reading MetalMiner and asking that, you haven’t been paying enough attention. DO NOT FALL FOR SHORT-TERM PRICE INCREASES! You need to look at that underlying trend. Non-farm payroll data will come out later today and many are looking to that report to give more information on U.S. and overseas oil production but, even still, we’d caution that oil is far from coming back to even its recent norms — 60 per barrel — and this increase could be short-lived as supply as those inventory numbers are still plenty high.
Oil won’t be giving the metals you purchase a boost anytime soon via higher production and transportation costs, either. Even if these prices can be sustained they’re not yet a significant enough jump to increase those downstream costs.
So, What DID Happen in Energy, Then?
So, then nothing really happened in energy this week? Oh, boy, no.
Earlier this week former Chesapeake Energy CEO was indicted by a federal grand jury and accused of conspiring with an unnamed competitor to rig the price of oil and gas leases in his native Oklahoma. McClendon — along with former Chesapeake founding partner Tom Ward — is credited as being an innovator in horizontal drilling and hydraulic fracturing leading to the US shale oil and natural gas boom.
McClendon’s rise was not without controversy and he was accused, in 2012, of taking out more than $1 billion in personal loans, to finance drilling costs, from firms that were lenders to Chesapeake. His personal lifestyle — using Chesapeake resources — also became an issue. Chesapeake’s debt load, itself, eventually forced McClendon out of the company in 2013. He went on to found American Energy Partners shortly thereafter.
Even after being indicted McClendon was defiant facing the charges.
“The charge that has been filed against me today is wrong and unprecedented,” McClendon said in statement. “I have been singled out as the only person in the oil and gas industry in over 110 years since the Sherman Act became law to have been accused of this crime in relation to joint bidding on leasehold.”
The indictment followed a nearly four-year federal antitrust probe that began after a 2012 Reuters investigation found that McClendon discussed with a rival how to suppress land lease prices in Michigan during a shale-drilling boom. Although the Michigan case was subsequently closed, investigators uncovered evidence of the alleged bid-rigging in Oklahoma.
McClendon made his statement on Wednesday. Then, on Thursday, McClendon died in a fiery, one-car crash.
McClendon was killed when he suddenly crossed the center line and struck the wall at a high rate of speed, crushing his sport-utility vehicle’s front end and engulfing it in flames, police said. The Oklahoma City police say it will take a week or more to investigate what happened to McClendon and if the crash was, indeed, a suicide.
We may never know if McClendon was guilty of rigging bids and fixing prices, but he can serve as a cautionary tale of how loose monetary policies and risky bets fueled what was, undoubtedly, a positive boom in American energy production. That the market had to mature beyond the ways of wildcatters like McClendon is a good thing for domestic energy.
While his risky bets on oil and natural gas paid off big for Chesapeake’s early growth, they also ended up forcing him out. All purchases have elements of risk and reward, especially in the competitive energy markets. Don’t let your risk outweigh potential reward.
This week was a rough one for companies such as BHP Billiton and BAE Systems, vast multinationals that call the entire world home and offer products as varied as mined raw materials to supersonic fighter jets.
Things started off auspiciously when BHP slashed its interim dividend by 75% on Tuesday, abandoning a long-held policy of steady or higher payouts as it braces for a longer-than-expected commodities downturn. That wasn’t the end of the rough ride for BHP, though. The Anglo-Australian miner was then sued in the US by investors who accused it of fraudulently overstating its ability to manage safety risks prior to November’s fatal dam burst at the Brazilian mine it co-owned and operated with Rio Tinto Group.
Mo’ Nations, Mo’ Problems
So, not only is BHP on the hook for the destruction caused thanks to the dam collapse in Brazil but, if the lawsuit is successful, it could also owe back any money lost by investors.
Saudi Arabia is delaying orders of the Euro Fighter Typhoon due to low oil prices. Is Bae no longer Saudi Arabia’s bae? Source: Adobe Stock / Andrew Dunn.
But, BHP was not along in facing angry investors and lower returns this week. My colleague, Stuart Burns wrote about the challenge that defense and aerospace multinational BAE Systems is facing as oil prices keep falling and Middle Eastern clients cancel orders for Euro Fighters.
As oil keeps declining, nations such as Saudi Arabia — fighting one war and it might have another conflict on the way — are passing on those expensive Euro Fighters and they’re making only the most necessary defense expenditures. For BAE, that meant issuing a $1.5 billion bond sale at the end of last year to facilitate cash flow in the event of much smaller up-front deposits for those fighter jets.
So, as BAE and BHP dealt with their problems in a fairly bad week for multinationals, was anyone making progress in this bearish metals market?
The General Bucks the Trend
Actually, GE made a first-of-its-kind deal with Chinese metal coatings manufacturer Tianjin Xinyu Color Plate Co, Ltd.
As the only international company bidding among strong local competitors, GE, this week, won a contract to provide power distribution and low-voltage drives as an electrical and automation solution for Tianjin Xinyu Color Plate’s two greenfield continuous galvanizing lines, which produce galvanized steel sheets for white goods and construction industries.
GE’s insulated gate, bipolar transistor-based LV7000 converters and high-performance controllers will allow Tianjin Xinyu Color Plate to manufacture high-quality galvanized steel.