Articles in Category: Investing Hedging

The London Metal Exchange steel scrap contract is coming of age much more rapidly than the old steel billet contract did. Unlike its older sibling, the steel scrap contract has the prospect of becoming a meaningful and valuable tool both for the trade but also for analysts and financial players.

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The LME Ferrous Monthly Update report for February reported there was steady uptake of both scrap and steel rebar contracts last year and that there was  a surge of activity in January, for both February dates and out to September of this year. LME Steel Scrap and LME Steel Rebar both traded record volumes last month. LME Steel Scrap traded the equivalent of 262,450 metric tons composed of almost 2,500 individual trades, the LME reports.

Source London Metal Exchange

As volume and liquidity builds, the contract will become more representative of real market prices and as a result increasingly relevant as a viable tool. One measure of liquidity is the narrowing of bid/offer spreads. In a non-liquid market buyers and sellers are harder to find and spreads tend to be wider, but as volume has built market makers have been able to narrow the spreads reducing trading costs and increasing the attractiveness of the contract for hedging. Read more

Leading Republican lawmakers said over the weekend proposals for a new Trump-administration-backed infrastructure bill could be introduced as early as the coming weeks.

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Senate Majority Leader Mitch McConnell (R. Ky.) told reporters he expects to receive “some kind of recommendation on an infrastructure bill, a subject that we frequently handle on a bipartisan basis,” but gave no details or timing.

He has previously voiced concern over adding to budget deficits with a new injection of federal funds for road, bridge and other construction projects like the ones President Barack Obama secured from Congress in 2009, especially after a major highway funding law was enacted about a year ago.

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During the campaign, Trump said he would push for a $1 trillion infrastructure program to rebuild roads, bridges, airports and other public works projects. He said he wanted action during the first 100 days of his administration, which now seems unlikely.

Global aluminum demand is more robust than most expected. Chinese stimulus measures boosted demand for aluminum in the auto and real estate industries. In addition, the U.S. is expected to demand more aluminum amid Donald Trump’s plans to inject one trillion dollars in U.S. infrastructure.

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Strong demand is supportive for aluminum prices this year. However, in this piece we are going to focus on the supply side. We believe three factors are going to disrupt global aluminum supply. As a result, we’ll see higher aluminum prices this year:

Graphic: Raul de Frutos, MetalMiner.

Trade Barriers

Last week, U.S. customs officials seized $25 million worth of aluminum linked to a Chinese billionaire accused of stockpiling the metal across the world. The move is the most potent action yet by federal authorities probing whether U.S. companies connected to Chinese magnate Liu Zhongtian illegally avoided nearly 400% tariffs by routing the metal through other countries. Currently, Homeland Security is conducting laboratory tests on the aluminum to determine whether the metal is restricted under U.S. law. Read more

Most aluminum consumers seem quite content with the range-bound behavior of the light metal over recent months.

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Aluminum on the London Metal Exchange has been trading broadly between $1,700 and $1,750 per metric ton for much of the fourth quarter. Maybe not to the same extent as copper or zinc, but aluminum along with most of the base-metal sector benefited from renewed investor interest as 2016 went on. Although net long positions have been trimmed back following some recent significant deliveries into LME warehouses, the consensus remains positive regarding prices for 2017. Read more

The Chinese yuan weakened on Monday afternoon after its midpoint was set at its lowest level in half a year.

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China’s authorities sets the mark 0.87% or 594 points lower than last Friday, the biggest daily decline since late June in 2016. Traders are allowed to trade up to 2% either side of the reference point for the day.

The Hong Kong Interbank Offered Rate for offshore yuan, known as the CNH Hibor, plummeted to 14.05% from last Friday’s 61.33%, down 4,728 points.

The People’s Bank of China set the yuan midpoint at 6.9262, a sharp drop for the renminbi compared with Friday’s fixing at 6.8668.

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China’s central bank does not allow the currency to move more than 2% from its daily fixing in onshore trade. While policymakers cannot closely control offshore trade of the currency, it usually remains relatively close to its onshore counterpart.
Onshore, the dollar was fetching as little as 6.8679 yuan last week, compared with 6.9318 yuan at 9:54 a.m. today.

Japanese electronics company Panasonic and U.S. electric car maker Tesla said today they plan to begin production of solar cells at a factory in Buffalo, New York.

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The two companies said they finalized an agreement calling for Tokyo-based Panasonic to pay capital costs for the manufacturing. Palo Alto, California-based Tesla made a “long-term purchase commitment” to Panasonic.

Their statement gave no financial figures. The factory in Buffalo is under development by SolarCity Corp., a San Mateo, California-based solar panel company owned by Tesla. The photovoltaic cells and modules will be used in solar panels for non-solar roof products and solar glass tile roofs that Tesla plans to begin making, the announcement said.

LME Names New Clearing Executive

The London Metal Exchange has appointed James Proudlock as deputy chief executive of its clearing system, the exchange said last week.

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Proudlock, who has 30 years experience in commodities, will join LME Clear in April next year.”Prior to joining LME Clear, James worked at JP Morgan Securities for 10 years where he was a managing director and commodity product lead for Futures and Options and most recently markets execution,” the LME said.

Gold prices since 2013

Gold prices since 2013. Source:MetalMiner analysis of @stockcharts.com data.

Gold is the only commodity wherein physical annual demand is only a tiny fraction of total supply available and shortages of gold caused by physical demand never happen.

Therefore, China’s demand growth for metals or the potential boost in U.S. infrastructure spending are factors that aren’t really helping push gold prices higher unlike industrial commodities.

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What’s causing gold prices fall dramatically? The U.S. dollar.

Gold (in dark) vs the dollar index (in green)

Gold (in dark) vs the dollar index (in green). Source: MetalMiner analysis of @stockcharts.com.

Since mid-August the dollar started a bull run that is still in play. Three main factors are propelling the dollar’s bull run:

Markets expected the Federal Reserve to raise rates by the end of the year. In December the Fed raised interest rates by a quarter point, as expected, but policymakers signaled a likelihood of three increases in 2017, up from prior expectations for two moves. While interest rates outside the U.S. stay near zero or even in negative territory, it’s no wonder yield-seeking investors are going after the greenback.

The ongoing political tensions in Europe are causing the dollar to appreciate against the euro. The ongoing refugee crisis in Europe, Brexit, terrorist attacks and political instability are some of the events causing investors to lose their appetite for the European currency this year.

Finally, the victory of Donald Trump has added fuel to the dollar’s bull market. The new president-elect has proposed new tax policies that will potentially make multinational companies bring their foreign profits back to U.S., increasing the demand for dollars. In addition, the dollar is perceived as a stronger currency since investors expect growth in US to get a boost.

What This Means For Metal Buyers

As long as the dollar continues to rise, there is little hope for gold investors to make returns. Gold buyers should wait closely for weakness in the dollar before buying gold. For now, sentiment on the dollar continues to be quite bullish.

About a year ago I was interviewed by a columnist from a leading economic newspaper about the prospects for the lithium market.

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The gist of the article was the question of will lithium demand from electric vehicles unsustainably drive up prices due to supply shortages? I said no. I expected the market to rise as demand increased, but that there was no shortage of lithium in the world and supply would rise in response to price increases and demand.

Well, the paper went on to report that supply shortages would constrain the market and the lithium price was set to boom. That’s okay. I don’t expect everyone to take my advice as gospel and, to some extent, you could say the author was right, the price has risen as this graph from CRU illustrates.

Source CRU Group

Source: CRU Group

But the same CRU article goes on to explain that to every price rise there is a response. The extent to which the market responds with new capacity or expansion to existing capacities varies with the commodity, the market during the time frame involved and any number of other issues. We will come back to CRU’s modelling of the lithium market a little later but, for now, how has the lithium industry responded to this rise in demand and what effect has the rising price had?

Lithium Investing

Well, Reuters leads an article with “stampede to invest in lithium mines threatens price gains” and goes on, as the title suggests, to say a rush to invest in new and expanded mines for lithium means material will flood the market just as demand for lithium batteries is due to soar, curbing prices. Read more

Over the holidays, we will be republishing our top posts of 2016 over the next few days. This was our single most-read post of 2016 from way back in January. Many of Soros’ predictions for the year we’re about to leave behind never came to fruition (a “hard landing” in China) while others were spot on (the Federal Reserve left interest rates, mostly, alone this year). Looking back on it now, much of what Soros spoke of has not changed. China is still exporting deflation even though metal prices recovered this year.

You would be a brave investor to bet against George Soros. The billionaire investor has shown a canny knack of making the right calls over the decades. As an article in Bloomberg says he rose to fame as the hedge fund manager who broke the Bank of England in 1992, netting $1 billion with a bet that the UK would be forced to devalue the pound.

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He also successfully bet that Germany’s deutsche mark would rise after the collapse of the Berlin Wall in 1989 and that Japanese stocks would start to fall in the same year. Between 1969 and 2011, Soros led his hedge fund to average annual gains of about 20% before returning money back to investors in 2011. Read more

It has probably never been as hard to read the runes for the fortunes of emerging market (EM) economies as it is now.

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If currencies are any barometer for the health of an economy, or at least for investor’s perceptions of the health of an economy, this year has seen considerable variations and fluctuations. Robust commodity prices appear to signal continued strong health and confidence in China, even as the government works hard to realign the economy from export-led manufacturing to consumer-led domestic growth, but the currency has been falling since the spring as this chart shows.

Source Financial Times

Source: Financial Times

EM investors started the year hiding over fears about China and the oil market, then recovered during mid-year as growth remained stable and commodities rose. Read more