Articles in Category: Investing Hedging

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

MetalMiner Price Benchmarking: Current and Historical Prices for the Metals You Buy

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

In recent weeks the Dalian and Zhengzhou commodity exchanges and the Shanghai Futures Exchange have all toughened trading requirements several times.

MetalMiner Price Benchmarking: Current and Historical Prices for the Metals You Buy

The measures imposed include raising trading margins, hiking transaction fees and imposing trading limits in attempt to tamp down speculative trading. Reuters’ Clyde Russell referred to the situation as China having “thrown the world’s commodity producers and traders a massive party.”

HRC and CRC prices in China continue to rise. Source: MetalMinerIndex

HRC and CRC prices in China rising through November. Source: MetalMinerIndX.

This year saw most analysts surprised by the strength of both China’s coal and iron ore imports, which led to rallies in the prices of both commodities. Chinese imports of iron ore jumped to the third-highest on record in November with 91.98 million metric tons up 13.8% from the previous month, taking the year-to-date gain to 9.2% compared with the same period in 2015, according to Reuters. Read more

Many economists and market observers have been warning for some time that with cheap cash sloshing through the Chinese economy, and attractive investments in the real economy remaining scarce, investors had plowed too much money into China’s bond market.

Two-Month Trial: Metal Buying Outlook

The Financial Times reports China’s 10-year government bond yield fell from 4.6% in January 2014 to 2.65% by late October. Banks borrow overnight and buy longer dated bonds in what appears a clear carry trade but, to work, the market requires stable and low market rates. Read more

While this year’s spectacular rebound in iron ore prices has been a godsend for the world’s biggest miners, it has not gone high enough for smaller, less-efficient producers that still have pits shuttered and equipment idle.

Two-Month Trial: Metal Buying Outlook

The price of the steelmaking material has nearly doubled in 2016 to above $80 a metric ton, a boon for miners such as Vale, BHP Billiton and Rio Tinto which extract the material at a cost of less than $20 per mt.

ABI Limps Out of 2016

Coming off a modest increase after two consecutive months of contraction, the Architecture Billings Index recorded another small increase in demand for design services. As an economic indicator of construction activity, the ABI reflects an approximate nine to 12 month lead time between architecture billings and construction spending.

MetalMiner Price Benchmarking: Current and Historical Prices for the Metals You Buy

The American Institute of Architects (AIA) reported the November ABI score was 50.6, essentially unchanged from the mark of 50.8 in the previous month. This score reflects a slight increase in design services (any score above 50 indicates an increase in billings).

It seems like a bizarre question when iron ore has been on a bull run this year and coking coal producer Glencore has just agreed first-quarter contract prices with Nippon Steel that are the highest since 2011.

MetalMiner Price Benchmarking: Current and Historical Prices for the Metals You Buy

But Morgan Stanley, in its 2017 Outlook, takes a bullish stance on base metals but forecasts bulk commodities such as iron ore and coking coal will do no more than tread water next year. Trying to call a peak in any market is, at best, a stab in the dark, but coking coal spot prices appeared to be easing just as contract prices set a new near-term record. Read more

Scenario: Within the next two months you need to go to your supplier and buy metal. Let’s say you are thinking about placing an order that will meet your metal needs for the next six months. Let’s say you correctly identify that you are in a bull market (you read us).

MetalMiner Price Benchmarking: Current and Historical Prices for the Metals You Buy

Therefore, as you expect prices to keep moving up, you quickly grab the phone and call your supplier to place the order ASAP.

Is that the right way to do it? Nope.

I say this over and over, but I don’t get tired of saying it: The key to being consistently ahead of your competitors (and beat the market) is not about predicting, but about finding the right time to buy. Markets are unpredictable and you can always get it wrong. The key to consistently lowering your purchasing costs is to buy at an attractive price, one in which the metal has high probability to make a move higher.

In a previous post (part one of this article), we talked about one of the situations we like to use to hedge/buy forward, price consolidations. Today we’ll show another good circumstance to time your purchases during a bull run:

Price Pull-Backs

In a bull market, sometimes prices rally and it’s risky to buy at those levels because prices could pull back simply due to profit taking. A good opportunity to time your purchase is when prices correct or pull back and then momentum picks up again. That signals that buyers are again back in control and prices are likely to move higher.

Tin offered two good opportunities to time purchases after prices pullbacks this year. Source:MetalMiner analysis of data

Tin offered two good opportunities to time purchases after prices pullbacks this year. Source:MetalMiner analysis of data.

We’ve seen examples of price pullbacks in pretty much across all industrial metals this year. A good example is tin.

After calling bull market back in April, buyers could have bought tin after a price pull back in May and recently after another pull back in November. It’s important to identify those areas where we expect to see support, which we indicate in our monthly outlooks. Buyers had another great opportunity to buy tin back in July after a price consolidation.

Subscribers bought cold rolled coil steel in November after a price pullback. Source: MetalMiner Index

Subscribers bought cold rolled coil steel in November after a price pullback. Source: MetalMiner IndX.

A more recent example is steel. We called bull market in steel back in April, when buyers had a great opportunity to buy forward (we recommended buying one year’s worth of demand). But then, in the summer prices signaled a top, we recommended subscribers to hold on purchases, and wait for a price pull back to buy again.

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Prices then corrected over the next few months. During price pull backs is important to wait until momentum picks upwards again. That happened during the third week of November, when we sent our subscribers a note recommending to buy steel forward. Another textbook price pullback during a bull market.

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Many of our readers are wondering what’s going on with the U.S. dollar and industrial metals.

MetalMiner Price Benchmarking: Current and Historical Prices for the Metals You Buy

The dollar and commodities tend to move in opposite directions. Why, then, is the dollar trading at a 14-year high at the same time as industrial metals are on a tear? For how long can these two continue to move together? Who is the real bull and which one is just imitating?

Industrial metals ETF (in black) vs dollar index (in green)

The industrial metals ETF in black vs. the U.S. dollar index in green. Source:

To answer these questions we need to look at history. The dollar and industrial metals have risen in tandem since September. Even oil prices are making multiyear highs. But this is not such a strange development.

The US Dollar and Commodities

The dollar-commodities relationship has not been without its temporary periods of decoupling. Over the past two decades there were two major periods in which the dollar and commodities moved up together for a whole year. The last time this happened was in 2005 and the causes were rather similar to what we are seeing now.

Dollar index (in green) vs Commodities (in blue)

The U.S. dollar index (in green) vs commodities (in blue). Source:

Has This Happened Before?

Back in 2005, industrial metals were on a tear thanks to China’s increasing appetite for commodities. Today, the main factor driving commodities up is higher-than-expected demand growth, especially from China, while lower than expected supply.

That would normally bring the dollar down, but in 2005 there were a series of factors that made the greenback rise, even in the face of a rising commodity market.

First, the dollar’s role in the temporary break in the dollar-commodity inverse relationship in 2005 was owed to a two-year push of U.S interest rate increases (from June 2004 to June 2006) which lifted U.S short-term interest rates above those in the Eurozone. Currently, the dollar is getting a boost as the Federal Reserve is expected to increase rates while interest rates in Europe are in negative territory.

Another driver of a rising dollar, back in 2005, was a blow to confidence in the European Union and its currency dealt by France’s rejection of a proposed European Union Constitution. Similarly, events like Brexit, a referendum in Italy or the upcoming presidential elections in France are adding tensions about stability in Europe and contributing to an appreciation of the dollar against the Euro.

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Finally, also contributing to the dollar’s surge in 2005 was a temporary tax break granted by the Bush administration to U.S. multinational corporations, allowing them to repatriate profits from their overseas subsidiaries. This prompted a surge of inflows into U.S. dollars from euros and, unsurprisingly, the dollar rose against the euro. A very similar case is what new president-elect Donald Trump has proposed: Lowering the corporate income tax rate from 35% to 15% while allowing repatriation of corporate profits held offshore at a one-time tax rate of 10%. These policies, if implemented, will create more demand for dollars so it’s no wonder that investors have already been betting on the dollar since the election’s outcome.

What This Means For Metal Buyers

By looking back in history we can relate the current macro factors driving dollar and commodities higher to what happened back in 2005. The dollar-commodity inverse relationship is a strong one but there are periods where they can decouple for some time. This means that there is no reason to be bearish on commodities because the dollar is moving higher and vice versa. These two markets could continue to trend higher in 2017. We will continue to watch them closely to determine which one breaks first but, until then, I’m temporarily bullish on both the dollar and commodities.

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MetalMiner’s Global Precious Metals MMI dropped two points this month to 79, from 81 in November; a 2.5% decrease. But that’s less the story than what happened within this precious metals sub-index.

The PGM Story

As we said last month, longer-term structural concerns remain for the platinum-group metals (PGMs), especially platinum and palladium. However, in the short term, one of those two precious metals that are instrumental in automotive catalytic converters kept the Global Precious MMI from falling even further for December.


Indeed, with gold and silver falling across all four geographic markets (see below), our U.S palladium bar price jumped to an 18-month high, rising a whopping 24% month-over-month. Japanese palladium also rose appreciably.

The platinum bar price, however, did the reverse. Our U.S. platinum bar price hit a 10-month low, dropping 7% since Nov. 1.

MetalMiner Price Benchmarking: Current and Historical Prices for the Metals You Buy

Crossing like ships in the night, one heading north, one heading south, what should buyers make of the platinum/palladium divergence?

According to HSBC senior analyst James Steel, talking to Platts, “the platinum-palladium spread has narrowed substantially, from $375/ounce before the U.S. election. This reflects clearly tighter underlying fundamentals for palladium.”

With car sales in the U.S. and China continuing to be robust, and with Johnson Matthey predicting another supply deficit in 2017, palladium could continue its buoyancy for the near future.

The Dollar –> Infrastructure –> Gold

Raul de Frutos gave MetalMiner readers this helpful rundown in late November:

A rising dollar depresses commodity prices, especially precious metals. It does have less of an effect on more economically-sensitive groups like energy and industrial metals. Indeed, industrial metals are on the rise despite a strong dollar. This is because the dollar is rising on expectations of higher rates down the road but, at the same time, metal prices are getting an additional boost because of Trump’s plans to spend big on the nation’s infrastructure. However, gold’s demand won’t be affected by infrastructure spending. As a result, investors are left without reasons to buy gold at this moment.

That still appears to be the case here in early December, as the US gold price on our MetalMiner IndX hit its lowest point in 10 months, falling to $1,173/oz on Dec. 1 — just over an 8% drop from Nov. 1.

(Silver prices followed suit across 4 markets globally, all dropping from November to December.)

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Zinc, lead and tin all hit multiyear highs this week and the Organization of Petroleum Exporting Countries finally agreed on a production — with its own members and Russia — to cut back production so oil prices are up, too.

MetalMiner Price Benchmarking: Current and Historical Prices for the Metals You Buy

We were already in a metals and commodities bull market before the beginning of the week but it’s now more like a bull stampede. They’re even running in India. Lead Forecasting Analyst Raul de Frutos notes that this bull market is particularly unusual because it coincides with a strong U.S. dollar. Since commodities are valued in dollars it’s odd that they’re both up — and rising — at the same time.

MetalMiner co-founder and editor-at-large Stuart Burns also chimed in with vexing information, noting that tin is up while there seems to be abundant to robust supply of the stuff in the Earth’s crust with stable nations and reliable companies set to mine it.

Bulls stampeding in a Madrid sculpture

Don’t get stuck under these guys in the rush to get into this market. Source: Adobe Stock/Kyrien.

So, supply and demand aren’t fueling tin’s rise and that’s likely true for other metals as well. “New money,” as they say, is flowing into metal markets as investors are excited about Chinese construction demand and the prospect of a still nebulous $1 trillion infrastructure plan here in the U.S. China is, once again, driving the demand boat as the U.S. consumes only about 8% of commodities worldwide and the People’s Republic consumes the most. Read more

Remember when Barack Obama defeated republican presidential nominee Senator John McCain? Or Usain Bolt’s first appearance in the Olympic games? Well… that’s how far back you need to go if you want to see zinc prices as high as they are now.

MetalMiner Price Benchmarking: Current and Historical Prices for the Metals You Buy

Last week, zinc closed just short of $2,300 per metric ton on the London Metal Exchange, the highest level since early 2008. Zinc is the first industrial metal we can say that about (and possibly not the last one).

Zinc Hits an eight-year high. Source: MetalMiner analysis of data

Zinc hits an 8-year high. Source: MetalMiner analysis of data.

Zinc markets moved into deficit this year following the shutdown of some big mines. The International Lead and Zinc Study Group (ILZSG) anticipates that global usage in 2016 will exceed production by 349,000 mt. In 2017, the market is expected to remain in deficit with the extent of the shortage forecast at 248,000 mt.

How our subscribers bought zinc this year

How our subscribers bought zinc this year. Source: MetalMiner analysis of data.

Whether fundamentals justify zinc’s spectacular rally or not is debatable. What’s not debatable is that there is no way you can time your purchases by just looking at the fundamentals. You need to understand how prices move, or have someone do it for you.

The first thing you need to know is what kind of market you are in. Are you in a bear market or a bull market? Industrial metals were in a bear market since 2011 until they hit a floor in January. Since it’s impossible to consistently pick the exact market bottom, we always recommend to hedge when prices are finally showing strength.

That happened back in April, when we saw enough evidence to call a bull market in industrial metals. At the same time, zinc prices were consolidating after rallying in the first quarter. Then, zinc managed to break out of that price consolidation (click here for what a price consolidation is). Given zinc’s bull narrative of supply shortfall, a confirmed bull market in industrial metals and zinc’s strong price action, we recommended our subscribers to buy one year worth of demand on the first of May, when prices were trading at $1,900/mt.

Then, Zinc prices continued to move higher but, since the future is always unpredictable, you can’t just buy at any price. Markets can always turn the other way around and you don’t want to buy large quantities just before markets turn around. Therefore, you need to wait for another strategic point to hedge/buy forward again.

Two-Month Trial: Metal Buying Outlook

That happened again on the first of November. The bullishness across the metal complex became more and more obvious and zinc prices broke out from another consolidation, confirming that there was a high probability that prices would move higher. On the first of November, we recommended our subscribers to buy six-months forward when prices where at $2,420/mt.

Bottom Line

Zinc buyers that followed our strategy will be buying zinc in 2016 at an average price of $1,830/mt. Those that simply bought month by month will pay and average of $2,080/mt, or 13% higher. Moreover, those that followed the strategy will have locked in their purchase requirements for 2017 at an average price of $2,160/mt while the others will enter 2017 with quotes near $2,900/mt.

What This Means For Metal Buyers

Zinc prices might look expensive, but they still look strong and could continue to move higher. Buyers need to pay attention to capitalize on future strategic points to hedge/buy forward. On the other hand, if markets turn around, buyers need to identify those turning points to start buying down the market.

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