Articles in Category: Investing Hedging

The Dow Jones Industrial Average opened at a record high today, driven by financial stocks, after the index capped off its best week since 2011 following Donald Trump’s unexpected victory in the U.S. presidential election.

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Since Trump’s triumph last Tuesday, investors have been betting on his campaign promises to simplify regulation in the health and financial sectors and boost spending on infrastructure.

The financial index rose 2.18% to its highest level since 2008. Goldman Sachs and JPMorgan Chase provided the biggest boost to both the S&P 500 and the Dow. Stock markets around the world were affected by a continued selloff in the global bond market as investors looked for more clarity regarding Trump’s policies.

Chinese Steel Output Increases in October

China’s steel output rose 4% to 68.51 million metric tons in October from a year ago, government data showed, as steel mills in the world’s top producer further expanded production.

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Total output for the first 10 months of 2016 edged up 0.7% to 672.96 mmt, data from the National Bureau of Statistics also showed on Monday.

Copper has burst to life on the London Metal Exchange after a year of choppy sideways trading. Benchmark, three-month copper has exploded to the upside, hitting a 15-month high of $5,443 per metric ton on Wednesday.

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As is the way with markets, the move is feeding on itself as shorts buy back positions and momentum-chasing funds join the action.

September Steel Shipments Down From August

The American Iron and Steel Institute (AISI) reported that for the month of September, U.S. steel mills shipped 6,769,312 net tons, a 10.3% decrease from the 7,542,605 nt shipped in the previous month, August 2016, and a 4.9% decrease from the 7,120,663 nt shipped in September 2015.

Shipments year-to-date in 2016 are 65,803,018 nt, a 0.5% decrease from shipments of 66,162,973 nt in the first nine months of 2015.

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A comparison of September 2016 shipments to the previous month shows the following changes: hot dipped galvanized sheets and strip, down 8%; cold rolled sheets, down 8%, and hot rolled sheets, down 13%.

There was no booing and no slow handclapping when Garry Jones, chief executive of the London Metal Exchange (LME), rose to address the exchange’s annual black-tie dinner at the Grosvenor House Hotel in London.

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There had been considerable speculation as to what sort of reception he would get after a year of falling exchange volumes and a protracted dispute with brokers over trading fees.

But decorum was maintained and Jones was in conciliatory mood, accepting with “some humility” that things hadn’t gone “as well as we hoped.” Reuters’ Andy Home has more.

Last Pre-Election Purchases Help Boost Copper

LME copper prices see-sawed in positive and negative territory on Tuesday after posting hefty overnight gains on growing signs that Hillary Clinton will win the U.S. presidential election over her Republican rival Donald Trump.

Shanghai copper futures showed consistent gains, with some traders hedging expectations that the value of the U.S. dollar would erode if Trump eked out a victory. Read more

Many active investors in the aluminim market will have watched, perplexed and confused, as to why the London Metal Exchange price continues to rise, yet the fundamental reality is one of, if not an oversupplied market, at least one with no shortage of metal in storage.

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

Producers will claim some credit for cutting capacity and talking up demand, which — to be fair — both positions hold some water. Western smelters in the U.S. and Europe have been relentless in cutting uneconomic refining in the face of weak prices.

Aluminum Smelter Closures

Source: CRU

This graph from CRU shows the steady demise of the U.S. primary aluminum smelting industry and you only have to Google “closure of aluminum smelters” or something similar and you will get a litany of stories about smelters being closed or facing imminent closure around the world.

Production Overseas

At the same time, though, production in the Middle East has jumped from 0.9 million metric tons (mmt) in 1999 to an expected 5.7 mmt this year, and Chinese primary production has skyrocketed from 2.6 mmt in 1999 to reach 31.2 mmt in 2015, with more to be added in 2016. Read more

The Telegraph newspaper, while widely respected, has a tendency to shout doom and gloom at the first signs of potential trouble, but that doesn’t mean it is always wrong.

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The paper, and particularly those articles of International Business Editor Ambrose Evans-Pritchard, have at times been quite prescient. So dire is his latest offering it should, maybe, not be dismissed as scaremongering for headlines sake. The article makes the point that dollar Libor rates are tightening across large parts of the global economy and will, if they continue, cause significant stress in credit markets and ultimately stock markets. Read more

Oil inventory hit an all-time high after a surprisingly strong last full week of October and a major copper trader said the LME should cut fees.

Oil Inventory Hits an All-Time High

The Energy Information Administration said oil inventory is up by 14.4 million barrels in the week to October 28, reaching 482.6 million barrels. That’s the largest weekly build since the U.S. Energy Department started keeping records in 1982.

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Oil prices fell after the data, with benchmark U.S. crude futures dropping 3.3%, or $1.57, to $45.12 a barrel, their lowest level since late September. U.S. crude imports jumped by about 2 million barrels per day to just under 9 million bpd, the highest rate since September 2012.

Red Kite Founder Says LME Should Cut Fees

The London Metal Exchange should further cut fees and review rules that may give high-speed traders an unfair advantage, the founding partner of Red Kite Group, Michael Farmer, said on Tuesday.

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Farmer, who has earned the nickname Mr. Copper for his long experience in industrial metals trading, warned that rising fees and high-frequency trading will further cut liquidity on the LME, which has suffered sliding volumes this year.

3M LME aluminum price hits 15 month high. Source: fastmarkets.com

Three-month LME aluminum price hits 15 month high. Source: Fastmarkets.com.

Aluminum prices hit new highs this week, rising above $1,700 per metric ton on the London Metal Exchange. Aluminum supply has increased this year as rising aluminum prices triggered release of new capacity and restarts of idled capacity. However, as we recently pointed out, there are other factors pushing aluminum prices up:

Rising Costs

It takes a lot of energy to smelt aluminum. Indeed, energy accounts for around half of the cost for Chinese smelters to produce aluminum.

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

Thermal coal prices in China have more than doubled this year. As energy prices increase, Chinese smelters are getting squeezed, making it tougher for them to keep up with production. Alumina prices in China have also entered the upward track from mid-August, increasing around 50% so far this year.

Strong Demand

Chinese demand from infrastructure and construction has been robust this year. The auto sector, another big industry for aluminum demand, continues to look strong. In September, Chinese automobile sales rose 27% from the same period last year. This is the seventh consecutive month in which auto sales have risen and the third consecutive month where growth was above 20%. The growth rate this year is substantially higher than last year.

What This Means For Metal Buyers

Industrial metals have been in bullish mode since early this year. Aluminum prices are finally jumping on the bandwagon. Aluminum buyers should minimize their price risk exposure if they haven’t done it yet.

Reuters reports 1.8 million metric tons of previously mothballed Chinese aluminum production capacity has now been restarted this year following a massive slump last year as prices plummeted.

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

While another 2.5 mmt of new capacity, much of it ultra-low-cost, is also expected to be added by the end of the year, a process of both restarts and greenfield additions that is expected to continue into the year end. Factor in new supply from Bahrain and India, and global supply is outstripping real demand.

Distortions in the Market

The aluminum market may be distorted more than most, but copper is not far behind and steel is plagued by overcapacity running into the hundreds of millions of metric tons.

Zinc has had a strong run this year with prices rising on the back of strong (construction-supported) galvanized steel demand and a constrained supply view. But 2017 will see the return of Glencore’s 500,000 mt/year operation, previously mothballed due to low prices, significantly increasing supply.

Even the nickel market, although said to be in deficit because of Indonesia’s absence from the market and cut backs in the Philippines, has seen prices rise on the back of rising (Chinese) stainless production.

How Far Can This Stimulus Go?

Prices and production are both supported and supporting each other on the basis of strong demand and production in China across a range of metals. How much longer has China’s housing market got to run?

Free Download: The October 2016 MMI Report

How much more debt is Beijing willing to acquiesce to being added in support of maintaining an adherence to a dogmatic GDP growth target? Take your guess, but 2017 could see an easing in support and many of these markets might lose the support they have enjoyed this year. That doesn’t mean a crash, but it will mean a cap to further price increases and the possibility of prices falling back for those commodities most vulnerable to speculative support and oversupply.

JamesMayheadshot_150

James May

It is the time of the year when a lot of managers get asked to prepare next year’s budget.

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

If you are a steel buyer then you probably need to come up with a number for your boss. It would also help if you were right, or at least had some strong arguments to back you up!

Don’t Panic!

We’re here to help. Early in the summer, U.S. hot-rolled coil prices topped out at $630 per ton. Currently, they are $500 a ton.

Our earlier reports highlighted the reasons why, but we recap them here:

  1. U.S. flat product mills are operating at high utilization rates. Don’t believe the American Iron and Steel Institute crude number.
  2. The high U.S. prices midyear opened up a major arbitrage. As the chart highlights, a big arbitrage results in rising imports, which have already turned higher. The anti-dumping action simply resulted in a diversion to alternate supply. This will arrive in Q4 and into Q1.
  3. The combination of higher domestic output and import arrivals led to excess supply and rising inventory.
  4. Under those circumstances, consumers do not need to buy and lead times have dropped to two to four weeks for HRC, incentivizing mills to discount. With scrap down to $220 per metric ton delivered, electric-arc furnace minimills, in particular, have the margin to offer those discounts.

Prices are therefore likely to drop to $450 per ton in Q4 and potentially even lower in Q1 2017.

U.S. Imports (000 metric tons) and HRC Price Arbitrage ($/metric ton)

JamesMay_100616

Source: Steel-Insight.

However, this rapid decline in prices means that the excess inventory build is likely to be small. Looking at the chart, we see that the “arbitrage window” was realistically only 3-6 months. In the last few weeks, HRC import buying has slowed dramatically, although cold-rolled coil and hot-dpped galvanized imports still make sense. Read more

Lead prices on the London Metal Exchange rose above $2,000 per metric ton, for the first time in 17 months. Just this week, the metal is up near 7% in only four days.

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At a face value, a combination of supply surplus and stable LME stocks doesn’t really support this bullishness. So what’s behind this price rally?

Lead hits a 17-month high. Source: fastmarkets.com

Lead hits a 17-month high. Source: fastmarkets.com.

Lead prices are playing catch-up. They have lagged behind zinc’s performance this year but, it’s not a surprise that lead prices are finally taking off.

The closure of mines caused zinc prices to rally this year but it seems like the market has ignored the fact that mine closures also affect lead supply. This may be because markets expected secondary production to make up for this shortfall.

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More importantly, a rising trend in the metal complex is adding fuel to lead prices. Lead prices are being driven by funds’ increasing appetite for industrial metals. Sometimes, a metal can rise significantly in price before the bullish story becomes clear. We warned earlier this month to hedge lead. If you are a lead buyer, don’t wait until the fundamentals of this metal look bullish because it might be too late…