Investing Hedging

Just about two months ago Zinc made a good rally. Despite the encouraging moves, it was hard to imagine this metal hitting record highs in a bearish commodity market.

Zinc 3M LME. 1 year out

Zinc three-month London Metal Exchange price (one-year out). Source: MetalMiner.

Last month, Zinc fell 10% as it couldn’t overcome resistance at $2,400 a metric ton. The metal is still the best performer among industrial metals and deserves some credit. If we saw a move upward in commodity markets we would expect zinc to rise to new levels but as long as markets remain bearish all we can expect for zinc is to stay range-bound.

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Similarly, lead prices surged in April but, as we expected, the rally didn’t last too long. Prices fell 12% in May.

Lead 3M LME. 1 year out

Lead, three-month London Metal Exchange price (one-year out). Source: MetalMiner.

What This Means For Metal Buyers

When the dollar is bullish and commodities bearish, industrial metals tend to fall. Metals in surplus have a tendency to fall sharply while those with better fundamentals have a hard time rallying and usually stay range-bound at best.

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A major aluminum producer challenged a US regulator’s authority to intervene in a foreign warehousing dispute and another nation placed tariffs on Chinese silicon this week.

Alcoa Challenges CFTC’s Authority

Alcoa Inc. on Monday challenged a federal commodities regulator’s authority to intervene in the contentious overhaul of the London Metal Exchange‘s warehouse policy that has caused an unprecedented drop in aluminum prices.

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In March, the Commodity Futures Trading Commission deferred a decision about the LME’s 2012 application to be registered as a “foreign board of trade,” telling the exchange it should do more to address concerns about long waiting queues.

Alcoa has questioned whether the agency even has the legal authority to intervene, and on Monday filed a request under the Freedom of Information Act (FOIA) to find out what had caused the CFTC to delay its decision on the LME.

“Our goal is to learn the extent to which the CFTC has engaged in substantive discussions with the London Metal Exchange,” Alcoa said in a statement. “The CFTC should examine any LME aluminum contract performance issues only through an open, inclusive and transparent process where all affected market participants have the opportunity to present their views,” it said.

The CFTC declined to comment.

Australia Puts Tariffs on Chinese Silicon

Australia has issued an anti-dumping notice on silicon metal exported from China after an investigation into dumping and subsidization.

Following the investigation the Australian Government Anti-Dumping Commission set dumping and subsidy margins for Hua’an Linan Silicon Industry Co. Ltd., and Guizhou Liping Linan Silicon Industry Co. Ltd. at 18.3% and 6.3% respectively. Both companies will be subject to an effective rate of combined interim countervailing duty and interim dumping duty of 12%, according to a statement by the MOC trade remedy and investigation bureau.

The commission announced dumping margin and subsidy margin for “uncooperative, and all other exporters” of 27% and 37.6% respectively, with an effective rate of combined interim countervailing duty and interim dumping duty of 58.3%.

Australia began its investigation in February last year after allegations of dumping and subsidization of silicon metal goods that originated from China with a total value of $12.78 million dollars, according to the MOC statement.

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There is a real divergence developing in the oil market which makes predicting future price direction quite challenging. On one side of the Atlantic the market is awash with oil.

According to a Reuters report vessels are sitting off the west coast of Africa and in the North Sea holding millions of barrels of oil for which there are no buyers. Worse, so many vessels are tied up essentially in this floating storage that VLCC (very large crude carrier) freight rates are rising because there aren’t enough vessels available to carry the cargo that is moving under longer-term contracts.

Effects of Floating Storage

This has the effect of making new production more expensive to sell in the Far East and Europe, exacerbating the problem faced particularly by Nigerian producers. According to Reuters, there are around six million barrels of crude from Nigeria’s May program available – some already loaded onto vessels.

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That joins more than 65 million barrels left in June and July for Nigeria alone. Meanwhile in the North Sea, only one VLCC booking has been made to Asia for June, leaving Europe to absorb almost the entire production of the UK Forties field. As mentioned above, the floating storage is putting a stranglehold on new booking rates. May freight rates on the key West Africa to Asia route are up more than 10% Reuters says, roughly 40 cents per barrel higher than April.

Not surprisingly, this has weighed heavily on prices. UK Forties traded at the lowest differential to dated Brent Crude since December 2008 this week, while Norwegian Ekofisk traded at a nine-year low, the paper said.

Prices Actually Going Up in the US

On the other side of the pond, prices are moving in the opposite direction. For the first time in six months, the US oil market is flirting with backwardation, where the spot price is higher than one- or three-month dated delivery – a sign of a tightening market and. potentially. a shortage.

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We have already written this year on the risk to the fossil fuel industry posed by potential carbon taxes. Consensus that such taxes are coming seems to be building surprisingly quickly, helped, it must be said, by a historic agreement between the USA and China to work together to agree on emission targets and add momentum for an agreement to emerge from the COPS21 conference planned in December in Paris.

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The most noise is, not surprisingly, coming from fear that trillions of investments in fossil fuels, principally coal but also oil and even natural gas, could become uneconomic if some form of carbon tax is agreed upon. Probably more because of this worry than any more altruistic notion major investors are already beginning to turn their backs on coal in particular. The latest is the world’s largest sovereign wealth fund, Norway’s $916 billion fund has decided this week to pull any investments from companies whose business relies more than 30% on coal according to the FT.

Divesting ANY Business

The crucial point here is “any business,” so not just mining companies but power generators will be hit. The fund says it is trying to alter behavior in these firms, but if you are a major European power generator you have billions invested in coal-fired power production. That is some super-tanker to turn around quickly.

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The three-month aluminum price on the London Metal Exchange is back below $1,800/metric ton. In April, aluminum rallied with most industrial metals thanks to a weaker dollar. However, in May the dollar bounced back up, unwilling to give up more ground, hurting industrial metals.

Aluminum prices are now hanging near previous troughs. If the dollar continues to rally, we would expect aluminum prices to hit record lows this year.

Why Manufacturers Need to Ditch Purchase Price Variance

Same story with nickel, the metal rallied in April after hitting its lowest level in six years, but in May Nickel fell as well and now it’s near that record low. As with aluminum, a stronger dollar would put nickel prices into a tailspin.

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Nickel has perplexed and confounded investors for the last year or more.

Prices had been expected to rise on the back of an anticipated shortfall in ore supply, only for the expect opposite to happen. Yet Norilsk Nickel, in it’s latest 2015 Strategy update, reported in a Platts blog that China’s inventories of nickel ore are down significantly, with only around two months of consumption left.

Why Manufacturers Need to Ditch Purchase Price Variance

Norilisk also believes China’s dependence on imported refined nickel is set to rise. It estimates that total nickel demand in China in 2015 will be made up of 42% imported refined nickel, 47% imported feed, and around 11% of domestic feed.

Imports Rising

In 2014, by comparison, total nickel demand in China consisted of 28% imported refined nickel, 61% imported feed, and 11% domestic feed. In its 2014 full-year results, the company forecast a 20,000 metric ton global deficit this year down from a 93,000 mt surplus in 2014. While a number of analysts are also forecasting a revised deficit between 20,000-45,000 mt this year, you have to say previous predictions have failed to materialize so why would this time be any different?

Maybe the issue here is that Norilisk is a producer and they are going to be bullish by nature, and indeed not all agree with Norilisk’s estimate of the current situation. The World Bureau of Metal Statistics reported just this week that the nickel market was in surplus From January to March 2015 with production exceeding apparent demand by 32.9 kilotons, less of a surplus than was running in 2014 but still significant.

Nor did they see it trailing off, in March nickel smelter/refinery production was 147.8 kt and consumption was 137.1 kt suggesting the surplus is continuing and may run through Q2.

The long-awaited dearth of ore supply resulting from the Indonesian export ban last year has failed to materialize. Chinese buyers have switched to a blend of Indonesian and Filipino ores for making nickel pig iron and an increase in refined nickel imports to meet demand.

Demand: Still Down

Demand is down, anyway. The Chinese economy is growing more slowly and stainless production (the source of two-thirds of nickel demand) is, at best, lackluster. In addition we are now coming towards the quieter summer period when demand falls and so it is unlikely the demand side is going to force a change in the downward trend in prices. Demand has stabilized in Europe after previous years’ weakness, but distributors are said to be well stocked and a restocking cycle is unlikely when most are anticipating further weakness in the nickel price.

As prices have fallen, stocks have risen, most obviously on the London Metal Exchange. Part of this rise can be attributed to finance stocks moving out of China and into supposedly safer LME Asian warehouses, but even so some 446,000 mt of LME stocks are going to take some working through and those speculators that have headed for the exits are not likely to pile back in again until they see a sustained downward trend in stocks.

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As we pointed out last month, the US dollar is showing some weakness for the first time in almost a year. That dollar weakness has helped metal prices during the second quarter. However, the recent price movements aren’t reason enough to suddenly become bearish in the dollar.

Why Manufacturers Need to Ditch Purchase Price Variance

The dollar increased in value very quickly in 2014, so it’s not weird to see the dollar taking a breath before it continues on its way up. Technically, this is called a “correction within an uptrend.”The question now is whether the dollar has weakened enough already or if it’s due for further declines.

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The US dollar index has declined 6% since its peak in mid-March.

Why Manufacturers Need to Ditch Purchase Price Variance

This decline gave a boost to commodities and, of course, precious metals were not left behind. However, their upside moves look anything but impressive. Despite the weaker dollar, it seems as if precious metals are having a hard time moving away from their lows.

Gold prices rose a shy 6% since mid-May. The yellow metal is still near record lows. A bit more encouraging is the move silver is making, up 12% since mid-May. The grey metal, however, is still near record lows as well. The metal is trading at $17.71/oz and we’ll see if it can break medium-term resistance at $18.5/oz.

A bit more encouraging is the move silver is making, up 12% since mid-May. The gray metal, however, is still near record lows as well. The metal is trading at $17.71/oz and we’ll see if it can break medium-term resistance at $18.5/oz.

Platinum is up 7%. A very small movement compared to its huge decline since summer last year. The metal has a long way up to reach last year’s levels.

Palladium rose 8% after making a 1-year low in March. Palladium is clearly the best performer among precious metals but since summer of last year is also being dragged down with the rest of precious metals.

What This Means For Metal Buyers

Recent weakness in the dollar is giving a boost to precious metals. However, these price movements have been quite shy so far. It still makes sense to be long-term bullish on the dollar and bearish on precious metals.

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ast week UGI Energy Services announced plans to build a liquefied natural gas production facility in Wyoming County, Pennsylvania.

Why Manufacturers Need to Ditch Purchase Price Variance

The facility will draw Marcellus Shale gas from UGI’s Auburn gathering system, then chill it to produce up to 120,000 gallons per day in liquid form. While we have regularly reported the slowdown in both new shale oil and LNG projects in the US this year — and the subsequent cutbacks in oil country tubular goods production — investments are still being made, in the US and overseas, in drilling.

Plants, Projects Planned

Bloomberg Business reported this week that Anadarko Petroleum Corp. selected a group of developers including Chicago Bridge & Iron Co. for a potential $15 billion LNG project in Mozambique.

CBI’s joint venture with Japan-based Chiyoda Corp. and Saipem SpA, based in Italy, will work on the onshore project that includes two LNG units with 6 million metric tons of capacity each, Anadarko said Monday. Construction plans also include two LNG storage tanks, each with a capacity of 180,000 cubic meters, condensate storage, a multi-berth marine jetty and associated utilities and infrastructure, according to Texas-based Anadarko, which says it will make a final investment decision by the end of the year.

Last week, the Department of Energy gave Cheniere Energy Inc. final approval for the nation’s fifth major export terminal at Corpus Christi in Texas, which will ship the fuel from 2018.

What’s Driving Infrastructure Investment?

While oil prices have bounced back from lows seen earlier this year, it’s certainly not the market that’s driving these investments. While high-cost projects, such as those in Canada’s oil sands, have been canceled by oil exploration companies, relatively inexpensive projects with a quicker path to payback, such as these LNG projects, are still being funded.

The payback is diverse and not confined to domestic home heating. LNG has been priced at a fraction of diesel prices for the last four years. Domestic trucking (18-wheelers and other heavy consumers of diesel) have yet to make a large-scale commitment to LNG, and most places where fuel is dispensed have yet to put in expensive infrastructure to handle the product, but there has been enough success for UGI to justify committing resources to its adoption.

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Financial moves and comments from the Federal Reserve dominated today’s MetalCrawler.

Yellen Says Stocks Could be Overvalued

Federal Reserve Chairwoman Janet Yellen on Wednesday said high equity valuations could pose potential dangers but that stability risks across the US financial system remained in check.

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“I would highlight that equity market valuations at this point generally are quite high,” Yellen said. “There are potential dangers there.”

Yellen’s view on the run-up in stocks was an answer to questions from International Monetary Fund Managing Director Christine Lagarde, who joined the Fed chief for the opening session of the “Finance and Society” conference.

Quebec To Help Cliffs Sell Iron Ore Mine

The Canadian Province of Quebec is prepared to buy a rail line and port facilities that service a shuttered Cliffs Natural Resources Inc. iron-ore mine there to pave the way for the operation to reopen under new owners. The government also is open to buying 20% of the Bloom Lake mine to facilitate a deal, Economy Minister Jacques Daoust said. Purchasing the rail and port facilities could lower the mine’s operating costs by as much as $20 a ton, he said.

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