Articles in Category: Macroeconomics

This week we recorded another month of price movements on the MetalMiner IndX. Some were up (Renewables and Grain-Oriented Electrical Steel or GOES), some were down (Construction, Aluminum and Copper) but most of them were simply flat. Steadiness: The sister-kissing tie of metal prices. Nothing lost and nothing gained.

Aside from stressing the need to invent Core-Optimized Mechanical Electrical Steel so that we can have both COMES and GOES price indexes, what can we learn from this?

Free Sample Report: Our February Metal Buying Outlook

Well, for one thing, oil prices are still driving down most commodities. In rapidly economically collapsing Venezuela gasoline can now, thanks to government subsidies, be purchased for 2-cents a gallon. Before you book the next flight to Caracas, red gasoline cans in hand, remember that oil exports account for more than 50% of the country’s GDP. The subsidies that once helped everyday Venezuelans are now choking them as oil continues to not bring in the revenue necessary to run their country.

How bad are things in Venezuela? Standing in line is now a profession.

In Venezuela products are so scarce you could get a job standing in line. Source: Adobe Stock/Andrey Popov.

In Venezuela products are so scarce you could get a job standing in line. Source: Adobe Stock/Andrey Popov.

While oil prices did increase a bit this week, they are still far below $50 a barrel and my colleague, Stuart Burns, warns that this rally will be short-lived. Low oil prices are dragging down all commodities and metals are no exception. Read more

As a little taster ahead of our analysis of the annual Energy Review from BP (stay tuned for that next week) we thought a review of recent expectations on the direction of the oil market would make an interesting canapé.

Free Download: The February 2016 MMI Report

That the oil price has collapsed is old news and the recovery the last five weeks has everyone second-guessing themselves. Is this the bottom or just a temporary bounce only for further weakness to follow?

brent crude oil chart

Source: Financial Times

The question is not an academic one. Big users of energy are keen to know if they should be hedging forward or buying short term pending further falls. Consumers of metals know energy prices over the medium term have an influence on prices and any company involved in distribution of their products, or as a service, knows oil prices have a direct impact on transportation costs.

Developing Markets

Many developing markets reliant on the export of oil or natural gas are facing dire financial prospects at current prices with default in places such as Venezuela a certainty this year. Much of the blame is put on China’s slowing economy but, in reality, China is importing as much oil as it has ever brought in, albeit the growth in that demand has slowed. The problem is with supply.

Read more

Tin cansOne word can be used to describe the London tin market, currently: tight.

While the low volume of tin on the London Metal Exchange has been an issue for some time now, its tin contract is now showing signs of entering into a period of volatility, according to a recent report from Reuters.

The spread closed this week and brought tin to its tightest point thus far in 2016. The reason for the squeeze? In part it’s due to Indonesia, the world’s largest exporter of tin. Shipments have been declining for the past several years, but that decline intensified in January with a 63% year-over-year drop.

Want a short- and medium-term buying outlook for aluminum, copper, tin, lead, zinc, nickel and several forms of steel? Subscribe to our monthly buying outlook reports!

This substantial drop off can be attributed to the Indonesian government’s regulatory measures on miners and smelters operating on its nearby islands. In fact, Indonesian exporters are now required to provide permits in order to ship metal out of the country, and some producers used up their limited permits before they were renewed to begin February, according to tin industry association the International Tin Research Institute (ITRI).

While it may seem contradictory that weak demand for all metals has bred a situation where tin supply is tight, the fact is there is tin supply around it is just currently being sat on in China.

Last month our own Raul de Frutos stated that he only recommends buying tin in small quantities due to a rising dollar, China’s economic issues and falling commodity markets.

You can find a more in-depth tin price forecast and outlook in our brand new Monthly Metal Buying Outlook report. For a short- and long-term buying strategy with specific price thresholds:

Base metals are bouncing off lows in February, helped by a weaker dollar. Although the long-term view for the dollar remains bullish, the currency is suffering some setbacks.

Free Sample Report: Our February Metal Buying Outlook

Last week, the US dollar index fell to its lowest level in three months.

Dollar index hits 3-month low

US dollar index hits a 3-month low. Source: @StockCharts.com

Last Wednesday, the dollar logged its largest one-day drop versus the euro since early December, on a lower than expected reading of U.S. service-sector activity.

The Institute of Supply Management non-manufacturing index fell to 53.5% from 55.8% in December, the slowest pace in almost two years. Some investors now fear a softer than expected US economy, potentially making the Federal Reserve put interest-rate increases on hold.

Higher rates make currencies more attractive for yield-seeking investors. The market had expected the Fed to raise rates for a second time in March and investors had probably priced in those hikes. The  indication that the Fed might hold off on increasing rates is having a depressing effect on the dollar.

Also in February, crude oil prices gained some ground. This helped commodity currencies, including the Russian ruble and Canadian dollar, to recoup some losses against the US dollar. Longer-term, the currency should hold its value well, especially while the rest of the world’s central banks keep up with their stimulus measures.

Last Week For The January 2016 MMI Report

But in the short term, a turbulent dollar is giving a boost to metal prices. Zinc, lead are tin were particularly strong as February started. So far, the moves seem like normal price reactions after previous declines. Whether the upward moves will continue or not will significantly depend on the fate of the dollar.

To say as the Financial Times did last week that China is undergoing significant transition is the understatement of the year.

Free Sample Report: Our February Metal Buying Outlook

A complex and interconnected reform agenda on this scale and at this speed has never been achieved before. It has scarcely even been attempted. It is only remotely possible with a central command economy and a compliant population yet, even then, it is far from without risks.

Coiledsteel_585

The Chinese steel industry will have to stop relying on overproduction to make the shift it is planning on.

As the FT explains, China is attempting a shift away from an export-driven and investment-led economy to a more balanced consumption-oriented one. At the same time as trying to achieve those goals, it is also trying to double gross domestic product and GDP per capita by 2020 from 2010 levels, according to the Chinese leadership.

How to Transition China?

They intend to achieve this with an extensive reform agenda, including further financial market liberalization, privatization or at least liberalization of state-owned enterprises, fiscal, and rural land reform. The FT goes on to warn if reforms are implemented too quickly, the country risks a sharp slowdown. If reforms are implemented too slowly, or not at all, China risks an unsustainable increase in debt-to-GDP ratio, which could push the country past the tipping point into economic and, possibly political instability. Read more

Roller Coaster Hill InclineIt was a volatile January for copper, in addition to other key metal, mineral and energy commodities, and isn’t set to change much despite the calendar turning over to a new month.

ANZ research is reporting that they are expecting further weaknesses in the oil and iron ore markets. “Both have ongoing supply side issues,” Daniel Hynes, senior commodities strategist, told ABC News.

Want a short- and medium-term buying outlook for aluminum, copper, tin, lead, zinc, nickel and several forms of steel? Subscribe to our monthly buying outlook reports!

With copper (as well as nickel), significant declines have been the story, but a minor rebound in the copper price was a welcome sight after it hit six-year lows. “The import numbers we saw into China in December were particularly strong for copper and some other base metals, and there are some falling inventories on global exchanges,” Hynes added.

Our own Raul de Frutos wrote recently that despite better-than-expected copper imports in China to close out 2015, there is little to no reason to anticipate a turnaround with the copper markets. “While the slump in commodities continues and global markets slide, copper has little upside potential,” de Frutos stated.

Why?

You can find a more in-depth copper price forecast and outlook in our brand new Monthly Metal Buying Outlook report. For a short- and long-term buying strategy with specific price thresholds:

 

Democratic senators want more restrictions on investment banks activities in commodities markets, including industrial metals. Chinese metal traders are thinking of taking an even longer break for the Lunar New Year due to to low prices.

Democrats Push for Commodities Oversight

Democratic senators pressed the Federal Reserve on Wednesday to act more forcefully, and quickly, to limit banks’ involvement in the commodities business.

Free Sample Report: Our February Metal Buying Outlook

For months, Congress has been evaluating complaints that the huge commodities holdings of investment banks such as Goldman Sachs and Morgan Stanley pose a risk to the financial system. Businesses and consumer groups have also expressed concern that the banks’ financial heft gives them an unfair advantage over other competitors as well as the ability to manipulate prices for essentials like energy, cotton and food.

Senator Sherrod Brown (D.-Ohio), who led Wednesday’s hearing on the issue, said he was “incredulous” that the Fed had been examining the matter for six years and had yet to make significant changes.

“The Fed’s proposal yesterday was a timid step,” said Brown. “It was too slow in coming, and there is still too much that we do not know about these activities and investments.”

A Longer Break for Chinese New Year

Chinese metal traders and merchants are likely to take longer than usual Lunar New Year holiday break this year, Reuters reported. They are betting that spot demand for metals such as copper will stay weak at least in coming few weeks, industry sources said.

Free Download: The January 2016 MMI Report

Manufacturers and merchants see weak demand weighing on spot prices that are already at multiyear lows, although some futures prices are higher as investors see demand recovering after the holidays. The most-active base metal contracts on the Shanghai Futures Exchange were up 1-7% on Thursday from late January levels.

With aluminum prices falling over the past year, stock prices for companies that smelt the metal such as Alcoa, Inc., and Rio Tinto Group are suffering as a result, but more action will have to be taken on their part if they’d like to return to profitability.

According to a recent article from US News & World Report, aluminum smelters have already started to reduce production of the metal, but they may have to further cut back on output if they want to return to the black as aluminum demand is not expected to rise any time soon.

Want a short- and medium-term buying outlook for aluminum, copper, tin, lead, zinc, nickel and several forms of steel? Subscribe to our monthly buying outlook reports!

“The price in general has gone lower even though we’ve seen industrial demand and some production cuts,” Michael Turek, a senior trader at BGC Partners, a New York-based global financial services firm, told the news source. “The fact that prices continue to go lower suggests the market feels that thus far, it’s been a cosmetic surgery rather than mainstream surgery.”

On the London Metal Exchange, aluminum prices have dropped about 20% over the past year with global demand slowing. China’s economic issues have spearheaded the decline, as has been the case with many commodities.

“In terms of pure fundamentals, (the aluminum industry) doesn’t appear to have a lot going for it,” Turek added. “I don’t have any major grand upside aspirations for the market. We’re going to need more production cuts, and they’re going to have to be sustainable.”

We here at MetalMiner™ agree with this sentiment.

How will base metals fare in 2016? You can find a more in-depth aluminum price forecast and outlook in our brand new Monthly Metal Buying Outlook report. For a short- and long-term buying strategy with specific price thresholds:

Last Friday, Japan’s central bank surprised markets by setting the country’s first negative interest rates. The current global economic instability, reflected in stock markets and low commodity prices, is threatening to drive the country back into deflation.

Free Sample Report: Our January Metal Buying Outlook

The Bank of Japan is now the second major central bank to set negative interest rates, after the European Central Bank first did so in 2014. In Sweden, Denmark and Switzerland central banks also have negative interest-rate policies.

What’s A Negative Interest Rate?

During inflationary periods, assets become more expensive over time and money that is not spent or invested is just losing its purchasing power. People tend to spend money during these periods rather than let it lose more value holding onto it.

While in deflationary periods, people tend to accumulate their money instead of investing or spending it, resulting in falling demand and lower prices. In deflationary periods central banks usually loosen their monetary policy to deal with it. However, in strong deflationary periods, simply cutting interest rates to zero may not be enough to stimulate lending.

Negative interest rates mean that depositors must pay regularly to keep their money in the bank. This measure encourages people and businesses to spend, invest and lend money rather than pay a fee to save it and keep it safe.

Dollar Up, Yen Down

Dollar jumps near 2% against yen on Friday

Dollar jumps near 2% against yen on Friday. Source: MetalMiner analysis of Yahoo! Finance data.

A result of the negative interests rates set on Friday was a devaluation of the Japanese currency against other currencies, including the US dollar. The dollar jumped almost 2% on Friday against the yen. Read more

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