Articles in Category: Macroeconomics
Crude oil (in black) diverges from industrial metals (in red)

Crude oil (in black) diverges from industrial metals (in red). Source: MetalMiner analysis of @Stockcharts.com data.

Historically, crude oil prices have moved in tandem with industrial metals. Why is that?

  1. Oil is  not just a commodity, itself, but an asset closely followed by commodity investors. Falling oil prices make investors move away from commodities and, of course, industrial metals.
  2. Oil is the main benchmark for energy prices. Lower energy prices mean lower transportation costs and lower production costs, especially for those energy-intensive metals like aluminum.

For these reasons, it’s not strange to see that the trend in industrial metals looks very similar to that of oil prices (see chart above). But since June, we are witnessing a divergence between these two trends. Oil prices have fallen while industrial metals continue to rally, for the most part.

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Just when it appeared crude oil’s oversupply was easing, a new glut of gasoline is drowning the market’s hopes for a recovery, sending crude prices sliding.

So far, oil’s price correction looks normal within this year’s bull market. It’s not strange to see profit taking following the strong rally earlier this year. However, now that prices are hovering near $40 per barrel, they should start finding support. This divergence likely won’t last too long and if oil prices continue to fall that weakness could spread out

What This Means For Metal Buyers

It’s normal to see a price correction in oil following a strong rally earlier in the year. Oil prices should start finding support near current levels; otherwise oil’s price weakness could spread out into other commodity assets, including industrial metals.

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A recent report by five U.S.-based steel trade associations analyzed 25 of the largest steel companies in China detailed the amount and type of government subsidies each company received in recent years.

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The analysis found that these subsidies and policies have led to tremendous overcapacity and created a fragmented domestic steel sector in China made up, primarily, of inefficient, heavily polluting companies, all of which require government subsidies at several levels to stay open. Read more

Nickel price investment trading arrow going up rising strong indDespite nickel prices going on a hot streak — having climbed 40% since bottoming out at the beginning of the year — many nickel miners are seeing diminishing returns on their production.

According to a recent report from the Financial Post, Sherritt International Corp., a Canadian nickel miner, announced recently that more than half of global output is losing money with the percentage of underwater production even higher when capital spending and other costs are factored in.

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“This rally in the last few weeks is perhaps more robust than some false starts we’ve had over the last year,” David Pathe, chief executive at Sherritt, told the Financial Post. “But it’s got a ways to go before we think we’re at a long-term nickel price that’s sustainable.”

Prior to the recent surge, nickel prices had been a victim to lagging demand, rising inventories and supply from the Philippines in recent years. The recent increase in nickel prices has been partially attributed to speculation that new environmental regulations from the Philippine government will spur mine closures yet only a few small mines have actually been shut down so far, the Financial Post stated.

Nickel Imports Rise

According to a recent piece from our own Raul de Frutos, nickel, along with zinc, have benefited from higher demand coming from China.

de Frutos stated: “In the case of nickel, the supply shortage comes as the new mining minister in the Philippines, Regina Lopez, said that there would be a ban on fresh mining exploration in the country for a month while all existing mines are being reviewed. At present, the Philippines is the top supplier of nickel ore to China and these new developments have sparked concerns about ore supply to China.”

You can find a more in-depth nickel price forecast and outlook in our brand new Monthly Metal Buying Outlook report. Check it out to receive short- and long-term buying strategies with specific price thresholds.

 

A new report attempts to quantify government subsidization of Chinese steel and the Fed has left interest rates alone again.

Steel Associations Release Chinese Subsidy Report

Five of the leading American steel trade associations today released a report documenting that the steel industry in China is heavily subsidized by its government, and the rapid growth in the industry there has been fueled by government subsidies and other market-distorting policies.

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The report was released by the American Iron and Steel Institute, the Steel Manufacturers Association, the Committee on Pipe and Tube Imports, the Specialty Steel Industry of North America and the American Institute of Steel Construction.

The report analyzed each of the 25 largest steel companies in China and detailed the amount and types of government subsidies each company received in recent years. The analysis also found that these subsidies and policies have led to tremendous overcapacity and created a highly fragmented domestic steel sector in China made up of many inefficient, and heavily polluting, companies.

The full report is available from AISI.

Fed Holds Rates Steady Again

The Federal Open Market Committee of the Federal Reserve decided to maintain the target range for the its benchmark interest rate, the federal funds rate, at 1/4 to 1/2 of 1%.

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The Fed, in a statement after a two-day meeting of its policy-making committee, said that the economy had overcome wobbles this year and that job creation had increased with moderate economic growth. The central bank added that it saw fewer clouds on the horizon as the U.S. entered the eighth year of an economic expansion.

Adobe Stock/ Björn Wylezich

Adobe Stock/ Björn Wylezich

Zinc prices, along with nickel, rallied to hit multi-month highs last week as investors hedged on continued supply disruptions.

According to a report from the Financial Times, the zinc price climbed to its highest point in 14 months to $2,275.5 per metric ton on the London Metal Exchange. Investor sentiment surrounding commodities has improved due in part to a weaker dollar and growing oil prices, in addition to government stimulus in China. That stimulus has enhanced the Far East nation’s transportation and infrastructure sectors.

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Meanwhile, nickel could reach as high as $12,000 per metric ton.

“You could easily be forgiven for thinking the market has now become the London Nickel Exchange as … that is where most of the volume is trading and suggests that for the moment it has become the favoured metal of the speculators,” Malcolm Freeman, director at Kingdom Futures, told the news source.

Back to zinc, which has seen its price more than 40% higher in 2016 following a number of mine shutdowns. Citing data from the International Lead and Zinc Study Group, the global zinc market deficit hit 68,700 metric tons in the first five months of 2016, compared to the supply surplus of 177,000 metric tons over the same time in 2015.

Global stocks rally, metals see gains

In his week-in-review, our own Jeff Yoders wrote that global stocks rallied, and metals along with them last week, with precious metals helped by Brexit and sustained despite neutral fundamentals.

“Yet skulking under this prosperity lies a specter that threatens to erode prices and even affect the positive performance of those stock markets: Chinese overproduction,” Yoders wrote.

You can find a more in-depth zinc price forecast and outlook in our brand new Monthly Metal Buying Outlook report. Check it out to receive short- and long-term buying strategies with specific price thresholds.

 

lead-prices-L1To begin July, lead prices moved up nearly a quarter of 1% in futures trades as participants increased their positions due, in part, to a pick-up in spot market demand and a boost in base metals overseas.

Meanwhile, according to a report from the Business Standard, lead for August delivery at the Multi-Commodity Exchange also grew by nearly .25%.

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Our own Raul de Frutos reported just this week that lead prices have hit a one-year high despite neutral fundamentals. It’s been a year of fluctuation for lead, but three-month London Metal Exchange data has prices at $1,900 per metric ton.

Stated de Frutos: “The latest data reported by the International Lead and Zinc Supply Group (ILZSG) indicate the world refined lead metal supply exceeded demand by 23,000 metric tons during the first four months of 2016. Reductions in Australia, China, India and the U.S. led the fall in global lead mine production of 5% compared with the first four months of 2015.”

A Closer Look at the World’s Lead Usage

In addition, world refined lead metal output fell by 1.8%, excluding Chinese usage of refined metal which increased by 4.2% due in part to an 8.8% increase in European demand.

These figures are considered fairly neutral, but the market has not been convinced by this development until now. What’s changed?

“Lead prices are being driven by funds’ increasing appetite for industrial metals,” de Frutos wrote. “This means that even though lead fundamentals don’t look overly bullish, the wind is now blowing at lead’s back. Funds are either seeing a tightening in the fundamentals that we can’t see yet or they are simply buying metals as sentiment in the industrial metals complex has improved. It looks more like the latter.”

You can find a more in-depth lead price forecast and outlook in our brand new Monthly Metal Buying Outlook report. Check it out to receive short- and long-term buying strategies with specific price thresholds.

 

 

Global stock markets are finally showing some strength after a difficult period of almost two years when investors had a hard time making money off stocks. Following the U.K.’s decision to leave the European Union, global stock markets fell sharply but the sell-off didn’t last very long.

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The fast recovery following Brexit is very encouraging and it suggests that investors are turning more positive on the health of the global economy.

U.S Markets Make New Highs

S&P Index makes all time highs. Source:MetalMiner analysis of stockcharts.com data

The S&P 500 Index makes all time highs. Source:MetalMiner analysis of @Stockcharts data.

In the chart above, we see the S&P 500 index making an all-time high this week after the index had struggled for almost two years. Rising stock markets don’t necessarily mean rising metal prices, but it’s a good sign. Read more

Road signs EU and BREXITWe recently held a webinar on Brexit’s impact on metal prices and the geopolitical risk posed to North American Manufacturing (sponsored by Avetta). The turnout was incredible with more than 100 registrants, half of which were from the manufacturing industry.

We posed several poll questions throughout the webinar and the responses paint a clear picture of what this industry thinks of Brexit and its impact on various companies’ industrial sourcing strategies. Here’s a recap:

Before the recap, just a reminder you can take 20% off an annual individual subscription to our Monthly Outlook by entering promo code BREXIT7 at checkout. OFFER ONLY GOOD THRU 7/31!

Question 1: “Do you consider the Brexit vote to be a ‘black swan’ event?”
21% Yes; 48% No; 30% Don’t Know

Question 2: “Why are you concerned about Brexit?”
31% have exposure to UK and/or EU suppliers; 61% don’t have said exposure but are concerned about commodity volatility; 56% concerned about currency volatility; 31% worried about other countries leaving the EU

Question 3: “How much of an impact will Brexit have on your industry?”
3% a large impact and we’re concerned; 50% some impact and we’re assessing how much; 16% I have no clue which is why I’m here; 0% no impact

Question 4: “As a result of Brexit, do you think non-ferrous metal (e.g. aluminum, copper, nickel, etc.) prices will:”
20% rise; 14% fall; 66% stay the same

Question 5: “As a result of Brexit, do you think ferrous metal (e.g. steel) prices will:
26% rise; 16% fall; 58% stay the same

Question 6: “As a result of Brexit, do you think precious metal (e.g. gold, silver, platinum, etc.) will:”
41% rise; 7% fall; 52% stay the same

Question 7: “Does your company have operations in Europe or the UK?”
40% yes; 60% no

Russia won’t cooperate with OPEC on oil production cuts and U.S. architecture billings are still up in June, but just not as much as they were in May.

Russia Won’t Coordinate Oil Production Cuts

Russian Energy Minister Alexander Novak said in an interview he has ruled out possible coordination with the Organization of Petroleum Exporting Countries on oil output after a failed attempt to jointly maintain production levels earlier this year.

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“We do not discuss the issues of coordination of actions between Russia and OPEC… We can’t agree on production cuts as we don’t have such tools and mechanisms,” Novak told Reuters in interview cleared for publication on Wednesday.

Architecture Billings Down But Still Up

The Architecture Billings Index was positive in June for the fifth consecutive month. An economic indicator of construction activity, the ABI reflects an approximate nine-to-12 month lead time between architecture billings and construction spending.

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The American Institute of Architects reported the June ABI score was 52.6, down from the mark of 53.1 in May, but this score still reflects an increase in design services (any score above 50 indicates an increase in billings).

mining-L1The South Crofty tin mine acquisition has finally been completed after initially being announced in March.

Various news sources are reporting the Canadian company Strongbow Exploration has acquired 100% interest in Western United Mines Ltd. and Cornish Minerals Ltd. (Bermuda).

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“This represents a significant step towards our goal of creating a new strategic metals company with Osisko Gold Royalties as a cornerstone shareholder,” said Richard Williams, president and chief executive at Strongbow.

The South Crofty Tin Project, as it has been referred to, spans several tons and holds an active mining permit through 2071 and also includes 26 former production mines. Several companies have previously attempted to revive the mine, dating back to 2001.

“The Cornish people are justly proud of their mining expertise, and Cornwall led the world in the tonnage of its tin production,” Sally Norcross Webb, mining lawyer at Stephens Scown, told Insider Media. “Completing this deal gives South Crofty a chance to progress towards a production decision, which could mean significant investment and generate valuable jobs for Cornwall.”

Tin Continues to Surge

Our own Raul de Frutos wrote last week that tin, along with zinc, have been the biggest gainers among base metals so far this year. July has been a particularly strong month in growth for tin as it rose above $18,000 per metric ton for the first time since March 2015.

You can find a more in-depth tin price forecast and outlook in our brand new Monthly Metal Buying Outlook report. Check it out to receive short- and long-term buying strategies with specific price thresholds.