Articles in Category: Macroeconomics

Nickel prices reached a 10-month low this week due in part to concern over demand from China, a top consumer of the metal.

According to a report from Reuters, these concerns were supported by Chinese trade data, indicating falling imports on the alloying material used to make stainless steel.

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Nickel traded on the London Metal Exchange ended Wednesday at $9,225 per metric ton, its lowest mark since June of last year.

John Meyer, SP Angel analyst, told the news source he anticipates nickel to be supported by concern over supplies of ore from the Philippines, which recently announced the ordered closure of more than half its mines in order to protect water sources.

“There is still a lot of stock for the market to burn,” Meyer told Reuters.

Nickel Trailing Other Industrial Metals

Our own Raul de Frutos wrote earlier this month of the downward pressure seen on nickel prices during Q1, which is in stark contrast to other industrial metals that have rallied during that same time.

Wrote de Frutos: “Nickel prices are struggling to make headway this year. Nickel’s supply narrative is rather complex and it’s exposed to significant changes depending on what policy makers in Indonesia and The Philippines do next. On the other hand, stainless buyers should continue to monitor their price risk exposure. Investors’ sentiment on industrial metals remains bullish and that could still trigger unexpected prices swings on the upside.”

How will nickel and base metals fare in 2017? 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:

President Trump announced last week that his administration is investigating whether imports of steel threaten the U.S. national security. This follows earlier administration plans to initiate trade enforcement cases involving countries such as China, Germany, Mexico, Japan, Canada (yes, Canada) or South Korea. Shares of U.S. steelmakers rallied on the news that the Trump administration could widen the probe against imported steel products.

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There is almost no difference in steel whether it’s produced domestically or in China, at least for the more commodity-grade steel products. The main difference, as many argue, is that the production of steel in the U.S. causes less environmental damage due to stricter environmental regulations.

The U.S. placed several anti-dumping and countervailing duty orders on steel products, but they had not substantially reduced the amount of steel entering the country. Steel imports account for roughly a fourth of total steel consumption in the United States. Now, import numbers are down 30%-plus from recent years but the impact has been more modest than many market participants would have predicted.

Cold-rolled coil spread US-China. Source Raul De Frutos analysis of MetalMiner IndX.

The potential of a blanket import tax comes as U.S. prices trade at unsustainable levels compared to international prices. That’s because since March, domestic prices have risen while prices in China have fallen sharply. The sell-off coincided with a big sell-off in seaborne iron ore. The declines come amid concerns that previous rallies had taken prices too far. In addition, China’s crude steel output surged to a record 72 million metric tons in March. However, prices could recover if China’s promises to address rampant, persistent overcapacity take hold sooner rather than later.

Benchmark Your Current Metal Price by Grade, Shape and Alloy: See How it Stacks Up

The point is, that although a wider international price spread is partly justified by more stringent import tariffs, this phenomenon has historically led to rising import volume. Unless the new investigation materializes into something, U.S. steel prices will likely find downward pressure if world export prices continue to slide.

What This Means For Metal Buyers

Momentum in U.S. steel prices has cooled down. This is because the international price spread has widened to record levels. If the U.S. imposes a new import tax on steel, that will likely keep this price spread wide. However, Chinese steel consumption and higher steel prices is what really represent a sustainable improvement to market fundamentals. Even with a new import tax, U.S. prices are already expensive and U.S. mills will still need a recovery in Chinese prices if they want to be able to justify higher prices. Ultimately, protectionist trade policies might provide only fringe benefits to U.S. steelmakers.

Industrial metals have been on a tear since we called a bull market just about a year ago. However, we have recently witnessed some price weakness over the past couple of months.

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Commodities like industrial metals are cyclical assets which tend to run in the same direction for long periods of time. The key is to recognize the peaks and valleys of the cycle to time your purchases accordingly. 

The industrial metals ETF: peak or pause? Source: MetalMiner analysis of @stockcharts.com data.

The ongoing bull market in industrial metals has run for over a year and while some metals are experiencing some setbacks, it’s a good time to bring up the question: Are we nearing a peak or this is just a pause before prices break on the upside?

To answer this question, let’s look at what the main macro drivers are telling us:

China: Strong Indicators

As we all know, China is the world’s largest producer and consumer of industrial metals. Any changes on China’s supply and demand equation can have a huge impact on the price of metals. The performance of Chinese stock markets are a great gauge of investors’ sentiment on China’s economy. Since China became a major economy, we’ve seen a strong correlation between Chinese markets and metal prices.

Chinese stock market etf trading near highs. Source: MetalMiner analysis of @stockcharts.com data.

Price momentum in Chinese markets has indeed picked up this year, tradin near a two year-high. The latest economic indicators continue to increase investors’ confidence in China.

The country reported growth of 6.9% in the first quarter, its fastest pace since the third quarter of 2015, fueled by credit and infrastructure spending as well as a stubbornly booming property market. Growth prospects in the country also seem to be improving thanks to easing trade tensions with the U.S. In China, investment in buildings, factories and other fixed assets grew 9.2% in the first quarter, while construction starts rose 11.6% during the same period. If that’s not enough, in April, China’s government announced plans to build a new megacity from scratch. The construction will require massive amounts of steel and industrial metals.

This growth translates into solid demand for industrial metals at the same time as China applies stricter anti-pollution rules and supply-side reforms designed to cut capacity in energy-intensive sectors like steel and aluminum. Overall, while we continue to see strength in Chinese markets, we are not ready to call peak in this industrial metals bull market.

US Dollar Falls to 5-Month Low

Base metals are commodities and, as such, move in opposite directions to the dollar. Over the past 20 years, every major bottom in commodities have coincided with a major peak in the U.S. dollar and vice versa. For a continuation of a bull market in industrial metals we should see weakness in the dollar. This year we have seen that.

The U.S. dollar index falls to a 5-month-low. Source: MetalMiner analysis of @stockcharts.com data.

On Monday, the dollar fell to a five-month low due to a surge in the euro after the first round of the French presidential election eased concerns about the future of the European currency. The election outcome could continue to support the euro as markets price out the risk of a far-right victory.

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If centrist candidate Emmanuel Macron gets elected in the final round (May 7), markets might start to focus on the positive macro picture of the euro-area and its higher growth relative to the U.S. That could potentially devalue the dollar against the euro, a bullish development for industrial metal prices.

What This Means For Metal Buyers

Industrial buyers need to watch closely for signs of a market top. For now, the recent price weakness in industrial metals seems normal in the context of a bull market and key indicators such as China and the dollar favor a continuation of this uptrend. Industrial buyers should continue to manage their commodity price risk exposure until we see real signs of a market peak.

France’s first round presidential run off may not have matched Britain’s Brexit referendum of last year or the United States of America’s presidential election of Donald Trump in upsetting the pollsters, but it does say a lot about the mind set of French voters all the same.

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Novice centrist candidate Emmanuel Macron and Far Right leader Marine Le Pen advanced to the second round presidential run-off on Sunday and in the process achieved a historic wipe out of the two principal political parties that have traded power in France since World War II.

Neither Benoit Hamon of the Socialists, whose popularity had dwindled to single figures under the bungling of outgoing president Francois Hollande, nor the centre-right candidate — Francois Fillon, a former front runner — came close to challenging the two eventual victors. France has clearly had enough of the established order and much like Britain almost exactly 20 years ago cho0sing a young and charismatic Tony Blair,  the new favorite Macron is young, dynamic, charismatic and unquestionably clever. Read more

The MetalMiner analyst team alerted subscribers and trialers last week to significant movement on the zinc front. Prices for the non-ferrous metal have pulled back over the past several weeks, and are now trading near key support levels.

Wrote our own Raul de Frutos: “The price weakness seems to come from longs exiting their positions rather than shorts coming to the market. This suggests that sentiment hasn’t shifted to bearish for now. This could be a good opportunity to time purchases (3-5 months’ worth of demand) while prices trade near $2,500/mt.”

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!

While many may panic and see this price decline as the end of zinc’s bull run, de Frutos sees this movement as an ideal opportunity to make purchases at an attractive price.

de Frutos added: “After doubling in price since the beginning of 2016, prices are now struggling in the $3,000 per metric ton level. However, the price weakness seems to come from long position buyers exiting those positions rather than shorts coming to the market. This suggests that sentiment hasn’t shifted to bearish for now. At the same time, we see strong support near $2,500/mt, which could provide a good opportunity to time purchases.”

How will zinc and base metals fare in 2017? 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:

Lead ore. Source: Adobestock.

Lead prices, along with tin, lost some ground on the non-ferrous metals market on April 18, due in part to stockists selling as the result of subdued demand in the user industries.

According to a report from the Business Standard, lead fell slightly lower than tin with copper dropping by an even smaller margin.

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!

Elsewhere in the realm of non-ferrous metals, lead’s sister metal zinc has seen its prices fall off sharply over the past several weeks.

Our own Raul de Frutos warns that now is the time to buy, although it’s important not to panic and view this as the end of zinc’s bull run. In fact, this is nothing more than a great opportunity to purchase the metal at an attractive price.

de Frutos wrote: “After doubling in price since the beginning of 2016, prices are now struggling in the $3,000 per metric ton level. However, the price weakness seems to come from long position buyers exiting those positions rather than shorts coming to the market. This suggests that sentiment hasn’t shifted to bearish for now. At the same time, we see strong support near $2,500/mt, which could provide a good opportunity to time purchases.”

Lead Price Outlook for 2017

How will lead and base metals fare in 2017? 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:

Beijing is caught in something of a quandary.

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On the one hand, an admirable, and increasingly important social imperative, the Chinese government’s focus on air pollution, has resulted in a crackdown on a range of polluting industries. Coal-fired power stations around Beijing and other major cities have been closed. Steel capacity has been targeted for cutbacks, although not universally.

Reports suggest rebar production used in construction has been prioritized over other product areas and that’s just one example of selective enforcement. A recent report by Reuters states new aluminum production capacity has been halted. What China fails to meet capacity cutback targets — an issue one suspects would have been “worked around” a year or two back when environmental considerations where less of an imperative?

This crackdown on output comes at the same time as the economy is performing quite well. Official data released last week showed China’s economy grew by a better-than-expected 6.9% comparing the March quarter to the same period in the previous year, Australian Financial Review reports. That is up from 6.8% in the final quarter of 2016. Industrial production was also far better than forecast, growing at 7.6% in March compared to 6.3% in first two months of the year. Read more

Lithium Australia is making inroads to Germany for a joint venture with Deutsche Rohstoff, parent company of Tin International, in an attempt to uncover lithium in the region for production purposes.

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!

According to a recent report from Business News, the key piece in the venture is Tin International’s Sadisdorf Tin deposit, a globally renowned Altenberg mine, which has been dormant since 1991 following 500 years of production. The mine is believed to contain a lithium-rich mica that is suited for Lithium Australia’s proprietary extraction means.

Adrian Griffin, managing director at Lithium Australia said, “The joint venture with Tin International provides Lithium Australia with a low-cost entry into an established JORC resource, albeit originally established for tin.”

“There is little doubt that a substantial Lithium inventory also exists and the focus of the joint venture is to fast-rack the project to feasibility,” he added. “The experience provided by Tin International will be a key element in expediting the evaluation process and we are pleased to have them as a partner.”

Your Tin Price Outlook for 2017

How will tin and base metals fare in 2017? 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:

Set of copper pipes of different diameter lying in one heap

The copper industry is still reeling from its crisis of plummeting prices, but hope is on the horizon and a recovery is underway albeit a gradual one.

According to a recent report from Reuters, falling prices led to a reduction in output, but industry executives announced this week in a meeting in Chile, a top producer nation of the metal, that any recovery will be a slow one.

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 market seems to have left behind its worst moment, although it’s very premature to anticipate a new cycle of high prices,” Chilean Mining Minister Aurora Williams told the conference, according to Reuters.

Arnaud Soirat, copper and diamonds unit chief at Rio Tinto added that copper prices could receive support from external factors, including pending mine closures and ore grade decline.

“Copper’s long-term fundamentals are quite positive, and we expect to see further demand growth from emerging markets,” he told Reuters, forecasting a small deficit this year.

Copper Prices on Upward Trajectory?

Reuters also reported that copper consultancy CRU is projecting copper prices to trend upward over the next 3-4 years.

Said Vanessa Davidson, director of copper research: “We expect pressure on costs to continue…but we see copper prices rising faster than operating costs, ensuring that profit margins increase.”

How will copper and base metals fare in 2017? 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:

One of the toughest calls over the last six months has been guessing which of President Donald Trump’s many campaign pledges would be implemented once his administration came into power, and more to the point if they would live up to the rhetoric on the campaign trail.

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Apart from diehard supporters, most commentators expected pledges to be watered-down when Trump got into power and have since been surprised at the vigor with which he has continued to pursue many of those objectives. Now, vigor is one thing, impact is another. His moves on healthcare were largely blocked by Congress but some other policies may gain greater support and Adam Posen, President of the Peterson Institute for International Economics is quoted in the Telegraph as saying, in the Institute’s estimation, the market is seriously underestimating the consequences of some of his more likely polices. In particular he is concerned about Trump’s fiscal stimulus coinciding with a tightening by the Federal Reserve causing a severe spike in the U.S. dollar.

Whether Pozen is right or wrong only time will tell, but for any business with involvement in imports or exports somewhere in their supply chain a significant strengthening of the U.S. dollar could have a significant impact.

“The Fed is going to be far more aggressive than people think. Our view is that there will be three to four more rate rises this year,” Pozen is quoted as saying.

The institute’s primary concern is about the consequences for emerging market debt of Fed tightening. Pozen said the resulting drain on dollar liquidity from the international financial system would have profound consequences after the surge in dollar-denominated debt over the last decade. Our concern here is more about the other implication of rising U.S. Federal Reserve rates and the impact they would have on the exchange rate.

The promise of rising rates has caused the dollar to spike in the past as markets have anticipated rate rises, but Pozen believes investors have become inured to Fed guidance and are discounting the probability of rate rises this year. Yet the economy continues to grow steadily. Employment is high — the U.S. economy is near full employment, and inflation is picking up. If President Trump comes through on his promises rates rises are inevitable, which brings onto the second issue, radical tax cuts combined with fiscal stimulus would cause U.S. federal borrowing to rise.

Quoting from the article, Posen believes there is enough Republican support for corporate tax rate to fall from 35% to 25%, along with income tax cuts for the wealthy and the middle class, and more generous tax deductions for business. Such a policy at this late stage of the business cycle will cause the economy to overheat, forcing the Fed to jam on the monetary brakes, which would send the dollar through roof. The institute suggests this could result in a 15% spike in the dollar hitting exports and undermining domestic manufacturers at the mercy of import substitution.

Two-Month Trial: Metal Buying Outlook

There is the possibility that Pozen has this all wrong. It’s not a forgone conclusion that President Trump will achieve his tax cuts, although an increasingly hawkish Fed is already in evidence. But at the very least, the situation deserves monitoring with the awareness that such a combination could have a very detrimental impact on the dollar and potentially for firms trading internationally. Posen is a former rate-setter on Britain’s Monetary Policy Committee, and is known for his work with former Fed chief Ben Bernanke on Japan’s Lost Decade and inflation targeting, he has sufficient experience and credentials to make his warnings worth listening to.