Articles in Category: Macroeconomics

Screen Shot 2016-04-06 at 9.37.41 AMOur most popular complimentary research download, the Annual Metals Outlook has recently been updated for Q2. This is an essential tool for your direct material sourcing toolkit as it informs your long-term strategic approach to metals buying. Have you locked in your steel prices yet? They’ve been on the rise since Q1 and we’ve called it every step of the way in our monthly reports. We’ve also been on top of steel price movements since the original 2016 annual outlook was released last October. Now is your chance to claim your copy of our Q2 update as you continue to make forward-thinking industrial buying decisions.

The Financial Times wrote this week that a key driver of bullish sentiment for many asset classes, particularly emerging markets and commodities, has been the U.S. Federal Reserve lowering its estimate of policy tightening this year, but for metals the knock-on effect of that has been a weaker U.S. dollar which — as my colleague Raul De Frutos has written recently — remains a key driver of both price direction and sentiment.

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Equally, if not more important, though, has been the sugar rush of China’s not-so-mini fiscal stimulus, initiated late last year which has really picked up momentum in the first quarter. Across a number of metrics, China’s economy has surged this year driving a risk on sentiment among investors, the strength of which has caught many by surprise.

Stimulus-Driven Bull Market

Chinese speculative investors have piled into the country’s commodity markets betting the upturn has the potential to boost demand for those materials. Wider sentiment has helped, according to the London Telegraph, new home sales jumped 64% in March from a year earlier. Housing prices have risen 28% in Beijing, 30% in Shanghai, and 6% in the commercial hub of Shenzhen. Read more

It would seem Iran is not the only major Middle East economy on the cusp of radical change. If the espoused wishes of deputy crown prince Mohammed bin Salman al-Saud (or MbS as the media have got into the habit of calling him) are realized, the desert kingdom is in for a period of change over the next decade that would be unprecedented in it’s recent history.

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Certainly, oil has transformed the kingdom since it was first commercially extracted in 1938 but the culture of Saudi society has been carefully nurtured, protected, even shielded — one might say — from the corrupting influence of the outside world.

Group of big fuel tanks. Ras Tanura oil terminal, Saudi Arabia

A group of fuel tanks in the Ras Tanura oil terminal in Saudi Arabia. If Prince Mohammad has his way, this will someday be a thing of the past in the kingdom. Source: AdobeStock/eugenesergeev.

Yet the days of a close compact between the House of Saud dynastic monarchy and the religious Wahhabi clerical establishment that, in exchange for control over education and the judiciary, has provided the rulers with legitimacy, may be seeing the beginning of its end.

The Prince’s Plan

The new King Salman’s son, Prince Mohammad, believes Saudi Arabia has been addicted to oil, an addiction that has cost it dearly in terms of economic development and progress. Trying to look into the future, he clearly feels Saudi Arabia needs to face up to the march of time before it is too late. Read more

The recent steel rally seen in China is triggering some warning signs. Fitch Ratings recently announced prices for the metal increased, in part, due to rising speculation about an inevitable slump.

According to a report from Bloomberg, the sharp increase in steel prices isn’t sustainable as mills are expected to fall back on idled capacity, thus increasing supply. The steel price rally has been driven, in part, due to a seasonal recovery that was further supported by increased speculation in the futures market.

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“The rapid increase in Chinese steel prices so far this year is not sustainable, as it is largely due to a seasonal pick-up in construction and elevated speculation in the steel futures market,” the Fitch report said. “With prices now surging, many of the suspended plants have resumed production.”

Steel prices have risen dramatically in 2016 with rebar up 48% after Chinese policy makers touted growth and added stimulus, boosting property prices, according to Bloomberg. These gains have helped mills’ profitability bounce back.

Metals Round-Up

Meanwhile, aluminum prices have joined the broader metals rally, hitting a nine-month high this week. Our own Raul de Frutos wrote: “The data shows us that many signals suggest that this rally in commodity markets could continue. Aluminum prices are starting to pick up and so are other industrial metals. Watch oil prices, the U.S. dollar, commodities markets and the price performance of other industrial metals. Don’t get caught as prices find momentum. In this period it is extremely important to understand the big picture and have a defined purchasing strategy.

You can find a more in-depth steel 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.

I know that the fundamentals for aluminum look poor: Sluggish demand and too much capacity with little to no willingness for production shutdowns. That doesn’t really make for a price uptrend. Or does it?

Aluminum price hits 9-month high

Aluminum price hits nine-month high. Source: FastMarkets.com.

It does if aluminum gets a tailwind, and that tailwind is a bull commodity market which is what appears to be in the cards right now.

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Aluminum might not need many mine shutdowns before we see higher aluminum prices. What aluminum needs is investors to believe that the slump in commodity prices is over and that China will drive demand with its stimulus measures. Read more

China has a dilemma.

On the one hand, popular protests due to increasing levels of pollution are an expression of growing unrest among China’s rising middle classes, all conscious of environmental issues.

Too Much Pollution

Pollution is a source of international shame that has prompted Beijing to take the drastic steps of closing down coal-fired power generation and coal-consuming heavy industry around cities hosting major events such as the Olympic games and flower festivals, so that the People’s Republic can show a clean face to the world.

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On the other hand, that same coal is mined by some 5 million coal workers who have already come onto the streets to protest loudly and publicly about proposed rationalization in the industry and Beijing is nothing if not sensitive to public protest.

Could 2015 be the beginning of the end for coal-fired power in the US? Source: Adobe Stock/Snap Happy

Coal-fired power continues to dominate Chinese power  generation. Source: Adobe Stock/Snap Happy

So, what to do? close coal mines and coal-fired power stations or keep them open and suffer the atmospheric pollution and health hazards that involves?

Pollution Exports

The answer, as with so much else in China, is export it so it’s someone else’s problem. In this case, the policy appears to have been to export the pollution and hence the problem westwards and centrally to less-affluent and less-populated areas.

According to the Financial Times, pollution has decreased in Beijing and Shanghai while it has increased in the interior. Beijing’s smog has been lifting, the average concentration fine particulate pollution (PM2.5) is down 28% year-on-year in the first three months of this year. Read more

Andrew Lane, source: Morningstar.

Andrew Lane. Source: Morningstar.

MetalMiner Editor Jeff Yoders recently had a chance to discuss the broad commodities rally, individual metals markets and other related news with Morningstar Senior Equity Research Analyst Andrew Lane, (here he is talking about Alcoa, Inc. on CNBC). The Chicago-based, independent investment research firm recently released its Basic Materials Observer.

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Morningstar warns that  basic materials stocks look somewhat overvalued, with the average company under its coverage trading at a 12% premium to their analysts’ fair value estimate. That’s not to say that Morningstar’s analysts don’t see pockets of significantly undervalued companies in the sector.  Key takeaways:

  • Despite the recent rally in some commodity prices, Morningstar analysts’ outlook for commodities related to Chinese fixed-asset investment remains negative.
  • Price outlooks are relatively better for commodities related to the Chinese consumer. However, Morningstar analysts would preach caution on the recent safe-haven gold rally.
  • With faltering Chinese growth likely to wreak havoc on investment-oriented commodities, the analysts look to U.S. housing as a pocket of opportunity. Morningstar analysts believe housing starts will be driven higher during 2016.

In discussing the ongoing steel overcapacity issue, Lane said that any real recovery in demand in the Chinese economy is still far away, hindering the demand outlook from what was once the main driver for worldwide production.

“Any real recovery can’t come until past 2020 which is as far our long-term outlooks go,” he said. “The funding for these loss-making facilities, it has to run out at some time. It remains to be seen how far the local governments in China can kick the can down the road by keeping their local and provincial capacity open with access to this (loan) capital. It’s a game that can’t go on forever but… we tend to think that they can maintain current production levels for a lot longer than most people give them credit for.” Read more

Adobe Stock/ Björn Wylezich

Adobe Stock/ Björn Wylezich

The International Lead and Zinc Study Group recently released new data that found the global market for refined zinc recorded a surplus during the first half of 2015, but was in deficit during the second half of the same year.

The London Metal Exchange, Shanghai Futures Exchange and Chinese State Reserve Bureau warehouse inventories — along with those reported by consumers, producers and merchants — decreased in 2015 with 79% of the refined zinc stored in LME warehouses in New Orleans.

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“Decreases in zinc mine output in Canada, China, Ireland and Namibia were partially offset by increases in Australia, India, Peru, the Russian Federation and Sweden resulting in an overall global fall of 0.7%,” according to the report. “A rise in global refined zinc production of 3.3% was primarily a consequence of higher output in Canada, China, India and the Republic of Korea that comfortably exceeded reductions in Iran, Japan and Namibia.”

Furthermore, increased demand for zinc in France, Germany, the Czech Republic, Poland and the Russian Federation was the main source of European usage with other increases noted in China. On the other side of the coin, usage in the United States, India, Japan and the Republic of Korea declined. Global demand overall increased by 0.7% in 2015, according to the ILZSG.

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.

Silver prices skyrocketed on Monday, hitting an 11-month high.

Silver price hits 11-month high

The silver price hits 11-month high. Source: MetalMiner analysis of @StockCharts.com data.

It is difficult to find a fundamental reason for such a price increase. It seems like silver is simply catching up with gold. Gold surged to a one-year high back in February and, ever since, the yellow metal hasn’t moved much, as if it was waiting for silver to close the gap.

Gold to silver ratio falls

The gold-to-silver price ratio falls. Source: MetalMiner analysis of @StockCharts.com data.

And the gray metal has done so. The gold-to-silver ratio has come down to more normal levels after rising to multiyear highs in February when gold prices surged.

Gold Gets Company

The truth is that gold is not moving up alone anymore, since this is not just about investors looking for safe haven. Commodity markets are showing the first signs of recovery.

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A weaker dollar and rising oil prices in Q1 lured investors into commodity markets this year. Not only gold but the rest of the precious metals, as dollar-denominated commodities are getting a boost over the past few months.

Platinum and Palladium Join the Party

Platinum (in red) and Palladium (in blue) recovering

Platinum (in red) and Palladium (in blue) are also recovering. Source: @StockCharts.com.

Will the Uptrend in Precious Metals Continue?

That will strongly depend on what the dollar and oil prices do from now on. The recovery in oil prices since February is encouraging, especially since prices are managing to hold their value this week despite bearish news after major oil producers supplying nearly half of global output ended their meeting in Doha, Qatar, over the weekend without reaching an agreement to cap production.

If oil prices continue to climb despite the bearish news, that would be a bullish development, suggesting that underlying supply/demand fundamentals might, indeed, be improving.

Dollar weakens in 2016

The U.S. dollar weakens in 2016. Source: MetalMiner analysis of @StockCharts.com data.

Another key factor to watch is the U.S. dollar, which will likely move in the opposite direction to oil prices. The interest rate stimulus policies that major world banks take through the year will be decisive in the value of the dollar and the rest of wold currencies.

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The U.S. dollar index is approaching new key support levels that if broken, would be another indication that commodity markets are set to continue improving.

lead-prices-L1The International Lead and Zinc Study Group released new findings that reveal in 2015, supply exceeded demand by 63kt in the global market for refined lead metal.

Over that same time frame, inventories reported by the London Metal Exchange (LME), Shanghai Futures Exchange (SHFE) and consumers and producers dropped by 83,000 metric tons, hitting 503,000 mt at the end of the year.

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Meanwhile, a global lead mine production drop off of 12.1% can be attributed to a significant 25.2% decrease in Chinese production. Elsewhere around the world, output in Ireland, Australia and the U.S. was by and large offset by increases in Sweden, Peru and India.

“As in the case of lead mine production, a 7.8% reduction in world refined lead metal output was almost exclusively due to a reported 18% fall in Chinese output,” according to the report, “to its lowest level since 2009. In Europe, there was a recovery in production in the U.K. after a fall in 2014 due to a disruption in lead bullion supplies. There was no production in Peru in 2015 as a result of the continued suspension of operations at the La Oroya plant.”

Lead Price Movements Since Q1

We’ve been keeping a close eye on steel price movements over the past several weeks, and how those movements relate to other industrial metals, including lead. Metals such as aluminum, copper, nickel and, of course, lead, haven’t moved all that much since hitting multiyear lows back in February. The key factor for their movements is oil, whose recent rally appears to be losing momentum.

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.