Articles in Category: Macroeconomics

Business news is full of doom and gloom for the metals sector, but for consumers it really couldn’t be better.

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Goldman Sachs is reported in a recent article as saying recent price gains this year may be seen as a swansong for the sector and prices are expected to fall back later this year as the underlying fundamentals reassert themselves over the recent speculative euphoria that has driven prices higher, particularly in China.

There is still mine oversupply. Source: Adobe Stock/nikitos77.

There is still mine oversupply. Source: Adobe Stock/nikitos77.

As we have come to expect with metals prices, so much has to do with China, whether it is demand in the case of iron ore, copper, nickel or supply as in the case of steel or aluminum, China dominates the landscape and calls the shots — whether its intends to or not. Read more

The CME Group is taking actions to more directly compete with the London Metal Exchange and China’s Ministry of Commerce has responded to tough U.S. tariffs and anti-dumping duties.

CME Group Will Take on the LME

The CME Group is talking to several warehouse companies to expand its metal storage network globally, three metal industry sources exclusively told Reuters, a move that could further challenge the London Metal Exchange‘s (LME) dominance.

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In recent years the CME, the world’s largest futures market operator, has been steadily building its storage network , partly as a result of controversy surrounding the LME warehouse system.

Chinese Ministry of Commerce Slams U.S. Steel Tariffs

U.S. efforts to protect its steel industry will not solve the sector’s fundamental problems, which stem from “past protectionist measures,” China’s Ministry of Commerce said on Saturday.

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The comments were posted on the ministry’s website following a decision on Friday by the U.S. International Trade Commission to continue probing imports of certain steel products from 12 countries, including China and Korea.

Improvements in commodity markets made copper prices hold above the lows recorded in January but investors are not yet excited enough to trigger a bull run in copper prices.

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We noticed in March that copper, aluminum and nickel were lagging badly in this year’s industrial metals rally, and they still are. Copper fell this week below $4,600 per metric ton, the lowest level in two months.

3M LME Copper hits 2-month low

Three-month London Metal Exchange Copper hits a two-month low. Source: Fastmarkets.com.

Overcapacity issues are still visible. Last December, a group of Chinese smelters announced intentions to cut refined copper output. However, recently, China’s largest copper producer,Jiangxi, said those output cuts have been offset by new capacity there.

More Expansion

Also, earlier this month, Rio Tinto Group approved a $5.3 billion expansion to more than double output at the Oyu Tolgoi copper mine in Mongolia, making it one of the world’s largest copper mines. Rio is also expanding its iron ore efforts. Even though almost everyone seems to agree that the market is oversupplied, copper producers seem quite optimistic on the long-term picture. Read more

The Commerce Department delivered final determinations in the case of Chinese cold-rolled steel this week, and while Commerce upheld the 265% duties initially placed on the imports, the agency also added 256% countervailing subsidy duties, nearly doubling the duties on Chinese cold-rolled.

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It’s safe to say the gauntlet’s been thrown down when it comes to Chinese steel imports. Doubling up the duties shows that Commerce finally isn’t kidding around and that the reforms passed by Congress last year have teeth.

Freight train with cargo containers passing by

Freight, whether by boat or by train, is being checked and inspected more vigorously by U.S. Customs and Border Protection.

Still, we wondered what effect this would have on U.S. manufacturers. Not only the ones accustomed to lower prices from foreign imports, but also the ones who export their finished goods to China. To paraphrase J.R.R. Tolkien, open trade war is upon you whether you’d risk it or not!

Chinese Response

China’s not taking it with a grain of salt, either. The Ministry of Commerce said on Saturday that it was gearing up for a legal challenge over the steel duties, most likely by opening an arbitration panel in the World Trade Organization.

The WTO is a better venue for China than Commerce or the U.S. International Trade Commission, which is likely why most Chinese steelmakers did not respond to Commerce’s requests for information in the cold-rolled case. What more might come out at the WTO is anybody’s guess.

“China will encourage and support its steel companies to defend themselves according to law, and China will safeguard the legitimate rights and interests of its steel companies using World Trade Organization rules,” the Ministry said in a statement today, less than 24 hours after Commerce announced further investigations into China’s steel industry.

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Understandable since there probably aren’t even any Chinese steel mills that can make money exporting goods to the U.S. with 522% tariffs upon entry. My colleague Katie Benchina Olsen reported this week that Customs and Border Protection is getting better at flagging trans-shipments and other tricks to avoid the duties, too.

The trade war is definitely on. Whether it ends quickly is up to the countries and companies involved.

Adobe Stock/ Björn Wylezich

Adobe Stock/ Björn Wylezich

The International Lead and Zinc Study Group recently released its latest findings, which revealed world usage of refined zinc metal is projected to grow 3.5% in 2016 due mostly to a 4.5% increase from demand in China.

The Far East nation’s demand is expected to grow due to continued investment in its infrastructure. In addition, Europe is expected to remain stable in 2016 after improving 3.2% in 2015 as far as zinc usage is concerned.

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Growth as high as 13.1% is expected in the Republic of Korea with increases also projected in India, Japan and the U.S.

As for supply? The ILZSG report states: “A sharp forecast fall in ex-China zinc mine production of 9.4% is due to a combination of mine closures and recently announced production cutbacks. Chinese output, which is reliant on production from a large number of small mines, is forecast to grow by 12.4%. Overall global zinc mine output is expected to fall by 1.4% to 13.27 million metric tons.”

Furthermore, Australia is expected to significantly reduce its production by 46% as a result of mine closures last year.

The ILZSG concluded: “Despite the fact that lower output is also expected in a number of other countries including Canada, India and Kazakhstan, current forecasts indicate that these reductions will be more than balanced by anticipated rises primarily in China, the Republic of Korea, Namibia and Norway. However, taking into account the predicted decrease in zinc mine supply it is possible that zinc metal production expectations in some countries may be subject to downward revisions later in the year.”

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-L1The Standing Committee of the International Lead and Zinc Study Group held its Spring meetings last month, and revealed they anticipate global demand for refined lead metal to rise 2% in 2016.

Furthermore, increased usage in China by the automotive and telecommunications sectors could be offset by a reduction in demand in the e-bike market there, leading to slower sales growth and higher competition from battery production.

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In Europe, demand is projected to grow 3.5% spearheaded by activity in Italy, Spain, the Czech Republic, and the U.K. This after demand fell 5.2% last year. Growth is also expected in Japan, Indonesia, India, Turkey and Thailand.

The ILZSG report stated: “An expected fall of 6.1% in ex-China production will be primarily due to reductions in Australia resulting from the closure of MMG‘s Century mine in August last year and cutbacks announced by Glencore, CBH Resources and Perilya.”

In 2015, Chinese imports of lead contained in lead concentrates reached a record 1.03 million metric tons, the ILZSG stated, and are projected to fall to just under 900,000 mt this year.

Global refined lead metal production is expected to grow 2.3% due in large part to increased output in the Republic of Korea. The ILZSG concluded: “Having taken into account all of the information recently received from its member countries, the Group anticipates that increases in refined metal supply, most notably in the Republic of Korea, will result in a global refined lead metal surplus of 76,000 mt in 2016.”

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.

Architecture billings are up, a good sign for the consumption of construction metals here in the U.S., while the American Petroleum Institute has some problems with the new EPA proposed ethanol standards.

Architecture Billings Rate of Gain Declines

The American Institute of Architects’ Architecture Billings Index fell in April to 50.6 from March’s 51.9 but still remains in positive territory. Any score above 50 reflects an increase in architecture billings which, themselves, reflect an approximate one-year lag between design work and actual construction projects breaking ground.

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Southern states showed the most strength, and the multifamily and commercial/industrial sectors saw the most billings.

API Calls on EPA to Limit Ethanol

The Environmental Protection Agency must do more to ensure Americans have access to fuels they want and can safely use in their vehicles until Congress changes the Renewable Fuel Standard (RFS) program, American Petroleum Institute Downstream Group Director Frank Macchiarola said following EPA’s proposal for the 2017 RFS mandates.

“Consumers’ interest should come ahead of ethanol interests,” said Macchiarola. “EPA is pushing consumers to use high ethanol blends they don’t want and that are not compatible with most cars on the road today. The administration is potentially putting the safety of American consumers, their vehicles and our economy at risk.”

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Higher ethanol blends, such as E15, can damage engines and fuel systems, the API said, potentially forcing drivers to pay for repairs, according to extensive testing by the auto and oil industries. The Congressional Budget Office found that consumer gas prices could rise by 26 cents per gallon unless EPA lowers RFS mandates. API is urging EPA to set the final ethanol mandate at no more than 9.7% of gasoline demand to help avoid the 10% ethanol blend wall and meet strong consumer demand for ethanol-free gasoline.

CNBC recently reported that home construction weakened in March even as sentiment among builders remained high, but what’s more interesting is a quote from a Goldman Sachs report further down.

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“Our analysis of payroll growth and wage inflation data suggests that labor shortages may not be to blame for the mediocre level of housing activity,” analysts wrote in a Goldman report. “We find that, on the one hand, the construction sector has experienced the largest job growth over the past year.”

Construction_yoders_550_030116

U.S. Construction workers are using 3D imaging, laser scanning and drones to place structural members like this one. Can the skilled labor shortage possibly be over? Source: Jeff Yoders/MetalMiner.

Construction growth has led all other sectors at 5%, according to the Bureau of Labor Statistics, but average hourly earnings in construction gained only 2.2% over the past year, which is about the national average.

Still, Goldman’s pronouncement that there’s simply no construction labor shortage anymore very much runs the opposite of what the industry has claimed for years. The numbers only tell half of the story because a lack of skilled labor is what plagues most construction sites.

Nearly 70% of home builders surveyed by the National Association of Homebuilders last June reported a shortage of carpenters, for example, up from 63% in 2014. And in a July survey by the Associated General Contractors of America, 86% of commercial builders said they’re having trouble filling hourly or salaried positions, up from 83% last year.

This may not look like it affects the bottom line to Goldman-Sachs, but it certainly does when only carpenters, iron workers or electricians can move your project along.

Many high schools have phased out shop classes and parents increasingly have steered graduates to four-year colleges and white-collar careers. The Home Builders Institute, which does training, and local home builders groups, recently rolled out more instruction programs but it takes at least 12 to 18 months for a new recruit to become a productive worker. That’s why pay increases had reached as high as 2.6% last year before falling back down to around the national average that Goldman cited. It’s likely a small rest in the rate of increase rather than a full stop, as unfilled job openings in the construction industry have risen steadily since 2009.

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So, while I respect Goldman Sachs and its analysts’ learned opinions, I’m not ready to bless this report’s findings and call the skilled construction labor shortage over. Mike Rowe may have to fill all of the dirty jobs that are still out there before that happens.

Last week, we briefly covered the decision by European Union lawmakers to vote against the application by China to be considered a market economy, a recognition China says it is due automatically by December following an agreement in 2001 set to mature this year.

We also published an in-depth look at what China market economy status would mean for U.S./E.U relationship with China.

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The European Parliament’s decision was overwhelming, 546 votes in favor and only 28 against, with 77 abstentions so, while the vote is non-binding, it raises the stakes for the European Commission, which will decide shortly whether China deserves to have its status upgraded.

Terrible Timing For Europe

For both sides the debate is at the wrong time. Europe’s steel industry is being decimated by cheap imports from China, raising the stakes for politicians otherwise inclined toward a more free-market approach. The British, in particular, find themselves (not for the first time) somewhat isolated in wanting more open engagement even though their domestic steel industry has been hit harder than most.

Chinese imports are allegedly being dumped in the EU and other foreign markets. Source: Adobe Stock.

Chinese imports are allegedly being dumped in the EU and other foreign markets. Source: iStock.

In reality, the decision is much more political than practical. Market economy status matters when it comes to deciding whether a country is “dumping,” exporting goods at below cost price. Nations deemed to be market economies can resist anti-dumping measures if they can show that domestic prices are no higher than the price at which goods are sold overseas. Read more

Tin and zinc are the best base metals performers this year.

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These two metals have risen on expectations of supply constraints. In the case of zinc, it’s about the number of key larger-scale mine shutdowns over the past months. Meanwhile, tin’s performance comes largely on the back of low first-quarter exports from Indonesia.

3M LME Tin trading flat after a big rally in Q1

3-month LME tin trading flat after a big rally in Q1: Source Fastmarkets.com.

Indonesian tin exports slumped by 50% in the first quarter of the year. Tin exports were low because of the application of new government environmental regulations, requiring smelters to provide new documentation. Moreover, the decline in exports was also because of extreme weather conditions that affected production during the first quarter. Read more