Articles in Category: Macroeconomics
Source: Adobe Stock/ epitavi

Source: Adobe Stock/ epitavi

Disappointing trade data from China caused copper futures to fall 2.2% this week, contributing to an overall downward trajectory for futures this month.

Copper’s losses this week came after China, a top consumer of the metal, announced that exports unexpectedly dropped 1.8% in April on an annualized basis while imports decreased by 10.9% year-over-year, according to a report from Economic Calendar.

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“Adding extra impetus to Monday’s losses was a stronger greenback,” wrote strategist Donald Levit of Economic Calendar. “The U.S. dollar climbed versus its rival currencies on Monday even after Friday’s disappointing jobs report. With copper a dollar-denominated commodity, a stronger greenback makes the metal more expensive for holders of international currencies.”

Levit added that overall, the forward momentum that propelled copper and other industrial metals higher during the first quarter of the year appears to be regressing. This can be partially attributed to the conclusion of China’s seasonal copper stockpiling coupled with the belief that China stockpiled most of the metal it imported earlier this year.

Copper MMI Holds Steady

According to our own Raul de Frutos, copper prices have trended higher since they hit seven-year lows in January, but this metal still hasn’t gained as much as other base metals like zinc or tin.

“Improvements in commodity markets made copper prices stop from falling but investors are not yet excited enough to trigger a bull run in copper prices,” de Frutos wrote.

You can find a more in-depth copper 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.

 

The New York Times isn’t renowned for writing depressing pieces and, to be fair, a recent analysis the paper carried out on productivity growth was intended to be, and indeed was, a well-balanced analysis.

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Unfortunately, although the newspaper presented three possible conclusions across a range of possible outcomes, the overriding conclusion remains uncomfortably depressing.

There have been a number of references in the business press over recent years about poor productivity growth, often in relation to the failure of mature markets to lift themselves out of the last recession and bounce back with stronger growth. But, in truth, falling productivity has been a feature of the U.S. economy for the last ten years. Nor does it appear to be related to recessions as this graph from the NY Times shows.

Source: NY Times

Source: New York Times.

Slow Growth or No Growth?

True the economy went through a similar decline from the mid ’60s to the early ’80s, and bounced back, but it only managed above-trend growth for a few years and the paper contends this was a result of prolonged and substantial investment in staff, equipment and information technology on the back of a rapidly expanding stock-market during the ’90s. Read more

Shiny aluminum ingots with a crane in the background while a plane is flying over

Shiny aluminum ingots with a crane in the background while a plane is flying over

Now that several years have passed since Alcoa sold its stake in the Mt. Holly smelter to Century Aluminum, it’s prudent to look back at the deal and assess who really came out on the winning end.

According to a series published on Yahoo News by Mark O’Hara of Market Realist, the selling price between the two companies was not fixed at the time of sale and was dependent on Midwest aluminum prices. While the base price was $67 million, the final transaction price could fall anywhere between $55 million and $90 million.

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

Wrote O’Hara: “As aluminum prices have been on a losing streak since the deal was announced, Century Aluminum recognized $13 million as an earn-out from the transaction during 1Q16. This helped Century Aluminum post positive free cash flows in the quarter.”

While falling aluminum prices over the long term have helped Century Aluminum in this deal, the Mt. Holly plant has faced energy supply issues for the past year, offsetting the come down in price over that same time.

Still, despite the energy supply conundrum, Century Aluminum maintains the Mt. Holly smelter remains the most efficient in the United States. As far as Alcoa is concerned, its investors should be closely monitoring the company’s split as it develops this year.

You can find a more in-depth aluminum 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.

 

The Silver Institute released its “World Silver Survey 2016” Thursday, reporting both tightening supply and increaing demand for the precious/industrial metal.

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According to the report, the silver market saw record demand in 2015, with the jewelry, coin and bar, and photovoltaic sectors posting new highs, helping to boost total silver demand to 1.17 billion ounces last year. Overall silver supply to the market was lower, led by the continued weakness in silver scrap sales. Last year’s supply and demand scenario led to the third successive annual silver market deficit, reaching 129.8 million ounces, more than 60% larger than 2014 and the third largest deficit on record.

You can install PV panels on our roof, collect a tax credit and bring down your own electricity bill. A wind turbine? Not so much. Source: Adobe Stock/rob245.

More silver panels this year, but less silver per panel. Source: Adobe Stock/rob245.

“We expect the silver price to average $15.90 this year and that’s going to be defined by an overall upward trend,” said Erica Rannestad, precious metals demand senior analyst for Thomson Reuters GFMS, who contributed to the report. “We’ve seen prices reach highs last week and we expect that trajectory to continue through the 4th quarter of this year.”

Rannestad said in an interview that the bargain buying of the last two to five years, in the silver market, has largely given-way to more sophisticated investing as a weak dollar has heightened the white metal’s demand. Read more

Screen Shot 2016-04-06 at 9.37.41 AMApril was a huge month for steel prices. What appeared to be a rally lead by anti-dumping actions has turned into something more powerful due, in part, to a rebound in demand from China.

“It is now clear that China has unleashed a renewed government stimulus program in the form of credit expansion and infrastructure build. This could have a bullish impact on commodity prices like we saw during the 2009-10 China stimulus program,” said Lisa Reisman, executive editor, MetalMiner™. “Some suggest it (the stimulus) will be over this year because China doesn’t want to encourage another speculative property bubble. But the Chinese have a history of extending stimulus measures beyond original time frames.”

For a long-term outlook to inform your direct material sourcing strategy, claim your copy of our Annual Metals Outlook, now updated for Q2!

The U.S. dollar index, which tracks the buck against a basket of international currencies, hit a 15-month low this week.

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The fact that traders are not supporting the dollar above these levels is quite bearish for the currency.

Dollar Index Hits 15-month low

The U.S. dollar index hits a 15-month low. Source: MetalMiner analysis of @StockCharts.com data.

.There are three major factors that explain the weakness in the dollar:

  • Japan was expected to implement a fresh round of stimulus to weaken the yen to combat low inflation. However The Bank of Japan kept interest rates unchanged last Thursday.
  • Federal Reserve officials left interest rates unchanged at their meeting last week and remained ambiguous about raising rates in June. The Fed showed intentions at the end of last year to raise rates four times in 2016, that changed early this year and the prediction is now just two rate hikes. Recent weak U.S. growth data isn’t encouraging at all for the prospect of increased interest rates.
  • The rebound in commodity prices hurts the dollar, too. As commodity prices rise, the currencies of commodity exporting countries appreciate against the US dollar.

Gold Surges on Dollar Weakness

Gold prices (in yellow) rise as dollar index (in green) falls

Gold prices (in yellow) rise as dollar index (in green) falls. Source: @StockCharts.com.

The dollar weakens on higher commodity prices and commodity prices rise on a weaker dollar, the effect is reciprocal. One asset that is really enjoying the dollar’s weakness is gold. The yellow metal hit a new 15-month high this week as the dollar index hit a 15-month low. The correlation, gold-to-dollar, is way more reliable that any physical demand indicator of gold.

Free Download: The April 2016 MMI Report

Not only gold but all precious metals are rising as the dollar weakness. Silver also hit a 15-month high this week, while platinum and palladium rose to their highest levels in 10 and six months, respectively.

Industrial Metals Gain Traction

Industrial metal ETF rises on weaker dollar and Chinese stimulus

Industrial metal ETF rises on weaker dollar and Chinese stimulus. Source: @StockCharts.com.

Now, with a falling dollar and the demand side of the equation looking brighter thanks to China’s stimulus measures (at least until their effect lasts), industrial metals are enjoying a tailwind. It’s a great time for metal buyers to minimize their price risk exposure.

To talk about the next recession feels bizarre.

For many people, we are barely out of the last recession and yet the numbers say that if the economy continues to grow as expected at over 2% this year and the next, by 2018 we will have “enjoyed” the longest period of expansion in the last century.

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The problem is, expansion has been weak. Between 1992 and 2000 the U.S. economy grew at 3.8%. Between 2010 and 2018 it is predicted by the Economist Intelligence Unit (EIU) to grow by only 2.4%. Part of the reason appears to be a collapse in productivity growth, of which we aim to pen another article shortly.

Not Keeping Up

For now, though, the EIU reports that although the U.S. in particular has continued to create excellent job creation numbers and is maintaining low but positive inflation, much of the developed world has failed to stimulate domestic demand. As growth has slowed in the emerging markets even export dependent economies like Germany have found growth prospects limited by slowing overseas demand.

Source EIU

Source: Economist Intelligence Unit

Of course, the flip side of a near-record-breaking run of expansion is the certainty that, sooner or later, it will come to an end. The U.S. has gone through 11 downturns since 1945, lasting an average of 11 months each but ranging from six (1980) to18 (2007-2009).

Expansions vs. Contractions

Expansions, by comparison, last for an average of just under five years. Helped by plenty of slack in the economy, low interest rates and low inflation, the EIU expects the current expansion to last for another 3-4 years.

But, and here is the point, the EIU expects the U.S. to overheat by 2018 by which time unemployment will be 5%, inflation will be 2.5% and the Federal Reserve will have tightened considerably as inflation begins to finally rear its head. Not that an external shock could not precipitate a recession beforehand — Europe has considerable potential to do just that and so does a hard landing in China — but on the balance of probabilities the EIU expects the next recession will be short, relatively benign, and home grown.

Source EIU

Source: EIU

In the meantime, we can expect continued and considerable volatility. As we have seen in just the first four months of this year, the markets have lurched from doom to euphoria, prompted by fears of a Chinese slowdown and then excitement at China’s stimulus. China cannot continue to stimulate itself out of slow growth. Every cycle adds debt and unproductive investment but, in the short term, the rush of demand raises metal and commodity prices.

Oil Impact

Interestingly, the EIU does not expect crude oil prices to bounce back to pre‑2014 levels in the next five years, as modest demand growth will fail to catch up with resilient supply. Despite a dip in U.S. production in 2016, global crude supply will expand further, the report states, on the back of continued output growth from OPEC and, to a lesser extent, Russia.

Free Download: The April 2016 MMI Report

Combined with moderating demand growth, this points towards only a gradual increase in prices. The firm believes industrial metals prices will recover slowly in the remainder of the decade as capacity restrictions are too limited to tighten the supply market in the face of slow demand growth.

Let’s hope the respected EIU are right in their predictions. For industrial metals buyers, processors and consumers a three-to-four year period of stable positive growth without the price spikes of 2010-12 would be welcome.

In a rising price steel market, every manufacturer feels the squeeze but perhaps none more than the small manufacturer sourcing semi-finished and finished components and assemblies from China.

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The Chinese have recently taken to a number of tactics with smaller manufacturers. By sharing some of these tactics, buying organizations can begin adapting their sourcing strategies. Here are some of the tactics we have recently heard of:

  1. Mills have begun demanding immediate cash payment for all open orders in which buying organizations secured lower costs previously. If the buyer does not pony up an up-front payment, the customer loses the material and must pay the inflated market price.
  2. The small manufacturer must now pay a higher trade price.
  3. Scrap prices have risen in China and, in fact, Chinese manufacturers have begun stockpiling scrap materials until further notice because scrap prices are trading at a steep discount to what they had traded for a year ago. We will explore a possible “why” momentarily.

What do each of these tactics suggest to us? I had a brief exchange with MetalMiner Co-Founder Stuart Burns who offered plenty of insight.

In terms of payment up front for open orders, Stuart suggested mills want to limit distributors and end users from taking speculative advantage of rising prices. Although it appears extreme, Stuart tells us despite the practice not occurring in recent years, it is indeed a fairly common Chinese business practice to demand advance payment for open orders.

Scrap Fetching “Only” RMB 720/mt?

This is perhaps the most significant Chinese steel news event at the moment. On the one hand, much of Chinese steel production is done via basic oxygen furnace, with fewer scrap requirements vs. electric arc furnaces, but, still, scrap is needed for all steelmaking. Furthermore, iron ore, coking coal and steel prices have all risen within China. So, why hasn’t scrap? Certainly if all factories are under strict orders to stockpile scrap materials, we can anticipate a potential glut of material during the summer months.

Our best guess would tell us that perhaps the mills had previously stocked up on scrap and are simply de-stocking.

Finally, Chinese Construction Activity

One of the most significant macro-economic factors we look to in determining price direction involves China. And the recent Chinese stimulus programs suggest that lax lending and stimulus have, indeed, spurred a new infrastructure economic boom.

Again, Stuart believes that speculative building has started again and has sucked steel into the market largely contributing to the point mentioned above: prepayment on open orders.

JP Morgan Chase & Co. believes the demand uptick from the program will taper off by the second half of this year because China doesn’t want to create an additional property bubble. But we remain skeptical. China has shown that shot-in-the-arm stimulus programs often turn into prolonged addictive habits and, therefore, this demand uptick could last longer than many anticipate.

What This Means for Small Manufacturers?

As we say in tight supply markets, all manufacturers will do better by making themselves a desirable customer to their suppliers. The negotiation dynamics have changed. Surety of supply may become a more critical issue than cost savings. Regardless, small manufacturers will want to evaluate current global sourcing strategies, particularly for steel products coming from China.

An earlier version of this story referred to increased premiums paid by small manufacturers. In actuality, they were not premiums but rather an increase in price. We regret the error.

How do interest rates impact the value of a currency? Let’s review:

Higher rates mean higher borrowing costs, which usually make a currency more attractive to investors seeking higher yields than in other currencies. That’s exactly what happened to the U.S. dollar during 2014-2015 when we saw a dollar bull market built on expectations that the Federal Reserve would raise rates domestically while central banks around the globe would keep on lowering interest rates.

Free Download: The April 2016 MMI Report

However, the Fed is not hiking rates as fast as markets had expected. On top of that, there are many questions regarding the ability of banks in Europe and Japan to lower interest rates more from here. This caused the U.S. dollar to weaken this year, having a bullish effect on commodity markets and therefore, metal prices.

Japan Holds on Rates

Japanese Yen appreciates against the dollar

The Japanese yen appreciates against the U.S. dollar. Source: Yahoo! Finance.

The Bank of Japan kept interest rates unchanged last Thursday despite coming under pressure to take further action. The yen surged more than 3% against the U.S. dollar after the announcement, its biggest one-day gain since May 2010. Read more

Markets are unpredictable. Picking a bottom is a difficult task as things can change quickly. However, for the first time since 2011, we are seeing enough positive signals to believe industrial metals might have bottomed out.

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A broad recovery might be underway and metal buyers should have a plan. “Commodity price risk” might become a highly popular Google search again.

Why is the picture turning bullish? First of all, the two main drivers of metal prices are finally giving some bullish signals for the overall metal complex.

CRB commodity index hits 5-month high

CRB commodity index hits 5-month high. Source: MetalMiner analysis of @StockCharts.com data.

The dollar has weakened since January, and it’s certainly showing no signs of strength. Second, and perhaps more importantly, the sugar rush of China’s not-so-mini fiscal stimulus, initiated late last year, has really picked up momentum in the first quarter. Read more