A rising dollar has a negative impact on metal prices. Not only lead, but all base metals are feeling the downward pressure this month. Metals are priced in dollars and when the value of the dollar rises, it takes more of them to buy metals. Another reason is that when the value of the dollar rises, foreign buyers have less buying power, typically causing demand for metals to shrink.
Lead Needs To Consolidate Gains
Lead faces long-term resistance level. Source: Fastmarkets.com.
Lead prices are consolidating recent gains and a stronger dollar is weakening the bullish mood across base metals. Prices could continue to climb higher after this pause. Lead buyers should consider hedging some purchases.
Aluminum prices have risen this year, but not as much as other base metals. Aluminum continues to struggle near $1,700/mt, a level that prevented prices from rising three times this year.
Three-month LME aluminum near stiff resistance levels. Source: MetalMiner analysis of Fastmarkets.com data.
Many analysts argue that this year’s rally is limited because they expect Chinese smelters to restart capacity in the fourth quarter. The argument is that now that aluminum prices are higher than at the beginning of the year, smelters making aluminum will be more profitable.
Some capacity has already been restarted, but the numbers are running short of analysts’ expectations. Despite all fears, it’s possible that aluminum output in China will not increase as most analysts are predicting. Why? Let’s look at the cost curve:
Energy Prices Rise
It takes a lot of energy to smelt aluminum. Indeed, energy accounts for around half of the cost for Chinese smelters to produce aluminum. While aluminum prices have increased 13% this year, thermal coal prices have surged near 70% this year. As energy prices increase, Chinese smelters are getting squeezed, making it tougher for them to expand production.
Oil prices near stiff resistance levels. Source: MetalMiner analysis of Fastmarkets.com data.
For this reason, it’s not a surprise that oil prices, the main benchmark for energy prices, look very similar to aluminum. Oil prices are currently at a stiff resistance level near $50/barrel.
What This Means For Metal Buyers
Most analysts expect capacity restarts to weigh on aluminum prices. However, higher energy prices could prevent Chinese smelters from restarting capacity. Oil prices are now trading near a key level. If oil prices manage to trade above $50/barrel, we would expect aluminum to finally break above $1,700/mt.
Like steel, there has been some positive news about aluminum consumption in India. A research report said aluminum intake is poised to grow from 3.3 million metric tons in 2015-16 to 5.3 mmt in 2020-21.
The report, “Indian Aluminium Industry: Geared for Growth,” is by global research and ratings agency Crisil and Mtlexs. It forecasts growth based on a combination of government initiatives such as “Make in India,” Smart Cities, Housing for All, and an increase in the transport of freight across the country.
Electrical Power Demand
The analysts say aluminum’s main demand would come from the power sector, since the white metal was now often used as a cost-effective, lightweight substitute for copper in transmission and distribution. In the coming five years, investments from state utilities and central government schemes worth millions of dollars are being planned to expand India’s transmission and distribution network.
The other sector that would drive the uptake is the automotive sector. The tightening of vehicular emission standards has forced automakers to look at aluminum to reduce vehicle fleet weight. India’s automobile sector is poised for heavy growth in the next five years.
As has become the norm, any news of increased consumption is accompanied by a downside: cheap imports. Like producers in the U.S., whose interests are being harmed by China’s exports of semi-finished products, India’s aluminum sector, too, as reported earlier by MetalMiner has been dogged by such imports. In India, imports make up almost 50% of the total consumption, largely from neighboring China. Just between 2011-2016, imports of aluminum increased 14%.
Smelters Want Tariffs
Aluminum majors such as Hindalco, Vedanta and Nalco have been urging the Indian government to impose a Minimum Import Price (MIP) to enable the domestic industry to take on what is being called as a “foreign economic invasion.”
Hindalco’s Managing Director Satish Pai was quoted saying such a government move would help the domestic industry compete with the cheap imports. He was addressing the recent World Non-Ferrous Conference 2016.
He said in the last five years, the imports from the ASEAN (free-trade agreement countries including Brunei Darussalam, Myanmar/Burma, Cambodia, Indonesia, Laos, Malaysia, Philippines, Singapore, Thailand and Vietnam) had increased from 6% of the total refined imports to 31%. The Indian Mines Secretary has indicated that the government is examining the aluminum sector’s demand and would make a decision on the imposition of an MIP in the next 15 days.The Mines Ministry already held several rounds of discussions with aluminum industry leaders.
Our monthly MMI saw a boost in October as three metals tied for the biggest gain and markets seemed to tighten as manufacturers started to make decisions for their end of year and early 2017 spending.
There seemed to be a Q4 tightening across most of the metal markets we follow. Sure, the Rare Earths and Renewables MMIs were flat as a board yet again, but Copper, Aluminum, Stainless and Raw Steels all saw strong gains. Our Global Precious MMI gained again but almost immediately suffered a pullback after talk of a Federal Reserve interest rate hike in December and renewed strength from the U.S. dollar.
“China released new credit data, which was better than expected,” Xiao Fu, head of commodity market strategy at Bank of China International in London, told the news source. “The new yuan loans hit the highest level since June, so that’s helped to lift sentiment.”
It’s also worth noting that tin was the top performer on the London Metal Exchange Tuesday this week following reporting from senior mine officials in Myanmar, China’s top supplier of ore, that production at key operations was falling drastically and deposits could be depleted in the next several years.
Tin Bull Market Extends into Q4
Earlier this month, our own Raul de Frutos wrote that industrial metals rose in the first half of the year, then subsided in Q3, but momentum is beginning to tick back up.
“The industrial metals exchange-traded fund, which tracks the performance of four base metals, recently hit a 14-month high,” de Frutos wrote. “This is important because when money is flowing into the industrial metals complex, every metal gets a tailwind. Recently, we witnessed particularly strong momentum in lead, zinc and tin.”
How will tin and base metals fare for the remainder of 2016 and into 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:
Zinc rose pretty fast this year. Such was the rate of advance in prices that zinc only needed some news to be the trigger for what was always in the cards technically. Moreover, zinc is at levels that prices couldn’t overcome in 2014 and in 2015. This is a level where it’s normal to see some selling pressure. Finally, in October zinc got the news that triggered selling:
First, it was announced that the Antamina mine in Peru will double its zinc output to 350,000 metric tons next year. Second, Vedanta Resources said that production in one of its mines has increased and it will continue to increase in the second half. Third, Nyrstar recently announced the reactivation of three of its mines. These mines were put on care and maintenance when zinc prices were low and the company is now restarting them to take advantage of higher prices.
Are we heading back to surplus? Not really.
Actually, the first two developments were already on the table. The only one that came as anything close to a surprise was Nyrstar’s restart. These mines only generate around 50,000 mt of annual output and it will take over a year to fully restart them.
This volume is not that significant. However, these restarts bring up the fact that more production could come back now that prices are above $2,200/mt. Zinc bulls’ biggest fear is Glencore restarting its 500,000 mt of capacity that the company closed last year.
What This Means For Metal Buyers
Zinc prices are struggling to build on this year’s gains. This is normal price action after the huge advance seen this year. There is no reason to become bearish on zinc yet but buyers need to keep an eye on further mine restarts. Glencore restarting capacity is the biggest downside risk that the zinc industry faces.
The precious metal had lost nearly 9% from July’s two-year highs to trade around $1,255 an ounce on Tuesday, hit by expectations the Federal Reserve would raise interest rates in December for the second time in a year.
China Overtakes U.S. as Top Crude Oil Importer
China imported record volumes of crude oil last month, eclipsing the U.S. as the world’s top buyer of foreign oil as Beijing’s state reserves shipped in cheap crude to fill new storage tanks.
On the one hand, as a steelmaker, it is exploring the possibility to merge its European steel operations with those of Tata Steel. The European steel market desperately needs consolidation, but no one is willing to bear the brunt — politically or economically — of closing multiple plants and laying off thousands of workers.
One attraction of a merger could be that ThyssenKrupp and Tata might keep open its German and Dutch facilities, but try to close or scale down Tata’s Port Talbot operations in South Wales. After Brexit, Britain — and maybe all of what’s presently the U.K. — will no longer be of much concern to the rest of Europe. Regardless, the article’s main focus is on protectionism. The E.U. is in the process of applying historically high duties to Chinese steel; some as high as 73.7% for heavy-plate and 22.6% for hot-rolled, levels said by the Chinese to represent “reckless trade protectionism.”
Protected Bubbles in a Global Marketplace
That sours the air between Europe and China on the question of open trade relations. ThyssenKrupp, one would think, would benefit, though. Of its six divisions — Steel Europe, Steel Americas, Components Technology, Elevator Technology, Industrial Solutions and Materials Services — the steel divisions represent 30% of its revenue but only turned a modest profit in Q2 not least of which because prices were depressed in part by China’s low-priced imports.
In microcosm, ThyssenKrupp is an example of a wider issue, the article suggests. You can’t adopt selective punitive tariffs on some products and not expect some form of retaliation or more willing adoption of reciprocal tariffs on other products or services areas by those affected importers. Steel generates just 2% of Thyssen’s profits, so 98% come from its much more promising elevator and industrial products divisions… divisions that benefit most from a free and open global market place.
Diversified Companies, Single-Industry Tariffs
The article berates ThyssenKrupp for its capital-destroying and high loss-making forays into primary steel production in Brazil and processing operations in the U.S. that the company has since sought to extract itself from. The share price, the FT says, has made no progress in five years.
But, from our perspective, the impressive fact is that even after these massive loss-making ventures — said to total some $15 billion — the share price has still managed to maintain its level from five years ago. Other steelmakers that have not made such, in hindsight, poor investment decisions are doing no better. ArcelorMittal is much the same, if not worse. The trend has been consistently down.
Source: Yahoo Finance.
What has held ThyssenKrupp up, kept the faith of its shareholders and created growth and promise for the future, is those elevator and industrial products divisions. Those divisions that rely on open, unfettered, access to world markets. Read more
The data showed a 10% fall in China’s exports last month and a greater than expected drop in imports sent copper down nearly 3% late last week before a slight recovery on Friday. The FT quotes Caroline Bein analyst at Capital Economics saying “ to drop in exports is negative for industrial commodities raising concerns about weakness in the manufacturing sector and import figures raise concerns about domestic demand.”
Copper was not alone in reacting to the poor trade figures, although the Shanghai market seemed remarkably sanguine, European and U.S. stock markets dropped sharply, driving stocks lower and boosting gold, bonds and safe haven currencies like the Yen.
Are the trade figures quite as bad as they seem? And do they justify the markets sharp reaction? There are broadly two issues at work here. First, the wider issue of China’s trade data. Back to the FT, China’s trade data showed that the country’s exports last month were down 10% from a year earlier — following a 2.8% contraction in August — suggesting that global demand was decidedly weak. Read more
Unlike other base metals, we haven’t really seen a decline in copper supply. Therefore, copper investors can only keep an eye on copper’s demand. China consumes nearly 40% of global copper demand. China isn’t self-sufficient when it comes to its copper needs and is the largest importer of the red metal. Rising Chinese imports signals increasing demand for the metal.
Last week, China released its trade data. In September 2016, China imported 340,000 metric tons of unwrought copper and copper products, down 25% from last year. Moreover, this is the sixth consecutive month where imports fell on a monthly basis.
Three-month London Metal Exchange copper falls on weak Chinese imports. Source: MetalMiner analysis of Fastmarkets.com data.
Prices fell sharply following the release of the weak numbers. Investors still lack any good reason to push prices much above $5,000/mt, a level that has proven to be a ceiling for copper this year. So, while we don’t see supply cuts and demand appears stagnant, the best copper producers can expect is for prices to remain rangebound.