Metal Prices

Energy prices got hit the most with oil prices falling below $50/barrel, followed by precious metals. Gold prices hit a 5-year low, falling as much as 8% in July, silver of course, followed because metal price correlation is still an important factor to account for.

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One may think that China’s steel industry could hardly be in a worse place.

Half the industry is losing money in spite of falling iron ore and coking coal costs and a reduction in domestic power costs all aiding steel producers on the supply side. Even among those that did not lose money in the first half, margins are said to be razor thin and banks are reported to be cutting credit lines and presenting difficulties in rolling over loans according to China Iron and Steel Association (CISA) comments posted by Reuters.

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Concern in China is rising that June’s 3.4% fall in auto sales, compared to the year before, could be the start of a trend. After two years of consistent growth and high capacity utilization the world’s largest car market is showing signs of fragility.

Data from the China Association of Automobile Manufacturers quoted in the FT suggests China’s automotive market may be maturing after years of breakneck growth.

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How will US construction purchasing move forward with, apparently, no cost certainty for Highway Trust Fund projects beyond six months?

As House members convened Monday for their final days of work before an annual August recess, Majority Leader Kevin McCarthy (R.-Calif.) ruled out taking up the Senate’s $130 billion highway bill, which cleared a procedural hurdle Monday.

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“We’re not taking up the Senate bill,” he told reporters at the Capitol, adding that the Senate should instead take up the bill passed last week by the House. “My best advice to the Senate is to get our highway bill moved forward,” he said.

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Steel Drivers

July 2015 Monthly Metal Buying Outlook copy

Want a short-term buying strategy for steel? Check out our complimentary July Metal Buying Outlook!

1. MOH service center inventory

2. US import levels (volume trends)

3. Total China steel exports

4. Raw material input cost trends

5. Quoted lead times

Market Commentary (HRC)

Without a doubt the historical passage of several trade measures in the US has the potential to change the steel products landscape in the coming years. After all, US HRC steel prices have dropped by 25% since the start of this year. The steel industry (e.g. producers) believes this price drop has come as a result of massive imports that have begun to slow. Certainly the data supports that conclusion though other factors undoubtedly contribute to falling steel prices.

Regardless of where one stands on the import issue (either for or against) buying organizations are likely to feel the impact of the new legislation. We will discuss some of these impacts in upcoming reports.

A Fundamentals View (HRC)

Meanwhile HRC pricing has held steady from a month ago (up slightly). However, service center inventory levels (which supply some 40% of all metal to buying organizations) still suffer from too much MOH inventory. According to the latest MSCI data, steel product inventories jumped 11% in June from the same period in 2014 and perhaps more significantly, the current MOH inventory of 2.8 months of supply remains above “healthy” inventory levels.

With higher than healthy MOH inventory, service centers remain weak buyers in the market and that helps keep a lid on prices.

The Outlook (HRC)

HRC prices seem to have begun to stabilize after falling for nearly a year by closing the month of May at $464/st. We remain hesitant to call bottom particularly as the broader commodity markets remain bearish and the dollar still holds stronger. It would appear challenging for HRC to make any bold price moves to the upside. But we may have found HRC’s floor. This will require buying organizations to be particularly mindful of any upward price movements.

Market Commentary (CRC)

CRC has fallen by some 21%+/- since the beginning of the year. The pricing dynamics for CRC are similar to HRC. Undoubtedly the impact of the trade legislation signed into law in late June will impact all steel product market segments including CRC.

Globally, European mills have filed an anti-dumping suit against cold rolled coil imports from China. India has begun collecting duties on HRC products from three countries but could add CRC tariffs as well. In short, all eyes remain on China but other countries are also contributing to the oversupply.

In the meantime, domestic steel capacity utilization rates are running at 72.5%, down 7.4% from a year ago. Generally speaking a “healthy” capacity utilization rate is up above 80%.

The Outlook (CRC)

CRC prices have crept up during the month of June closing at $590/st but failing to breach last month’s short-term resistance levels. We also still see some price weakness on the horizon and continue to remain hesitant to call bottom particularly as the broader commodity markets remain bearish and the dollar holds stronger. Like HRC, it would appear challenging for CRC to make any bold price moves to the upside.

Market Commentary (HDG)

HDG continues to face price weakness, falling from $619 to $594/st, a 4% price drop. Interestingly, while steel imports have dropped during the month of May by 3.6% from April, HDG imports have continued to increase growing by nearly 17% from April to May after having jumped 20% from March to April. As with the other forms of metal, the new trade legislation will provide more enforcement “teeth” to the import process.

Six steelmakers with major US operations filed a trade complaint over HDG in June, seeking punitive tariffs for alleged unfair pricing of imported steel from China, India, Italy, South Korea and Taiwan. The suit is the first salvo in the campaign this year by the beleaguered US steel industry to protect itself against a record flood of imports.

And though US auto numbers remain positive, Chinese automotive sales continue to decline placing additional price pressure on HDG prices – which have fallen some 24% since the beginning of the year.

The Outlook (HDG)

We remain hesitant to call bottom particularly as the broader commodity markets remain bearish and the dollar holds stronger. Like HRC and CRC, it would appear challenging for HDG to make any bold price moves to the upside. It is possible, however that we will see some price stabilization.

Market Commentary (Plate)

Steel plate prices have held nearly steady this past month despite continued weakness in the energy sector, which contributes heftily to plate demand. US imports of plate products grew 13% in May and are up 36% from the same five- month time period one year ago June – May.

The Outlook (Plate)

Plate prices held steady this past month at $574/st. And indeed last month we indicated prices may be stabilizing. However, we remain hesitant to call bottom particularly as the broader commodity markets remain bearish and the dollar holds stronger. In addition, plate suffers from an inventory overhang that will take some time to work off.

So What Should My Industrial Buying Strategy Be?

This steel price forecast was excerpted from our brand new Monthly Metal Buying Outlook report. For a short- and long-term buying strategy with specific price thresholds, consult the July 2015 report!

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We recently saw short article in the Financial Times arguing that the link among industrial metals is vanishing and that individual metals are now moving more according to their “idiosyncratic fundamentals.”

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In this post, we’ll make a few arguments why we disagree with it:

Correlation is not always a good measure to determine the relationship between metal prices, because short-term price fluctuations can make correlation numbers look worse. The key metric we use at MetalMiner is the direction of the trend, and you just need to take a look at a graph to know what’s going on, no need for correlation metrics.

Aluminum (orange) vs Copper (green) since 2011

Aluminum (orange) vs Copper (green) since 2011. Graph: MetalMiner analysis of Infomine.com data.

The article even argues that copper’s relationship with aluminum has weakened over the past few years. Still, we see a strong relationship between both metals. In the chart above we can see how copper and aluminum have moved together, falling in tandem since both peaked in 2011. Over this four-year period, they only moved differently when aluminum rose during the first half of 2014 helped by an increased use of the metal in the automobile and aerospace industries. That disparity didn’t last too long, as both metals continued falling, recently hitting six-year lows.

Birds of a Feather

Indeed, every single base metal peaked in 2011 and all of them are now at or near multi-year lows. You must be blind to think that the relationship between metal prices has vanished. This close relationship has always been there and remains in place since similar macro-forces drive different base metals in the same way.

This is why our historical studies show that approximately 40% of the individual metal price movements are driven by the general market, another 30% driven by the metal sector and the remaining 30% driven by what is going on with that specific metal.

What This Means For Metal Buyers

Analyzing metals solely by their “idiosyncratic fundamentals” is never a complete analysis. What’s happening with the sector and with commodities across the board is as important, if not more than, as what’s happening with the individual metal. By simply understanding these three forces, you’ll do a way better job at managing your metal price risk.

Free Download: July Metal Price Forecast

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The US House will not vote on the Senate’s six-year transportation bill and China’s economic crisis could cause gold imports to plunge there.

House Won’t Vote on Senate Transportation Bill

House Majority Leader Kevin McCarthy, (R-Calif.), says the House will not vote on the Senate’s six-year highway transportation bill. Funding in the federal government’s Highway Trust Fund will run out on July 31st without any further action.

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The House has already adopted a bill that pays for transportation construction through mid-December. The stumbling block appears to be the provision to reauthorize the Export-Import Bank that’s included in the Senate bill. House members will leave for their August recess on Thursday, and funding for Highway Trust Fund expires Friday. The Senate will be in session next week and could choose to vote on the House bill.

Chinese Gold Imports Hit by Lower Credit Rates

China’s gold imports could fall as much as 40% this year as demand for bullion used to back domestic financing deals decreases, the world’s biggest refiner Valcambi told ThomsonReuters. A lot of the gold China imported in the last three years was used to secure cheaper loans due to a liquidity crunch, but that is now flowing back into the market as lending rates drop there.

Free Download: July Metal Price Forecast

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An interesting if short article in the Financial Times reviewing research carried out by a team at Bank of America Merrill Lynch illustrates something those in the metals markets will have been subliminally aware of but may be not have focused on unless they were truly cross-metals active.

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In recent weeks there has been wholesale weakness across all the metals in the face of fear over global demand, particularly Chinese demand, and concerns about when, not if, the Federal Reserve will raise rates and the impact that will have on the US dollar. A stronger dollar is invariably a harbinger of weaker metals prices as it raises the cost of metals in foreign currencies by virtue of exchange rate, not demand.

Source Bloomberg, re-printed in the FT

Source: Bloomberg, re-printed in the FT

Comparing how metal prices have moved relative to each other over the last ten years to how they have moved over the last twelve months, the bank contends that metals have been, with the exception of the most recent weeks, influenced more by their fundamentals these last twelve months.

Breaking From Metal Price Correlation

In the period prior to the financial crash, links between metals were tighter. The analysis said, “Correlations between metals’ prices were high ahead of the Great Financial Crisis (GFC) and in the immediate aftermath of it. Prior to the GFC, this was heavily influenced by exceptionally strong global economic growth and Chinese demand. Immediately after the GFC, cross-asset correlations remained high, partially because several governments implemented large fiscal stimulus packages and many central banks flooded the markets with liquidity.”

But since the post-crash period, say from 2013 onwards, metal prices have been relatively driven more by their fundamentals. In the last twelve months copper’s correlation with gold is down 11.9%, the bank estimates, and the copper’s relationship with aluminum is 17.8% weaker. Only precious metals have increased, with gold and silver rising from 78.8% over the past 10 years to 81.4% in the last year.

Back to Fundamentals

The trend among base metals is a reflection of the lack of demand and rising surpluses. As investor demand has weakened, supply and demand fundamentals have been allowed to take on more of a role in price determination. A trend that is likely continue for the next two years, as surpluses remain and global demand is muted by lower Chinese demand.

Free Download: July Metal Price Forecast

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Another two metals fell last week into multi-year lows, aluminum and copper. The price drop is not surprising, commodities keep falling, the dollar remains and other industrial metals like Nickel, already fell sharply amid China’s stock market tumble.

3M LME Aluminum since 2012

Three-month London Metal Exchange aluminum since 2012. Graph: MetalMiner.

We recently wrote that aluminum would need to fall further in order to cause additional non-Chinese closures to balance the market. Chinese aluminum exports surged 35% year-on-year in the first half of the year, adding to global excess supply of the metal.

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Three-month aluminum on the London Metal Exchange closed on Friday below $1,650/metric ton, hitting a six-year low.

3M LME Copper since 2012

Three-month LME copper since 2012. Graph: MetalMiner.

Copper prices keep doing the same thing over and over: lower peaks, lower troughs. Copper’s fundamentals are nothing but bearish, excess supply from mines and weak Chinese demand for the metal. We recently highlighted some Chinese numbers showing poor demand from key sectors.

During the first half, we questioned every copper rally. Three-month copper on the LME closed on Friday below $5,300/mt, the lowest level in six years.

What This Means For Metal Buyers

The outlook for base metals remains bearish. The buying strategy to take on aluminum and copper is pretty clear: don’t buy on weakness.

Free Download: July Metal Price Forecast

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