Articles in Category: MetalMiner IndX

Our Renewables MMI regained some of the ground it lost last year and climbed back up to 52 this month.

Free Sample Report: Our February Metal Buying Outlook

However, renewables are still a market stuck in a low-price rut with little prospect of breaking out of the low range they’ve been settling into over the last four years. Seemingly paradoxically, renewable energy was the biggest source of new power added to U.S. electricity grids last year as falling prices and government incentives made wind and solar increasingly viable alternatives to fossil fuels.

Renewables Lead New Energy Capacity

Developers installed 16 gigawatts of clean energy in 2015, or 68% of all new capacity, Bloomberg New Energy Finance said in its Sustainable Energy in America Factbook released Thursday. U.S. clean-energy investments rose to $56 billion last year, up 7.5% from 2014. The majority, $30.2 billion, went to solar. Investors pumped $11.6 billion into wind energy and $11.1 billion into technology to improve grids, boost efficiency, develop storage systems and other ways to better manage power usage.

Renewables_Chart_February-2016_FNL

With so much investment in the technology, why such a gloomy outlook for the metal products, such as grain-oriented electrical steel and silicon, that go into them? Most are oversupplied and their individual markets have not yet hit bottom in this bearish commodities cycle. We’ve also often lamented that the recently extended tax credits for products that contain these metals actually help keep prices low and discourage any real price inflation based on value.

Low prices for both gasoline in cars and natural gas for electrical power generation will also discourage further adoption as those fossil fuels will look more attractive to investors.

Adoption Keeps Climbing

The good news is that with more adoption, green technologies are getting into the hands of more homeowners, in the case of solar, and more utilities in the case of wind. Some lesser-subsidized technologies such as biomass are also taking a bite out of the electrical power generation market where natural gas is now the dominant player.

Power from natural gas-fired plants accounted for 25% of capacity added to grids last year. Nearly one-third of all electricity in the U.S. is now generated by gas, putting it nearly on par with a declining provider, coal.

Compare Prices With The January 2016 MMI Report

The future is certainly bright for the metal inputs of wind turbines and solar panels. We just wouldn’t advise anyone to invest in these metals right now expecting a turnaround and an escalating market such as nickel’s 2014 climb. Slow, steady and subsidized will win this race.

Actual Renewables Prices

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The Raw Steels MMI held steady at 47 this month. Although international steel prices remained depressed in January, domestic prices drew a different picture.

US Mills Increase Prices

US steel mills began raising prices in December, leading to higher domestic prices in January. Domestic supply had declined significantly in 2015, with capacity utilization close to 60%.

Raw-Steels_Chart_February-2016_FNL

At the same time, with the uncertainty regarding anti-dumping actions, finished steel imports have slowed.

Free Sample Report: Our February Metal Buying Outlook

Finally, steel companies’ shipments were impacted over the past few months as service centers focused on destocking and now that inventory has finally come down, service centers will finally need to start restocking activity. This combination of factors left US mills in a sweet spot in 2016 to increase prices.

Sustainable Increase?

Domestic prices might continue to rise in the coming weeks. After the huge price slump in 2016, domestic prices deserve a bounce in Q1. However, mills won’t likely succeed in raising prices for too long.

The world remains oversupplied and demand is weak. Due to the political backlash from job losses spurred by mill closures, China wants to keep its mills running. With the ongoing Chinese yuan devaluation, Beijing has made its intention clear. China wants its exports even more competitive in global markets, especially in the steel industry as China continues to seek a home for its excess steel.

Compare With The January 2016 MMI Report

If domestic prices stayed higher, that would attract more imports, resulting in more material coming into the US and depressing prices as a result. In addition, it’s hard to imagine steel prices bucking the falling trend across the industrial metal sector. It will be hard for US mills to convince buyers to pay higher prices while commodities nearly universally fall.

Falling Raw Material Costs

Another important factor that will keep a lid on steel prices is the slump in input costs. In January, oil prices fell below $30/barrel. Falling energy prices will cause companies in the energy sector to reserve capital to keep on their balance sheets, rather than spending money on new exploration. This will continue to hurt steel demand from the energy sector. At the same time, while raw material prices keep falling, it will be difficult for US steel mills to justify their price increases for long.

Actual Raw Steel Prices

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Although other base metals made new lows in January, aluminum prices held steady. The aluminum MMI fell only one point to 71.

Free Sample Report: Our February Metal Buying Outlook

What didn’t fare well in January was Alcoa‘s stock price, which fell sharply to its lowest level since March 2009.

Alcoa stock plunges in 2016 hitting a 7-year low

Alcoa stock plunges in 2016, hitting a seven-year low. Source: MetalMiner analysis of @StockCharts.com.

Lower aluminum prices were the main cause driving the company’s shares down over the past months. In addition, the recent turmoil in stock markets is not helping matters. A combination of both caused Alcoa’s stock price to plunge in January.

Midwest Premiums

Rising domestic premiums have helped Alcoa improve its margins. Since September, premiums in the U.S. rose from the lows of $0.06 per lb., mainly because of the production cutbacks announced by domestic producers in Q4 2015. However, we haven’t seen falling stockpiles and we’ll probably not see a major bounce-back in premiums. Indeed, over the past couple of months, MW premiums have stabilized at around $0.09 per pound.

Aluminum_Chart_February-2016_FNL

There are a few factors preventing premiums from rising much more. First, some of the proposed cutbacks have been partially rolled back. Alcoa previously announced the closure of its Intalco smelter in Q1, but now the company will keep running until the end of Q2. Century Aluminum is running its Mount Holly smelter at half capacity despite its previous announcement of a complete shutdown.

In addition, domestic aluminum producers will find it hard to succeed in increasing their premiums while global sentiment remains negative. Despite the relative scarcity of material created by domestic producers, there is still a glut of material elsewhere in global markets. Finally, any significant increase in domestic premiums would attract more imports into the country, especially coming from China.

Stockpiles

The main problem with the aluminum industry is that smelters in China keep running and refuse to cut production. The other problem is high inventories. Even though official London Metal Exchange inventories have been trending lower since mid-2013, unofficial stocks have actually increased. According to CRU, global aluminum inventory including unofficial stocks stands at around 15 million metric tons.

Moreover, China wants to keep stockpiling instead of cutting production. In January, top aluminum smelters in China agreed to form a joint venture to stockpile aluminum. These measures will only keep Chinese smelters producing more aluminum while material only goes into financial deals. However, the market knows what China is up to, and investors won’t buy aluminum until shutdowns happen. The stockpiling game will only keep prices low for longer, potentially making the problem even worse once that aluminum enters the supply chain.

Free Download: The January 2016 MMI Report

For as long as China doesn’t change its approach, the best that aluminum producers can hope is for prices to stay at current levels.

Actual Aluminum Prices

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Real gross domestic product expanded by just 0.7% (seasonally adjusted annual rate) during the fourth quarter of 2015. This follows a 2% increase during the year’s third quarter and a 3.9% increase during the second quarter. For the year, GDP expanded by just 2.4%, matching the slow rate of growth seen in 2014. Without any support from real GDP growth, our Construction MMI keeps falling.

Free Download: Compare with January 2016 MMI Report

With no GDP growth it shouldn’t come as a surprise that prices of construction materials are still falling. Low prices are always the solution to low prices… except when they’re not.

Construction_Chart_February_2016_FNL

In the fourth quarter, overall inflation came in at just 0.8% with sharp declines in both import and export prices. The Federal Reserve’s benchmark Personal Consumption Expenditures Price Index (commonly known as the PCE deflator) came in at just 0.1% with both durable and non-durable goods’ prices registering a decline.

“The economy did not end the year well,” said Associated Builders and Contractors Chief Economist Anirban Basu. “Today’s GDP data adds weight to the argument that the US is in a corporate profits recession, an industrial recession, and was experiencing a softening of investments. With the exception of the residential building sector, business capital outlays have declined as corporations deal with a combination of sagging exports, competitive imports, declining energy-related investments, rising wage pressures and healthcare costs.”

All Construction-Sector Metals, Materials Down?

With the exception of scrap, no single product tracked in our Construction MMI showed much of an increase this month, a worrisome trend that’s carried on since the beginning of last year, except for a small increase in June.

New tariffs by the European Union on Chinese rebar might help producers there recover some market share, but won’t likely move prices on international exchanges. Globally, the deflationary environment is worse than it is for US producers.

Free Sample Report: Our January Metal Buying Outlook

Steel and aluminum markets are still not seeing anything close to a bottom and that’s being felt acutely in construction.

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Our Automotive MMI held steady for the third month in a row at 68.

Free Sample Report: Our January Metal Buying Outlook

Considering that other metals prices are still falling, it’s quite a feat that automotive has been able to even hold steady for this long. Prices of stainless, aluminum and copper are all down in their individual MMI sub-indexes this month and our Raw Steels MMI was flat.

Automotive_Chart_February-2016_FNL

Low prices simply have not been enough to entice larger raw material purchases by automakers. U.S. auto sales fell slightly in January because of the East Coast snowstorm, but analysts say end user demand remains strong and buyers will likely head back into dealerships this month. Sales fell less than 1% to 1.1 million, according to Autodata Corp.

Low gas prices and even lower interest rates are continuing to fuel sales and most automakers are optimistic that they can break last year’s sales record by the end of the year. The problem facing metal producers is that there is still so much oversupply out there that even the market hunger for new cars, trucks and SUVs can be sated several times over by the stockpiles that currently exist.

Producers Targeting Automotive

Automotive is still a coveted market for most producers. Nucor Corp. recently opened an office in Detroit as part of a push to increase its sales to the auto industry by 40% to 50% over the next two years. Charlotte-based Nucor saw its sales to the automotive industry increase 20% last year — 1.4 million tons of steel products — over 2014’s numbers.

Alcoa, Inc. is even coming closer to realizing its previously announced split by naming new directors for its new automotive and aerospace company, all of them with experience in the fields.

Free Download: The January 2016 MMI Report

The fundamental strength of the sector will likely still be there when stockpiles finally dwindle and we see prices rise. Many are predicting that rebound for later this year, but there’s very good reason to believe 2016 could be another low-price year as there is still no definitive deal to reduce oil production and many miners and metal producers are not curtailing production.

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Lead prices took a hit this month.

Free Download: New! The January 2016 MMI Report

In December, prices rose while other metal prices fell, but the rally turned out to be short-lived, a typical behavior in this bearish commodity market. Our subscribers knew, though, at the beginning of January that it wasn’t a good time to buy, since lead was destined to fall as it neared resistance levels around $1,800 per metric ton.

Lead prices fall in January

Lead prices fall in January. Source: MetalMiner analysis of FastMarkets data.

In only two weeks lead prices fell 16% from December’s high. Interestingly, the slump came during one of the strongest months in the auto industry. Auto sales in US hit a new high in 2015, with sales topping 17 million units. In Europe, they grew by 9.3% in 2015 to 13.7 million vehicles. Meanwhile, China, with the largest vehicle market in the world, hit record sales in December, up 18.3% from a year earlier.

Although China’s vehicle sales hit a new record in 2015, its car market decelerated in 2015. The annual growth rate in 2014 was almost 10% while annual growth in 2015 was only 4.7%. In addition, the Chinese market grew thanks to a strong last quarter, which came from a 50% tax cut for small cars, serving as a stimulus measure rather than a sustainable longer-term demand increase.

Free Sample Report: Our January Metal Buying Outlook

If it wasn’t because of those inflated numbers, China’s auto market would have probably seen its first down year in 2015.

What This Means For Metal Buyers

It can be argued that, overall, automotive output remains one of the few bright spots in a darkening global manufacturing picture. However, that is not enough to lift this metal up under the current commodity environment. What lead has done in January is just another example of how any metal can struggle when investors don’t put money in commodity markets.

 

Gold is typically considered a safe haven while markets are volatile, and with the recent equity slide both in China and US, investors are thinking of gold as an alternative, safe haven investment.

Free Download: New! The January 2016 MMI Report

Indeed, since the start of the year gold prices have received a boost, hitting a 2-month high as global stock markets sold-off.

The Gold-Silver Ratio Spreads

The global stock rout didn’t have any bullish effect on silver prices since the precious metal has an industrial metal status, too. That might help explain why gold fared better than silver in January.

Gold (in yellow) versus Silver (grey)

Gold (in yellow) versus Silver (gray). MetalMiner analysis of @StockCharts.com data.

Is Gold’s Rally Sustainable?

We don’t think so. Gold’s rally comes after prices hit a six-year low in December so it seems like a normal reaction after an oversold condition. As we can see in the long-term chart below, gold is still in a textbook falling trend.

Gold bouncing off lows

Gold is simply bouncing off lows. Source: MetalMiner analysis of @StockCharts.com data.

If investors were seriously putting money into gold, we would have prices moving significantly higher by now. The key point here is that the stock market selloff is driven by a slump in commodity prices. Gold is also a commodity and falls along with commodity markets.

Free Sample Report: Our January Metal Buying Outlook

Moreover, a strong dollar is also bad news for gold. We expect the dollar to keep strong as interest rates rise domestically and the currencies of commodity-intensive countries keep losing value against the dollar while low commodity prices hurt their economies more significantly.

What This Means For Metal Buyers

We’ve discussed previously that the gold’s safe haven theory doesn’t always work, especially under the market environment we have right now. Gold’s rally is likely to be short-lived. Although stocks don’t look attractive right now, buying gold doesn’t look like a much better idea. Cash will probably give better returns than most assets in this first half.

After trading sideways for nine consecutive months, tin prices finally succumbed.

Free Download: New! The January 2016 MMI Report

Although other sources were calling for higher prices in 2016, in our monthly and annual outlooks we continued to recommend buying only small quantities. In the face of a rising dollar, China’s slowdown and falling commodity markets, tin buyer should only expect downside moves.

Tin breaking down support levels

Tin breaking down its support level barriers. Source: MetalMiner analysis of FastMarkets.com data.

Indonesian Regulations

In November, Indonesia introduced new rules requiring tin exporters to obtain new “clean and clear” (CnC) certification. Many firms ramped up exports ahead of it. Indonesian exports from January-November dropped by 1.9% compared to the same period last year, a somewhat negligible result. However, exports in December exceeded 10,300 metric tons, whereas December 2015 exports are unlikely to reach half of last year’s total. Despite lower Indonesian exports in 2015. More production from Myanmar offset the difference of Indonesia’s drop.

Free Sample Report: Our January Metal Buying Outlook

Thanks to already low prices and decreased Indonesian exports, tin prices held well over the past nine months compared to the rest of the base metals. However, 2016 might bring a different picture. Indonesian exports will likely recover as more companies get CnC approval and, with the ongoing Chinese stock market crash, we can only expect tin prices to head south after breaking key support levels while demand, globally, weakens.

Just like Oprah giving out cars, our January Metal Price Trends report was generous with the dead cat bounces this month. You get a dead cat bounce, copper! You get one, too, aluminum! You get a dead cat bounce, raw steels! Everyone gets a dead cat bounce!

Free Sample Report: Our January Metal Buying Outlook

Okay, not everyone. Construction, stainless steel, renewables and rare earths all lost ground and automotive was merely steady.

MM-IndX_TRENDS_Chart_January2016_FNL-TOPVALUE100

Still, it’s the most positive movement we’ve seen for many of these metals since early last year. We say they’re dead cat bounces — a cruel-sounding investment term for a temporary recovery from a prolonged decline or bear market, followed by the continuation of the downtrend (sorry, kitties) — because there is little reason to be optimistic that any of these gains will continue.

Stop Me Before I Bounce Again!

The main driver of commodity, and now stock market losses, has been the slowing Chinese economy and it’s looking worse this year than it did at the end of last. Financial institutions such as RBS are even advising clients to sell everything, save bonds, that’s not tied down.

This is great news for buyers but exactly what metal producers don’t want to hear. What’s worse, for them, is that everything the Chinese government is doing to try to turn their economy around, including a panic button system for its stock markets that actually caused more panic, isn’t working. My colleague Raul De Frutos also pointed out that purposely devaluing the yuan actually hurts metal prices.

How Low Can it Go?

The other big driver of the commodity price rout, the price of oil, shows no signs of turning around, either. Oil hit $30 per barrel this week stoking bankruptcy fears among US energy companies and it even temporarily created some nervousness among OPEC nations who clamored for an emergency meeting.

So don’t expect these price increases to continue as transportation and production costs follow oil’s race to the bottom. My colleague at our sister site Spendmatters, Kaitlyn McAvoy, reported that Goldman Sachs is predicting $20 per barrel for oil this year.  It’s not a very happy new year for metal producers… or cats.

Our copper MMI scored a one point gain to 61 from 60. Like other base metals, after sliding in November, copper prices stabilized in December.

Free Sample Report: Our January Metal Buying Outlook

Similar to aluminum, copper prices have fallen more than 30% since May and the fact that prices aren’t able to bounce after such a decline should have copper producers worried. The low pricing environment has depressed producers’ earnings and liquidity causing their stock prices to plunge this year.

Freeport McMoRan stock price 1 year out

Freeport McMoRan stock price, one year out. Source: MetalMiner analysis of @StockCharts.com data.

Freeport McMoRan’s stock price is down 76% on the year to date, falling to its lowest level since 2003. The company recently undertook cost cutting measures. When Freeport announced spending cuts in August 2015, its stock soared more than 28% but announcements of further cuts in December didn’t help boost shares this time, indeed shares are down 25% since the announcement a few weeks ago.

Copper_Chart_January-2016_FNL

The company also announced the suspension of its $0.20 per share annual stock dividend. By suspending dividends, Freeport expects to save around $240 million annually, helping the company to raise cash under the weak current market conditions. Although some long-term investors might see the reasoning behind this move, dividend cuts are very discouraging for investors looking for a constant stream of income. The decision shows the challenging business situation that Freeport and other mining companies are in.

In December, The International Copper Study Group reported a market surplus of 35,000 metric tons for the first nine months of 2015. This compares with a market deficit of 450,000 mt for the same period last year. Weakening demand and the unwillingness of miners to cut production continues to generate surplus copper. Despite low prices, we are not seeing big production cutbacks from copper producers as companies don’t want to leave market share open to competition. What’s even worse is that copper producers including Rio Tinto Group, BHP Billiton and Southern Copper are still going ahead with their 2016 production plans.

Will Copper Producers Manage to Stay Alive?

Thanks to cost reduction measures and the suspension of dividends, Freeport expects to generate cash flows of $600 million in 2016. However, Freeport’s estimates are based on assumptions that might not materialize. In the math, the company assumed that copper will be at $2 per pound while crude oil at $45 in 2016.

Free Download: The December MMI Report

It only took copper prices a week to already trade below $2 per pound and we’ve already seen crude oil at $32 per barrel in January. Some say it might hit $20 per barrel by the end of the year. Although Freeport is not facing any short-term debt maturities, the company is prone to financial stress if the slump in energy and copper prices doesn’t stop. We feel that many companies like Freeport are being too optimistic about 2016 and we suspect that prices still have room for more declines. Many producers will need to give up believing in those rosy outcomes to support prices and help other producers survive this bearish commodity market. A dose of reality is necessary.

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