Articles in Category: MetalMiner IndX

U.S. steel prices have had a spectacular run this year. Three main developments caused the price rally:

  • U.S. trade cases which produced a decline in U.S imports
  • China’s commitments this year to cut steel capacity
  • Steel demand growth thanks to China’s stimulus measures

The second one is still based on expectations because, so far, we have yet to see those capacity shutdowns in China.

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Despite commitments and trade friction with several of China’s trading partners, China’s June trade data surged, raising more questions on the validity of China’s commitment to cutting steel production.

China’s Exports Are Up in June

June China steel exports up 21% year over year. Source: marketrealist.com

China’s June steel exports up 21% year over year. Source: marketrealist.com.

In June, China exported 10.9 million metric tons of steel, a 21% increase from June 2015 and the second highest total ever. The data raises questions on whether global steel markets will be able to absorb this much steel coming from China without it weighing on prices. Read more

Six little letters have dominated the political and economic news cycle over the past month or so: BREXIT. While the long-term effects of Britain’s vote to exit the European Union won’t be felt for awhile, the surprising result has already roiled global markets, including commodities in general and metals specifically.

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Our biggest winner of the Monthly MMI series, the Global Precious Metals MMI, gained the most from June to July, primarily driven by gold prices (themselves driven by near-term investor moves over to safe-haven assets brought on by the Brexit vote).

MM-IndX_TRENDS_Chart_July2016_FNL-TOPVALUE100

Some have indirect Brexit connections, such as our Renewables MMI and the consequences of the U.K. announcing it won’t make E.U. 2020 climate reduction goals… which it won’t need to if it completes its exit before 2020 (likely). Others, like our GOES MMI, were not affected at all.

The value of the U.S. dollar, China’s import/export activity, and international trade cases (especially those in the ferrous realm should continue to be watched by industrial metal buyers during these dog days of summer. However, we wish our British colleagues well in these politically uncertain times and offer our recent webinar to help them navigate the newly choppy purchasing waters.

The GOES M3 spot index reading fell for the fourth month in a row to 181 from 191. Contract buyers may have already begun to see a $200-per-metric-ton increase in prices from a year ago, according to a recent TEX report due to domestic mill closures.

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The recent Brexit decision has also created complications for grain-oriented electrical steel markets both from the demand as well as the supply side. First, the supply side: Tata Steel’s precarious Port Talbot, South Wales operation in the U.K. that was destined for sale and then for a bailout remains in limbo. As previously reported by MetalMiner, the British government insists that its equity and pension support remain on the table. The Port Talbot operation produces grain-oriented electrical sheet at the Orb works in Newport, South Wales.

GOES_Chart_July_2016_FNL

An acquisition now, with Port Talbot lacking free and open access to the European single market, may have dimmed the operation’s prospects. My colleague Stuart Burns speculated that merely the prospect of higher export tariffs for the U.K .producer would make any potential bidder skittish.

Meanwhile, Baosteel and Wuhan Iron & Steel unveiled a potential mega-merger creating the largest steel producer in Mainland China. Baosteel is a leader in GOES production within China for standard grades. This merger would likely not impact GOES production in any meaningful way.

On the demand side, Siemens announced it would hold off from making any investment in wind power in the U.K. until the E.U.-U.K. trading relationship becomes clearer. That move will contribute to the U.K. failing to meet the E.U.’s 2020 15% requirement that energy consumption come from renewable sources.

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The crux of Brexit, from an energy perspective, comes down to investments. Will projects move elsewhere? Will businesses such as Siemens stall decision-making, impacting demand until the U.K. devises a clear Brexit strategy?

From a metal price perspective, it doesn’t appear as though Brexit will have much if any impact on GOES pricing. Certainly July’s price performance follows a similar price trajectory.

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Every single price point across the precious metals tracked by the MetalMiner IndX — gold, silver, platinum and palladium — increased over the month of June, helped mainly along by the boon that Brexit has been (for precious producers, anyway…more on that below).

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As a result, our monthly Global Precious MMI for July shot up 8% to 83, the index’s highest value since June 2015.

black and gold precious metals price index chart

Exit Britain, Enter Gold Price Increases

Britain’s vote to exit the E.U. left the pound Sterling in turmoil, with the British currency recently troughing at a new 30-year low, with no end to the bleeding in sight, while the Euro has also suffered. We all know what that means: investors flocking to safe-haven assets, such as gold. Which, in turn, means producers will be able to justify keeping near-to-medium-term mine production levels and exploration status quo (at least).

The U.S. bullion price of the yellow metal jumped 8.7% month over month, a significant increase. (Correspondingly, US silver bars shot up 17.2%.) Just after the Brexit vote results came in, HSBC analysts predicted that gold will breach $1,400 per ounce. It has already been flirting with the high $1,300s the past couple weeks and, according to HSBC Chief Precious Metals Analyst James Steel, “the drive higher may be more than 10% in the longer term if there were to be broader concerns about the future direction of the E.U. after the vote,” as originally reported by Kitco News.

Investors Go Long

Adding more fuel to that fire, hedge funders increased their net long positions in COMEX gold and silver contracts to record highs by the end of last week, further showing their bullishness in the safe-haven asset, according to Reuters.

Another major driver of the gold price has been the U.S. bond market. As my colleague Raul de Frutos has written, treasury prices soared and yields plunged to four-year lows as investors continued to seek haven assets. The benchmark 10-year Treasury yield fell as low as 1.45% two weeks ago, the lowest level in four years. Bond yields not only fell in the U.S.; British 10-year government bond yields sank below 1% on Monday for the first time ever. Similarly, Japanese bond yields fell below 0.1% for the first time, reflecting unprecedented long-term pessimism.

The lower the yield, the lower the returns investors get from their bonds. That’s important, because in periods where yields are near zero, many investors prefer to buy gold rather than bonds. In this manner, in the current stock market turmoil, part of the money that would normally go to assets paying a yield is going to gold instead.

Negative interest rates worldwide also help gold’s case.

Big M&A News: Centerra Gold + Thompson Creek Metals

All this Brexiting has prepped large Canadian miner Centerra Gold to pull the trigger on acquiring Thompson Creek Metals last Tuesday, based in Denver, as reported by Reuters.

The price tag: $1.1 billion, including debt.

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The main reason: Centerra owns and operates its main asset, the Kumtor gold mine, in Kyrgyzstan, and seeing as how the Asian nation wants a bigger cut of Centerra’s pie lately, the Canadian miner wants to reduce its exposure in Asia while boosting its footprint in North America.

With the recent upsurge in gold prices, times for miners such as Centerra are looking quite rosy.

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Our Stainless MMI rose to 55 points in July thanks to a recovery in nickel prices. Nickel finally climbed to five-digit territory in July, trading near $10,000 per metric ton on the London Metal Exchange, its highest level in eight months.

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A factor supporting nickel prices this year is expectations of lower nickel pig-iron ore exports from the Philippines. Ore producers in the Philippines warned earlier this year that they would cut production due to low prices. So far, Chinese imports of Philippine ore fell by 27% in the first five months of the year.

Stainless_Chart_July-2016_FNL

But price momentum picked up last month following recent news that the Philippine government would review all mining operations in the country. The new President-elect, Rodrigo Duterte, ran on an anti-mining platform and could impose an Indonesian-style raw ore ban, which could potentially disrupt supplies for Chinese buyers.

New Philippine Government

In addition, the new mining minister, Regina Lopez — a committed environmentalist — provided the latest trigger for a rally after saying that there would be a ban on fresh mining exploration in the country for a month while all existing mines are being reviewed.

The expectation is that mines could potentially have their licenses revoked. At the beginning of July, the Philippines already ordered the suspension of operations at two nickel ore mines for environmental violations and the government halted the issuance of exploration permits as a nationwide crackdown led by the mining minister begins.

Nickel’s Bullish Backers

This bullish price action also follows a broad recovery in the whole metal complex this year, which gives more credibility to nickel’s bulls. Our historical analysis shows that a metal has far greater upside potential when the overall commodities market is in bullish mode, while its chances of going down increase in a falling commodities market. While we continue to see bullish sentiment in commodity markets, investors will continue to react in a bullish manner on news like potential supply cuts in the Philippines.

On the other hand, not everything is bullish about nickel. Most analysts call for a deficit this year due to stainless mills having to rely more on refined nickel. This deficit would follow a five-year period of surplus but estimates are for a deficit of less than 100,000 mt this year. That is not a big number considering that LME and Shanghai Futures Exchange inventories currently account for around 500,000 mt combined, at least five times more than the expected deficit.

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In early June, the Chinese government held an auction for nine types of rare-earth metals, but bids came in below the production costs of China’s six major, consolidated suppliers.

Rare-Earths_Chart_July-2016_FNL

This year, China plans to add about 20,000 metric tons to its rare earth stockpiles. The six major suppliers are to keep 5,000 mt at government-designated warehouses and Beijing is to purchase the other 15,000 mt from those same six suppliers.

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Beijing is hoping that the stockpiles will make prices rebound as, except for a few minor increases, rare earths have fallen for the entire year.

Our Rare Earths MMI fell another 6% this month and there is little reason to expect the important metals for batteries and magnets to escape the low range they’ve fluctuated in for the last two years. Dysprosium and neodymium both lost ground this month as demand has faltered for the motors and batteries both are used in. Yet, it wasn’t an entirely lost month for rare earths.

Scandium Exploration

Texas Mineral Resources signed a memorandum of understanding with an unnamed coal company in Pennsylvania to produce scandium and other rare earth byproducts from coal ash and tailings. Initial studies on the coal ash project there suggest modest capital expenditure would be required, along with profitability.

Scandium is used in fuel cells today but its future as an additive in high-strength aluminum is bright. We’ve already written about Airbus‘ experiments with it in both 3D-printing and generative design. If TMR’s scandium from coal ash experiment is successful, its plan to establish a new subsidiary titled Scandium America Corp. with the unnamed Pennsylvania Coal Company.

This won’t affect prices anytime soon. Scandium isn’t even a part of the Rare Earths MMI yet. However, it shows that manufacturing companies are demanding more and rarer metals snd companies are devoting significant resources to providing them.

India Sets Aside Rare Earth Blocs

India is also exploring more rare earths production. The nation recently issued new policy guidelines to encourage more private-sector exploration for the minerals that demarcates a total area of 1,000 square kilometers (386 square miles) where companies can search for rare earths, and introduce auctions for the right to explore for the deposits, according to Balvinder Kumar, the top bureaucrat in the nation’s Ministry of Mines.

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India has one of the world’s bigger reserves of rare earths and Prime Minister Narendra Modi wants to cut the red tape involved with setting up new mines. The region to be earmarked for exploration includes states such as Kerala and Tamil Nadu, according to Kumar, with another 400 square kilometers set aside exclusively for state-run companies to search for uranium and thorium.

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Like most industrial metals, copper saw an increase in June. However, the metal is still lacking the strong upside action we have seen in other metals and it continues to struggle near the $5,000 per metric ton mark on the London Metal Exchange.

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The latest trade data showed a huge spike in Chinese copper exports, which increased by 256% in May from a year earlier. This raises fears about domestic demand. Domestic production is also rising strongly, up 7% year-on-year in May. With these figures, it’s tempting to view May’s export surge as a warning sign that the Chinese market is saturated.

Copper_Chart_July-2016_FNL

In addition, Chinese manufacturing data came in weak in June. The Caixin Manufacturing PMI, which focuses more on small-to-medium-sized private firms, stood at 48.6 in June. That reading missed estimates and was the weakest number since March.

Uncertainty Still Looms

Given the disappointing industrial data and the ongoing economic uncertainties after the U.K.’s decision to leave the European Union, the market is expecting more economic stimulus from China. That stimulus, if it happens, will be critical for copper prices to finally pick up steam.

On a side note, although most people focused on the export surge, China’s imports were robust. China has imported 1.77 million mt of refined copper so far this year, up 24% from the same period last year. Even with May’s high exports, net imports are also up by 22% for the first five months. That gives copper bulls hopes that China is starting to work off its previous glut.

But to make this issue even more complex, inventory levels also rose sharply last month. Copper warehouse levels in the LME system increased by almost 40% in June. Along with the LME copper inventory, bonded copper stocks held in free trade zones in China have climbed this year. Higher inventory levels are, perhaps, limiting the upside potential of copper prices.

Although copper rose in June, the outlook remains neutral and, due to all of this uncertainty, we could continue to see choppy price action in the coming months.

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Our Raw Steels MMI fell from 56 to 55 in July.

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U.S. steel prices have had a spectacular run this year, mostly attributable to trade cases as the U.S. steel industry has turned into a virtual island, creating a divergence between domestic and global steel prices. That was the case during the first half of the year but nothing guarantees that this trend will continue in the longer term.

Prices In China Fall

In the first half of the year, prices for hot-rolled coil in U.S. have risen over 70%. Although trade cases are what helped U.S. steel prices the most, the domestic rally was also supported by rising steel prices in China.

Investors’ sentiment in the steel industry improved this year as China’s stimulus measures made an impact on steel demand. Also, the world’s biggest steel producer vowed to cut production capacity by 45 million metric tons this year and 100-150 mmt over the next three to five years. This combination of demand and supply measures boosted sentiment in the steel industry and prices in China increased.

But as time goes on, China is failing to meet its promises. China produced more steel than the rest of the world combined in May. According to the World Steel Association, China produced 70.5 mmt of crude steel products in May, up 1.8% from the levels of a year earlier and just shy of the record 70.65 mmt level hit in March 2016.

Raw-Steels_Chart_July-2016_FNL

On top of that, demand doesn’t seem to be offsetting rising production. Exports keep rising. In May, China exported 9.4 mmt of steel, a 2.3% increase compared with a year earlier. For the first five months of the year, exports are up 6.4%. Given these numbers, 2016 could turn out as another record year for Chinese steel exports.

The continued growth of these figures worries steel investors. That is being reflected in the price action. Hot-rolled coil prices in China have fallen more than 20% from their April peak and the decline could be even more severe if Beijing doesn’t come through with more mini-stimulus in the second half.

US Steel Prices Flatten

The decline seen in Chinese steel prices haven’t hit domestic prices, at least not yet, but could be pointing to some domestic price turbulence in the second half.

Indeed, over the past few weeks the rally in U.S. steel prices has lost some steam, keeping domestic steel prices pretty much flat in June.

Falling U.S. steel imports caused prices to rally this year. However, the rate of decline last month was the lowest in 10 months. In fact, absolute import levels have increased on a monthly basis since February. An increase in steel imports later this year serves as one of the biggest risks facing U.S. steelmakers, considering the current price gap between domestic and international prices.

Should service centers come back into the market and restock with imports, domestic mills may see some price pressure. If prices in China continue to decline, this is something that steel buyers should watch.

Finally, steel stock values have also lost traction. Domestic steel prices directly impact the stock prices of steel producers in the U.S. Since May, we have witnessed investors’ enthusiasm for these companies vanish. This is an early sign that domestic steel prices could suffer a correction.

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To conclude: Domestic steel prices haven’t shown signs of weakness, but this rally seems overextended and prices might struggle to build on their gains if international prices continue to fall.

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Our Aluminum MMI rose 3% to 79 points. Despite a stronger dollar following U.K’s decision to leave the European Union, aluminum prices continued to rise in June finishing the month above $1,600/mt.

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Aluminum prices have yet to make a significant upside move, although prices have held well this year, we haven’t seen gains like in the cases of steel, zinc or tin. But the industrial metal complex is in bull mode since early this year and that is giving aluminum a tailwind.

Overcapacity Still an Issue

The reason why aluminum is lacking that upside momentum is that overcapacity hasn’t really been addressed like in the steel industry. China has committed to stop the expansion of its steel capacity and has at least tried to actively and appropriately wind down “zombie enterprises” through a range of efforts, including restructuring and bankruptcy. That’s not the case when it comes China’s equally giant aluminum sector.

Aluminum_Chart_July-2016_FNL

In June, China and the U.S. failed to reach an agreement on how to address excess global aluminum capacity. Although aluminum and steel markets have some similarities, there are also some key differences that explain China’s willingness to engage with its steel critics but not its aluminum critics.

First, China’s steel industry represents an old economic model that keeps losing money due to poor profitability. In contrast, China also has some of the most modern and low-cost operating aluminum smelters in the world, although China’s aluminum industry has its own loss makers, too. It’s understandable that China is more focused on getting rid of old, high-cost capacity in its steel industry, rather than removing its new generation of aluminum smelters.

Second, China wants to achieve market economy status in the World Trade Organization. But this goal is jeopardized by steel organizations and policymakers unhappy with the prospect of even heavier Chinese exports and less freedom in dealing with them.

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The U.S.-based trade body Aluminum Association has also been fighting against China being granted market economy status, but it’s mainly doing it alone. The aluminum sector is simply not as important for European and U.S. politicians as the steel sector.

On the other hand, the International Trade Commission (ITC) launched an investigation into the global aluminum trade to impose tariffs of up to 50% on primary unwrought aluminum. This proceeding could have a significant impact on global aluminum producers, particularly from China, and U.S. importers and users of aluminum products. The ITC will likely release its findings any day now.

This trade case is something to watch in the second half. It could be the tipping point from which China starts tackling the aluminum overcapacity issue for real. The demand side of the equation is just as important. Furthermore, China’s stimulus measures later this year would continue to support demand for aluminum, while investors could be disappointed if China fails to spur growth.

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The Construction MMI held steady at 66 in July, as spending remains stubbornly low during the traditionally strong East Coast construction season.

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Construction spending during May reached a seasonally adjusted annual rate of $1,143.3 billion, 0.8% below the revised April estimate of $1,152.4 billion, but 2.8% above the May 2015 estimate of $1,112.2 billion, according to data from the U.S. Census Bureau. Construction spending in the first five months of this year, construction totaled $438.5 billion, which is 8.2% higher than the $405.4 billion for the same period in 2015.

Construction_Chart_July_2016_FNL

It’s difficult to quantify the lack of spending increases in what outwardly looks like a robust U.S. construction sector.

Spending Struggles to Stand Pat

Residential construction was at a seasonally adjusted annual rate of $451.9 billion in May, virtually unchanged from the revised April estimate of $451.7 billion, while nonresidential construction was at a seasonally adjusted annual rate of $407.4 billion in May, a mere 0.7% dip from the revised April estimate of $410.1 billion.

Ken Simonson, chief economist at Associated General Contractors of America, a construction industry trade group, noted that the latest data affirms complaints that contractors are having an increasingly hard time finding skilled workers to hire.

“Mild winter weather in many regions early in 2016, followed by extreme rains in some locations in May, has probably distorted monthly spending patterns but shouldn’t mask the robust widespread growth in demand for construction so far this year,” Simonson said. “It appears there will be plenty of activity in the remainder of 2016 — if contractors can find the workers they need.”

We have, indeed, documented the lack of skilled labor in the U.S. market for more than two years now. Labor costs are increasing so much that they are outstripping the savings many general contractors had captured from low commodity prices for construction products. While it’s true that many are also cutting costs by using more efficient construction methods, the drop in spending is still highly concerning since most sectors look like they should be growing with strong demand and, supposedly, lots of design work on the boards.

Chinese Spending Grows

There is, however, good news from abroad. In China, the Caixin/Markit services purchasing managers’ index for June rose to 52.7 from 51.2 in May on a seasonally adjusted basis. Readings above 50 indicate an expansion on a monthly basis, while readings below signal contraction.

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Beijing has fast-tracked planned infrastructure spending this year to boost growth, and a strong run-up in housing prices as buying restrictions were loosened helped turn around a slowdown in property development. Like many of our sub-indexes this month, it will be interesting to see what effect the U.K.’s vote to leave the European Union has on construction prices when markets have had a month to settle.

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