The broad metals rally continued in April with all but three of our MMI sub-indexes gaining value this month and two of those holding their value from last month. Only the GOES MMI lost value and that had more to do with its specialized market.
The Aluminum, Raw Steels, Global Precious, Renewables, Stainless Steel, Automotive and Construction MMIs all increased in April amid a broad commodities rally. The U.S. dollar continued to weaken, hitting its lowest point in 15 months, pushing oil and other key commodities up in value and helping metals see their boat rise with the tide.
In investments, both gold and silver are testing multiyear highs as investors look to them for a short-term safe haven from falling currencies.
Further dollar depreciation could increase demand for all dollar-denominated commodities and metals are currently in a sweet spot on the demand side, particularly because of China’s economic turnaround.
The China Front
Continued stimulus in China is increasing demand for steel, aluminum and other metals there. As we’ve previously reported, the People’s Bank of China has cut requirements for first-time homebuyers, cutting the minimum mortgage down payment from 25% to 20%, taking it to the lowest level of requirement ever.
This is just one of many stimulus measures that Beijing has undertaken in recent months. However, global steel and aluminum oversupply is still a top concern, and China’s role in that glut continues to be front and center.
With U.S. home sales and the non-residential sector continuing to show strength, construction in both of the world’s largest markets has been a positive driver for metal, as has automotive demand.
The MetalMiner monthly GOES MMI reading dipped slightly from 202 to 195 against smaller import volumes. Market participants report to MetalMiner that grain-oriented electrical steel prices have fallen a bit in China, as well, though non-grain-oriented electrical steels have increased.
However, AK Steel did add a surcharge of $65 per metric ton effective with June orders, the first higher surcharge since January.
According to recent comments made by Roger Newport, CEO of AK Steel, demand appears solid for high-efficiency electrical steel. He also pointed to stronger housing starts, though they remain below historical norms. In addition, Newport indicated the new transformer efficiency standards would help with overall demand. AK Steel also received a boost when ATI closed its Bagdad facility in Gilpin, Pa., driving approximately 35,000 tons of new business to AK Steel.
In the meantime, the steel market price rise, in general, appears more supply-driven as opposed to demand-driven. Many have questioned whether any more new demand will appear during the second half of the year which means that for prices to stay supported, producers will need to remain vigilant about managing capacity. Some believe prices will flatten during the summer and then start slipping toward the end of the year.
Although GOES markets don’t closely correlate with underlying steel markets, some of the drivers of steel prices also apply to electrical steel. These drivers include: China’s ability to hold prices higher (we have started to see some cracks in that foundation). Unlike in the U.S., Chinese producers work together to set market prices, a recovery in products and materials used in the oil and gas industry on the basis of a rising oil price and, finally, the overall health of commodities markets and base metal prices.
Nickel’s price fall last year caused some miners to curb production. Some of these production cuts went into effect in 2015, helping prices to find a floor this year. However, the cuts haven’t been enough for the markets to really make a bull run. Global nickel supply is still running strong as the supply side has proved quite inelastic to low prices with most producers hanging on while they hope Chinese pig-iron producers will close down first.
Recently, Russia’s Norilsk Nickel, the world’s largest nickel miner, said that in order for a sustained recovery to happen, more cuts will have to materialize. According to the company, over 20% of the global nickel supply needs to be cut if we want to see a sustained recovery in prices. However, we have yet to see anything close to that since, so far this year, there haven’t been any supply cut announcements. The latest significant production cut was announced late in 2015. Read more
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.
Overcapacity issues are still visible. Last December, a group of Chinese smelters announced intentions to cut refined copper output. However, recently, China’s largest copper producer, Jiangxi, said those output cuts have been offset by new capacity in the country. Therefore, everyone seems to agree that the market is oversupplied even as producers slash costs.
Can Prices Only Fall?
The outlook for copper is still challenging and many of the industries are still facing overcapacity. However, there are a couple of factors pushing commodity markets up and copper prices could still rise.
Momentum Picks Up in China
China’s manufacturing activity has shown signs of improvement in 2016. China’s manufacturing PMI came in lower than expected in April but the numbers were still above 50 for the second consecutive month this year.
The Chinese automobile sector also saw improvements this year. A tax reduction on smaller vehicles last September helped a seven percent growth in Chinese passenger vehicle sales in the first quarter.
In real state, the numbers also showed positive improvements. China’s investment in fixed assets rose by 10.7% in Q1 while new construction starts have also risen by 19.2% in the same quarter after falling for two consecutive years. Finally, Chinese copper imports in March jumped 39% from the same period last year and have hit an all-time record.
The Federal Reserve 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. If the dollar keeps weakening this will play in favor of copper prices.
What This Means For Metal Buyers
Copper prices have held well this year but we haven’t seen a significant rally yet. Copper prices are now running up against resistance and the question is whether prices are just consolidating before they move higher or we will see another sell off.
If monetary policies keep driving the dollar down and the upturn in Chinese demand is for real (at least for an extended period of time) then we could see higher copper prices this year. However, in a year full of global uncertainties, bears might not be out of sight for too long.
During 2015, flat performance was, relatively, a moral victory as we saw commodities fall across the board against a strong dollar. It’s now safe to say, though, that that environment is shifted as the dollar has weakened and a broad commodities rally has set in. Standing still is now tantamount to falling behind.
Of course rare earth elements are difficult to track as many of the high-tech elements not exchange-traded and their prices and production can be hard to come by. Efforts to modernize the industry, particularly in China, have not yet been able to add transparency to their production and pricing.
China’s Ministry of Industry and Information Technology (MIIT), however, intends to change that by setting new standards for domestic rare earth producers. The proposal is still being discussed in Beijiing, but the idea is to specify minimum production utilization levels, recovery rates and yields, as well as to implement an exploitation plan that complies with environmental standards.
In the first quarter of 2016, average operation rates at Chinese smelters was 52.6%. If the new utilization plan is implemented, though, the expectation is that the rates will rise above 65% at the outset, according to Core. This might help to add transparency in the long term, but In the short-term, higher production rates may place further downward pressure on prices.
There have also been rumors, since April, that China’s National Development and Reform Commission would begin stockpiling material again soon and many buyers are holding off purchases ahead of assumed government stockpiling.
Silver has mostly caught up to its investment metal cousin, too, thanks to its dual use as an industrial and precious metal. Silver miners are seeing their stock prices increase as supply has been constrained by recent mine shutdowns.
As with most of the metals we track, China is the biggest consumer and biggest producer of gold. So, the news that China’s central bank and customs service will allow companies that have “frequent imports and exports” of gold and gold products to apply for a single permit that can be used in as many as 12 shipments was welcome for both producers and consumers. The trial to simplify the rules takes effect June 1 and applies to Beijing, Shanghai, Guangzhou, Qingdao, Nanjing and Shenzhen, the bank said in a statement.
Aside from loosened regulations, the investment metals are sitting in a good, fundamental place. The safe haven status of both gold and silver continues to help their prices as the Federal Reserveagain showed no stomach for interest rate increases this month.
As my colleague, Raul de Frutos, recently wrote, this has led to the weakest U.S. dollar in 15 months and sent investors flocking to silver, gold and even the platinum group metals. That’s right, 15-month high for gold, 15-month low for the U.S. dollar index. The correlation, gold-to-dollar, is way more reliable that any physical demand indicator of gold.
It seems as if the Fed’s dovishness is catching on globally, too. 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 this month.
The sub-index is still range-bound but it’s in the upper portion of the range we’ve seen it inhabit for the last year.
The steel plate products in the IndX were mainly responsible for the increase. Magnetic rare earth electric motor metal neodymium and silicon actually saw their prices decrease this month.
Rather than bore you with my regular disclaimer on how difficult it is to gauge what exactly is going on at the U.S. consumer level with renewables, due to rebates and subsidies, let’s talk about recent initiatives that could move the needle on solar.
The Department of Energy recently announced $25 million in available funding through an effort called Enabling Extreme Real-Time Grid Integration of Solar Energy (ENERGISE) to help software developers, solar companies, and utilities accelerate the integration of solar energy into the grid.
How to Capture Solar Power?
It’s been a long-term gripe from many in the power generation business that solar, at least here in the U.S., has been great for homeowners and businesses using crystalline silicon photovoltaic panels to feed energy directly into their appliances, laptops, lights and TVs, but much more difficult to transfer it back into the nation’s grid.
$25 million might seem like a lot, but it’s actually a rather small sum considering how long this problem has confounded some of the greatest engineering minds out there.
The initiative specifically seeks to develop software and hardware platforms for utility distribution system planning and operations that integrate sensing, communication, and data analytics to help utilities manage solar and other distributed energy resources on the grid. Its products will, supposedly, be data-driven, easily scaled-up from prototypes, and capable of real-time monitoring and control.
We’ve been promised similar systems in the past so we’re not holding our breath or anything. Still, the expected 10-15 solutions developed with the new funding will be field-tested by utilities to demonstrate their performance and value in real-world operating environments so there’s some rigor to the program.
In Q1, it appeared that anti-dumping actions were the only force causing steel prices to rally. That questioned the longevity of the price rally since steel buyers could always turn to international suppliers for cheaper prices if domestic prices overextended. However, the picture has recently changed.
China Steel Prices Surge on Government Stimulus
Prices are not just rising domestically but globally, particularly in China. Chinese steel prices have jumped over 40% in a matter of weeks. Take HRC prices, in the U.S. they have increased in the ballpark of 30% so far in 2016 while Chinese HRC prices have now risen over 50% this year.
China’s not-so-mini fiscal stimulus, initiated late last year, has really picked up momentum in recent weeks. Across a number of metrics, China’s economy has surged this year driving a risk on sentiment among investors, the strength of which has caught many by surprise.
In Q1, China’s industrial production rose 5.8% year-on-year, the highest growth figure since June 2015. State banks and local governments are also pumping money into fixed asset investment (FAI). In Q1, FAI growth accelerated to 10.7%. The data indicates that China’s real estate investments grew due to rising home sales.
Raw Material Prices Rise
Of course, the rally in steel prices was also supported by a rise in raw material prices. Oil prices managed to climb above $45 a barrel, shaking off bearish news in April, a sign that underlying sentiment might be shifting in favor of higher prices. Iron ore prices climbed as high as $70.46 in April, the highest level in 15 months. Scrap prices also continued to rise in April.
Production Ramps Up
Global raw steel production during March reached its highest total in nine months with global raw-steel capacity utilization at 70.2%, up 3.9% from February although still 1.3% lower than the same period last year.
Previously, China committed to reduce its excess steel capacity. However, it doesn’t look like this will be in the form of supply cuts. For the month of March, China’s raw steel production increased 20.74% from February to 70.7 million metric tons, an increase of 2.9% over the March 2015 total. That seems to suggest that rising steel prices have only ensured that Chinese steel mills produce more of the metal. The big question is whether the stimulus-driven demand will be enough to absorb current supply. So far, markets seem optimistic about it.
Sustainable Price Rally?
These developments might only serve to prolong the problems of overcapacity in the steel industry but that doesn’t change the fact that we could see strong steel prices for at least much of the second half of the year. Prices could come down sometime in the future but, right now, momentum is clearly pointing upward for steel and for commodities across the board.
Chinese stimulus programs suggest that lax lending and stimulus have, indeed, spurred a new infrastructure economic boom. China has stated that it doesn’t want to create an additional property bubble but there are reasons to be skeptical. Previously, China has shown that shot-in-the-arm stimulus programs often turn into prolonged addictive habits, perhaps spurring demand growth for longer than what most people anticipate.
If we narrow our view to the specific supply/demand fundamentals in the aluminum industry, it’s really hard — if not impossible — to find a reason for the price increase. The aluminum industry still seems oversupplied and April marked another month with little to no willingness for production shutdowns.
On top of that, Chinese aluminum exports surged in March, up 17% year on year. The steep rise in aluminum exports is a negative for aluminum markets as it exemplifies the issue plaguing global aluminum markets. Interestingly, though, prices reacted — in this instance — in a bullish manner.
Meanwhile, the U.S. is investigating whether aluminum imports are harming the domestic industry, an inquiry that could help pave the way for new import tariffs. Aluminum prices are more global in nature than steel prices since they are decided by exchanges. If import duties were imposed on aluminum products, aluminum producers couldn’t arbitrarily hike their selling prices. However, duties could potentially bring U.S. Midwest premiums up, which are now hovering near $0.08 a pound.
Commodity Markets Rebound
In our April MMI report, we warned that: “The long-term outlook for aluminum is still poor. Prices in the short term could rise, however, following the recent strength in the base metal sector.”
The best explanation for higher aluminum prices is the recent rebound in commodity and base metals markets. If you are a frequent reader, you’ve probably heard us saying that based on our own historical analyses, 70% of the price movement of an individual metal is caused by the movements in the commodity and base metal sectors. Which is exactly what we saw during the month of April.
Aluminum prices got a tailwind thanks to a recovery in commodity markets. Every single industrial metal rose in April. The ongoing recovery in oil prices, a weaker dollar and a potential boost in demand for base metals thanks to Chinese stimulus are the real factors explaining this move in aluminum prices.
If commodity markets continue to improve, we should expect higher aluminum prices even when most people would agree that the market is still oversupplied. The extent of this rally will likely depend on how successful China proves to be in boosting spending. Back in 2009, the positive sentiment lasted for more than two years. At present, we have no way of knowing how long Beijing will keep this up.
Shares of Aluminum Producers Jump
Not surprisingly, the stock prices of aluminum producers such as Alcoa, Inc. or Century Aluminum jumped on higher aluminum prices. Investors betting on a recovery in aluminum prices would increase their exposure in these companies given their strong price correlation with aluminum prices, as their earnings are very sensitive to the metal’ price movement.
U.S. construction spending increased in March to its highest level in more than eight years and our Construction MMI shot up 15.9% along with it. Gains in home building and nonresidential construction offset a drop in government projects.
Construction spending rose 0.3% in March after a 1% gain in February, the Commerce Department said Monday. The back-to-back increases raised total spending to a seasonally adjusted annual rate of $1.14 trillion, the highest level since October 2007.
Residential construction grew at a 14.8% annual pace in the first three months of the year. It was one of the few sources of strength in a quarter in which the economy grew at an annual rate of just 0.5% — the slowest pace in two years.
Aluminum, steel scrap and copper all saw gains on the index, moves that are in line with the broad metals mix used in nonresidential and residential construction here in the U.S. In China, numbers are similarly positive.
Chinese housing data for March showed another increase in home sales, putting a dent in China’s housing oversupply and helping the construction reset there. As lower rates and yields work with a lag, sales growth could stay strong in China this year. A reduction in the requirement for a down payment by the central government is also underpinning increasing sales.
While China’s manufacturing purchasing managers index from Caixin Media and Markit Economics fell to 49.4, missing economists’ estimates for 49.8 and down from 49.7 in March, the construction numbers in the People’s Republic remain strong and could, theoretically, pick up the slack this year if manufacturing there remains depressed.
A total of 83.19 million metric tons of iron ore was discharged at Chinese ports during April, according to ship-tracking data compiled by Thomson Reuters Commodity Research and Forecasts.
This was up from the 81.76 mmt offloaded in March, suggesting that China’s iron ore import volumes will show an increase when preliminary customs data is released in the next few days.
China is back to producing steel at a high rate. Even zombie mills have come back from the dead. While this might not be good for the oversupply situation, it is a good thing for construction estimators and procurement professionals looking for as many options as possible to fulfill orders and reduce prices via competition.