Articles in Category: MetalMiner IndX

Our November metal price trends report showed an industrial metals complex buoyed by strong Chinese demand and bullish on the future, thanks to the election of republican presidential candidate Donald Trump who promises to curtail regulations on metals producers and the energy suppliers that provide power for smelting, steelmaking and mining.

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While some of the metals turned in a flat performance during the month of October, almost all quickly took off after the election. Now, as our lead forecasting analyst, Raul de Frutos, recently wrote, the industrial metal bulls are in full charge.

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The minor metals remained flat, but that’s no surprise to any buyer at this point. The fact that rare earth miner Lynas Corp. received a lifeline from a hedge fund and a Japanese state-owned enterprise was a minor (metals) surprise itself.

It’s a good time to be a producer of base metals as it looks like the bulls may continue to run in 2017. For more information on how to plan your purchases well into the New Year, consult our monthly metal buying outlook.

Our Stainless MMI inched up 2% in October. However, it was at the beginning of November when prices surged. Three-month London Metal Exchange nickel jumped above $11,000/mt, the highest level since August 2015. By the way, we predicted this move just a few weeks ago.

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Robust Chinese demand for nickel and other metals has broadly supported a price rebound from multiyear lows that were hit earlier this year. Not only nickel, but the whole metal complex is hitting new highs. When investors turn bullish in the metal sector, any bullish news can make the individual metal increase in price and, nickel is particularly enjoying a bull narrative.

Bullish Industry Fundamentals

First, Indonesia recently announced that the country will “almost definitely” keep in place a ban on nickel ore and bauxite exports. Just a few days ago, nickel investors were concerned that Indonesia was considering lifting the ban. Now that those fears have waned, investors seem willing to chase prices higher.

Stainless_Chart_November-2016_FNL

Second, The Philippines announced that it will prolong the ban on new mines, reviewing all environmental permits previously granted to nickel producers. The announcement dashes industry hopes that some restrictions may be lifted following the audit that was finished in August.

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The news come after a quarter of the country’s miners have been closed with another 20 of them under the risk of suspension.

Bullish Price Action

On top of the above, we are seeing a very constructive price action. After nickel jumped 25% from June to August prices rested in a narrow range for the next three months. Despite a strong dollar in October, investors were unwilling to sell nickel. Now that momentum for investing in the industrial metals complex is picking up again, we expect nickel prices to work higher into 2017.

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Grain-oriented electrical steel M3 prices rose by about 3% this past month.

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Coincidentally, Allegheny Technologies, Inc. announced that it would now permanently idle its Midland, Pa. and Bagdad in Gilpin, Pa. facilities, thus exiting some commodity stainless steel markets as well as the GOES market entirely.

The closures — combined with new labor agreements, rightsizing plans and defined benefit retirement plans closed off to new employees — will help ATI improve its cost structure. ATI’s flat-rolled products division is expected to return to profitability in 2017 according to the most recent earnings announcement.

GOES_Chart_November_2016_FNL

And though these ATI plants have been idled since the Spring of this year, it now appears certain that the U.S. will have only one remaining GOES producer: AK Steel.

Similar cost reduction themes played out at the most recent AK Steel earnings call on October 25, “The improved product mix, higher average selling price per ton, improved carbon steel market prices, focus on cost reductions and lower raw material costs contributed to the 31% increase in adjusted EBITDA.”

In terms of the improved carbon steel market, we noted that non-ferrous metal prices continued to rise throughout October, confirming a bull market. Steel price declines have started to slow and, in fact, cold-rolled coil prices notched up $1/st this week. Though this appears insignificant, it demonstrates that steel prices may have found a price floor. In addition, the gap between domestic and international CRC prices has narrowed.

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Although GOES prices tend to move somewhat independently from other non-ferrous and ferrous metals, the fact that non-ferrous metals have moved in a bullish direction and steel prices also appear to be finding a floor means that, in the near term, we would not expect to see any dramatic GOES M3 price declines.

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China, the world’s biggest clean-energy investor, lowered its solar and wind power targets for 2020, a reflection of how record installations of panels and turbines have simply overwhelmed the ability of the nation’s existing electrical grid to absorb the new electricity.

Renewables_Chart_November-2016_FNL

This is more bad news for the burgeoning renewable energy infrastructure market and it’s not like the metals that go into panels (steel, silicon and copper wire) were setting the world on fire before this news. Our Renewables MMI has been flat as a board, stuck at 52, for the last three months and only held at one point higher for the previous two months. Along with Rare Earths, Renewables have been habitually flat for much of the year.

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The problem, for China, is two-fold. It must upgrade its grid to accept available solar and wind power directly into local grids and also set up energy storage that can save generated power when for when the sun doesn’t shine or the wind doesn’t blow.

China is now aiming for 110 gigawatts of solar power by 2020, a 27% reduction from an earlier target, according to a webcast posted on the website of the National Energy Administration that cited the agency’s chief engineer, Han Shui. The nation reduced its goal for wind power by 16% to 210 gw.

While China has poured billions of dollars into clean energy in recent years, the ability to deliver the newly-generated electricity from where it’s produced to where it’s needed has lagged, a common problem with wind and solar. The mismatch has left solar and wind capacity sitting idle in some parts of the country, hurting companies such as China Longyuan Power Group Corp. and China Datang Corp. Renewable Power Co.

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Two weeks ago, Japanese lenders and a hedge fund struck a deal to save Australia’s Lynas Corp., the only major rare earths producer outside China, from collapse. In doing so, they cut its interest costs and gave Lynas nearly four years breathing room to pay off its debt.

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State-owned Japan Oil, Gas and Metals National Corp. (JOGMEC) and Sojitz Corp. did so to ensure a supply of rare earths from outside China, the world’s biggest producer of the elements. Japan’s interest is understandable. It’s the nation that Chinese producers unceremoniously boycotted in 2011 back when rare earths prices were flying high. Even though that’s not the case today, Japanese manufacturers have no interest in ever being dependent on China’s rare earths industry again. After the collapse of Molycorp, JOGMEC even agreed to slash the interest on its loan to Lynas to 2.5% from 6%.

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Lynas will not have to make any fixed repayments on the $203 million it owes to Sojitz and JOGMEC until 2020. It previously faced staged repayments up to 2018.

Our Rare Earths MMI held at 17 for the fourth straight month, the textbook example of a stagnant market with flat demand and more than enough supply.

The one bright spot in the sub-index continues to be the permanent magnets used in electric motors for wind turbines and other products. These elements include neodymium and samarium.

Research and Markets recently published its “Permanent Rare Earth Magnets Market – Drivers, Opportunities, Trends & Forecasts: 2015-2022” report. It said that the global permanent rare earth magnets market is expected to grow at a CAGR of 13.2% during the forecast period 2016-2022 to reach $41.41 billion by 2022.

For Lynas, and the companies that have invested in it, this market offers hope of salvation but we would exercise caution as always. China is attempting to consolidate its rare earths industry the same way it is attempting to do so with steel. The problem is that Beijing still exerts relatively little control over small, provincial mines that fly under the rardar of national mining standards.

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Permanent magnet demand has always been strong but it will need to grow by quite a bit to exhaust current Chinese production and, just like with steel, the consolidation process is slow and sure to be manipulated by the economic growth needs of the People’s Republic.

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Our Copper MMI held steady at 61 points in October. At first glance, it might appear that there is nothing bullish about that. Markets remain in surplus due to producers’ unwillingness to cut capacity.

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Copper prices have lagged the rest of the industrial metals this year and we’ve been pretty bearish on copper since 2011. But, although still early to make a call, there might be a bull lurking in the shadows. Copper prices might be setting up for a big run.

Copper_Chart_November-2016_FNL

Although prices didn’t rise in October, they showed resilience in the face of a rising dollar. Moreover, base metals continued to hit new highs. Even aluminum, a metal that has lagged this year, recently hit a 15-month high. With this bullish sentiment in the metal complex, it wouldn’t be surprising to see bulls going after copper sooner than later.

Strong Demand

China makes up nearly half of the world’s copper demand. Chinese demand from infrastructure and construction has been robust this year and the release of new manufacturing PMI data confirmed strong demand. The Caixin manufacturing PMI for October rose to 51.2, the highest reading since July 2014 and betting market expectations.

Surplus Now But Future Deficit

Copper is a very slow business in terms of new project development. Lead times can be more than a decade for new copper mines. Projects that started during the boom years have still been coming online, keeping markets oversupplied.

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However, current copper prices are way below incentive prices for new investments. Over the past 2-3, years miners haven’t committed to new developments. Consequently, even if prices rose to levels high enough to incentive new developments, it will take a long time for that new supply to hit the market. Read more

MetalMiner’s Global Precious MMI dropped 5.8% to a value of 81 for November, the sub-index’s lowest level since June.

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In the midst of worries over the U.S. presidential election and the Federal Reserve‘s interest rate moves, precious metal prices have been on the rise over the past week.

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Many investors are girding for a Brexit-like jump if Republican contender Donald Trump wins; the U.S. palladium price, for example, coming off $700/ounce-level highs from early October to just around $600/oz at the start of November, jumped back up to $630 mid-last week.

Focus on Palladium Prices

While some more short-term spikes are undoubtedly coming, longer-term structural concerns continue to swirl around the PGM markets in particular.

In just last month’s analysis of another MetalMiner monthly sub-index (the Automotive MMI), my colleague Jeff Yoders brought up excellent points about the state of the platinum group metals:

“The increasing cost of PGMs was keeping the Automotive MMI in positive territory for most of the first three quarters of 2015. The pullback in precious metals prices could pull the rug out from under automotive, too. The catalyst metals never took off for investors the way that gold did and that’s bad news for their prices as supply was never really in much doubt without more investor interest.”

Now, it looks as though that’s coming true.

Bloomberg reports that palladium futures “tumbled to the lowest in more than three months amid signs of weakening investment and physical demand for the metal used in auto pollution control devices.”

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Phil Streible, a senior market strategist at RJO Futures in Chicago, told Bloomberg that “demand is really starting to fall.”

“You’re going to see that as interest rates go up in the U.S., auto loan rates will rise and you’re probably going to see automobile sales decline,” according to Streible.

The Rest of the Precious Metals

Platinum, silver and gold prices fell across the board from October to November, across geographies including the U.S., China and India.

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Our Aluminum MMI jumped to 83 points after London Metal Exchange aluminum prices hit a 15-month high. Not even a strong dollar could ruin aluminum bulls’ party last month.

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Aluminum rose above $1,700 per metric ton for the first time in over a year. Aluminum supply has increased this year as rising aluminum prices triggered the release of new capacity and restarts of idled capacity. However, other drivers have pushed prices into new ground:

Rising Costs

Energy accounts for around half of the cost for Chinese smelters to produce aluminum. Therefore, there is a close correlation between aluminum and energy prices.

Thermal coal prices in China have more than doubled this year. The price spike has been spurred by domestic mining cuts in China, with electricity generators and steelmakers making up for the shortfall via imports. Aluminum_Chart_November_2016_FNL

As energy prices increase, Chinese smelters are getting squeezed, making it tougher for them to keep up with production. In addition, alumina prices in China, another key ingredient for the making of aluminum, have increased around 50% so far this year.

Strong Demand

Aluminum output is running higher this year but so has demand for the metal. Chinese demand from infrastructure and construction has been robust this year. The automotive sector, another big industry for aluminum demand, continues to look strong.

In September, Chinese automobile sales rose 27% from the same period last year. This is the seventh consecutive month in which auto sales have risen and the third consecutive month where growth was above 20%. The growth rate this year is substantially higher than last year.

Investors Are Buying Metals

Industrial metals entered a bull market earlier this year and aluminum is finally playing catch up. 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.

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When commodities are on the rise, aluminum investors tend to overreact on bullish news while dismissing bearish news. That’s what we are seeing right now.

What This Means For Metal Buyers

Industrial metals have been in bullish mode since early this year. Aluminum prices are finally jumping on the bandwagon. Aluminum buyers should minimize their price risk exposure if they haven’t done it yet.

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Our Raw Steels MMI rose 4% in October, meanwhile flat-rolled products in the U.S. continued to fall sharply.

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This is a strange divergence in prices and something to take into account. Indeed, the fact that international prices are rising while they fall domestically suggests that prices in the U.S. are close to finding a floor.

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This summer, the price arbitrage between U.S. and international steel prices was huge. Well above historical levels. Two months ago we predicted that this unprecedented price arbitrage wouldn’t last, since enough holes existed in the anti-dumping duties to allow material to reach U.S. shores. But now, domestic prices have declined enough that this arbitrage is falling back to normal levels.

HRC Spread

Take, for example, hot-rolled coil. The price spread between Chinese and U.S. HRC is now below $150 per ton from $280/st just two months ago. At these levels, U.S. prices should start following Chinese prices, as we are used to, and given that prices in China are hitting new highs, it’s normal to expect U.S. prices to stabilize toward the end of the year.

Cold-rolled coil prices in the U.S. are still expensive compared to China but not nearly as much as they were during summer. The spread between U.S. and Chinese CRC has halved in just a few weeks. The spread has fallen from its peak at $420/st to stand now at $195/st. Still elevated but not much above of what we are used to.

Chinese Demand Still Looks Strong

Chinese demand from infrastructure and construction has been robust this year. So has its auto sector, a key industry for steel demand.

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In September, Chinese automobile sales rose 27% from the same period last year. This is the seventh consecutive month in which auto sales have risen and the third consecutive month where growth is above 20%. The growth rate this year is substantially higher than last year. Steel prices in China have held well thanks to strong domestic demand. This could continue to support prices in China and in the U.S., too, now that the price arbitrage between China and the U.S. has come down to normal levels.

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Automotive sales fell 5.8% in October, marking the first time since the beginning of the recession that sales of new cars and trucks in the U.S. declined for three consecutive months.

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The yearly rate of sales for October was 18.02 million, according to Autodata Corp. That’s in line with the 18.18 million in October 2015. Nearly every major automaker posted sales declines in October. Ford Motor Co. and Fiat Chrysler Automobiles NV both posted double-digit declines of 11.9% and 10.3%, respectively. General Motors Co. beat analyst expectations, with sales down only 1.7%.

We had warned last month that last month that while our Automotive MMI was flat, that could signal a plateau for end-user automotive sales and this month we saw the other side of that plateau, as the sub-index fell 4%.

Automotive_Chart_November-2016_FNL

Automotive metals are still a lucrative market for steelmakers and aluminum smelters, but the drop in sales could be a bit worrying as any prolonged drop in demand could for vehicles could eventually be felt down the supply chain.

However, most analysts are still bullish on automotive sales despite the fact that the sales record of 2015 will mostly likely not be met.

“Key fundamentals like job security, rising personal incomes, low fuel prices and low interest rates continue to provide the environment for a very healthy U.S. auto industry,” GM Chief Economist Mustafa Mohatarem said in a statement. “The U.S. auto industry is well positioned for sales to continue at or near record levels for the foreseeable future.”

Automotive demand is strong in Europe and other mature markets, too.

BMW AG recently reported higher profit in the third quarter even though a decline in sales in the U.S. and increased investment in electric vehicles and other technology eroded earnings at its automotive division. Fellow German automaker Daimler (maker of Mercedes-Benz automobiles) and BMW are benefiting from the strong recovery in Europe’s car markets and renewed demand in China.

Austria’s Voestalpine AG, a company that supplies both with automotive steel and hot-briquetted iron ore, recently held an event wherein its CEO Dr. Wolfgang Eder said that their automotive metal sales, most of which are to European customers, are strong.

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“We do not see it different than what we see and here in U.S. auto markets,” Eder said. “We do not see any weakness. These deliveries are lower than U.S. domestic production, and while we do WANT to do more business with American automakers, those customers (BMW and Daimler) are paramount right now because we know that people, especially in the U.S. market, like those cars.”

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