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.
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.
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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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!
Okay, not everyone. Construction, stainless steel, renewables and rare earths all lost ground and automotive was merely steady.
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.
Rare earths prices have been in free fall ever since China removed export quotas on the minor metals that are key components for defense, high-tech gadgets and data storage products.
US rare earths producer Molycorp, Inc. is spiraling closer to a bankruptcy sale as this story went to press. Embroiled in a bankruptcy court fight between its main lender and junior creditors, Molycorp reached agreements with the latter group on Friday. That clears the way for the bankrupt company to accept bids for the company and to ask creditors to vote on a plan to exit the bankruptcy.
Molycorp, the only US producer and processor of rare earths, has been battling its bondholders who have alleged it is doing the bidding of its main lender, Oaktree Capital Management.
Lawyers for Greenwood Village, Colorado-based Molycorp told a US Bankruptcy judge it would allow advisers for the official committee of unsecured creditors and a group of bondholders to join calls and meetings about potential bids.
On Tuesday, Bloomberg reported that potential buyers from China and Australia submitted nonbinding bids of more than $700 million for Molycorp’s assets, including processing operations in Mountain Pass, Calif. The company has estimated the operations were worth less than $450 million.
Bids for the company’s bonds have jumped this week from less than 5 cents on the dollar to more than 12 cents as the prospects for repayment have improved for bondholders. The asset auction is scheduled for March 4. If bids fall short of a certain threshold, Molycorp has proposed exiting bankruptcy through a reorganization plan, excluding the Mountain Pass mine, under the control of Oaktree.
Molycorp and Oaktree still face more legal battles with the junior creditors, who convinced the bankruptcy judge on Friday to strike a provision in the reorganization plan that would deny payments to objecting creditors.
What Went Wrong With Molycorp
Molycorp’s long fall is not news anyone who has followed rare earths for the last few years. David Abraham, author of the rare earths book “Elements of Power” recently told MetalMiner that “they faced real challenges: the amount debt they had to cover, the competition they were up against, and the processing facility they developed, which wasn’t efficient and took longer to set up than expected, indicated that profitability would be an obstacle.”
With its main competitors, rare earths producers in China, having export duties removed the market was flooded, prices fell and it became that much harder for Molycorp to compete. The situation is the same for Lynas Corp. and anyone else competing with China’s state subsidized rare earth producers. Lynas, however, has the benefit of better backers from Japan, a nation eager to insulate itself from another Chinese rare earths shipment boycott like the one that happened in 2010.
Rare earths prices are as compromised by the bearish commodities environment as any metals. Buyers need not fear a significant. rise in prices anytime soon.
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Jeff Yoders: Your chapter on the ways that mining companies receive funding was very eye-opening. Is it happening that mining executives are making more money off of investment than they are off of mining?
David Abraham: I think you can go around at conferences and ask people have they ever produced a salable material and you would find that, much of the time, the answer is no. That’s certainly understandable because a lot of these mines take a long time to develop. You have to do your own due diligence, as an investor, and dig into a company’s financial reports, and make your own judgements, to find out how much someone deserves to be paid.
That’s something that the board of directors should be doing. Some of the time, though, it does seem a little out of line to see what these executives are being paid and judging what they are paid in comparison to other industries. I tried to allude to that.
Lighting technology marches on from candles to tungsten to fluorescent to LEDs. Source: Adobe Stock/vladimirfloyd.
JY: It can be a very risky investment to be involved in without, so to speak, your head up.
DA: It is a big risk and, financially, a challenging investment to get involved in. As much as you want people investing in the space, because these materials are critical, the challenge is you don’t know what demand is going to be, exactly, in the future. The prices are so volatile that you it’s hard to make projections. You can see a trend line, sure, but you could be investing in the wrong trend. If you made a decision to invest in, say, rare earths specifically because you thought demand for compact fluorescent lighting would take off, well, LEDs came about, and you would have gotten stung.
JY: What’s interesting is a lot of these technologies are not new at all and take off due to availability of materials or recent research. Light-Emitting Diodes (LEDs) are a semiconductor technology that, as consumer lighting, has been around since the ’60s. The road to mass adoption for much of these rare metal products can be a long road.
DA: There is a challenge of knowing what material is going to be needed because of changing of technology. My hope is that if we start clarifying some of the supply chains as best we can and start investing in some of these materials that they will be commodities, in terms of price and availability, and they will be more adaptable for use in consumer technology. We won’t try to NOT be using these materials, and many companies have shied away from rare earths, we’d try to use them more.
Indeed many technologies like LEDs have been around for many years, but the commercialization can happen very quickly. The adoption of LEDs surprised many who thought that rare earths in phosphors would be a growing market because rare earths are used heavily in compact fluorescent lighting —only a fraction of them are used in LEDs. But LEDs quickly won out.
Trying to predict new technologies and, therefore, the elements necessary to make them is fraught with risk. Just before the iPhone came out, Microsoft’s Steve Ballmer said there was no chance it would take market share. Those who are most in the know often have no clue. So predicting the resources that future tech will use is impossible.
But, with the rapid adoption of technology globally — the smartphone and tablet spread around the world faster than any other technology ever — and a middle class set to grow by 2 billion over the next 15 years, we are sure to use a lot more of these specialty resources, even if some technologies become more efficient in their use of rare metals.
JY: Were you surprised when Molycorp, Inc. declared bankruptcy earlier this year? I don’t think many of us were.
DA: It goes back to the first thing we talked about. They faced real challenges: the amount debt they had to cover, the competition they were up against, and the processing facility they developed, which wasn’t efficient and took longer to set up than expected, indicated that profitability would be an obstacle. Now, Molycorp was not the only one with those challenges. Lynas Corp.has faced those same challenges, and although Lynas has been able to, apparently, last a little bit longer, Lynas also has the good fortune of having forgiving backers in the Japanese government.
I wrote the book, really, to give perspective to a lay audience about where this stuff comes from and the implications when they make decisions to buy computersand iPhones. I wanted to let consumers know that there’s this whole other world of rare metals under their fingertips.
This part of our discussion focuses on rare earths, environmental product declarations, conflict-free minerals certifications and the challenges for buyers, miners and refiners in very loosely defined markets.
Jeff Yoders: Looking at solar panels, cell phones, wind turbines and other end-use products that use rare earth elements, do you feel that, in the near future, their production will require more readily available data about available supply, production and existing stockpiles of these elements or more transparent commodity markets? As we’ve seen in other maturing manufacturing industries?
David Abraham: With the increasing specialization of the materials we need — higher-grade, different specs — it’s going to be increasingly challenging to commoditize them. There is not a lot of interest among the producer companies to open the books and allow people to know what materials are being produced at what grade and so forth. Although it would be much more beneficial to have an open accounting, it’s a real challenge to do so. The London Metal Exchange is trying to commoditize certain minor metals but the challenge there is at what stage? What becomes the base commodity? What grade of neodymium? What grade of dysprosium? Because they are traded so lightly, the challenge is are vast. I would love to see it done, but I just don’t see it being done very well anytime soon.
Circuit boards depend on minor metals such as tantalum. Source: Adobe Stock/Lionelpc.
JY: Too many hurdles to cross?
DA: The interests are there further downstream especially as companies need to report on conflict minerals. As I elude to in the book, the people who are buying and selling the metalsdon’t see much benefit without that pressure from further downstream.
JY: What about the trend toward environmental product declarations and conflict-free metal designations. Do they hold any hope for opening up the rare metal supply chain to transparency?
DA: We really want to make sure the products that we use aren’t causing unintended harm. That’s a wonderful thing in and of itself and it gets people thinking, ‘where did these materials come from?’ The challenge, though, for a company to know exactly where all its materials come from, it’s a huge hurdle. Right now, they have to know where the material doesn’t come from, which is a little easier.
To know where EVERY spec comes from is a lot harder, and unrealistic currently. Many parts of the world simply don’t document, and don’t really have a reason, honestly, to document. As you know, going seven or 10 layers deep in a supply chain is difficult and they are going to places that don’t understand conflict minerals or even what’s to understand about them. I appreciate the direction it’s going.
JY: When Dodd-Frank conflict mineral certifications were due earlier this year we reported on the results and one of the companies that submitted a 1502 form SD was Party City. They wanted to disclose the supply chain for their mylar balloons. The company’s submission said “It is possible that certain of the company’s metallic balloon and novelty products may contain Conflict Minerals” while explaining the many layers of suppliers and sub-suppliers in their chain.
DA: Its a relatively easy thing to know where balloon material is coming from. Compared to, say, airplanes with really complex alloys with say, a sprinkling of titanium or rhenium in various components. It’s a challenge and hopefully we are pushing people in the right direction to ask the right questions, even though they’re not always going to be able to come up with the complete answer. The US Congress is saying to the Department of Defense ‘know where everything comes from.’ But supply chains are moving things and go through time. They’re not only seven to 10 layers deep, they’re years deep, in some cases. To know where everything comes from all of the time is more of an ideal than an end statement.
A recipient of numerous fellowships, Abraham researched the rare metal trade at Tokyo University, Japan’s Ministry of Economy, Trade and Industry and the Council on Foreign Relations. He also oversaw operations of a clean water non-profit, starting the organization’s operations in Japan and Uganda. He recently wrote in a New York Times Op-Ed that our emerging green energy market could quickly create a shortage of rare metals. Below is a discussion about rare metals, particularly rare earth element production and other issues surrounding the metals that fuel the gadgets and technology we love, with MetalMiner Editor Jeff Yoders.
Jeff Yoders: With your background in rare metals — as a trader, researcher and regulator — you are one of the few people who has an intimate knowledge of all facets or rare metal production, procurement and end use. Was this book the culmination of your career in rare metals?
David Abraham: I think I’ve been dancing around natural resources for much of my career. I’m not an expert in one particular area of the supply chain. The book is a culmination of my work trying to understand many aspects of the entire field. I was in commodities trading, I understand the language there, although I wasn’t in it for my entire career, I was in government. I understand government policy-making, although I’ve only been there for a little while, too. I’ve been able to understand the language and perspectives of many different folks and that helped me understand the flow of these materials better.
The problem with many rare metals, is that there is no way to track their origins without known warehouses or chains of custody. Many are traded in backrooms in handfuls, such as this Columbite-tantalum ore. There is little to no transparency of sourcing. Source: Adobe Stock/dipling.
JY: One of our founders, Stuart Burns, came to metals the same way. Stuart used his scientific training and business experience to communicate effectively with engineer and buyer, local politician and corporate manager before he and our other founder, Lisa Reisman, started MetalMiner in 2008. They met while both were trading metals. You were really able to explain the the complexity of the rare metals supply chain that we have known about for a long time.
DA: It’s amazing to me and it’s even more amazing (the complexity of the rare metals supply chain) when you draw it out graphically. I was at a conference a few months back and someone drew out the interplay between China and Japan just on rare earths phosphors, you can’t even put it on one sheet of paper because it spreads everywhere. And that’s just phosphors.
JY: Looking at the chapter you wrote about CBMM and niobium, it shows the full scope of how this mineral is mined in Brazil, refined in Estonia and then used to strengthen steel in many nations. Looking at rare earths, do you believe market-based producers can compete with Chinese mines that are mostly state-run? Such as Bayon Obo, the Chinese iron ore mine you wrote about that has a very profitable rare earths business on the side?
DA: Well, I’ll let the market determine that. What we have seen, though, is that when you have to pay back your debt — when you have to absorb all of the operating costs and capital costs, just to get your minerals out of the ground and to process them — when you’re competing against someone who can do the same thing without a debt overhang, with often lower absorbing those operating and capital costs, and you’re still competing with someone who has lower environmental costs, it becomes really hard to compete, especitally when people only want to spend a 3 to 5% premium for your products.
JY: We have not seen prices rise significantly for rare earths in the last 4 years, yet we have seen demand increase for both rare metals and rare earths. How does that square?
DA: : Abundant supply, has overwhelmed demand. Eventually, increasing demand will have to cause an increase in prices, but with the illegal materials world — that many of these metals are traded in within China — it’s hard to come by statistics that will tell you when that will be. Moreover, we don’t know where these materials are stockpiled, how much of them are in government warehouses, private warehouses, etc.
JY: After the 2010 incident where China stopped exporting rare earths to Japan, do you believe that China’s use of its near-monopoly on their production is a national security issue? Could Chinese producers simply refuse to export their minerals again? Possibly blocking exports to the US?
DA: When it’s something that has happened in that past, there is always a likelihood that it could repeat itself. The bigger question is, is how vulnerable are our supply chains? There are always ways to get materials from one place to another. In the book I wrote about how the US accessed titanium from Russia during the Cold War, despite non-existent trade relations. So, there are always going to be ways to get specialty materials, but it creates a huge risk when your defense supply line goes through another country. Alternatively, the fact that everyone is interdependent also creates some opportunities for collaboration that reduce the specter of war. You have both things going on at the same time.
JY: It’s such a web, with so many shared and competing interests. It makes it difficult to see the whole picture.
DA: Right. Is it true that US security is undermined because we need resources from countries that we consider competitors? I would say yes, but there are also some positive sides to this situation that aren’t discussed as much. Interdependencies can sow the seeds of cooperation.
We will showcase Part Two of our discussion with David Abraham tomorrow. Follow Jeff Yoders on twitter at @jyoders19.
As you well know, the main cause of the commodities meltdown has been China’s slowdown. Since China makes up half of the world’s demand for commodities, the economic slowdown means lower demand which has led to a situation where a glut of materials can’t find a home.
The role that China plays in commodity prices is so big that the future of metal prices is totally dependent on China. The longer it takes China to clean up its mess, the later metal prices will hit bottom. Currently, some key Chinese indicators we are tracking are giving us no reason to expect higher metal prices in 2016.
Imports to China dropped 8.7% to $143.14 billion in November from a year earlier, extending a slump in imports to a record 13 months, suggesting that government stimulus measures are failing to boost growth.
China Imports (millions $) Source: TradingEconomics.com from Customs Administration Data.
Meanwhile, Chinese exports declined 6.8% to $197.24 billion in November from a year earlier, marking the fifth straight falling month. The fact that China is struggling to increase its exports demonstrates that global demand is weak and that China will have to find a more painful solution to balance its surplus. The trade surplus and the inability to find a home for the excess of materials flow will continue to keep a lid on China’s growth, depressing commodity prices.
China Exports (millions of dollars). Source: TradingEconomics.com
Yuan Falls To Four-Year Low Against The Dollar
Chinese authorities want to see a smooth depreciation of the yuan/renminbi as China faces external pressure not to devalue its currency too quickly. A sharp depreciation would probably hurt the country’s credibility at the same time China wants to attract more foreign capital. In addition, it would raise criticisms that China is keeping its currency artificially low to encourage more exports.
Yuan versus dollar. Source: Yahoo Finance.
Recently, China’s central bank cut its reference rate to the lowest level since 2011. The yuan fell against the dollar to the lowest level since 2011. Although China has said that it has not allowed the yuan to slide to boost the economy or increase exports, it seems that the market is taking these developments as desperate actions from China’s government to help the economy, raising concerns among investors that the country’s slowdown might worsen.
China’s Equity Markets’ Slump Continues
We believe that equity markets are the best benchmark for the performance of China’s economy, or at least investors’ sentiment about China. We’ve analyzed before the link between China’s stock market and commodity prices. Currently, this link is even more noticeable.
China FXI shares continue to fall. Source: @StockCharts.com.
After the huge slump this summer, equity prices mildly recovered, but since October we see that equities are heading south again. The poor performance of Chinese stocks demonstrates that investors are still worried about the future of the country and not lured by its government actions.
As we entered the final month of 2015, what we’ve known for some time became all but cemented: 2015 will go down as one of the worst years on record for metals producers. Great news for buyers, sure, but was it ever lean to be a producer this year.
Our final MMI report of the year showed another batch of all-time low prices and not a single sub-index showed positive growth. The best any of our metals could do was hold steady. You may remember us saying something similar — all-time low prices and little, if any, upward movement in the sub-indexes — in November,October and September… and June… and March.
Commodities’ Bad Year
How bad is it? The last time raw materials like copper and oil were this cheap, an economic depression loomed. the Bloomberg Commodity Index, which tracks a wide swath of raw materials, plummeted to its weakest level since June 1999.
The last time US oil reserves were this flush with crude was 1972. What’s a major miner to do as raw materials are historically low, too? Well, If you’re Anglo American, this week, you announce you’ll cut jobs, sell mines and retrench. 85,000 Of Anglo American’s 135,000 workers’ jobs are on the line.
There will be less loading of iron at Anglo American mines next year. Source: Adobe Stock/nikitos77.
It’s not surprising and no one can really blame Anglo American for finally cutting jobs and production. It’s now more expensive, depending on where it’s mined, to pull iron ore out of the ground than to sell it at these prices. Alcoa‘s move to shut down smelters came from the same economic conditions.
For steelmakers, it’s the worst downturn in 15 years. US steel shipments were down about 11% through the first nine months of 2015 compared with the year-ago period, according to the American Iron and Steel Institute (AISI). The industry, which employs about 150,000, has announced 12,000 layoffs the past year, the group says.
What’s most disturbing is this downturn is nothing new and it’s been afflicting producers since last year. It would be great to say that the overproduction problem and supply gluts are being curtailed and the shutdowns are having their desired effect.
Except that’s not true. So far, oversupply still exists and producers are still in the same boat. So things could, indeed, get a lot worse in 2016. Umm, Happy New Year?
The December MMI Price Trends Report is out and it’s, well, just what we expected, unfortunately. Prices have plunged this year and last month was no exception with metals such as copper, 9% plummet, and raw steels, fell 4.2%, posting big losses after months of a smaller, more gradual slide.
The finished product sub-indexes are showing how much of a buyers’ market really exists right now. The Construction MMI fell 4.6% as rebar and steel scrap continued to be oversupplied, despite strong demand. For automotive products, the drop was even more precipitous with the Automotive MMI falling 7%. Santa was good to buyers this year.
Thinking 2016 will be better? No signs of that yet. Is it any wonder that a mined mineral, coal, is what everyone hopes they don’t get in their stocking this time of year? Miners and base metal producers are closing smelters, shutting mines and girding up to reduce capacity in 2016. The market, though, is still in a glut for most of the metals we track right now.
So buyers shouldn’t overspend, thinking they’re getting a great deal, this holiday season. The after the holidays sales could be even better.
Our Rare Earths MMI charted another flat month, still mired in the low range we have seen all year for the trace elements that power batteries, magnets, flat screens and nearly all of the personal gadgets we use today.
It’s not that rare earths don’t have strong demand, it’s that many rare metals are traded clandestinely in finite amounts and difficult to track. Manufacturers are also constantly discovering new ways to become more efficient with rare earth metals, using less in each product.
Air conditioners produced with rare earths are more efficient, but most US manufacturers will use older technologies rather than splurge on materials that are hard to source and difficult to build a sustainable supply chain of.
Supply Chain Issues
There’s also the issue that most are not mined purely to be sold by themselves. They are byproducts of more lucratively mined metals such as copper. This means that even if prices of a rare metal were to skyrocket, companies often have little economic incentive to produce them if it means sacrificing some base metal production or investing in new processing equipment, according to David Abraham, author of “The Elements of Power: Gadgets, Guns, And the Struggle For a Sustainable Future in the Rare Metal Age.”
Still, every time we turn around rare earths are in more products, not less. The rare earth scandium is a key strengthening agent in Airbus’ new A320 interior partition, a weblike, 3D-printed part that will be in every new A320 once it passes a final test this month.
Airbus and development partner Autodesk are using scandium as a strengthening agent to make the partition, made of aluminum and magnesium, as strong as titanium. It performs a similar function for the aluminum partition as niobium provides for steel.
The new ‘bionic’ additive manufactured partition for the Airbus A320 gets its strenght from Scandium. Source: Airbus
While the bearish market is dragging down all commodities, and rare earths is certainly no exception, we’re not worried about the future of the market, be for alloying metals, magnets, batteries of their other end uses.