Articles in Category: Non-ferrous Metals

US construction spending rose in July to the highest level in over 7 years as private construction outlays surged, providing another sign of solid economic momentum at the start of the third quarter.

Construction spending increased 0.7% to $1.08 trillion, the highest level since May 2008, the Commerce Department said on Tuesday. June’s outlays were revised up to show a 0.7% increase instead of the previously reported 0.1% gain.

Meanwhile, the monthly Construction MMI® – tracking the key industrial metals used in the construction sector – registered a value of 69 in September, a decrease of 4.2% from 72 in August, another all-time low.

Construction_Chart_September-2015_FNL

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Construction spending has increased for 8 straight months. Economists polled by Reuters had forecast construction outlays rising 0.6% in July. Construction spending was up 13.7% compared to July of last year.

Chinese Oversupply

Still, no matter how much the US construction sector booms – both residential and non-residential construction are hitting multiyear highs – prices are staying low mostly due to oversupply and a sharp decline in Chinese demand.

China Construction Bank Corp., the nation’s second-largest lender, reported zero profit growth and rising bad loans as the government struggles to prop up the economy.

Net income for the three months ending June 30 was 64.9 billion yuan ($10 billion), unchanged from a year earlier, based on an exchange filing on Sunday. That was below Bloomberg analysts’ expectations.

After the stock market crash there last week, China’s economy is still in freefall and it’s unlikely that the world’s second-largest economy can be counted on to restore its falling construction activity in the short term. Beijing is, rather, doubling down on export stimulus policies, such as devaluing their own currency, and tacitly encouraging overproduction of base metals at home. This actually increases oversupply and hinders supply-demand equilibrium.

Export destinations such as the US and now Mexico are responding, as one would think, with anti-dumping investigations and tariffs but price relief in most of those cases is still far off.

Here in the US, construction spending in July was buoyed by a 1.3% jump in private construction spending to the highest level since April 2008. Spending on private non-residential construction projects surged 1.5% to the highest level since October 2008.

What This Means for Metal Buyers in Construction

Until oversupply, particularly from China, of construction products such as rebar and H-beam steel is dealt with, it is unlikely that prices will reverse course and rise soon.

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This Month’s Prices and Trends

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Once masters of the universe, or at least the commodities universe, major traders like Noble Group and Glencore PLC are now suffering from the fall in commodity prices. In theory, a trader could make money in a rising or falling market protecting their position in a bear market by hedging their exposure, but in practice some elements of the price can be hedged and some cannot.

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According to the Financial Times, Noble Group’s profits before interest and tax in its metals and mining segment fell 98% in the first half of the year; particularly hurt, the newspaper says, by the collapse in physical delivery premiums causing massive write downs on aluminum positions. In the US, the Midwest Premium is down 67% this year, an unhedgeable exposure position takers in the industry have had to take on the chin.

Premiums Fall, So Do Profits

In Europe, the premiums are trading near levels last seen in 2010, barely above $100 per metric ton. While in Japan, premiums for third-quarter shipments were agreed at around $100 per mt, compared with $425 in the first three months of the year.

The FT quotes a trader saying, “It’s a pretty nasty drop. What happens is, all the big boys have gotten crushed. They’re sitting on stock which then becomes worth a lot less, so you’ve got to mark it down.”

Why the delivery premiums fell so far and so fast is eloquently summed up in an article by Reuters’ Andy Home some weeks ago. The collapse has all the hallmarks of a collapsing bubble and, like most bubbles, wasn’t sparked by one event but several impacting in parallel.

First, the LME aluminum warehouse rule changes, first muted and then finally implemented, initiated behavior changes by the warehouse operators, reducing load-out queues and slowing new deliveries. At the same time, the stock and finance trade moved increasingly to off-LME market storage reducing pressure on premiums by reducing demand for LME warehouse space.

Global Aluminum Premiums

Global aluminum premiums July 2013 to last May. Source: ThomsonReuters

Meanwhile, that once lucrative stock and finance trade – the cause directly or indirectly of the load-out queues and high premiums – has become less attractive. As recently as 2013, the LME curve structure could generate a gross rate of return of up to 12% for holding aluminum for 15 months, according to Home. Read more

US auto sales remain the bright spot in the drivers of the monthly Automotive MMI®.

The Real Steel Story

Seasonally adjusted annual rate of sales for light vehicles rose to 17.8 million compared with 17.3 million a year earlier and was the highest since July 2005, according to researcher Autodata Corp. August was the fourth consecutive month that adjusted sales remained above the 17 million mark.

Automotive August-2015The Automotive MMI® still registered only a value of 73 in September, a decrease of 3.9% from 76 in August. Weak prices for most of the base metals that make up the index (HDG, copper, aluminum and lead) abound despite strong end user sales in the US. In China, auto sales are falling with the rest of the domestic economy there.

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China Again

Chinese auto sales fell by 7.10% in July 2015 compared to July 2014, the largest fall since February 2013 and such a large economy’s fall is dragging down the prices of automotive metals just as it is dragging down the prices of oil and other commodities.

Major iron ore producers, Rio Tinto PLC, BHP Billiton, Vale SA and Fortescue Metals Group Limited have ramped up production again despite massive iron ore and steel oversupply. Zacks.com believes they intend to continue exploring for iron ore in Australia despite lower growth forecasts from China and weaker iron ore prices, betting on continued strength in iron ore demand over the long term.

What This Means For Metal Buyers

This is normal behavior from major miners such as the Big Three (Rio, BHP and Vale) and almost-there cousin Fortescue. They can make a profit by squeezing volume out of their mines at low prices based on scale, alone, but iron ore investment is coming from non-traditional miners, as well.

India’s Essar Steel is making a $1.9 billion investment in the steelmaking ingredient in Minnesota, of all places. It’s difficult to imagine how such an investment makes long-term sense for Essar without a turnaround in both iron ore and steel prices. Since high-strength automotive steel alloys are one of the best-performing steel products on today’s market, it’s even more difficult to imagine those prices turning around without continued strong auto sales in the US and Europe and a turnaround in China and other emerging markets.

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This Month’s Prices and Trends

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Aluminum premiums may be increasing in Japan and Indonesian officials assured industry leaders that the nation’s unrefined ore ban is here to stay.

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Japanese Aluminum Premiums To Rise

Some aluminum producers have offered Japanese buyers a premium of $110 per metric ton for October-December primary metal shipments, up 10% from the previous quarter, four sources involved in quarterly pricing talks told Reuters on Tuesday.

Ban Will Stay

Indonesia will keep its export ban on nickel ore, contrary to recent media reports suggesting the country may relax curbs to prop up its slowing economy, senior government officials said.

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As if we needed any reminder of how close the link is between energy and aluminum smelting a Financial Times report this week reveals details of how Beijing has engineered the transfer of assets between a cash strapped power generation group, the State Power Investment Group (SPIC ), and a loss-making alumina and aluminum smelting group Aluminum Corp. of China (Chinalco).

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In the process, Chinalco will become the world’s biggest aluminum company by production leap-frogging from third place over the US’ Alcoa, Inc., and Russia’s UC Rusal to take the number one spot. According to the FT, Chinalco will add 2.7 million metric tons of annual smelting capacity to its present 3.8 million metric tons when it inherits SPIC’s smelters, easily pushing it ahead of Rusal and Alcoa. Read more

The China Non-Ferrous Association announced this week that leading Chinese aluminum smelters intend to axe 2.4 million metric tons of capacity in the next couple of months.

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Nearly all the world’s net gain in production capacity has come from China this year and, while estimates vary, a portion of the industry, even in China, is certainly losing money at current prices.

That is the case in the rest of the world, too, with UC Rusal and Alcoa, Inc. both contemplating further closures. Inside China, the growth of new smelter capacity has been in the northwest, often based on captive, low-cost coal deposits for power generation and utilizing the latest smelter technology that, combined with large economies of scale, has made these Chinese smelters some of the lowest cost of production in the world.

aluminumingots_500

The aluminum surplus, and a weak economy at home, have finally forced Chinese smelters to cut production.

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New EPA water rules were blocked by a federal judge and two Chinese, state-owned aluminum giants could combine forces.

Water Rules Blocked

New water rules from the Environmental Protection Agency aimed at protecting small bodies of water were set to go into effect Thursday, but a federal judge blocked them from being implemented in 13 states.

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Those states have sued the federal government over the rules, arguing that they are an overreach, “overly broad and infringe on [state] sovereignty.” Congress has proposed a bill that would force the EPA to rescind or rewrite the rules.

Chinese Aluminum Giant

China is trying to push its two biggest aluminum businesses together as part of a planned shake-up of state-owned enterprises, industry sources said, a move that would create the world’s largest aluminum maker. Power company State Power Investment Corp. is in talks to surrender its aluminum assets to Aluminum Corp. of China, allowing SPI to focus on power construction and generation, three industry sources told Reuters.

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Lead and zinc are two metals that performed well last year.

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Both metals have a pretty neutral supply/demand story, in which production is outpacing demand but not by much. However, both metals are falling as China’s bearish momentum hasn’t changed, it’s actually gotten worse.

World Lead Production minus Usage

World lead production, minus usage. Graph: MetalMiner.

The lead market has been in surplus over the past few years. However, production versus usage has been pretty stable since 2013, which might have caused prices to remain pretty stable since 2013.

3M LME Lead since 2011

Three-month London Metal Exchange lead since 2011. Graph: MetalMiner.

However, lead broke that price range this year leading it to more declines. It seems like although the supply/demand picture hasn’t really changed over the past few years, concerns about China are what’s really weighing on this metal.

Zinc’s supply/demand equation is a bit different:

World Zinc Production minus usage

World zinc production minus usage. Graph: MetalMiner.

After two years of deficit, zinc supply has outpaced demand so far this year. The main reason for this shift involves China, which is now producing more and consuming less zinc. Chinese imports of refined zinc have decreased by 66.3% to 126 kilotons, according to the International Lead and Zinc Study Group.

3M LME Zinc since 2011

Three-month London Metal Exchange zinc since 2011. Graph: MetalMiner.

With this shift in demand/supply and a bearish market in China’s future, zinc prices have fallen more than 30% in less than four months, a sharper decline than lead’s. The metal is now at a five-year low and heading south.

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Copper prices are dipping below the psychological basement support level of $5,000 per metric ton.

3M LME Copper since 2010

Three-month London Metal Exchange copper since 2010. Graph: MetalMiner.

The metal has done nothing but fall since 2011, but the declines have become steeper over the past few months. Investors particularly dislike copper, as worries about China’s economy are simultaneously rising. China’s stock market crash and the recent devaluation of its currency are just aggravating expectations of a further copper fall.

Meanwhile, China’s latest Purchasing Managers’ Index numbers fell to a two-year low, while construction numbers are still disturbing to investors. The slowdowns in the Chinese manufacturing and construction sectors are significantly hitting copper demand, or at least any hopes of demand coming back.

Zinc_228

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The CEO of a leading Chinese zinc supplier believes the devaluation of the yuan will help manufacturers on the mainland, but possibly not before year’s end.

Clara Chan of Lee Kee Group told Reuters: “The depreciation of the yuan will help customers when they get import orders. Obviously it just happened last week so it will take a few months to see the effect.”

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Lee Kee supplies zinc and other base metals to automobile manufacturers and other end-users throughout Southeast Asia. It is one of just a few Asian members of the London Metal Exchange.

“The US market is recovering, but at a slower pace than before,” Chan added. “Europe is a bit slow at the minute and so is the Chinese economy. We have started to see some activities coming back after summer, but it’s still too early to tell. So the outlook for the metal prices, we think that it will stay challenging in the short term.”

Zinc Prices: Brace for volatility

We reported last week that the zinc market continues to confuse, and we expect that to continue as the metal has been in a consistent downturn for the past year. In China, manufacturing sentiment and refined zinc import levels are the main drivers for the metal, but stocks in New Orleans, a region far from any other representing demand, are trending lower and LME stocks likewise, suggesting a tightened supply for what would constitute a “normal” market.

You can find a more in-depth zinc price forecast in our brand new Monthly Metal Buying Outlook report. For a short- and long-term buying strategy with specific price thresholds: