This is the first full year for the new LBMA gold and silver prices. More open and transparent processes for precious metal prices can only help purchasers in the long run by giving them more information about what goes into the prices they are quoted. We are thankful for market transparency in all its forms.
Happy Thanksgiving from everyone here at MetalMiner!
That’s why our own MetalMiner IndX is updated daily with over 600 price points from domestic and multiple international markets. We’re always happy to add more open and transparent price points. Read more
The London Metal Exchange (LME) launched three new contracts this week — LME Aluminium Premiums, LME Steel Rebar and LME Steel Scrap, the first new contracts to be offered by the Exchange in more than five years.
You can now hedge aluminum physical delivery premiums using an LME contract. Source: iStock.
The two steel contracts are cash-settled against physical Turkish scrap and rebar price indexes as opposed to the current steel billet contracts that are settled by physical delivery and have largely proved to be a failure since launch.
Why, we might ask, would these new contracts prove anymore successful? Well acknowledging the failure with billet, the LME has worked assiduously to garner industry support both in the shaping and specification of the new contracts. Goldman Sachs, for example, is on the LME’s steel committee and major trading firms like Stemcor have publicly stated they intend to be actively involved from day one, although they still add the caveat “subject to market conditions and liquidity.”
Liquidity was always a major issue for the billet contract. It never secured anywhere near enough interest from the trade to generate sufficient volume and, hence, a fair market price.
Rebar and Scrap
The steel scrap and rebar contracts will be traded on LME Select in small lots of just 10 metric tons making them more accessible for smaller market players, while, at the same time, the LME is offering discounts for volume trades to encourage liquidity. Read more
The Midwest aluminum premium has risen as fears about costs set in after Alcoa’s announcement that it is shuttering much of its North American smelting capacity. Despite cuts in China, zinc is still massively oversupplied.
Midwest Premium Rises on Alcoa Shutdowns Announcement
The US Midwest aluminum premium has risen to its highest level in six months, traders told Reuters on Tuesday, but the current forward curve and Alcoa‘s plans to save a US smelter from curtailment were seen pressuring prices in the near-term.
The premium, paid on top of London Metal Exchange (LME) futures prices for physical delivery in the US, has risen to around 8.75 cents a lb., the traders said, citing the continued impact of Alcoa’s plans to shutter the bulk of its US smelting capacity, announced Nov. 2.
Chinese Cuts Fail to Balance Zinc Market
Output cuts announced by Chinese zinc smelters last week will do little to tighten next year’s global supply-demand balance in refined metal because already-known mining cutbacks would have forced smelters to reduce production anyway, Reuters reported.
On top of that, hard-hit prices will fail to get much of a lasting boost in coming months due to a glut of world inventories, although there may be spikes of short-covering, analysts and investors said.
In honor of Throwback Tuesday, we are revisiting MetalMiner’s Top 50 posts with an eye toward illuminating what’s happening in metals today. #TBT This post, originally published Feb. 26, 2009, about the production of primary aluminum, is as relevant to the LME’s new aluminum contracts as it was to explaining aluminum’s price drop at the time.
Since the aluminum price on the LME dropped below $1500/ton, it has been repeatedly stated that some 60-70% of aluminum smelters are losing money.
What goes into producing aluminum? Source: Adobe Stock/Pavel Losevsky.
Electricity alone is generally accepted as representing about a third of the cost of aluminum ingot, although at what sales price that metric is judged is open to debate. We thought it would be interesting to explore what the true costs of production are for a ton of primary aluminum and thereby test to what extent the smelters’ claims that they are losing money are correct.
As with the steel industry, many of the industry’s woes may have as much to do with low plant capacity utilization as they do with low sales prices.
How Much Does it Cost to Produce One Ton of Aluminum?
Although the newest smelters can be closer to 12,500 kWh per ton, let’s say most smelters are consuming electricity at 14,500-15,000 kWh/ton of ingot produced. With the LME at $1,300/metric ton, that means electricity should be costing a typical smelter $0.029/kWh.
Needless to say, smelters are rather coy about their power cost contracts so it’s hard to verify how prevalent this number is though many smelters are on variable power cost contracts with their electricity suppliers such that the power generators are paid a fixed percentage of the world ingot price. If we take that as one-third, then it’s not only smelters that are losing money – many power generators must be, too.
When US national average industrial and commercial electricity consumers are paying $0.0706/kWh and $0.1013/kWh, respectively, according to the Energy Information Administration, to be selling power to smelters at $0.029/kWh represents a huge subsidy. In reality, power costs to the smaller US smelters are probably higher than this and explains why many have been cut back or idled, but interestingly the same source gives specific power costs for the Pacific Northwest of only two-thirds the national average, suggesting that many NW smelters may indeed still be getting power at ingot-price-related levels.
Aluminum producers are in a race to the bottom, desperately trying to reduce their production costs so they can maintain output and, by extension, continue to flood the market with metal that it doesn’t need.
As UC Rusal’s third quarter earnings plunged 11% and it announced plans to cut a further 200,000 metric tons of capacity, US smelters have been closing capacity like the metal is going out of style, as we reported earlier this month.
Pile of aluminum bricks waiting for transport. Source: iStock.
But, if you think business is bad for western smelters, out in Asia it is almost worse. Japan is the worlds largest seaborne aluminum market, importing metal rather than using high-priced domestic power to smelt the metal at home.
Japanese Premiums Plummet
As such, the Japanese physical delivery premium has long been a benchmark for the supply-demand balance of the physical market. As in Europe and North America, physical delivery premiums in Asia have collapsed this year, with Q4 premiums just being fixed at $90 per metric ton, according to Thomson Reuters‘ Andy Home, recently.
In part one of this series, we analyzed how metal prices have fallen in three selling waves. In this section, we will analyze the current sell-off (third wave) in metal prices that a rising dollar is producing.
Investors expect that the Federal Reserve will rise interest rates in December for the first time since 2006 while the European Central Bank plans to continue with more easing monetary policy. This, and the fact that growth prospects look brighter in US than they do overseas both add to the dollar’s attractiveness. Indeed, we suspect that the bullish move in the dollar over the past few weeks could be the beginning of a bigger move which could depress metal prices even more down the road.
Let’s take a snapshot of industrial metals to see the individual impact of a rising dollar since mid-October.
Three-month London Metal Exchange aluminum. Source: MetalMiner analysis of FastMarkets.com data.
Aluminum prices are trading below $1,500 per metric ton, the lowest level since 2009. Notice how prices fell sharply as the dollar surged in mid-October (red arrow). Read more
“Today’s announcement highlights the LME’s new approach to market engagement,” said Garry Jones, CEO of the LME. “This has been an extremely customer-focused product launch, and we have collaborated with participants throughout the metals value chain to ensure we have created contracts that people want to trade.”
The new scrap and rebar contracts will be traded on LMEselect, allowing industry participants to reduce their risk exposure by hedging more steps in the steel production process. The contracts are cash-settled against physical Turkish scrap and rebar price indexes.
The new ferrous contracts will be supported by market-making programs to optimize market depth and tightness of spreads.
With the physically settled aluminum premiums contract, participants can now hedge the regional all-in price to ensure the metal they receive is readily available in a non-queued LME warehouse at a convenient location
There is much debate about how much further copper prices have to fall. The LME Copper price dropped to $4,590 per metric ton on Tuesday and has recovered only slightly since. It is now at its lowest level in six years and, according to ThomsonReuters, some analysts are suggesting it could fall to $4,000 per mt, that is apparently Glencore’s worst-case scenario and the number they are cutting their cloth to live with as part of their ambitious debt reduction program.
Not all producers are willing to join Glencore and make cuts. Bloomberg reports Codelco is saying it won’t cut copper production as prices slump. Speaking at the Metal Bulletin conference in Shanghai, Codelco’s CEO is quoted by the paper as saying he would rather rein in costs than curb output; noting that “if we suspend production then it’s difficult to restart.”
Goldman Sachs is Still Bearish
Goldman Sachs is quoted as saying the bear cycle in copper has years to run, predicting rising global surpluses through 2019. The growth in China’s demand will slow to 3% a year from 11% in 2013 as the government shifts the focus from investment spending to consumer demand and services as the main driver of the economy. Read more
For the past several years, lead has been in a good place. A surplus along with stable production versus usage combined to create a stable environment for lead while many other industrial metals found themselves in a volatile price situation.
But with 2015 being the year of the bear, so to speak, lead has found itself in the same situation as many other industrial metals, which brings us to 2016.
We’ve identified the main price drivers for lead next year as:
China GDP & PMI data
China automotive demand
Dollar to Euro xchange rate
For a long-term industrial buying strategy for lead, complete with specific support and resistance levels, download your complimentary copy of our 2016 Annual Metals Outlook report!
This report also includes commodities markets and industrial metals market analysis, in addition to key price drivers and commentary on aluminum, nickel, copper, zinc, tin and various forms of steel, in addition to lead.
These niche acronyms, when they roll off the tongue of presenters and attendees, will contribute to the soothing sounds of an upcoming conference titled Modeling, Simulation and Crash Testing Of Automotive Lightweight Materials Congress, which bills itself as The Only OEM-Led Congress Encompassing Cost-Effective Modeling, Crash Simulation And Lifecycle Prediction For Lightweight Materials And Composites. (Whew.)
Computer-aided engineering (CAE), finite element analysis (FEA), finite element method (FEM) simulations, forming limit curves (FLCs), and forming limit surfaces (FLSs) are all elements of the stuff that lightweighting dreams are made of — and the first round of folks that the Dreamers-in-Chief begin with are (with all due respect) the R+D Nerds-in-Chief, several of whom will be attending and presenting at the January 2016 conference.
Two such engineering experts, Steven Sheng, formability engineer for General Motors, and Xinran Xiao, professor of Mechanical Engineering at Michigan State University, recently gave interviews on what they expect to see on the lightweighting horizon.
Newer, stronger forms of aluminum should help vehicles perform better in crashes. hroephoto/Adobe Stock
While I don’t recommend reading both interviews in their entirety unless you’re deeply embedded in the R+D sector, the essential takeaways are that material fracture prediction and modeling and simulation will become more important than ever, which means CAE analysis will continue playing ever-larger roles in lightweighting. “To increase the use of composites in crash critical structures, we have to be able to predict the crashworthiness of the structure as we do for metal parts. Good material models, robust and accurate safety simulations are critical to vehicle lightweighting,” Xiao is quoted as saying. This, ultimately, will increase understanding of, say, aluminum’s performance under stress way before the first crash test.