This week, our metals, along with the rest of the commodities, fought a bear market and the bear won. Commodities are getting beaten up by a strong dollar and falling demand. This bear has paws like dinner plates.
How did commodities fight back? Other than not very well? Details emerged this week from China about how, exactly, Beijing will attempt to stimulate its sputtering economy.
The battle between the bears and the bulls has been lopsided lately.
China will spend at least 2 trillion yuan ($315 billion) to improve its power grid infrastructure over the 2015-2020 Five Year Plan period, according to another Reuters article that cites government sources. Read more
Even though silver hit a 3-month high this last week, the metal is still in an overall long-term downtrend – as my colleague Jeff Yoders writes, hey, take the victories where you can get ’em.
And long-term downtrends are where it’s at lately for the precious sectors, mirroring the ferrous and base metal sectors. Platinum isn’t immune to losses either, as prices in the US, China, India and Japan have all come down over the last month. Palladium, however, did tick up a bit across those markets. (The price for US palladium bars, for example, rose 8.5% over the month of September, up to $651 per ounce.)
As my colleague Raul de Frutos wrote recently:
“Palladium and platinum prices have been volatile after investors heard of the Volkswagen Group scandal. Industry reports are suggesting that this could be the end of diesel cars. With 40% of platinum demand coming from the making of auto catalysts for diesel cars, that’s pretty bad news for the precious metal. Platinum fell 4% after the news, although it recovered some of its losses” soon after.
Ultimately, in MetalMiner’s view, based on how investors reacted to the news, we’ll likely see both platinum and palladium trending in opposite directions in the short-to-medium term.
Notable Precious Price Mover
US palladium bars shot up 8.5% over the month of September, up to $651 per ounce from $600.
Silver prices hit a 3-month high on Tuesday. The move is encouraging and prices could continue to rally in the short-term, but the metal remains in a long-term downtrend. Silver will likely have a hard time reaching $17.50 per ounce. Gold prices are still lagging. Source: MetalMiner analysis of @StockCharts.com data.
It’s more of the same for an automotive metals market that, while strong on both the supply and demand sides here in the US, is being dragged down by falling demand in other large markets. Automotive specialty metals have been cited as the savior and the future demand driver for many a steel or aluminum company in this bear market.
Gerdau is practically staking its entire Indian business on it. Aerospace and automotive are also regularly cited as the growth markets for stainless and aluminum overseas, too. The aluminum-bodied Ford F-150 continues to be the darling of the US automotive market with its lighter corporate average fuel economy (CAFE) load and its Denis Leary commercials about “military-grade” aluminum. Even the Super Duty is getting in on aluminum. The emerging markets were on the aluminum train before Ford was, too, and that trend is only growing.
US, European Auto Sales
So, what gives?
In September, US vehicle sales topped a SAAR (seasonally adjusted annual rate) of 18 million vehicles. Leading automakers reported the healthy year-over-year increase in sales number thanks, in part, to big gains over the Labor Day holiday weekend.
It wasn’t just us yanks buying cars constructed cold from specialty metals, either. The Czech Republic will report its highest car sales ever this year. The Volkswagen scandal might be hurting platinum prices but it’s clearly not denting overall vehicle sales, even in Europe where the scandal hits close to home with more diesel cars on the road.
VW has a market share of around 48% in the Czech Republic, a country of roughly 10.5 million people, with the company’s domestic maker Skoda Auto the top seller.
Chinese Demand Collapses
The fly in the automotive metals ointment is demand in China. Like steel, aluminum and other markets, the economic collapse in China has eroded what was once healthy automotive – and automotive metal – demand there.
The urbanization that economists counted on to fuel more Chinese car purchases went away with housing demand there, as well as the un-manipulated renminbi. Beijing is looking entirely to exports now (hence the purposeful devaluation) to pull its economy out of the doldrums, and isn’t even trying to goose those domestic markets much.
Sad to say, but no matter how strong the US or European automotive markets are, they can’t make up for the loss of Chinese demand, which numbers sales (and people) in the neighborhood of a billion. That’s one of the reasons so many steel companies are looking to India, with its large population, to make up for that demand. The problem there is India’s urbanization isn’t as far along as China’s was. Still, automakers and steel companies such as Gerdau are digging in there for the long haul. Here’s to hoping it’s not as long as some predict.
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We really don’t pay that much attention to gold’s demand because gold is the only commodity where physical annual demand is only a tiny fraction of total supply available. Unlike base metals, where physical demand plays a big role because of their industrial uses, shortages of gold caused by physical demand never happen.
For this reason, the price of gold is almost entirely dependent on the factors that drive traders’ psychology, such as inflation and the dollar. Despite all that, we still see analysts writing lengthy reports analyzing factors with zero predictability, such as jewelry usage and annual gold production.
Gold struggling to overcome resistance at $1,160 per ounce. Source: MetalMiner analysis of @StockCharts.com data.
Since August, gold prices haven’t moved much. They have traded between $1,160 per ounce and $1,080 an ounce. As we pointed out in July, gold broke a key support level and now prices have some resistance to overcome before they can attempt to advance.
Gold is considered a safe-haven asset and certainly equity markets are not in their best shape at the moment. However, it’s hard to imagine gold prices rising while commodities markets, overall, fall and the dollar is strong. The same applies to silver, which is showing the exact same behavior.
Silver struggling to overcome resistance at $15.6 an ounce. Source: MetalMiner analysis of @StockCharts.com data.
What This Mean For Metal Buyers
Gold and silver prices remain weak and it’s difficult to see them increasing while commodities keep falling and the dollar remains strong. Buyers should keep an eye on $1,160 per ounce and $15.6 an ounce levels. A break above these levels would signal a change in the direction of the short-term trend.
Mints have begun rationing sales of silver coins as supplies dry up due to low, low prices and the London Metal Exchange is set to launch its first contracts with position limits.
Silver Coins Running Low as Prices Fall
The global silver-coin market is in the grips of an unprecedented supply squeeze, forcing some mints to ration sales and step up overtime while sending US buyers racing abroad to fulfill a sudden surge in demand.
The US Mint began setting weekly sales quotas for its flagship American Eagle silver coins in July because it can’t meet demand, and the Canadian mint followed suit after record monthly sales in July. In Australia, the Perth Mint sold a record of more than 2.5 million ounces of silver this month, nearly 4 times more than in August, and has begun rationing supply of a new line of coins this month, a mint official told Reuters.
LME Premium Contracts Will Have Position Limits
The London Metal Exchange‘s new premium contracts, scheduled for launch in November, will come with position limits, a first for an LME contract.
Reuters’ Andy Home writes that the LME is proposing to give itself the authority to introduce position limits “as a general power rather than a power specific to premium contracts.”
With an eye on looming, broader regulation in financial markets, that represents a major shift in the way LME trading has been regulated. Position limits have long been anathema to a market that, as Home writes, “has come to epitomize Britain’s light-touch oversight of wholesale markets.”
An industry minister in South Africa says the nation needs to make its own platinum refining industries to combat global commodity prices and while construction employment was up in August in the US, it also showed weakness in nearly half the country’s metro areas.
A South African Platinum Production Industry
South Africa’s platinum sector needs to develop local industries such as jewelry production to counter falling global prices which steepened after Volkswagen admitted rigging diesel emissions tests, the country’s industry and trade minister said on Monday. Platinum posted its biggest weekly drop since July last week.
“If we are going to smelter platinum and nothing much else, we are going to be at the mercy of global markets, we are going to be hanging around, waiting for some recovery in the price,” Trade and Industry minister Rob Davies told Reuters.
“I don’t know directly what impact the VW issue will have, we will have to wait and see where that goes,” Davies said.
Platinum fell below $900 an ounce for the first time since January 2009 on the Volkswagen news.
Construction Employment Falls in Almost Half of US Metro Areas
Construction employment increased in 163 of 358 metro areas in August compared with the year-ago levels, but it fell in 153, according to an Associated General Contractors of America report. Florida’s metro areas saw an increase of 7%, while two Texas metro areas saw steep declines.
Palladium and platinum prices have been volatile after investors heard of the Volkswagen Group scandal.
Industry reports are suggesting that this could be the end of diesel cars. With 40% of platinum demand coming from the making of auto catalysts for diesel cars, that’s pretty bad news for the precious metal. Platinum fell 4% after the news, although it recovered some of its losses yesterday.
Palladium (in red) and Platinum (in black) decoupling. Source: MetalMiner analysis of @StockCharts.com data.
On the other hand, palladium would benefit from the switch to gasoline engines and it looks like palladium investors liked the news. Palladium prices jumped 8% to a 2-month high after the news.
What This Means For Metal Buyers
It will take some time until we see the real impact that this will have in the demand for both metals. But based on how investors reacted to the news, we’ll likely see both metals trending in opposite directions in the short-to-medium term.
Car shares aren’t the only commodity to fall out of favor following the revelations that German automaker Volkswagen Group has been manipulating laboratory emissions tests on its diesel cars for years.
Apparently, VW ran software on its cars that sensed when the tests were being made and released urea into the emission gas to neutralize harmful nitrogen oxide emissions and dramatically improve the results.
So successful was the fix that the real results could be ten times worse than the recorded figures. Shares in the firm have collapsed more than 35% since the scandal hit and today CEO Martin Winterkorn resigned.
PGM Collateral Damage
But collateral damage from news of the VW scandal rolls on daily. Johnson Matthey, a refiner of platinum group metals used in catalytic converters has also seen its share price drop by 11.8% so far. Even though diesel car catalysts account for no more than 15% of Johnson Matthey’s profits.
Likewise, platinum prices have taken a pasting as their use in diesel car catalysts is such a significant part of the demand picture. Platinum fell to a 6-and-a-half year low of $925.30 an ounce this week,, after dropping 4% on Tuesday alone, its biggest one-day fall in more than 2 years.
The metal is already down more than 20% so far this year and speculators digesting the likely impact on demand will not have been encouraged by some reports suggesting this could be the end of diesel cars.
In Europe, diesel car sales make up about 50% of all new registrations so potentially the impact on new car demand and production could be catastrophic. Compared to the US, where only 2-3% of all new cars are diesel according to data in the Financial Times. Improvements in gasoline engine efficiency had already begun to have an impact of demand for diesel cars though as this from pre-scandal days graph shows
US manufacturing growth is still only plodding along and platinum prices are at their lowest since 2009 thanks, in part, to the Volkswagen emissions scandal.
Markit PMI Still Barely Positive
US manufacturing activity remains at a nearly 2-year low this month, and job creation in the sector has slowed. Markit‘s purchasing managers’ index registered 53, indicating sluggishness due in part to the strong dollar and suggesting “the sector will have acted as a drag on the economy in the third quarter,” Markit Chief Economist Chris Williamson told Reuters.
Any reading above 50 indicates expansion in the sector.
Platinum Near a 7-Year Low
The price of platinum, widely used in diesel car engines, could fall below $900 am ounce for the first time since the financial crisis in the wake of the emissions scandal at Volkswagen AG, according to some metals investors and analysts.
Spot platinum fell heavily on Tuesday and nearly hit a 7-year low on Wednesday at $929.08 an ounce, before recovering slightly to $932.25, as some questioned whether the affair would have a lasting effect on demand for diesel cars.