Goldman Sachs is still bullish on iron ore and China has set its first ever energy consumption target.
China Sets First Energy Consumption Target
China aims to keep energy consumption within 5 billion metric tons of standard coal equivalent by 2020, it said in its five-year plan published on Saturday, marking the first time the world’s second-biggest economy has set such a target.
China has long been considering an energy consumption cap in a bid to improve industrial efficiency, tackle smog and control greenhouse gas emissions. China’s are the highest in the world. Beijing is also pushing structural reforms to decouple economic growth from energy consumption.
Goldman Sachs Still Bullish on Iron Ore
The rally in iron ore prices will not last in the absence of a significant improvement in steel demand from top consumer China, Goldman Sachs said, as the investment bank stuck to its bearish take on one of this year’s biggest commodity comebacks.
The London Metal Exchange‘s Hong Kong owners have seen revenues soar for the venerable metals exchange and Vale SA and BHP Billiton may have reached a deal with the Brazilian government over the deadly Samarco mine disaster.
LME Revenue Soars
The London Metal Exchangeposted a 36% jump in revenue for 2015 to $223.15 million, as higher trading fees and tariffs helped it offset a drop in volumes, its owner — Hong Kong Exchanges and Clearing Ltd.— said on Wednesday.
The revenue gains at its London unit were a key contributor to HKEx record net profit last year, showing the payback has begun from its $2.2 billion buyout of the 139-year old metals exchange near the height of the commodities boom in 2012.
Samarco Owners Reach Deal With Brazil
Samarco Mineracao SA will pay at least $5 billion over 15 years as part of a deal reached with the Brazilian government to settle a lawsuit for damages caused by a deadly dam spill at a mine in November, a government source told Reuters on Tuesday.
Volume means the number of shares traded. When prices rally in low volume, it means that not a lot of people are participating in the price move which is the same as saying that demand for stocks is not strong.
When prices actually find a floor, they tend to bounce in higher volume, showing that buying interest is necessary to move markets higher. In this case, we are not being enough buying interest, suggesting that more selling pressure will soon come to prevent prices from rising more.
Beaten Down Stocks Lead Rally
Major stock indexes are getting a boost thanks to a rebound in beaten down stocks such as energy and material sectors. Last week, stocks of oil producers rose as oil prices rebounded back to $30 per barrel. Companies in the materials sector such as Freeport-McMoRan also rebounded last week.
Freeport-McMoRan (FCX) soars in February. Source: MetalMiner analysis of @StockCharts.com data.
The fact that downtrodden stocks are leading this rally is not a good sign. For markets to turn around fresh leadership should emerge. So far, we haven’t seen anything of the sort.
Weak Chinese Trade Data
China’s January trade data showed more weakness in the global, as well as in Chinese, economy. China’s exports, which for some are a good barometer of the global economy minus China, fell by 11.2% year-over-year in January. The decline signals weak global growth and demand and the fact that China is not succeeding at fighting its domestic slowdown through exports. Even though China took steps to weaken the Chinese yuan, exports have continued to fall.
However, China’s import data was even worse, with imports tanking by 18.8% year-over-year. Lower imports underscore weakness in the Chinese economy. Global equities, however, rose on the weak trade data since it probably increased hopes of more stimulus from the Chinese government. Although, we must remember that previous government attempts to spur the economy weren’t successful.
Money Still In Safe Haven Assets
The gold price is still near 1-year high. Source: @StockCharts.com.
While equities scored some gains last week, money hasn’t really rotated out of safe-haven assets such as gold or bonds. That’s not a good sign. A strong rally usually moves money out of these assets and into stocks.
Overall, we are not buying this stock market rally. Investors are not jumping into stocks, companies in leading sectors are not causing the rally, weak trade numbers keep coming out of China and money hasn’t really rotated out of safe-haven assets.
Needless to say, the oil price promptly dropped 3% as the market saw the statement for the hollow, face-saving attempt that it was. Saudi Arabia and the rest of the Organization of Petroleum Exporting Countries (OPEC) have long said they will only consider production cuts if non-OPEC members — for which, read Russia — and new entrants, read Iraq and Iran, will also limit output.
In this corner, the Organization of Petroleum Exporting Countries, led by Saudi Arabia and its government largess. Source: Adobe Stock/Alexlmx.
Freezing output at January levels still leaves the world in surplus and will do nothing to change that situation. Russia’s oil production hit a post-Soviet-era high in January of 10.8 billion barrels per day so, although output for the whole of 2016 is not expected to rise beyond 2015 levels, that is still record output.
Fighting Out of South America, Africa, the Middle East: OPEC
Meanwhile, Saudi Arabia produced 10.2 million bpd in January, below the most recent peak of 10.5 million bpd set in June 2015, but as this graph from Bloomberg shows, even freezing at January levels would be meaningless in the face of strong output from Iraq and the prospect of an additional 1 million bpd from Iran over the coming months.
Fighting Out of the US, Canada, Brazil: Tight/Tar Sands/Deep-Water Oil
OPEC has made no secret of the fact that it is trying to squeeze out of the market what it perceives to be higher-cost producers; such as US tight oil, Brazilian deep water and Canadian tar sands producers, by driving down the price below the new upstarts’ cost of production.
Ministers from seven steel-producing member states — Germany, Italy, the UK, France, Poland, Belgium and Luxembourg — essentially all the major European steel producers — have put their names to a letter urging the European Commission in Brussels to take greater action to tackle unfair trade practices by Russia and China.
Provisional Anti-Dumping Duties
The pressure group asked the European Commission to expand on actions announced last week to impose provisional duties later this month of up to 16% on China, and of up to 26% on Russia, following its investigation into alleged dumping by the two countries. Reuters reported that provisional duties on cold-rolled flat steel were announced Feb. 14 and definitive duties could be imposed at the conclusion of the investigation, by Aug. 12. Such duties would typically apply for five years.
Import duties on cold-rolled steel could hamper China and Russia’s imports to the European Union.
China’s Ministry of Commerce retorted saying “the European Commission will strictly abide by World Trade Organization (WTO) rules, show prudence and restraint and use trade remedy tools in accordance with the law,” the MOFCOM said in a notice posted on its website. Read more
It’s a problem that’s dogged almost all the major economies as well as developing nations – the dilemma of steel cheap imports. Steelmakers in the U.S. have, in the past, not only cried foul at the World Trade Organization but also imposed steep anti-dumping duties on cheap imports from China, Korea and India making their way into the U.S. market, thus further depriving an already-stressed out market.
A few days ago, as reported by MetalMiner, seven EU nations asked the European Commission to intervene to stop cheap imports of steel, particularly from China and Russia.
India has imposed a minimum import price on most steel products. Source Adobe Stock/Jovanning.
In India, a market where steel consumption continues to grow bucking global trends, the situation is no different. So, finally giving in to the loud protests by domestic steel companies against cheap imports, the Indian government recently imposed a minimum import price (MIP) ranging from $341 to $752 per metric ton on 173 steel products as a “temporary” measure.
Minimum Import Prices
The MIP conditions are valid for six months from the date of the notification or until further orders, whichever is earlier. The MIP, though, will not be applicable on imports under the advance authorization scheme and high-grade pipes used for pipeline transportation systems in the petroleum and natural gas industry are exempt.
The move seems to have gone down well with a majority of the steel trade bodies and a large section of India’s steel industry, but some have called it simply a band-aid for the hemorrhaging steel sector.
India’s domestic steel production between April-January 2016 dropped 1.8 % to 75.66 million mt, while imports rose 24.1% to 9.3 mmt. Consumption grew 4.2% to 65.91 mmt. For domestic steelmakers, apart from the MIP, the import duty has also been raised to 10% for flat products and 7.5% for long products.
The rationale behind the MIP was explained by Steel Secretary Aruna Sundararajan, in an interview with The Economic Times. She said the move would give India’s steel industry much-needed breathing space to get healthy.
Over the last couple of years, India had seen a spurt in steel imports, leading to a decline in prices. According to the Steel Secretary, India had over 400 mmt of surplus steel. All that surplus has put the domestic steel industry into distress.
While imposing the MIP, the Indian government also took care to ensure that downstream users were not affected. That’s why certain categories of steel — required by end-user industries — not manufactured in India, were exempted.
The government’s decision to impose MIP will, however, reduce the benefit of lower commodity prices for automobile companies, according to many experts. Also, according to the engineering goods exporters’ body, EEPC India, the MIP will lead to further erosion in engineering exports. It has thus sought from the government a compensatory mechanism to make up for the increased raw material price (about 10%) for the distressed exporters, mostly in the small and medium-sized enterprises segments.
The Indian government has dubbed the MIP an “emergency provision.” In the next six months, it will be looking at anti-dumping duties and moving toward more stable, longer-term measures. It will also be keeping a close watch on imports after the MIP, as well as the response of domestic steel companies and consumers.
In an order released Tuesday night, the court said it is placing a stay on the EPA’s Clean Power Plan to cut carbon pollution from power plants while industry and state lawsuits move forward. This is not unexpected, as the rule — currently being challenged by 29 states and several industry groups — will be heard at the D.C. circuit court in June and could go through appeals that could last more than a year after that.
The length of the appeals process is important because the High Court granted the request in a 5-4 vote on Tuesday night, saying the rule was on hold until the circuit court reviews it and all Supreme Court appeals are exhausted. The court’s four liberal justices dissented from the decision.
The rules would have required existing electricity generating utilities to reduce carbon dioxide (CO2) emissions by 32% in the next 15 years. The Court “stayed” a decision on implementing the rule while it considers the legal challenges.
White House press secretary Josh Earnest said in a statement that the administration disagrees with the order, but “we remain confident that we will prevail” when the rule is argued on its merits.
That stands in stark contrast to the statements from the 29-state majority challenging the law and the industry groups that have joined the lawsuit.
The American Iron and Steel Institute (AISI) released a statement saying it applauded the decision. Wisconsin Attorney General Brad Schimel (R.), one of the 29 attorneys general challenging the rule, took his applause a bit further.
“It is an extraordinary action for the Supreme Court of the United States to grant a stay and is telling of the obvious illegality of the rule,” Schimel said in a statement. “It’s imperative that we fight back against the federal government’s intrusion into the affairs of the State of Wisconsin.”
Steel Shipments Up in December, Down for the Year
The AISI also reported that for the month of December, U.S. steel mills shipped 6,556,342 net tons, a 1.5% increase from the 6,457,870 nt shipped in November 2015, and a 17.8% decrease from the 7,978,310 nt shipped in December 2014. Shipments for the full year 2015 were 86,546,657 nt, an 11.9% decrease vs. full year 2014 shipments of 98,248,666 nt.
The suggestion was that legislation was required to force power generators to switch to less polluting energy sources and, while in the meantime tougher emissions standards have played their part, the market has been much more active than government in encouraging change.
Could 2015 be the beginning of the end for coal-fired power in the US? Source: Adobe Stock/Snap Happy.
A recent US Energy Information Administration report covered by Reuters states that generators produced 101.86 million megawatt hours (MWh) of electricity with gas in November versus just 87.78 million MWh with coal, the lowest monthly level since May 1980 when monthly coal use was 84.88 million MWh.
How Coal Lost Ground
After more than one hundred years during which coal was the dominant fuel for power generation, some analysts think that when the final data for December is in, 2015 will prove to be the year natural gas took over. Read more
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.
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China vowed to cut its steel production over the next five years and the Trans-Pacific Partnership is now officially signed.
TPP Signed, Legislative Fights Ahead
Trade ministers for the 12 Trans-Pacific Partnership nations formally signed the massive accord on Wednesday in New Zealand and vowed to throw their weight behind surpassing the various legislative hurdles necessary to actually put the deal into place.
The 12 nations account for some 40% of the world’s economy. They now have two years to ratify or reject the pact.
China Vows to Cut Steel Production
China will cut crude steel capacity by 100 million to 150 million metric tons within the next five years in a bid to tackle a crippling glut that has dragged prices down to multiyear lows and saddled firms with huge debts, the nation’s cabinet said recently.