Articles in Category: Sourcing Strategies

The ongoing turmoil over Donald Trump has increased investors’ worries over political stability in the U.S. In addition, investors worry that under these political turbulences, the Trump administration will struggle to implement pro-growth initiatives.

The dollar is one asset that was affected by the news, falling to a 6-month low. Investors have been selling dollars and buying euros as political risks rise in the U.S. and, following the French elections, fall in Europe.

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Usually, a falling dollar would give a boost to industrial metal prices, but that wasn’t the case here. Precious metals like gold did benefit from a falling dollar, but it didn’t prevent base metals from declining. This is because investors are now focused on what looks like a slow down in China.

Investors were disappointed when China’s Caixin Manufacturing PMI came at 50.3 in April, the lowest reading since September 2016. In addition, as Beijing talks about curbing credit, investors have come to realize that lower funding for the construction of infrastructure projects will hurt demand for industrial metals.

Just about two weeks ago we noticed that commodity markets were getting in trouble. As time goes on, that weakness is spreading out into industrial metals. Some specific metals are holding their value better than others due to their specific supply narrative, but overall we would expect them to move in tandem, as they always do. Here are some charts suggesting that the bull cycle in industrial metals could be ending:

Nickel falls to a 10-month low. Source: MetalMiner analysis of fastmarkets.com data

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Macro photo of a piece of lead ore

The International Lead and Zinc Study Group released its Spring 2017 Meetings/Forecasts, which found that global demand for refined lead metal will increase 2.3% this year to 11.39 million tons.

The main reason? Further development in Chinese usage, which is projected to grow 4.3%.

Want a short- and medium-term buying outlook for aluminum, copper, tin, lead, zinc, nickel and several forms of steel? Subscribe to our monthly buying outlook reports!

The ILZSG report states: “After increasing by a robust 9.8% in 2016, usage of lead metal in Europe is expected to remain unchanged in 2017. A stable outlook is also foreseen in Japan and the Republic of Korea. In both India and the United States modest growth of 1.5% is predicted.”

Lead Supply Update

Furthermore, the ILZSG report states that global lead mine production is projected to increase 4.3% to 4.92 million tons this year, due in part to growth in China and increases in Canada, Mexico, India, Greece and Kazakhstan. Read more

The International Lead and Zinc Study Group (ILZSG) recently released its annual demand/supply forecast for the zinc market.

Benchmark Your Current Metal Price by Grade, Shape and Alloy: See How it Stacks Up

The group anticipates global demand for refined zinc to be greater than supply in 2017, keeping zinc markets in a deficit for a second consecutive year. The ILZSG predicts a deficit of 226,000 tonnes, not much different from the deficit recorded last year.

Global refined zinc metal balance. Source: MetalMiner analysis of ILZSG data

Given these numbers, you could assume that prices have no other option but to go up. However, despite a projected deficit, I’m starting to doubt zinc’s ability to climb much above today’s levels. Indeed, high prices are simply what could play against zinc’s rally. Zinc has more than doubled in price since the beginning of 2016, and investors now seem unwilling to chase prices above $3,000/mt, a level that has acted as a ceiling for prices this year. Read more

Tin supply is tight on the London Metal Exchange, but is this an isolated issue or just one example of a more far-reaching dilemma?

Writing for Reuters, Andy Home cites LME tin at its lowest level in 20 years, but it’s important to look closer as any comparison to two decades in the past is null and void as the global metals market and LME’s place in it are so different now.

Want a short- and medium-term buying outlook for aluminum, copper, tin, lead, zinc, nickel and several forms of steel? Subscribe to our monthly buying outlook reports!

Home writes: “Unsurprisingly, low inventory is once again generating tightness across short-dated time-spreads, extending a pattern that has been running for a couple of years now.”

He adds that tin price is underperforming as well, currently trading just under $20,000 per ton. This is a 5% decrease when compared to the start of the year, placing it with nickel as the worst performer among significant LME metals.

However, Home writes that there is now more tin inventory in Shanghai Futures Exchange warehouses than in the LME system. Read more

Set of copper pipes of different diameter lying in one heap

Copper on the Shanghai market traded lower this week with investors choosing equities and oil, an area where a domestic rally was overflowing into Asian markets.

According to a report from Reuters, three-month copper on the London Metal Exchange did find some support, trading 1.1% higher, which offset losses from the previous session.

Want a short- and medium-term buying outlook for aluminum, copper, tin, lead, zinc, nickel and several forms of steel? Subscribe to our monthly buying outlook reports!

However, the Reuters report also stated that LME copper stayed close to the four-month lows reached earlier this week as the market suffered from weak demand stemming from China and falling imports.

The most popular copper contract on the Shanghai Futures Exchange slipped to $6,558 a ton, Reuters reported, a decline of 0.71%.

Copper Bears Take Over

Just this week our own Raul de Frutos wrote of the commodity outlook shifting for copper buyers, as well as buyers of aluminum, steel and tin, and that the bears are taking over:

de Frutos wrote: “About a month ago I noted that while industrial metals were on the rise, commodities were range-bound, a sign of sluggish global demand. As I had written, ‘a healthy bull market in base metals should be accompanied by a bull market in other commodity markets.’ Commodities not only have struggled to make new headway but in the past few days they weakened significantly. Recent moves in China have caused a significant shift of sentiment in financial markets.”

de Frutos cited several issues, including oil prices taking a dip and China curbing its credit, to signal that the bull market for commodities might be coming to an end.

How will copper and base metals fare in 2017? You can find a more in-depth copper price forecast and outlook in our brand new Monthly Metal Buying Outlook report. For a short- and long-term buying strategy with specific price thresholds:

Commodities gave important signals in April/May. The performance of commodity markets has a heavy impact on the price movements on any industrial metal. If you are a metal buyer, it doesn’t matter if you buy aluminum, copper, steel or tin. The information in this article is important for you.

Reuters/Jefferies CRB commodity index. Source: MetalMiner analysis of stockcharts.com

About a month ago I noted that while industrial metals were on the rise, commodities were range-bound, a sign of sluggish global demand. As I had written, “a healthy bull market in base metals should be accompanied by a bull market in other commodity markets.” Commodities not only have struggled to make new headway but in the past few days they weakened significantly. Recent moves in China have caused a significant shift of sentiment in financial markets.

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China Curbs on Credit

Interest rates in China have risen to the highest level in two years amid the country’s tough talks on curbing credit. China is putting on the brakes on credit growth, and the effects of those policies are already starting to be felt. As the Financial Times reported, “China Vanke, one of China’s biggest property developers, was [recently] forced to drop a bond sale… blaming changes in market conditions.”

The noticeable tightening in Chinese monetary policy is bad news for its property markets. The country has also pledged to halt risky local funding for the construction of infrastructure projects. Investors know that this will hurt demand for commodities and industrial metals. Read more

Aluminum Rod

Goldman Sachs is bullish on aluminum, projecting it to rise following China’s supply-side reforms.

According to a recent report from CNBC, Goldman expects aluminum prices to hit the $2,000 per metric ton point in six months and $2,100 per ton in a year.

Want a short- and medium-term buying outlook for aluminum, copper, tin, lead, zinc, nickel and several forms of steel? Subscribe to our monthly buying outlook reports!

Year-to-date, aluminum prices have outperformed other industrial metals, climbing roughly 15% compared to steel and 3% compared to copper, the news source stated.

“In our view, this strong performance has reflected an increase in the potential for aluminum to be the next target of supply-side reform in China, a tightening ex-China balance, and rising costs of production,” wrote the bank’s analysts. “Further, global political developments may also be supportive of capacity and production cuts, given the two leaders of the U.S. and China launched a 100-day (trade) plan on April 7. These developments support our existing view that aluminum is the next target for supply-side reform in China,” they added. Read more

Our Global Precious Metals MMI inched up a point in April. However, this year the index seems to be struggling near 84 points. Let’s take a look at gold and palladium, two of the precious metals integrated in this index, to better understand the ongoing trend in precious metals.

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Gold

Some analysts are saying that gold is up this year on its safe haven appeal due to rising geopolitical instability. But that’s simply not true. Otherwise, we would see it reflected in stock market indexes, which are trading at record highs. Not only the U.S. but also Europe, China and other emerging markets are seeing their stock markets hit multi-year highs. Investors are confident about the prospects for the global economy, and until something proves them wrong, gold is lacking any appeal as a safe haven.

Gold CME contract. Source: MetalMiner analysis of stockcharts.com

If you held gold this year, don’t thank rising political tensions; simply thank a weaker dollar and some dip buying. This year’s rally in gold follows a 18% price slump in Q4 of last year. But prices are back to their average and just 8% below $1,380/oz, a level that has been a ceiling to gold prices for four consecutive years. This means that investors will have to find good reasons to chase prices higher. Given the ongoing strength across global stock markets and the rather neutral picture of the dollar, we wouldn’t expect gold investors to get a good return on their money for the balance of the year.

Palladium

As I’ve written earlier on MetalMiner, “palladium prices rose to a two-year high in April, making it the biggest gainer among precious metals. Last month we outlined some of the factors contributing to the palladium price rise: a growing auto sector; a strong South African currency; a falling dollar; and bullish sentiment across industrial metals. However, as prices continue to climb, it’s time to question how high prices can go. Despite a still solid outlook, there are some reasons to believe palladium prices could be nearing their peak.”

One of them is a potential slowdown in demand for cars. U.S. car sales declined in April, following a disappointing month of March. Markets suspect that the car industry boom that has run since 2010 has now come to an end.

Meanwhile in China, car sales are still going strong, but the pace is not the same as last year. As I wrote before, “weaker sales tax incentives have put pressure on demand this year and are expected to slow down demand even more next year. Buyers of cars with engines up to 1.6 liters paid a 5% purchase tax last year, but they are now paying a 7.5% rate. Buyers are still finding incentives to rush on buying cars this year since the rate will increase to 10% in 2018.”

Palladium nears long-term resistance levels. Source: MetalMiner analysis of stockcharts.com data

Finally, as with the case of gold, palladium might need the stronger fundamentals to lure investors to chase prices higher. Historically, palladium has peaked in the range of $850-$900. Prices closed in April at $827.

FREE REPORT: How Circumvention Impacts Both Downstream, Value-Added Manufacturing

What This Means For Metal Buyers

Precious metals gained this year, but gains won’t come easily from now onwards. The opportunity to buy or invest in precious metals might have passed by.

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Our Raw Steels MMI fell seven points* due to the slump in China’s steel prices in April.

Raw Steels MMI

(*Note: We changed one of the data elements of our index to map the underlying market more effectively. That change contributed to a lower number this month.)

Benchmark Your Current Metal Price by Grade, Shape and Alloy: See How it Stacks Up

Since their peak in February, China’s steel prices have fallen by more than 20%, while U.S. prices have continued to climb. But guess what, things changed towards the end of April. Prices in China started to recover (see how we predicted that) while U.S. prices fell (yes, we predicted that too). In this post, I’ll analyze what this price divergence means and how you — assuming you buy or invest in steel — can take advantage of it.

China HRC price. Source:MetalMiner IndX

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In preparing our new Monthly Metal Buying Outlook for May, we’ve seen that prices in both industrial metal markets and commodity markets have fallen over the past month.

What’s the deal?

Well, a few things are happening that stirred up that pot:

  • The U.S. dollar fell to a five-month low. The dollar’s movement usually has an inverse relationship with that of commodity prices, but not lately. Election season across the pond in France is heating up, and the outcome of the first round of presidential voting had eased concerns about the future of the euro, which rose against the dollar.
  • Interestingly, China’s annual GDP growth increased to 6.9% during Q1 2017, the fastest growth rate since the second half of 2015. Not only that, but the country also announced that it will build a “new megacity” — two things that would usually portend higher industrial metals prices. And yet…here’s what China’s economy has been doing since 2012 (the overall trend is pretty clear):

  • President Trump ordered two investigations, one for steel and one for aluminum, into whether imports of those metals threaten U.S. national security.

Check out how these types of events and trends are affecting six non-ferrous metal markets and four specific forms of steel — HRC, CRC, HDG and plate — in our detailed monthly analysis.

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