Whether you direct source aluminum, copper, nickel, lead, zinc, tin or steel (HRC, CRC, HDG, Plate) you have to have a strategy. Let us inform that strategy with our 2016 Annual Metals Buying Outlook, now available for complimentary download.
We have the commodities markets, industrial metals markets, key price drivers and commentary and analysis you need to make the right sourcing decisions. Answers to the question “When will we hit bottom?” and a close inspection of the impact the US Dollar and China have on the ebb and flow of metals prices are just a piece of what’s inside.
US industrial output has been falling on a month-on-month basis since August and the manufacturing PMI fell below 50 in late 2015. Even with the bounce in January PMI data to 52.7, the manufacturing outlook remains uncertain after an extended period of weakness and continued currency strength.
Yet, we suggest that US mills are (right now) in a sweet spot in terms of pricing. Are we crazy?
After a dismal 2015, steel mills are finally in a position to drive prices higher. It may not be for long, but any buyers that are short of flat steel in the short term will have to pay substantially higher prices in the next few months. We suggest that prices could rally $100-150 a ton between December 2015 and April/May 2016.
Supply Finally Constrained
Import and domestic supply is curtailed. US mills operated at 60-65% capacity in December.
With continued uncertainty regarding anti-dumping actions, finished steel imports are slowing. Importers cannot start selling again until final determinations are in, meaning that June arrivals are probably the earliest.
For day traders, industrial metals including lead climbed slightly on the London Metal Exchange, but the longer-term projections tell a different story.
For January, lead prices are down nearly 10% and that is after a December rebound that our own Raul de Frutos followed very closely.
“After surging 10% in December, lead prices have already given up all those gains in the first half of January,” de Frutos said. “Like the rest of base metals, lead prices fell in January as global stock markets sold-off on China’s worries. The metal is now trading near multi-year lows.”
For the short term, with US markets shut down for the Martin Luther King, Jr. holiday, lead, aluminum, tin and zinc gained slightly with copper climbing 1.1% to $4,378 a metric ton and nickel rising 2.3% to $8,590 per mt on the LME, according to a report from Bloomberg Business.
Day traders for lead and other metals will continue to keep a close eye on China’s gross domestic product with the country expected to report annual growth of 6.9%, the slowest rate of growth since 1990, according to Bloomberg.
“The persistent downward trend for industrial base metal is still in play, and the downward skew is very much dependent on the stagnant growth in China,” Naeem Aslam, chief market analyst at Avatrade in Dublin, told the news source.
How will base metals fare in 2016? You can find a more in-depth lead 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:
Morningstar recently published its Basic Materials Outlook. Like most analysts, Daniel Rohr, director of basic materials research is bullish on the overall commodities sector and cautions investors that the transitioning Chinese economy will continue to depress both prices and consumer spending.
“You are already seeing a knock on effect from the slowing fixed-asset investment environment and deflation of asset prices on households’ willingness to spend,” Rohr said. “That would more broadly fit the pattern that you observe when you look back through history at prior episodes of profound economic rebalancings. Japan, Taiwan, South Korea all had spectacular investment-led growth. Once that growth came to an end, a rebalancing wasn’t accomplished by an acceleration in consumption and a deceleration in investment. In each and every case, consumption decelerated sharply as well.”
Divestment as a Strategy
Morningstar expects Chinese household consumption growth to decelerate from the trailing 10-year average. Rohr said companies are responding to tectonic shifts in the macroeconomic environment by reorganizing their portfolios.
ATI can still pay off for investors, according to Morningstar, once it settles its lockout and uses its new stainless production facility. Source: Adobe Stock/Jovanning.
Miners coping with poor Chinese demand and weak commodity prices are looking to sell assets and shrink. Agricultural chemical companies have taken a different approach. Faltering crop prices have prompted many to seek mergers in a bid to cut overhead and grab synergies.
The Chinese economy has been a significant factor in the bearish metals market over the past year. First the collapse of its stock market and then the surprise devaluation of the yuan, and now the daily fixes in the yuan’s exchange rate. As a top consumer (and producer) of the industrial metals you source, it’s critical we keep a sharp eye on the state of the Chinese economy as the year progresses.
The losses incurred by nickel mines due to low prices continue to pile up with Canada’s Sherritt International Corp and Japan’s Sumitomo Corp announcing this week more than $1.7 billion in losses from their Ambatovy nickel mine in Madagascar.
The reason? Nickel prices are at 12-year lows and it’s wreaking havoc on operations. With 60,000 metric tons of nickel mined a year at Ambatovy, the continued slump in commodities has taken a significant toll on miners and traders alike, forcing asset sales, losses and write downs, according to a report from The Globe and Mail.
“There is a possibility that we may post impairment losses in additional projects,” Sumitomo stated in a press release.
Slumping demand in stainless steel is the main source of nickel’s surplus. The glut in supply is putting downward pressure on prices for the metal, which recently dropped to its lowest mark in more than 12 years.
The Madagascar nickel project is one of the world’s largest and has suffered from both the global commodity slump as well as slowing Chinese demand, reports The Wall Street Journal.
“Our earlier outlook was too optimistic,” Hiroyuki Inohara, Sumitomo CFO, told the WSJ.
Demand Slowdown Not Stopping in China
China continues to produce steel in spite of a slowdown in domestic demand, according to our own Stuart Burns. “China’s steel exports rose by almost 20% in 2015 to a record 112.4 million mt. To put that in perspective that is enough to meet demand in Germany and Japan for a year and still leave almost 9 mmt to spare,” he wrote.
However, that amount of exports is not sustainable in the medium term. With global demand stagnant and trade tensions on the rise, exports will have to find a way to decrease this year either on their own or through anti-dumping actions.
How will base metals fare in 2016? You can find a more in-depth nickel 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:
The Shanghai Metals Market conducted a survey that found about 35% of Chinese tin smelters are optimistic over tin prices in the short-term. In addition, recent market research anticipates the global tin market to grow at a moderate rate of about 2% due in part to the increase in lead acid battery usage.
Government regulations, most notably in China, are forcing manufacturers to replace antimony and cadmium in lead acid batteries with tin to alter the composition of the grid alloy. However, it should be noted that we consider this just a blip in the radar and the downward trend for tin is expected in our medium- and long-term projections.
China’s economy continues to be a sore spot on the global radar and as a top consumer of many of the industrial metals sourced, its fate plays a significant role in the price trends for those metals.
Chinese Economy Not Off to a Good Start in 2016
As we reported earlier this week, the global start market took a huge hit to begin the year. In fact, $2.5 trillion has been cleared from the value of global equities this week, starting in China and leading to a domino effect that has rippled through the rest of the world. This has led to one of the worst starts for the stock markets since the 1980s.
Our own Stuart Burns wrote: “On the Shanghai market, trading was stopped on Monday as ‘circuit breakers’ closed the market after shares plunged 5% and, again, Thursday trading was canceled for the day after just 29 minutes when the CSI300 fell more than 7%. Under the ‘circuit breaker’ system, created after the plunge in shares last August, if an index rose or fell 5%, trading was halted for 15 minutes. If it dropped by 7%, trading stopped for the rest of the day.”
How will base metals fare in 2016? You can find a more in-depth tin 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:
Metro International Trade Services — the dominant London Metal Exchange warehouse operator in Detroit but also with depots across the US, Italy, South Korea and Malaysia — was ever the stand out contrarian operator.
Indeed, it was the fabulous profits the firm was generating that encouraged Goldman Sachs to buy the company in 2010, and it was the prospect of lower profits and regulatory oversight that probably prompted them to sell in 2014 to Swiss-based but British-owned investment house Reuben Brothers.
Metro and Pacorini’s Load-Out Game
It’s probably not unfair to say Metro, along with Glencore’s Paccorini, were the black sheep of the warehousing family in the years following the financial crisis, as they engineered massive load out queues, lasting up to two years, in order to generate vast rent profits from metal stuck waiting in the queue to be loaded out.
Aluminum ingots, possibly waiting at a Metro International warehouse for load out.
Consumers and processors put up with that for a while, but under threat of legal action the LME moved to tackle the problem in recent years and a number of rule changes have effectively forced warehouse firms to limit intake when queues are over a certain length. Increase load out rates and changes this year will force firms to reduce rent on metal in the load out queues.
Open and Transparent Warehousing
As a result, the warehouse business has been forced to operate on a more fair and open basis, charging rents on a competitive basis against other LME warehouses without the benefit of being able to offer massive incentives, in the form of secret discounts or up-front payments, to encourage firms to store metal in their sheds. Read more
Similar to aluminum, copper prices have fallen more than 30% since May and the fact that prices aren’t able to bounce after such a decline should have copper producers worried. The low pricing environment has depressed producers’ earnings and liquidity causing their stock prices to plunge this year.
Freeport McMoRan stock price, one year out. Source: MetalMiner analysis of @StockCharts.com data.
Freeport McMoRan’s stock price is down 76% on the year to date, falling to its lowest level since 2003. The company recently undertook cost cutting measures. When Freeport announced spending cuts in August 2015, its stock soared more than 28% but announcements of further cuts in December didn’t help boost shares this time, indeed shares are down 25% since the announcement a few weeks ago.
The company also announced the suspension of its $0.20 per share annual stock dividend. By suspending dividends, Freeport expects to save around $240 million annually, helping the company to raise cash under the weak current market conditions. Although some long-term investors might see the reasoning behind this move, dividend cuts are very discouraging for investors looking for a constant stream of income. The decision shows the challenging business situation that Freeport and other mining companies are in.
In December, The International Copper Study Group reported a market surplus of 35,000 metric tons for the first nine months of 2015. This compares with a market deficit of 450,000 mt for the same period last year. Weakening demand and the unwillingness of miners to cut production continues to generate surplus copper. Despite low prices, we are not seeing big production cutbacks from copper producers as companies don’t want to leave market share open to competition. What’s even worse is that copper producers including Rio Tinto Group, BHP Billiton and Southern Copper are still going ahead with their 2016 production plans.
Will Copper Producers Manage to Stay Alive?
Thanks to cost reduction measures and the suspension of dividends, Freeport expects to generate cash flows of $600 million in 2016. However, Freeport’s estimates are based on assumptions that might not materialize. In the math, the company assumed that copper will be at $2 per pound while crude oil at $45 in 2016.
It only took copper prices a week to already trade below $2 per pound and we’ve already seen crude oil at $32 per barrel in January. Some say it might hit $20 per barrel by the end of the year. Although Freeport is not facing any short-term debt maturities, the company is prone to financial stress if the slump in energy and copper prices doesn’t stop. We feel that many companies like Freeport are being too optimistic about 2016 and we suspect that prices still have room for more declines. Many producers will need to give up believing in those rosy outcomes to support prices and help other producers survive this bearish commodity market. A dose of reality is necessary.
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The Department of Commerce announced affirmative preliminary determinations in the countervailing duty (CVD) investigation of imports of hot-rolled steel flat products from Brazil yesterday. It also announced negative preliminary determinations in the investigations of imports of hot-rolled steel flat products from the South Korea, and Turkey.
Countervailable subsidies are financial assistance from foreign governments that benefit the production of goods from foreign companies.
In the Brazil investigation, Commerce preliminarily determined that mandatory respondents Companhia Nacional Siderurgica (CSN) and Usinas Siderurgicas de Minas Gerais SA (Usiminas) both received a subsidy rate of 7.42%. All other producers/exporters in Brazil were assigned a preliminary subsidy rate of 7.42%.
The subsidy rates in the South Korea and Turkey investigations were all found to be less 1% or “de minimis” meaning that no import duties will be due and no cash deposits will be necessary.
As a result of the preliminary affirmative determination for Brazil, Commerce will instruct US Customs and Border Protection to require cash deposits based on the preliminary rates, 7.42%, established for producers and exporters of hot-rolled steel flat products from Brazil.