Articles in Category: Supply & Demand

“Where next for oil prices?” Stuart Burns had asked on Monday. In the short term, that would be downwards.

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

Yesterday the Organization of the Petroleum Exporting Countries (OPEC) met in Vienna and decided to extend supply cuts for another nine months, until March 2018. That is what was expected, but oil prices responded by dropping quite a bit, Reuters reported, by roughly 5%.

The price of oil has indications beyond, well, oil. “Oil prices are a proxy for energy prices, and a rising oil price can be supportive for energy intensive metals like aluminum,” Burns wrote. “A rising oil price is also taken as a proxy for rising industrial demand – a bullish indicator that global growth is strong. A falling price, on the other hand, should be good for consumer spending as it keeps more money in drivers’ pockets and lowers the cost of goods sold for companies far and wide.”

Where Next for the U.S. Dollar?

Another driver of metal prices is the dollar. This past week, Raul de Frutos looked at the movement of the U.S. dollar, which recently hit a seven-month low. What is the reason for this drop?

“First, the dollar had steadily risen for three consecutive months,” de Frutos wrote. “It’s not uncommon to see profit-taking after such an increase. But there are also some fundamental reasons behind this sell-off.” Read more

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This morning in metal news, a new report paints a positive picture for jobs in the renewables sector, Moody’s downgrades China’s credit rating, and the results of the OPEC meeting are in. The current supply cuts will be extended for another nine months, and oil prices tumbled on the news.

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

OPEC Agrees on 9-Month Extension of Supply Cuts

Let’s start with the big headline of the morning. As expected, the Organization of Petroleum Exporting Countries (OPEC) has agreed to extend supply cuts for another nine months, until March 2018.

After OPEC wrapped up its first meeting in Vienna around 3:30pm CEDT (8:30am CDT), oil prices responded over the next few hours by sliding 4.5% to $51.60 per barrel. Some industry analysts think OPEC should have agreed to deeper cuts. As The Guardian reported, OPEC is “sticking to the 1.8 [million] barrel a deal first agreed in late November.” Russia and other oil producing non-OPEC members are also expected to go along with the supply cuts.

Forget Bringing Back Coal Jobs

The burgeoning renewable energy sector employed 9.8 million people in 2016, according to the latest annual report released by the International Renewable Energy Agency (IRENA). Global employment in the sector has been growing every year since 2013, and there may be as many as 24 million renewables workers worldwide by 2030. Read more

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Last month, China announced plans to build a new megacity from scratch. Since the city will be twice the size of New York City, analysts expect the project to require huge amounts of steel and other industrial metals such as aluminum and copper.

Two-Month Trial: Metal Buying Outlook

According to Citi Research analysts, 12-14 million tons of extra steel will be required annually to build this new development. Since the country’s current domestic demand is about 700 million tons, that would lift Chinese steel demand by 2% per year over the next 10 years.

But are the analysts correct? Should we expect a steel demand boost over the next 10-15 years?

Although building this city from scratch will indeed require a lot of steel, analysts are making the mistake of missing the forest for the trees. The key driver for steel demand in China is the net migration from the countryside to cities. It doesn’t really matter whether China builds a new megacity or it expands its city limits. The key measure is the rate of urbanization in the country at a national level.

Urban and rural population in China. Source: China’s Economy book by Arthur R.Kroeber

China’s urban share has grown quickly over the past two decades since its rural population peaked in 1995. Last year, China’s urban population share reached 57.9%. The share, however, is still small given the country’s income level. Read more

This morning in metals news, the strike at Freeport McRoRan’s Grasberg copper mine was extended for a second month, oil prices rose in expectation of supply cuts, and silver prices reached a three-week high.

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Freeport Indonesia Strike Extended

This past Saturday, the union representing thousands of workers at Freeport’s Grasberg copper mine in Papua, Indonesia announced that the ongoing strike will be extended beyond May 30, Reuters reported. As union industrial relations officer Tri Puspital told Reuters, “We will extend the strike for 30 more days.” Approximately 9,000 workers are participating in the strike.

Two-Month Trial: Metal Buying Outlook

The reason for the strike revolves around employment. Last month, Freeport laid off about 10% of its 32,000 workers to cut costs, which accrued to the tune of millions thanks to an ongoing dispute with the Indonesian government over rights to the Grasberg mine. “With this problematic combination of protests from workers and tensions with the Indonesian government,” wrote MetalMiner analyst Raul de Frutos earlier this month, “it’s no wonder that investors are concerned about further supply disruptions this year.” It looks like supply disruptions will continue.

A Key Week for Oil

One hopes that this will be the only time when news source after news source mentions Saudi Arabia and glowing orbs in the same headline. In more important news, Bloomberg reported yesterday that Saudi Arabia has received Iraq’s support to extend oil output cuts for nine months, after Saudi Minister of Energy Khalid Al-Falih flew to Baghdad to talk to Jabar al-Luaibi, his Iraqi counterpart. Read more

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It isn’t an idle question. Oil prices are a proxy for energy prices, and a rising oil price can be supportive for energy intensive metals like aluminum.

Two-Month Trial: Metal Buying Outlook

A rising oil price is also taken as a proxy for rising industrial demand – a bullish indicator that global growth is strong. A falling price, on the other hand, should be good for consumer spending as it keeps more money in drivers’ pockets and lowers the cost of goods sold for companies far and wide – but particularly for those in the transportation or more energy intensive sectors.

But despite rising last year following the agreement on the parts of OPEC and major non-OPEC oil producers to limit output, the price has since fallen back so consumers are not surprisingly wondering where it goes from here.

Just this month the two architects and key players in last year’s agreement, Saudi Arabia and Russia, announced they would continue with the agreement, set to shortly expire, until March 2018 and indeed will accelerate cuts to reduce near record inventories. It should be said the announcement still must be officially agreed at next week’s meeting of OPEC ministers in Vienna.

While initially slow to contribute, Russia has stepped up cut backs of late and combined non OPEC cuts are said to be some 255,000 b/d in April, but others such as Brazil and Canada are expected to increase output in Q2 and the USA has added substantially since last year. According to Oilprice.com, U.S. oil production has risen to approximately 9.3 million barrels a day and is projected by the EIA to reach 10 million barrels a day by 2018. Read more

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.

Two-Month Trial: Metal Buying Outlook

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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As I pointed out two weeks ago, U.S. steel prices had no choice but to decline as the spread between U.S. and international prices had widened to unsustainable levels.

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That’s exactly what I’ve seen so far in May, and I suspect that the recent price decline is just the beginning of a deeper correction that could easily extend to the rest of the second quarter.

U.S. hot-rolled coil prices fall in May. Source: MetalMiner IndX

Hot-rolled prices have fallen around 5% since they peaked in April. Meanwhile, steel prices in China have started to stabilize after a slump during March/April. As the chart below shows, the price spread appears to have peaked near the same levels as it did last summer. U.S. steel prices will likely continue to fall, bringing this price arbitrage down.

Hot rolled coil price spread US vs China. Source: MetalMiner IndX

U.S. Steel Imports Hit a Two-Year High

Although the U.S. doesn’t import steel directly from China, Chinese steel prices set the floor for international prices. Therefore, when China’s steel prices fall, imports become more appealing to U.S. buyers. That’s exactly what’s happening now. In March, U.S. steel imports rose 31% year-over-year, hitting the highest level since May 2015. 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

So much has been written in recent months about China and the Chinese aluminum market that we are in danger of losing sight of the performance of major producers outside of that market.

Free Download: The May 2017 MMI Report

The position of producers like Alcoa and Rusal arguably have more impact and more significance for Western consumers than those behind the tariff barrier walls of China’s borders. The Financial Times reported last week that Rusal (still the world’s second largest producer, according to Statista) is in robust health and has reported rising profits on the back of stronger first quarter prices.

According to the FT, net profit for the first three months of the year was $187 million, up 48% from $126 million in the same period last year, on the back of 20% rise in revenue to $2.3 billion. While not quite reaching analysts’ predictions, it allowed the firm to reduce debt levels and encouragingly was achieved on the back of only a modest 0.7% increase in production to 910,000 metric tons. Likewise, alumina production was up a correspondingly small 0.9% to 1.889 million tons.

Costs, however, have remained a bugbear with electricity prices, transportation – principally railways, and other raw material costs rising in Q1, in part due to rising commodity prices but also due to a 6.7% strengthening of the ruble.

Nevertheless, demand growth remains robust, and supply outside China remains relatively tight with the forward market spreads not favouring the roll-over of stock and trade storage of primary metal with only a 3.5% margin over 18 months.

Much will depend on China going forward and how seriously Beijing continues to pursue its policy of clamping down on environmental non-compliance and limiting new smelter investment. Aluminum demand in China grew at 7.5% in the first quarter, according to Aluminium Insider, and it is growing at 5.0% in the rest of the world.

Free Sample Report: Our Annual Metal Buying Outlook

Prices may have slipped back of late but that was probably to be expected after the surge of enthusiasm following Beijing’s clampdown. As the realisation sinks in that China’s winter heating period closures are still six months away, some softening is to be expected.

There are certain models that economists use to explain markets or to illustrate market behaviour. Cyclical commodity markets are one such model, and the principle of swing producers is another.

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

Among metals, nickel has been a wonderful example of both in recent years, and a Financial Times article written by a team from consultancy Woods Mackenzie ably illustrates how the metal’s current poor price performance is a result of both.

Cyclical commodity markets are invariably caused by violent swings in supply and demand. In times of rising prices, miners invest in new mines. As they take time to come to fruition, they often unhelpfully come in at the end of a commodity bull run, flooding the market with oversupply just as demand falls. Prices then collapse.

In the case of nickel, as the article reported, five years of surpluses meant nickel prices have more than halved between 2011 and 2015. Having just invested in new capacity, the miners tend to be slow to adjust. But in the end, mine closures ensue, and in the case of nickel, this resulted in the loss of about 6% of global mine supply. Supply, however, has remained more than adequate with many countries competing for market share. Read more