Articles in Category: Supply & Demand

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This morning in metals news, the wait for Section 232 continues, investors are betting on copper as electric cars grow in popularity and palladium is having a record year.

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Section 232 Watch Drags On

These days, folks in the aluminum and steel industries are looking for any sliver of information regarding what the Trump administration will do with its Section 232 investigations.

Many expected the steel investigation results to be announced by the end of June, but that never happened. Regardless, on Wednesday President Trump told a reporter that tariffs on steel imports “could happen.”

Not exactly the most illuminating quote, but it’s something. Given Trump’s economic rhetoric, both as a candidate and as president, the likelihood of some form of protective measures being instituted seems fairly high.

Copper and Cars

As automotive companies, from Tesla to traditional automotive industry stalwarts, compete to develop next-generation vehicles, investors are betting on copper, according to a report in the Financial Times.

How much more copper will be needed to back the next wave of automotive production?

Estimates vary, but one thing is certain: copper will play a very big role and, as such, demand for it will be high.

Big Year for Palladium

It’s been an up-and-down year for some metals in 2017 — but not palladium.

In fact, palladium is expected to hit its highest annual average price on record this year, Reuters reports. Even more, platinum has outperformed platinum in a big way.

But the question is: Can it last?

“We remain constructive on palladium’s outlook,” Standard Chartered analyst Suki Cooper told Reuters. “Not only is the market set to deliver a deficit this year, but it looks set to be undersupplied over the coming years.”

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While it’s easy to look askance at something that shoots up in price so quickly, there are indications that palladium will continue to be a strong player in the market.

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Despite U.S. oil stocks falling 7.6 million barrels, the biggest drop since September, a recent Financial Times article reports, quoting U.S. Energy Information Administration data, that the oil price is struggling to get back to $48 per barrel, let alone the heady heights above $50 it achieved in May.

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U.S. refineries are running flat out to meet summer demand, drawing down on U.S. stocks — but still, the price is not responding.

Meanwhile U.S. exports are booming. Rather than being constrained by OPEC cuts, global production is rising. Ironically, even Saudi Arabia is pumping above its target, reporting to the cartel that last month it raised output to 10.7 millions barrels per day, a 190,000 b/d increase on the previous month and 12,000 b/d above its own target.

The Kingdom claims it needed to increase output to meet peak electricity-generating demand experienced during the summer months, but the Saudi increase contributed to total OPEC overproduction of 393,500 b/d from last month, according to the Financial Times.

Source: Financial Times

Iraq, Nigeria and Libya are all pumping more oil than at any time this year and Iran is close to its own year’s highest output, too.

In addition, Canadian oil sands production is rising, Production is predicted to be higher still next year as new projects come on-stream (despite the low prices), making many projects marginal or even loss-making, debts must be repaid and oil sands producers are hanging in there hoping for firmer prices.

News south of the border is not encouraging, though. U.S. tight or shale oil production has continued to rise this year, although at a more gradual rate than seen over the last 12 months. Nevertheless, shale oil producers have become adept at squeezing profits out of production, even at sub-$50 per barrel prices, and show no signs of backing off at current levels.

Long-position holders are hoping OPEC may take further action to curb supplies, but members are sticking to their mantra that they expect stocks to decrease and, therefore, prices to rise, as the current restrictions bite.

But as the Financial Times notes, OPEC’s own monthly report indicates the group still faces an uphill struggle to balance output under the terms of its supply deal, what with cheating and non-OPEC production.

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A balanced oil market seems a distant dream for producers.

The jury may be out on whether the recently concluded Group of 20 (G20) summit’s protectionist slant will hurt India or not (though everybody is near-unanimous that where overproduction of steel was concerned, China’s had it coming for a long time).

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The G20 leaders at the July 7-8 summit in Hamburg, Germany, had agreed to address “growing overcapacity and rock-bottom prices in global steel markets.” This, after pressure was applied by the U.S. administration, which managed to get some strongly worded language inserted into the G20 communique, even setting deadlines for G20 members to address the issue of excess steel production.

The communique urged world leaders to seek the removal of “market-distorting subsidies and other types of support by governments and related entities,” according to a copy obtained by news agency Bloomberg.

The statement called on all G20 members to “fulfill their commitments on enhancing information sharing and cooperation by August 2017, and to rapidly develop concrete policy solutions that reduced steel excess capacity.” All the data and proposed policy solutions will also be compiled as a report and published by the OECD’s Global Forum on Steel Excess Capacity in November this year.

Some last-minute maneuvering by the Trump administration saw such strong language being inserted into the communique to fight protectionist measures and ensure reciprocity in trade and investment frameworks. Many saw this as a departure from attempts to include similar language at the G20 finance ministers’ meeting in March, barely a month before the U.S. had launched investigations to determine whether cheap steel imports posed a threat to U.S. national security, startling many sector experts.

Calls to lower overcapacity are largely aimed at China, producer of half of global crude steel output until May 2017. Even though China has insisted it had clamped down on polluting and unviable steel capacity, the impact on steel production has been negligible so far, experts say. (Stuart Burns wrote on the subject of capacity cuts last week.)

Even at the 2016 G20 summit, European and U.S. leaders asked China to accelerate capacity cuts, blaming its big exports on slumping prices and accusing it of dumping cheap metal in foreign markets.

Data for global crude steel output in 2017 through May showed output grew 4.7%, while U.S. output was up by only 2.2%. In comparison, steel output in the European Union (EU) rose by 4.1%. China’s output was up by 4.4%, although May saw output grow by 1.8%.

India’s steel industry has come to rely on exports since its domestic demand had not kept pace with the increase in capacity. While some in India say the country needs ready access to global steel markets, any such protectionist move could put pressure on growth.

On the other hand, other experts were of the view that the move could resolve a large part of the non-performing assets problem in the Indian banking sector. At the moment, a number of Indian steel companies were facing bankruptcy and their lenders were looking to sell their assets.

Any move by G20 companies to support the world steel prices would eventually help Indian companies’ realizations from exports.

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China’s campaign to cut environmentally polluting steel, aluminum, power generating and similar industries, like cement plants, is understandably catching the headlines.

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For producing industries like steel and aluminum, the cutbacks have supported prices. The expectation is the closures made this year will accelerate during the November to March heating period, when there will be forced closures of plants, even some that have passed the environmental tests.

All this has supported the expectation that there will be supply shortages in the face of an economy that continues to grow strongly and where recent PMI data supports current growth levels persisting at least through to the end of the year.

Yet while the headline announcements are all about capacity cuts, a recent Reuters article illustrates they are only part of the story.

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It is no surprise that oil prices continue to fall when you look at the rising tide of oil production around the world.

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Source: Financial Times

The U.S. shale industry is frequently accused of being the main culprit, but tight oil is far from alone.

A recent FT article explores how investments that were started five or six years ago, when the oil price was $100 a barrel, are now coming on stream with a vengeance.

The FT quotes a forecast released by the Canadian Association of Petroleum Producers, which sees the country’s output increasing by 270,000 barrels a day this year and a further 320,000 barrels a day in 2018. The article notes that the combined two-year Canadian increase will be equal to almost a third of OPEC’s production cuts planned for this year.

Canada is home to the world’s third-largest reserves of oil and is the largest external supplier to the U.S. market, shipping in as much as the rest of the world put together. These new projects may not be making money at today’s prices, but they are making a contribution to the massive investments already incurred.

The FT quotes the Alberta Energy Regulator saying the minimum per-barrel oil price for a mining project to recover capital expenditures, operating costs, royalties, and taxes in 2016 ranged between $65-$80 a barrel. Meanwhile, the price for “in situ” plants using steam was $30-$50 per barrel. Today’s cost for oil shipped to the Cushing hub is at no more than $44 per barrel.

Costs for operational plants are lower, with estimates quoted by the FT is $22 per barrel for mining projects and as low as $11 a barrel for in situ plants. In addition, it could be that many of these new investments have hedged their forward sales at higher prices.

Source: Financial Times

That is certainly the case with the U.S. shale frackers.

A separate FT article estimates that some 40% of the industry was hedged at about $50 dollars a barrel, with some resource areas — like the Permian Basin of Texas and New Mexico — having hedging rates as high as 70-90%.

Unlike tar sands, tight oil can be turned on and off with considerable flexibility, like the hare to the oil sands’ tortoise.

Rig counts have been rising for 23 consecutive weeks, the FT notes, and with a growing stock of  drilled-but-uncompleted (DUC) wells rising by 22% to over 5,000 between December and May, there is considerable potential for output to be increased further.

As if rising production from Canadian tar sands and U.S. tight oil was not enough, OPEC is also seeing its own cartel members increase output by 336,000 barrels a day in May from April, led by big rises from Libya and Nigeria, according to FT.

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Saudi Arabia may well be ruing the day it opened the taps in order to drive down the oil in the hope of killing off “high cost” U.S. shale oil. The prospects of getting an oil price back above $100 must now look like a distant dream.

In the week when the world pensively awaits the U.S.’s Section 232 judgement — a move promised by President Donald Trump during his election campaign and aimed largely at China — a recent Reuters report on Chinese steel exports makes interesting reading.

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Source: Reuters

China’s steel exports have been sliding for months.

According to Reuters, China’s January-May export total was 34.2 million tons, down 26% from last year’s equivalent period and the lowest level since 2014. The year drop in export tonnage amounted to 12.1 million tons — roughly equivalent to Canada’s production over a full 12-month period, Reuters reported.

Yet bizarrely enough, China produced 72.78 million tons of steel in April, an all-time record Reuters says. The following month, China tallied the second-highest monthly total at 72.26 million tons.

Meanwhile, profits on products like steel rebar have surged to $162 dollars per ton this month, as inventory levels have fallen and demand has remained robust (particularly from the construction sector). Investment in real estate is running at an annual growth rate over 6%, Reuters reports. Although there are fears of overheating in some regions, real estate has been stronger for longer than analysts outside the market expected.

As we noted in a piece yesterday reviewing the 232 probe, China’s share of the U.S. import market for steel products has been falling for the last couple of years, mainly due to successful anti-dumping cases. China no longer appears even in the top 10.

So, what exactly is going on in China with respect to steel production and demand? Can we take it that Beijing’s actions to tackle excess steel production have finally resolved China’s deflationary impact on global steel markets?

First, Reuters notes that China has been quite successful in permanently closing previously shuttered steel plants, as well as in in tackling older and more environmentally damaging mills. Those actions combined has resulted in the removal of some 100 million tons of capacity.

In addition, Beijing’s focus on environmental issues has hastened the closure of induction furnaces, which use scrap rather than iron ore as their input and are often labelled as producers of sub-standard products (and, hence, unapproved). Unapproved equates to illegal by Beijing — as such, their production and their closures does not figure in the normal statistics. A significant proportion of China’s rebar production came from these mills, which explains the record profits being earned by surviving state-owned manufacturers of the same products as they capitalize on the removal of these scrappy competitors.

Unfortunately, nobody expects China’s construction market to continue at the current pace and a slowdown is in the forecast for the second half of the year.  Replenishment of low inventory levels will maintain steel mill production runs for a while, but as Reuters notes, China’s mills have a notoriously poor record in adjusting output to demand. So, we should expect that as demand eases, inventorying levels will rise, prices will fall, and access production may well begin to leak through exports onto the international market.

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While America’s anti-dumping legislation will largely protect that market from Chinese material, the rest of the world may find itself under pressure next year from greater availability of Chinese steel at falling prices, further fueling an already rising tide of protectionist sentiment in both developed and emerging markets.

Physical delivery premiums are a pretty accurate measure of primary aluminum metal supply. They reflect the balance between suppliers’ aspirations for the highest price and buyers’ determination for the opposite.

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The setting of physical delivery premiums is, therefore, a function of supply and demand — or, more accurately, the availability of physical metal in the marketplace.

So when Metal Bulletin announced that third-quarter main Japanese port (MJP) premiums have fallen 7.4% quarter on quarter and settled for the July-September period at $118-119/ton, from $128/ton in the second quarter, it supported anecdotal evidence that, despite supply disruption from Australia and New Zealand, the Asia-Pacific market remains well supplied.

Source: Reuters

Credit for this — if “credit” is the correct term — goes in part to China’s failure to sufficiently implement supply-side reform of its aluminum sector.

The aluminum price rose strongly in the first quarter with the expectation that Beijing’s announcements regarding curtailment of excess aluminum capacity would be vigorously implemented this year.

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The landmark North American Free Trade Agreement (NAFTA) went into effect 23 years ago — unsurprisingly, many in the metals industry are eyeing reforms to modernize the long-standing agreement signed by the U.S., Canada and Mexico.

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In late April, President Donald Trump signed an executive order focusing on trade-agreement violations and abuses, directing the Department of Commerce and the United States trade representative (USTR) to study the U.S.’s free-trade agreements. One month ago, the office of the USTR notified Congress of the administration’s intention to renegotiate NAFTA.

In recent months, Trump has indicated he is willing to terminate the agreement if renegotiation efforts don’t go anywhere. In April, the president said he was “psyched” to terminate the deal, but ultimately had a change of heart after speaking with Canadian Prime Minister Justin Trudeau and Mexican President Enrique Peña Nieto, per media reports.

That came three months after Trump pulled the U.S. out of the Trans-Pacific Partnership (TPP), negotiated by his Democratic predecessor Barack Obama.

When will renegotiation actually happen? The timeline isn’t clear. On Monday, Secretary of Commerce Wilbur Ross told reporters renegotiation might not happen until next year.

As uncertainty clouds NAFTA’s future, domestic metals organizations have weighed in on the ways in which they believe the 23-year-old agreement can be improved.

Metal Industry Hopes to Keep Positives, Target Problem Areas

Players in the metals industry have spoken out about how they want to see 23-year-old trilateral trade agreement modified for this new age.

In a filing June 12, The Aluminum Association, addressing U.S. Trade Representative Robert Lighthizer, urged that NAFTA should be renegotiated in a way that modernizes it without compromising the benefits of the original agreement.

In the letter to Lighthizer, The Aluminum Association underscored three ways to strengthen the agreement:

  • Improving and strengthening customs procedures and cooperation to facilitate the movement of aluminum and aluminum products among the United States, Canada, and Mexico
  • Working with the Canadian and Mexican governments to ensure that “NAFTA preferences are available only to aluminum articles that truly originate in the territory of a NAFTA party” and that “unscrupulous producers and exporters operating outside the NAFTA region are not improperly claiming preferential treatment under NAFTA by either making fraudulent country of origin claims or incorrectly classifying the article at issue”
  • Negotiating common disciplines on the operations of State-Owned Enterprises (SOEs), which “often benefit from favorable government policies and subsidies that create significant market distortions”

Regarding the third point, the release specifically zeroed in on China, noting “massive overcapacity” encourages unfair trading practices.

In addition to the aluminum industry, steel groups are weighing in on a potential NAFTA face-lift.

The American Iron and Steel Institute (AISI), like The Aluminum Association, stressed in a letter to Edward Gresser, chair of the Trade Policy Staff Committee, that NAFTA has yielded “significant benefits” but could be modernized after nearly a quarter of a century since its passage.

NAFTA has been critical to the steel industry, as 90% of all U.S. steel mill product exports went to Canada or Mexico in 2016, according to the June 12 AISI letter.

U.S. steel exports to Canada and Mexico grew rapidly following the passage of NAFTA. Source: American Iron and Steel Institute

Like The Aluminum Association, the AISI cited rules-of-origin issues, global overcapacity and conduct of SOEs as issues needing assessment in a revamped agreement.

In addition, currency manipulation was a point of emphasis.

“Currency manipulation makes exports more expensive, imports cheaper, and can subsidize cheaper prices for exports to third-markets,” the AISI letter states. “The International Monetary Fund (IMF) has provisions against currency manipulation, but the lack of an enforcement mechanism has limited their effectiveness.”

The AISI also suggested possible improvements to “streamline” customs procedures and “to ensure that manufacturers can ship and receive steel in an efficient manner.” Part of that streamlining, AISI argues, includes updating border infrastructure.

So, in many ways, U.S. steel and aluminum seem to be on the same page with respect to NAFTA — that is, that there’s room for improvement.

NAFTA Renegotiation a Hot Topic

The USTR sent out a notice May 27 seeking public comments on the topic of NAFTA renegotiation. The period for public comments closed June 12, but not before 1,396 comments were submitted.

Clearly, NAFTA is a very important subject to many people and industry organizations. While the minutiae of free-trade agreements can sometimes make the subject seem opaque, the outcomes are decidedly human, as jobs and livelihoods are often at stake.

Leo Gerard, international president of United Steelworkers, submitted a public comment in support of renegotiating NAFTA, provided it is “along the lines identified in the comprehensive approach identified in the negotiating framework document submitted on behalf of the USW and other unions by the AFL-CIO.”

“We have felt the negative impact of the NAFTA first hand since it entered into force more than two decades ago,” Gerard wrote. “Tens of thousands of plants have shut down, millions of workers have lost their jobs and many other workers have seen their compensation stagnate or decline as a result of NAFTA.”

Looking Ahead

What’s next for the process? A public hearing will be held at 9 a.m. Tuesday, June 27, in the Main Hearing Room of the United States International Trade Commission, 500 E Street SW., Washington D.C.

As demonstrated by the volume of public comments, there is a wide range of suggestions being offered with respect to NAFTA renegotiations.

One thing, however, is clear: Many of the interested parties want change of some kind.

Free Download: The June 2017 MMI Report

What’s up — or should we say, down — with zinc?

Source: Fast Markets

Together with other base metals, zinc has experienced a downtrend during this past week, reaching a seven-month low on Wednesday. Since then, it has recovered slightly up to $2,540/metric ton.

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Zinc is moving together with commodities and industrial metals, both of which have experienced a weaker start to June. These weaknesses began in the beginning of 2017, as zinc prices failed to reach new highs, turning into a sideways market.

Other metals, such as tin and lead, have also experienced lower prices during the first week of June, which could be a signal of a general trend reversal. We do not believe zinc will succeed in surpassing its previous $3,000/mt upper limit.   

In fact, zinc could be at the start of a downtrend.

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The market for biomedical metals — like the ones used in orthopedic implants — is expected to reach $34.9 billion by 2025, according to a recent market research report. Sandor Kacso/Adobe Stock

This morning in metals news, a recent report predicts the global biomedical metal market will reach $34.9 billion by 2025, palladium continues to stand strong and metal makers are looking for new markets for their products.

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Market for Biomedical Metals to Only Get Bigger

The market for biomedical metals is large — to put a number on it, it is expected to be valued at $34.9 million by 2025, according to a recent report from Accuray Research LLP.

According to the report, the biomedical metal market is expected to grow by a compound annual growth rate of 7.8% over the next decade.

Among the factors underpinning the expected growth are: increased demand for orthopedic implants; new developments in titanium-based alloys; and recent technical developments in biomedical metal.

Palladium Defies Analysts’ Expectations on Strong Run

At around $900 per ounce, palladium is trading at 16-year highs, according to a Platts report.

Analysts told Platts they saw no justification for palladium’s strength, especially considering a struggling Chinese automotive market (palladium is an important autocatalyst ingredient in gas-powered engines).

One Japanese analyst told Platts the current state of the palladium market was a “once every decade” situation.

Is a reversal in palladium prices on the way? Only time will tell.

New Markets for Metals

According to an article Wednesday in Bloomberg, makers of metals are looking for new commercial uses for their products, particularly as a boom in Chinese demand for raw materials has tempered. In general, China’s intent to crack down on credit — particularly on the heels of May’s Moody’s downgrade — has led many to believe a negative impact for metals markets will follow.

To make up for the loss of Chinese demand, producers of metals are looking for new markets for their products.

What uses do producers have in mind?

According to Bloomberg, a few uses include fertilizer, salmon cages, electric-car batteries and household cleaning products, among others.

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Many expect growth to slow in China through the remainder of the year. As such, producers will have to get creative in finding new uses for their products, from cars to fertilizer and everything in between.