Articles in Category: Supply & Demand

Iron ore prices have done an amazing job of defying gravity, the price has risen 41.7% this year after three straight years of losses according to Australia’s Business Insider.

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Prices for 62% fines hit $61.75 per dry ton this week and have averaged $53.64 per dry metric ton this year.

Source: Business Insider

Source: Business Insider

The raw material has variously been called the darling of the commodities market and by Citicorp as 2016’s hot commodity but many are now beginning to ask if enough is enough and just how much support there is for current price levels let alone further rises. Read more

Tin prices are up as shipments have fallen off and the Philippines is, once again, considering a raw ore export ban in a bid to bolster local processing.

Tin Shipments Fall, Prices Rise

Falling shipments from top tin exporter Indonesia and predictions that a surge in mining in Myanmar is tapering off has led to a scramble for the metal, sending inventories to the lowest level in over seven-and-a-half years.

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This provides a potential for further price gains for the metal mainly used to make solder for the electronics industry, already the second-best performer among industrial metals this year.

Filipino Lawmaker Revives Ore Ban

A Filipino lawmaker has revived a proposal to ban exports of unprocessed minerals to spur domestic processing, in a move that may tighten global nickel supply and make it an even tougher business environment for miners in the world’s top producer.

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The Philippines has vast but largely untapped mineral resources, limiting the contribution of mining to its economy to less than 1%. The sector is now facing a tough regime under the government of firebrand President Rodrigo Duterte who has suspended some miners causing environmental destruction.

Reuters_zinc_prices_vs_zinc_stocks_550_081616

Source: Thomson Reuters Datastream.

London Metal Exchange warehouse zinc stocks have steadily fallen since mid-2012, despite mostly stable prices during that period.

Saudi Arabia is pushing for an oil production cut among its fellow OPEC nations as well as other big producers such as Russia. In China, Beijing is pushing local governments to cut steel overcapacity.

Saudis: Let’s Make a Production Cut Deal

The Organization of Petroleum Exporting Countries will probably revive talks on freezing oil output levels when it meets non-OPEC nations next month as top exporter Saudi Arabia appears to want higher prices, according to OPEC sources, although Iran, Iraq and Russia present obstacles to a deal.

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Riyadh sharply raised expectations for a global production deal between on Thursday when Energy Minister Khalid al-Falih said Saudi Arabia will work with OPEC and non-OPEC members to help stabilise oil markets.

China Vows to Accelerate Steel Capacity Cuts

China should quicken capacity cuts in its bloated steel and coal sectors, the country’s top economic planning agency said on Tuesday, putting pressure on local officials to meet annual targets despite some worries the steps could hurt economic growth.

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China has promised to slash steel capacity by 45 million metric tons and coal capacity by 250 mmt this year, as it tries to rejuvenate two industries suffering from slowing demand and a massive supply glut.

When it comes to metals, demand has been heavily influenced by China for most of this century, but for copper, China has more than heavily influenced the market, it has dominated the demand landscape.

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According to Reuters, China has accounted for most of the demand growth since the commodities super cycle started in 2002, while over the same period consumption in the other parts of the world has stagnated or fallen as economic growth slowed. So, after a solid run this year for the copper price, the London Metal Exchange has risen from a six-and-a-half year low of $4,318 a ton in January to between $4,500 and $5,000 now. It should come as no surprise that warning bells are being rung in the face of weakening Chinese demand.

Imports Down… Supply Up?

China’s copper imports were down an annual 14.3% in July at 360,000 metric tons, Reuters reports, as the stimulus measures announced last year and early this year begin to lose their earlier impact. Much of the demand strength, such as it is, is currently attributed to speculative activity rather than real market demand. Shanghai stocks are rising suggesting metal being imported isn’t being consumed.

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Unlike steel, copper demand is not as heavily tied to the housing market in China. Demand comes from a variety of sectors, most of which benefited earlier this year from a surge of investment but which are now weakening as that stimulus wanes. Investment in the state grid and power industry accounts for about one-third of China’s copper demand, according to Reuters but demand is already said to be slowing, as is that in property and construction, which account for a smaller 20% of copper consumption.

CRU is quoted as saying “In the consumer sectors, demand from the auto sector is steady. Exports helped demand for air conditioners, but domestic sales were sluggish and that isn’t going to change much in the second half.”

Second Half Forecast

Not surprisingly, many are seeing falling prices in the second half, Goldman Sachs forecasts copper prices at $4,200 in six months and $4,000 in 12 months as a wall of supply — forecast by the bank to hit 4.2% growth this year — hits a stagnant demand market. Predictions of supply and demand balance vary considerably underlying the level of uncertainty but HSBC is predicting surplus as this graph from its recent Quarterly Metals & Mining Report shows.

Screen Shot 2016-08-11 at 14.01.59

Source: HSBC.

This prediction is made with a 5% disruption allowance built in, but according to Bloomberg 2016 has been the year for which mine supply has been the least disrupted since 2004. Contributing to the surplus supply position, this has impacted prices and Bloomberg says after a rise of 3% this year prices have already fallen back 1.9% this month, maybe forewarning of more to come.

One of the causes of falling aluminum prices over the past few years was the rise in China’s aluminum exports. But Chinese exports started to calm down this year, helping aluminum prices to recover.

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China exported 390,000 metric tons of unwrought aluminum in July, down 9.3% from July of last year. Chinese aluminum exports have fallen around 7% for the first seven months of 2016. Lower Chinese aluminum exports suggest stronger aluminum demand in China coupled with some supply cuts.

According to the latest figures released by the International Aluminum Institute (IAI), Chinese aluminum production has now fallen on a year-over-year basis in five out of the last six months. For the first half, Chinese aluminum production has fallen by 3.3% compared to the same period last year. This will be the first year where Chinese annual aluminum output declines if Chinese smelters don’t restart idled capacity. But, will they?

US Producers Warning Of Higher Chinese Supply in H2

During their second quarter earnings calls, some U.S. producers pointed to higher Chinese supply as one of the biggest risk for the aluminum industry in the second half. Century Aluminum believes that aluminum production in China could increase in the high single digits in 2016. For that to happen, we would need to see a sharp increase in China’s aluminum output in the coming months. Norsk Hydro also expects some of the Chinese capacity to come back later this year.

Prices: Not Too High But Rising Steadily

3M aluminum LME rising this year. Source: MetalMiner analysis of Fastmarkets data

Three-month aluminum LME price rising this year. Source: MetalMiner analysis of Fastmarkets data.

The ongoing fall in Chinese exports and a good-looking demand picture thanks to Chinese government stimulus are supporting aluminum prices this year. Unlike other metals, aluminum prices haven’t really skyrocketed but they are drawing a nice uptrend this year, signaling that investors’ sentiment on the metal is improving. If China doesn’t restart capacity, we could continue to see prices climbing higher.

Our Copper MMI gained just one point. Unlike other base metals, Copper on the London Metal Exchange continues to trade up and down. The metal struggled near $5,000 for the ninth-consecutive month.

Copper Markets In Deficit

According to the International Copper Study Group (ICSG), the refined copper balance for the first four months of 2016 indicates a production deficit of around 119,000 metric tons (and a seasonally adjusted deficit of about 129,000 mt). This compares with a production surplus of around 13,000 mt (a seasonally adjusted surplus of about 12,000 mt) for the same period of 2015.

Copper_Chart_August-2016_FNL

Stronger apparent Chinese demand caused the deficit. In the first four months, Chinese apparent demand increased by around 14% and world apparent refined usage is estimated to have increased by around 6%.

Chinese Imports Surge

In June, China imported 420,000 mt of unwrought copper and copper products, up 20.3% from June of last year. For the first half of the year, imports increased 21% compared to the same period in 2015. The growth in imports has helped support metal prices, too. However, there are different opinions on whether those imports are actual demand or just stockpiling into warehouses.

An expected, new round of infrastructure spending in China should continue to keep copper demand and China’s imports strong in the second half.

Prices Struggle

So the whole metal complex is performing well. Markets appear to be in deficit (although with high stock levels looming), investors are optimistic that they’ll see more stimulus coming from China and copper imports are strong. This all sounds bullish for copper prices this month, but traders seem unwilling to chase prices much higher than $5,000.

We have yet to see that bullish shift in investor sentiment in copper. Unlike other base metals, it’s still early to call this a bull market.

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The London Metal Exchange made news this week for cutting trading fees and retroactively slapping Detroit warehouse operator Metro International with a $10 million retroactive “settlement” long load-out queues that distorted prices.

LME Will Cut Trading Fees

The London Metal Exchange is expected to cut some trading fees, in a bid to arrest sliding volumes, but lower costs are unlikely to convince those already using cheaper alternatives — such as off-warrant storage — to return, metals industry sources say.

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Volumes on the 139-year-old exchange have been falling since trading fees were hiked an average 31% in January 2015. The drop has accelerated this year; in the six months to June volumes are down nearly 9% from the same period in 2015.

LME Hits Metro International $10 Million Non-Fine

Metro International Trade Services has just been hit with a $10 million “settlement” by the London Metal Exchange for its role in abetting the original load-out queue for aluminum in Detroit.

The subsequent splintering of the aluminum price between LME basis price and physical market premium caused collective outrage among manufacturers struggling to find ways to hedge the latter’s unprecedented volatility.

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Some are still pursuing Metro and its owner, Goldman Sachs, through the courts. The LME insists that the $10 million payment is not a fine but, rather, a settlement Metro agreed to in negotiations about the long load-out queues at its operation in the last three years.

10% publicly-traded companies in the U.S. who filed form SDs with the federal government have proven it is possible to not only comply with Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, but to also perform supply chain due diligence in line with industry best practices, according to an analysis of public filings by Dr. Chris Bayer, PhD, of Tulane University.

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Yet, more than three years after U.S. companies began filing reports about their efforts to find conflict minerals linked to armed militias in Africa in their supply chains, 65% say they still can’t make a determination.

U.S.-listed companies are required to investigate their supply chain for the presence tin, tantalum, tungsten and gold (commonly known as 3TG in metals circles), under a rule stemming from the 2010 Dodd-Frank Act. The law is meant to choke off mining revenue to militia groups in the Democratic Republic of the Congo and adjacent countries.

As well-meaning as it is, even last year many companies were not able to fully vet their supply chains and have previously said so in their filings.

This year, 10% of Form SD and CMR (conflict minerals) filers were found to be 100% SEC Rule compliant 67% were at or above the 75% compliance threshold. In all, SD & CMR filers averaged a compliance score of 79%, a generally high degree of compliance.

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More than 100 companies said or implied they had conflict-free products, Bayer found. His study was advised by Assent Compliance, among others. But only 19 companies, including Intel, Qualcomm, Cree, Hasbro and Texas Instruments, actually underwent an audit for those claims on one or more of their products.

Crude oil (in black) diverges from industrial metals (in red)

Crude oil (in black) diverges from industrial metals (in red). Source: MetalMiner analysis of @Stockcharts.com data.

Historically, crude oil prices have moved in tandem with industrial metals. Why is that?

  1. Oil is  not just a commodity, itself, but an asset closely followed by commodity investors. Falling oil prices make investors move away from commodities and, of course, industrial metals.
  2. Oil is the main benchmark for energy prices. Lower energy prices mean lower transportation costs and lower production costs, especially for those energy-intensive metals like aluminum.

For these reasons, it’s not strange to see that the trend in industrial metals looks very similar to that of oil prices (see chart above). But since June, we are witnessing a divergence between these two trends. Oil prices have fallen while industrial metals continue to rally, for the most part.

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Just when it appeared crude oil’s oversupply was easing, a new glut of gasoline is drowning the market’s hopes for a recovery, sending crude prices sliding.

So far, oil’s price correction looks normal within this year’s bull market. It’s not strange to see profit taking following the strong rally earlier this year. However, now that prices are hovering near $40 per barrel, they should start finding support. This divergence likely won’t last too long and if oil prices continue to fall that weakness could spread out

What This Means For Metal Buyers

It’s normal to see a price correction in oil following a strong rally earlier in the year. Oil prices should start finding support near current levels; otherwise oil’s price weakness could spread out into other commodity assets, including industrial metals.

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