Articles in Category: Supply & Demand

The showdown between global copper miner Freeport-McMoran, Inc. and the Indonesian government got a little hotter this week.

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Arizona-based Freeport majority-owns the world’s second-largest copper mine, Grasberg in Indonesia. The company has been trying to get a new permit from the Indonesian government to continue exporting copper concentrates for the last six months. On Monday Freeport said it would not accept terms of a deal the government offered that would allow it to resume shipments of copper concentrate that have been idled since January 12.

One More Year… Then Give Up Your Mine

Friday the Indonesian government offered Freeport a new, one-year deal that would allow the company to continue exports but only if it agrees to new rules requiring it to build a new copper smelter in Indonesia within the next five years and also agree to switch to an operating license, the terms of which would require Freeport to, eventually, give up control of Grasberg.

Kennecott Copper Mine

Open pit copper mines such as Rio Tinto’s Kennecott in Utah could increase production and increase sales if Grasberg stays closed. Source: Adobe Stock/Photofly.

Freeport CEO Richard Adkerson, naturally, turned down that offer and said the company is unwilling to revisit the terms of its 30-year contract to mine at Grasberg, which accounts for about a third of Freeport’s annual copper production and 40 to 50% of its worldwide assets. He also said Freeport would consider going to arbitration if it can’t settle this dispute within 120 days. Read more

The 3-month London Metal Exchange lead price is still climbing. Source: Fastmarkets.com.

Lead has had a pretty wild ride over the past few months. After a big run in 2016, prices sold off in December, offering buyers a great opportunity to buy the metal as prices pulled back.

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Prices are now back near new highs as bulls seem to be taking control again. For reasons we’ll see below, we expect momentum to pick up again on the upside.

Global Lead Refined Production and Usage. Source: MetalMiner IndX.

According to the International Lead and Zinc Study Group, in 2016 refined lead supply exceeded demand by 11,000 metric tons in the global market. Read more

Source: MetalMiner IndX

Zinc hit a record shortage in 2016. According to the International Lead and Zinc Study Group, zinc registered a deficit of 286,000 metric tons last year. Global usage of refined zinc metal rose 3.6% while supply remained pretty much flat thanks to a number of mine shutdowns.

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The tightening in zinc’s raw material segment accelerated last year thanks to the closure of big mines such as Century, Lisheen and Glencore‘s suspension of 500,000 mt of annual mine capacity. These closures have impacted the supply of mine concentrates drastically and, for the first time, we are seeing an impact in the refined metal market.

In February, Korea Zinc Co. announced it will reduce its refined zinc output by 7.7% (or 50,000 mt) this year. The company attributed its decision to tight supplies of mined concentrate and the accompanying reduction in treatment charges, which have plummeted to multiyear lows.

Prices at Multiyear Highs

Zinc is trading near multiyear highs. Source: MetalMiner analysis of Fastmarkets.com data.

As a result of this narrative of supply shortfall, zinc is trading at the highest levels in more than eight years. Bulls have been in such a powerful position that prices have barely retraced during this run.

Will China Cut Output This Year?

Outside of China, mine supply of zinc fell by 10% last year. However, production increased inside China. In 2017 investors will be closely monitoring China’s numbers. Although output rose, imports slumped by 38% last year. This, combined with falling treatment charges, suggests that a raw material shortfall is building in China as well. China must get serious about controlling industrial metals output to solve its pollution problems.

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The conclusion: it’s only a matter of time before Chinese producers are forced to cut refined zinc output.

The 3-Month LME aluminum price soars. Source: Fastmarkets.com.

Aluminum prices hit $1,900 per metric ton this week. Aluminum has surged 13% so far this year.

China Proposes Supply Cuts to Fight Pollution

We already predicted at the beginning of January that China’s supply would be the most important price driver to watch this year.

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In February, a Chinese government document proposed that about a third of aluminum capacity in the provinces of Shandong, Henan, Hebei and Shanxi be shut down over the winter months. If implemented, they would be some of the most radical steps so far to tackle air quality in the country of 1 billion’s most polluted cities. Read more

We warned last month that the mostly small losses the prices our MetalMiner IndX experienced were caused by investors taking profits.

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Our suspicions were confirmed when almost all of our sub-indexes had big price rebounds this month. The Automotive MMI jumped 12.2% Raw Steels 8% and Aluminum 6%. Even our Stainless Steel MMI only dropped 1.7% and has taken off since February 1 as nickel supply is even more in question now with both the Philippines and Indonesia’s raw ore exports in question.

The bull market is on for the entire industrial metals complex. Last month’s pause was necessary for markets to digest gains but the strong positive sentiment for both manufacturing and construction shows no signs of ebbing in the U.S. and Chinese markets.

Last year, investors were wondering whether copper was worth more than $6,000 per metric ton or not.

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Late in 2016, prices were struggling to overcome this psychological level, but things are shaping up for 2017 to be a hot year for copper production, which could translate into a hot year for the copper price.

Upside momentum for copper prices picked up on supply disruptions. Copper rises above $6,000 per metric ton. Source: MetalMiner analysis of FastMarkets.com data.

Escondida Stops Production

Chile’s massive Escondida mine’s processing plants completely stopped supplying refined copper to markets on Thursday as no miners arrived for morning work. The mine produced around 1 million mt of copper last year, or 5% of global production.  Read more

Nickel was said to be in a supply deficit last year of 209,000 metric tons, according to Bloomberg, and is projected to remain in deficit this year to the tune of 188,000 mt.

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The Philippines has just ordered the closure of 21 mines and the suspension of another six. The island chain is a source of around half of the country’s nickel output. After Indonesia’s 2014 export ban, the Philippines became the world’s largest exporter of nickel ore and the primary supplier to China’s massive nickel-pig iron industry, raw material for the alloying of stainless steel.

Stagnant Prices

Yet, while there has been an uptick in prices, nickel’s performance can hardly be said to have been stellar. Since the middle of the summer the London Metal Exchange‘s LMEX index of six key base metals is up almost 18% yet nickel has risen by only 1.2%.

Deficit or not, the market does not seem to be in short supply yet. Between Indonesia and the Philippines the two countries produced about 700,000 metric tons of nickel a year in 2014 and 2015, with about 170,000 mt of that coming from Indonesia due to the export ban.

Chinese buyers simply switched to the Philippines as supplies dried up from Indonesia and drew down on extensive stocks they had amassed in advance of the export ban. Just as the Philippines’ new firebrand environment and natural resources secretary, Regina Lopez, moved to close environmentally damaging open pit mines, Indonesia is increasing exports again. Investors have their eye on a probable surplus towards the end of the decade as both countries return to some level of consistent supply. This graph illustrates the rise of the Philippines and since the export ban the relative decline of Indonesian shipments.

Nickel production

Nickel from major producers in the last nine years. Source: U.S. Geological Survey.

Of course, it’s not clear at this stage how quickly mining companies will be able to implement stricter environmental conditions that are likely to be applied by the new administration of Philippines President Roderigo Duterte, but it would seem that the action is not unjustified with comments in the Financial Times describing the Philippines’ nickel supply chain as an environmental disaster. Read more

The GOES M3 MMI took another jump this past month moving from 192 to 200 for a 4+% increase. Last month the index made a 5% gain.

Last month, MetalMiner examined the Trump administration’s stance on trade policy and likely impact on GOES markets (and concluded that GOES prices would not see too much of an impact since most of the imported GOES material comes from Japan, Russia and the U.K.) In other words, even in a trade war with China, we don’t expect that to drive GOES price momentum.

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However, and as one of our readers pointed out, our story failed to address “Buy America” requirements which, indeed, could impact GOES markets.

We know President Trump implemented Buy America requirements for the Keystone XL and Dakota Access pipelines including all new pipelines and retrofits (even slab imports are disqualified for domestic producers with only rolling operations here in the U.S.) Could Trump implement Buy America requirements for transformers? The answer to that question: absolutely! It’s clear that Trump will act aggressively to promote Buy America requirements. These requirements will serve as a bullish indicator for GOES prices.

In the aftermath of the GOES domestic anti-dumping case, many large equipment manufacturers moved production of stacked and wound cores as well as laminations to suppliers in Mexico and Canada in anticipation of significant duties being placed on GOES imports here in the U.S. Those duties did not materialize. Nevertheless, production moved to NAFTA countries anyway.

Which brings us to NAFTA. President Trump has promised to renegotiate NAFTA. But in truth, NAFTA has not been bad for the domestic steel industry. It remains unclear what specific changes the President will attempt to renegotiate. Furthermore, AK Steel could find itself in a bit of a pickle. On the one hand, from an overall perspective, AK Steel has probably benefited from NAFTA as the agreement currently stands, though its GOES business, in particular, may have suffered as AK customers moved operations to Canada and Mexico. As the sole remaining domestic GOES producer, AK Steel may need to walk a fine line between what it lobbies for in terms of Buy America and what it has gained with NAFTA.

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Meanwhile, the industry should pay close attention to Big River Steel which reported record first-month production for a flat-rolled mini mill. BRS has publicly stated that they will add GOES capacity at a later stage. Aperam South America has started a GOES line out of Brazil. Imports from South America could increase just as BRS is starting its GOES line.

Meanwhile, what’s driving GOES price momentum right now?

According to a recent TEX report, orders that are typically placed during the summer months did not get placed which created a surplus. Since January, buying organizations have come back into the market including: Chinese, Korean and U.S. customers. In addition, a large tender for the Middle East will soak up some extra capacity which has caused market entrants to secure material before that tender is released. This has likely caused some price momentum as Baosteel raised prices for February shipments.

U.S. import levels have also increased during January supporting the notion that demand has increased.

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Tin prices plunged 9% since the year started, hitting a five-month low. There are two factors driving this decline:

  • Profit taking: Prices rallied near 70% in 2016 and prices need to digest those gains.
  • Speculation that China has removed it’s 10% export duty on refined tin exports.

After this decline, we believe buyers can now take advantage to time some purchases.

Prices Near Support

Tin prices are trading near key support levels. Source: MetalMiner analysis of FastMarkets.com data.

Technically, the recent price decline seems normal within the context of a bull market. In bull markets, buyers can find good opportunities to buy metal after prices pull back.

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Tin prices are now nearing a support area where traders will likely lift prices, especially given the ongoing bullish sentiment across the metals complex.

The Removal of an Export Duty is Not That Bearish

Some say that China’s removal of its export duty could have a significant impact but we don’t necessarily agree. If China was a net exporter of tin, and prices in China were lower than in the rest of the world (as is the case with steel), then the removal of the export duties would have a significant impact on the market balance. However, that’s not the case.

Tin primary cash China vs LME. Source: MetalMinerIndX.

China is a net importer of tin. In 2015 China produced 146,600 metric tons while it consumed 175,842 mt. In addition, prices in China are lower than those on the London Metal Exchange. Moreover, China is trying to curb local output of metal, including tin, to fight pollution.

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For these reasons, we can’t see why removing the duty would result in a flood of metal coming out of China. In anything, it will just encourage more refining.

What This Means For Metal Buyers

Tin price levels look attractive. Now it could be a good time to minimize your tin price risk and buy forward.

On Thursday, the Philippines ordered the closure of 21 mines, and seven others could be suspended. The country previously suspended nickel mines last year. The nickel mines recently ordered to shut down account for about 50% of the country’s annual output.

Nickel Prices Rebound

Nickel Rebounds on news of the Philippines’ shutdowns. Source: MetalMiner analysis of fastmarkets.com data.

Nickel rose sharply on the news. Over the last few weeks, nickel prices were struggling to make headway as investors feared that the easing of the Indonesian export ban would bring more ore supply into global markets.

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Now we have two factors, Indonesia’s easing of its export ban and the Philippines’ shutdowns, that could drive prices in opposite directions. However, as we explained recently, the mining shutdowns in the Philippines are likely to be a greater driver of prices. Read more