Articles in Category: Supply & Demand

Oil prices fell as Saudi Arabia poured cold water on a potential deal with other Organization of Petroleum Exporting Countries members and other countries such as Russia. China is threatening to place tariffs on sugar imports.

Crude Oil Selloff

Crude prices are selling off today, aided by Saudi comments that a decision will not be forthcoming from next week’s Organization of Petroleum Exporting Countries meeting in Algiers.

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Many had thought that OPEC was close to reaching a deal to curtail production for up to a year with its members and non-member producers such as Russia, but the Saudi announcement makes it highly unlikely that any deal will happen soon now.

Clipperdata_OPEC_Production_500_092416

Source: Clipperdata.

Saudi Arabia has made production by regional rival Iran an issue in any deal to constrain production. The Saudis say Iran must abide by any deal just like other member-states and Iran and its allies say Iran should be allowed to bring its capacity up to full production, as it just re-entered markets after decades of sanctions, before it starts to cut.

China Explores Sugar Tariffs

China has launched a probe into soaring sugar imports following complaints by its domestic industry, the government said on Thursday, the latest sign that trade tensions between major commodities producing nations is intensifying.

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The Ministry of Commerce said the probe will look at imports since 2011 and into possible protectionist measures provided by foreign countries for their producers. It will last six months, with an option to extend the deadline, it said.

At this time last year, there was nothing really bullish about zinc.

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Global zinc markets were in surplus and prices were heading lower while sentiment in the mental complex was pretty bearish. But the picture quickly turned around earlier this year. For zinc buyers, the right time to hedge/buy forward was in April, when prices were still below $1,900 per metric ton, as we pointed out in our Monthly Outlook.

In April buyers should have hedged zinc one year out

In April, buyers should have hedged zinc one year out. Source: Fastmarkets.com.

Zinc investors have been drawn in by a narrative of mine closures and a resulting tightening of the supply chain. As zinc prices weakened over the past three years, more than 1.5 million mt of mine capacity was either idled or closed permanently. These closures were further exacerbated when Glencore announced plans to suspend 500,000 mt of production last October.

According to the latest data compiled by the International Lead and Zinc Study Group, the global market for refined zinc metal was in deficit by 174,000 mt from January to July 2016 with total reported inventories falling by 17,000 mt over the same period.

Is Now a Good Time To Hedge?

Earlier this month, zinc smelter Nyrstar announced the initiation of a hedging program that would lock in prices six month forward. Is this a good move given that prices are on the rise and everyone is still buying into the tempting narrative of supply shortfall?

I think Nystar made a smart move. Now it seems like a good time for producers to hedge for the midterm while on the other side, zinc buyers might want to wait for more attractive prices to hedge again. Here is why:

Zinc migt struggle to build on gains as it faces strong resistance levels

Zinc might struggle to build on gains as it faces strong resistance levels. Source: MetalMiner analysis of Fastmarkets.com data.

Zinc has risen in almost a straight line since those January lows. Traders sitting on healthy profits may now be tempted to lock in a bit of downside protection. Moreover, prices are near key resistance levels, meaning that in 2014 and 2015, zinc fell as prices approached $2,400/mt. Traders might again find reasons not to chase prices higher from this point, especially given the spectacular rally seen this year.

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Moreover, a zinc rally could run out of steam if miners are tempted to bring production back quicker than originally planned. Chinese mines could respond to higher prices by lifting production and filling any supply gap. Also, bulls are concerned that Glencore could reactivate the 500,000 mt of mine capacity it has idled since late last year.

Bottom Line

Zinc is still one of the favorites among metal investors and this rally could continue into 2017. However, zinc has gone pretty ballistic so far this year and although fundamentals might back the story up, we could see a price pullback around the end of the year. Zinc producers might want to hedge some of their production now while zinc buyers might want to wait for better opportunities to time their purchases.

China’s steel industry will see demand drop even further in 2017 and the Federal Reserve left rates unchanged yesterday.

CISA: Chinese Steel Demand Will Fall More

China’s steel demand is likely to drop for a third year in a row, an industry official said on Thursday, as mills in the world’s top producer focus on reducing capacity.

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China’s crude steel consumption slipped 1.9% from January to July and there may be a slight drop for the year, said Wang Liqun, vice chairman of the China Iron and Steel Association (CISA).

Fed Leaves Rates Unchanged Again

U.S. stocks marched higher on Thursday, with the Nasdaq hitting a record intraday high, as investors cheered the Federal Reserve‘s decision to not raise interest rates yesterday.

While the Fed said the risks to economic outlook were roughly “balanced”, it left rates unchanged for want of “further evidence of continued progress”. Inflation remains below the central bank’s target of 2 percent and members saw room for improvement in the labor market.

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Even if the Fed raises rates at its last meeting of the year in December, many are worried that Central Banks toolkit for hitting inflation targets is ineffective.

On the heels of six out of seven months of increasing levels of demand for design services, the Architecture Billings Index (ABI) fell just below the positive mark in August.

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An economic indicator of construction activity, the ABI reflects the approximate nine to 12 month lead time between architecture billings and construction spending. The American Institute of Architects reported the August ABI score was 49.7, down from the mark of 51.5 in the previous month. This score reflects a decrease in design services (any score above 50 indicates an increase in billings).

“This is only the second month this year where demand for architectural services has declined and it is only by a fraction of a point,” said AIA Chief Economist, Kermit Baker, Hon. AIA, PhD. “It doesn’t appear that this is the beginning of a broader downturn in the design and construction industry.”

Metal prices bottomed out earlier this year and ever since we are seeing rising prices. However, was that the ultimate bottom after a five years of a bear market? Are metal prices set to continue running higher in 2017?

Industrial metals ETF flattens in Q3

The industrial metals ETF flattens in Q3. An end to rising prices? Source: MetalMiner analysis of @StockCharts.com data.

These are questions we can’t answer, but they will be answered moving forward. Although industrial metals entered a bull market this year, we have yet to see how long this rising market will last. In Q3 we already witnessed some weaknesses with many base metals struggling to build on this year’s gains.

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We see three critical factors to watch as we move in 2017. These factors will determine the sustainability of this year’s bull market:

Supply Cuts

Some production capacity was closed this year to fight low prices and the market now seems more balanced than last year. These supply cuts helped push metal prices higher, but the problem is producers might now have enough incentives to restart production. A good example is the zinc market. Zinc prices rose sharply this year thanks to supply cuts, but now markets wonder if Glencore and China’s zinc miners will start upping their production to reap the rewards of higher prices. Read more

There appears to be an almost universal expectation that iron ore prices will start to retreat soon, after surging some 62% through April. They have since eased back but are still up 28% on the year.

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Without doubt, much of iron ore’s gains in 2016 have been driven by strong demand from China, with imports up 9.3% to 669.65 million metric tons in the first eight months of the year from a year ago. But prices in Qingdao lost 5.8% in the seven sessions through Wednesday. That was the longest run of daily declines since March and while steel output remains robust, questions are again being asked how much longer prices can remain north of $55 per mt as yet more supply comes on stream. According to the MetalMiner index, finished steel prices have eased this month.

Iron Ore Output

You would expect the miners to refute this and, sure enough, in a Bloomberg report, Vale SA and Cliffs Natural Resources Inc. said that the impact of the new output won’t be as severe as expected and will see the $50 per mt level holding, but banking analysts are not so sure with Westpac saying last month rising supply will drive prices below last year’s lowest point of $38.30, while Citigroup expects an average of $45/mt next year. Read more

India will complete the second phase of its mining auctions later this month, after the first round last year received a lukewarm response. Going under the hammer will be gold, diamond and iron ore mines.

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Mines in five provinces — Karnataka, Andhra Pradesh, Madhya Pradesh, Rajasthan and Jharkhand — will be auctioned. This time, there are 14 iron ore mines, 12 blocks of limestone and one block each of gold, diamond and copper. While some analysts have predicted a better response than last time to the iron ore mining auction, the limestone blocks may not see much action because of the cement market slump.

Round One

In the first round of the auction, the states offered 47 mines bearing minerals such as gold, iron ore, bauxite and limestone.

They were able to auction seven mines in that phase, earning the government billions of dollars over the next 50 years. However, 17 blocks were not sold due to an insufficient number of initial bids on account of factors such as quantity and grade of ore and low quality of the mineralization studies, among other reasons.

The first round also came under scrutiny when the comptroller and auditor general of India (CAG), a body that audits all government expenditures, passed certain adverse observations. It said in a report tabled in the Indian Parliament that competition may have been restricted in the auction of 11 coal blocks on account of multiple bids by corporate groups made through joint ventures or subsidiaries.

What Does This Mean For India’s Steel Exports?

The iron ore auction comes at a time when the Indian government is contemplating a relaxation of export duties on iron ore. This has led to protests from the domestic steel industry.

In a representation to the steel ministry, the Indian Steel Association asked the government to continue with a 30% export duty on all grades of ore, to preserve natural resources for domestic use.

The government already cut the export duty on low-grade fines to 10% earlier this year but continued with a 30% levy on lumps.

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India’s ore production is lagging its growth of steel production. Production, according to steel ministry data, fell at a compound annual growth rate (CAGR) of 6.5% in the past five years.

There is a delicate game of cat and mouse, feint and counter feint, smoke and mirrors going on among oil producers universally suffering from low oil prices.

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On the one hand we have Saudi Arabia, the architect of the current low-price environment which started pumping oil at record levels specifically to grab market share in the face of growing U.S. shale production and the return of archenemy Iran to the market after years of sanctions. The low prices that resulted have caused pain for all producers and driven some heavily oil-dependent economies to the brink of collapse.

Talk of a production freeze in the early part of this year got everyone excited and the crude price rose, only for Saudi Arabia’s powerful deputy crown prince, Mohammed bin Salman, to throw cold water on the idea if Iran was not willing to be a part of any coordinated freeze.

The Arabian Stallion and the Russian Bear

Since then, all parties have tried to tough it out. Saudi Arabia, with the largest sovereign wealth fund, has managed to maintain appearances but is still trimming budget deficits, burning through reserves and talking of selling its crown jewel, Saudi Aramco.

Russia has been partly shielded by a collapse in the value of the ruble that has partially compensated domestic budgets from low crude prices but is still desperate to achieve higher returns. Some 40% of the country’s revenue comes from oil and natural gas and the economy has languished in recession territory for the last two years.

Source: Financial Times

Source: Financial Times

It has taken five months but all the parties are now maneuvering to have another go at a production freeze in the hope that it will push up prices. Talk of a “task force” pact between Russia and Saudi Arabia was enough to drive the oil prices up in a matter of minutes last week. Read more

U.S. construction spending during July came in at an annualized rate of $1,153.2 billion, nearly the same as the revised June estimate, which was $1,153.5 billion, the Census Bureau reported ahead of the Labor Day holiday. Even so, the July 2016 figure is 1.5% higher than the July 2015 construction spending total.

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July’s numbers could be attributed to spending on private construction projects, which was up 1% compared to the revised June total. Public construction spending, by contrast, was down for the month by 3.1%. For the year, private construction spending gained 4.4%, while public spending dropped 6.5%.

Construction_Chart_September_2016_FNL

The Construction MMI reflected healthy U.S. demand for construction metals and jumped nearly 5%. Economists polled by Reuters had forecast construction spending rising 0.5% in July but keeping its gains from June is still good news for construction.

The upward revisions to the May and June construction spending data could see the second-quarter gross domestic product estimate revised up from the 1.1% annual pace reported last month and economic growth is good for construction and the economy as a whole.

Aluminum, Surcharges Up

Construction received a boost from the aluminum components of the sub-index, which posted strong gains despite the Aluminum MMI turning in an overall flat performance this month. Fuel surcharges were up across the board as oil’s taken a bit of wild ride lately. Products such as rebar and H-beam steel were also up.

Despite individual product strength, steel remains a very bifurcated market with prices up in the U.S. and down globally. Despite promises to wind down production in the second half of the year, China is buying up coal for steel production. The price of coal needed to make steel has surged more than 45% over the past three weeks, to its highest level since early 2013.

Major Shipper Close to Insolvency

South Korean shipping giant Hanjin Shipping Co. appears to be sailing toward oblivion as we’re writing this, a move that reflects weaker global steel demand or overall excess capacity. In the past week, creditors pulled the plug after $900 million (1 trillion Korean won) in support failed to keep the company afloat, forcing Hanjin to file for bankruptcy protection. Seoul Central District Court, which will decide the fate of the company, has set a Nov. 25 deadline for it to develop another restructuring plan, but many experts think liquidation will be the most likely outcome.

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Even though construction product demand looks strong, there are a lot of other factors that could plague these metals in the near future.

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No one has really been talking about lead this year. The metal, with relatively “boring fundamentals,” hasn’t really caught investors’ eye this year. Especially, when its metal cousin zinc is getting all the attention.

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However, if you are a lead buyer, don’t wait until this metal gains popularity, because it might be too late. Perhaps this metal hasn’t really made it to the front pages yet, but it’s worth paying attention to. Sometimes, a metal can rise significantly in price before the bullish story becomes clear.

3M LME lead hits 14-month high

Three-month London Metal Exchange lead hits a 14-month high. Source: MetalMiner analysis of FastMarkets.com data.

That’s what seems to be happening with lead. The metal hit a new 14-month high last week. It’s up over 20% since January. Read more