Articles in Category: Supply & Demand

Nickel prices are, finally, on the move.

Owners of shares in nickel mines shouldn’t start popping the champagne corks just yet, it’s going to be a slow burn rise but the landscape appears to be shifting and it is because of, as usual, China. First and foremost, there is a trend among stainless producers this year, particularly in China, to produce more 300 series nickel-bearing grades than last year.

Real Demand is Up

Just as mills and consumers shifted wholesale from 300 to 400 series grades when nickel prices went through the roof in 2010-11, a prolonged period of falling prices has encouraged consumers and designers to switch back to higher-quality grades.

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Macquarie Bank is quoted by Reuters saying global nickel demand will grow by 4.4% this year, largely on the back of a predicted 4% rise in Chinese 300 series stainless production. Likewise, the INSG estimates the global market will fall into a small 600-ton deficit in Q1 of this year, although it must be said the market remains well supplied by huge global stocks. Read more

Anyone looking at the seaborne Asian Iron ore market? A cursory glance at China’s iron ore market and one has to ask, “what’s going on?”

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Iron ore prices have been on a roller coaster this year, yet reports abound of excess iron ore supply, excess steel production, excess steel capacity and falling property prices and, by extension, excess appetite for construction steel.

There is still mine oversupply. Source: Adobe Stock/nikitos77.

There is still mine oversupply. Source: Adobe Stock/nikitos77.

This week, reports of rising port stocks, up 1.6% to 100.45 million metric tons or five weeks of supply should have depressed prices, but the prevailing mood among traders seems to be one of cautious optimism that iron ore consumption and, hence, steel production will continue strongly this year, so much so that iron ore prices actually rose 2.7% to $54.98 per mt late last week. Read more

U.S. Crude oil reserves unexpectedly jumped this week and major miners and trying to move older assets but can’t close deals because of cleanup costs.

Crude Oil Reserves Rise

U.S. crude oil stockpiles rose unexpectedly last week even as gasoline and distillate inventories fell more than expected, data from the Energy Information Administration showed on Wednesday.

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Crude inventories rose 1.3 million barrels in the week to May 13, compared with analysts’ expectations for a decrease of 2.8 million barrels and a 1.1 million-barrel drawdown reported on Tuesday by the American Petroleum Institute.

Miners Can’t Afford to Older Pits

Major miners are trying to avoid hundreds of millions of dollars in closure costs by selling off pits, as cash is tight due to a prolonged commodities price slump, but the crippling cost of environmental rehabilitation is making it tough to seal deals.

Free Download: The May 2016 MMI Report

Where mine sales have gone ahead, production is being prolonged, adding to oversupply in depressed markets, like coal.

This week, the market heard some words of wisdom from Norilsk Nickel’s vice president Pavel Fedorov.

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Very unusual for a metals producer, instead of talking up the market, Fedorov gave a very candid assessment, reported by the Financial Times, of metals markets in general and the nickel market in particular.

Until producers begin to behave rationally, he said, prices will remain depressed for the foreseeable future. Pointing to the state of demand in the world’s largest nickel consumer, China, Fedorov said about a third of current Chinese stainless steel capacity was unsustainable due to a slowdown in real estate demand while Macquarie Bank is quoted as saying Chinese stainless steel demand is likely to fall a further 7% in the first quarter of this year from the same period a year earlier and that demand is not going to come back.

No Shutdowns Yet

The only rational reaction to reduced demand is to cut supply, if producers want prices to recover, which will bring with it profitability and a return for shareholders. In part, producers are recognizing this new reality and assets are being written down.

Glencore wrote down its nickel assets last year contributing to a $5 billion loss, but in spite of writedowns Glencore and fellow Australian miner BHP Billiton have said no more than they “may” close capacity at Murrin Murrin and Nickel West, respectively, even though they are losing money at current prices.

Yet Norilsk is Still Profitable

Indeed, Norilsk’s comments are all the more interesting because the company is not suffering losses as a result of the low prices, just loss of better profits. The world’s largest miner has a cost of production currently below $8,630 per metric ton price levels, aided and abetted by co-mined minerals and the depreciation of the Russian Ruble.

Almost in provocation, Fedorov is quoted as saying that due to the value of its Talnakh deposit in the Russian Arctic — which contains some of the world’s largest concentrations of platinum, palladium, gold, copper and silver — the company could “theoretically stockpile nickel and still make money.”

Betting on the long term, Norilsk is moving ahead with the development of new projects despite current prices. Last year it is said to have sold a 13.3% stake in its Bystrinsky copper mine in Siberia near the Chinese border to a group of Chinese private equity and other investors. The project is expected to cost $1 billion, the company has said. That’s before it starts production in 2017, adding pressure to the 70% of global capacity that, in Norilsk’s estimation, is losing money at current prices.

Free Download: The May 2016 MMI Report

Nickel is not an isolated case. Across the metals spectrum there are plenty of examples of oversupply where prices are depressed and unlikely to recover in the face of weaker demand and excess supply. We are into a new normal but many producers are unable or unwilling to face up to the the implications.

The broad metals rally continued in April with all but three of our MMI sub-indexes gaining value this month and two of those holding their value from last month. Only the GOES MMI lost value and that had more to do with its specialized market.

MM-IndX_TRENDS_Chart_May2016_FNL-TOPVALUE100

The Aluminum, Raw Steels, Global Precious, Renewables, Stainless Steel, Automotive and Construction MMIs all increased in April amid a broad commodities rally. The U.S. dollar continued to weaken, hitting its lowest point in 15 months, pushing oil and other key commodities up in value and helping metals see their boat rise with the tide.

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In investments, both gold and silver are testing multiyear highs as investors look to them for a short-term safe haven from falling currencies.

Further dollar depreciation could increase demand for all dollar-denominated commodities and metals are currently in a sweet spot on the demand side, particularly because of China’s economic turnaround.

The China Front

Continued stimulus in China is increasing demand for steel, aluminum and other metals there. As we’ve previously reported, the People’s Bank of China has cut requirements for first-time homebuyers, cutting the minimum mortgage down payment from 25% to 20%, taking it to the lowest level of requirement ever.

This is just one of many stimulus measures that Beijing has undertaken in recent months. However, global steel and aluminum oversupply is still a top concern, and China’s role in that glut continues to be front and center.

Other Drivers

With U.S. home sales and the non-residential sector continuing to show strength, construction in both of the world’s largest markets has been a positive driver for metal, as has automotive demand.

It was a good week for commodities in general and metals in particular as prices kept increasing and the broad metals rally looked like it has legs. But what if it’s all speculative investment?

Free Download: The May 2016 MMI Report

Oil nearly hit $47 a barrel, a 6-month high, bringing drillers back online and pushing up commodities in general. The Silver Institute predicted a deficit for the industrial/precious metal this year, the first in 13 years.

So prices are up, the U.S. dollar is down and it’s a good time to be invested in metals. But what if it’s all not real? What if it’s all based on rank speculation! Speculators snapping up all of the metals contracts out there looking to make a quick buck! Driving up prices only to dump their investments later!

That actually wouldn’t be such a bad thing, our own Raul De Frutos reported this week.

“Speculation is the act of trading an asset, with the risk of losing part of all of the capital invested, in the expectation of a substantial gain,” he wrote. “For traders to trigger a price rally there must be a fundamental reason justifying that the risk of loss is more than offset by the possibility of a significant gain; otherwise, there would be very little motivation to speculate. So, in reality, every price movement, especially in commodity markets, is speculative.”

That’s right, people snapping up iron ore futures and other contracts are actually helping the rally and it might not be short-term investing. That oil rally we talked about earlier? Yep, driven mostly by people buying and storing oil. Spot crude prices, time spreads and refining margins all showed signs of weakening since the start of this month before the big gains this week.

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So, in short, get out there and speculate. People wouldn’t be doing if they didn’t think the potential gains outweighed the risks of losses.

Over the past few days, several analysts have said the recent metals rally was purely speculative, without a fundamental justification for the price swings. But what’s speculation?

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Speculation is the act of trading an asset, with the risk of losing part of all of the capital invested, in the expectation of a substantial gain. For traders to trigger a price rally there must be a fundamental reason justifying that the risk of loss is more than offset by the possibility of a significant gain; otherwise, there would be very little motivation to speculate. So, in reality, every price movement, especially in commodity markets, is speculative.

Iron Ore and Steel Rebar Prices Fall

Steel and iron-ore futures traded in China have gone into sharp decline, reversing the huge price run-up seen this year. Analysts believe that the rally has retraced because of new measures taken by exchange officials. In late April, Chinese exchanges raised margin requirements on iron ore, hot-rolled coil and steel rebar. That is, they raised the amount that investors need to deposit to trade these assets.

Steel-rebar and iron ore prices year to date

Steel rebar and iron ore prices year to date. Source: Wind Info.

But are higher margins a reason for a price fall? I don’t think so. Higher margins only mean that investors enjoy less leverage, that’s not a justification for a sustainable decline in prices. Higher margins can reduce the volume traded (as investors need to deposit more money per trade) but that doesn’t necessarily cause a change in price direction. Read more

A major fight between the OECD and the IEA might finally lead the organizations to separate. Big, multinational commodity houses are all seemingly refocusing on their core businesses.

OECD and IEA Might Separate

The West’s energy watchdog, the International Energy Agency, faces a possible legal split from its parent body following decades of friction and fresh disagreements over cooperation with China, a document seen by Reuters shows.

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Any divorce from the Paris-based founder, the Organization for Economic Cooperation and Development, might complicate funding and confuse governance of the IEA, whose role includes coordinated stocks releases to address global oil shortfalls.

Big Commodity Trade Houses Change Strategy

Commodity trade houses are going back to their roots and focusing on what they know best, whether it’s energy, metals or agriculture, while shedding peripheral activities.

Free Download: The April 2016 MMI Report

From the world’s largest independent energy trader Vitol‘s retreat from agricultural markets, to trade house Gunvor pulling out of metals and Archer Daniels Midland disposing of its chocolate and cocoa businesses, traders are concentrating back on their historically strong activities.

Mining giants BHP Billiton and Rio Tinto Group are both shifting to a growth strategy after years of cost cutting and oil’s rally may be over.

BHP Joins Rio in Growth Shift

BHP Billiton has talked up its future growth options, joining fellow mining giant Rio Tinto in marking a shift in focus after four years of aggressive cost cutting. While big miners are still looking to sell assets to help cut debt or to exit businesses like nickel and coal, they are also preparing for a pick-up in demand as looming supply gaps in at least some commodities sow the seeds for higher prices.

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While the big miners are still looking to sell assets to help cut debt or to exit businesses like nickel and coal, they are also preparing for a pick-up in demand as looming supply gaps in at least some commodities sow the seeds for higher prices.

Oil Rally Loses Momentum

The rally that carried oil prices up by more than $20 per barrel between the middle of January and the end of April seems to have run out of steam for the time being. Spot crude prices, time spreads and refining margins have all showed signs of weakening since the start of this month.

Free Download: The April 2016 MMI Report

Reuters’ John Kemp writes that prices for both West Texas Intermediate and Brent Crude recently closed below their 14-day and 20-day moving averages for the first time since early April.

U.S. construction spending increased in March to its highest level in more than eight years and our Construction MMI shot up 15.9% along with it. Gains in home building and nonresidential construction offset a drop in government projects.

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Construction spending rose 0.3% in March after a 1% gain in February, the Commerce Department said Monday. The back-to-back increases raised total spending to a seasonally adjusted annual rate of $1.14 trillion, the highest level since October 2007.

Construction_Chart_May_2016_FNL

 

Residential construction grew at a 14.8% annual pace in the first three months of the year. It was one of the few sources of strength in a quarter in which the economy grew at an annual rate of just 0.5% — the slowest pace in two years.

Aluminum, steel scrap and copper all saw gains on the index, moves that are in line with the broad metals mix used in nonresidential and residential construction here in the U.S. In China, numbers are similarly positive.

Chinese housing data for March showed another increase in home sales, putting a dent in China’s housing oversupply and helping the construction reset there. As lower rates and yields work with a lag, sales growth could stay strong in China this year. A reduction in the requirement for a down payment by the central government is also underpinning increasing sales.

While China’s manufacturing purchasing managers index from Caixin Media and Markit Economics fell to 49.4, missing economists’ estimates for 49.8 and down from 49.7 in March, the construction numbers in the People’s Republic remain strong and could, theoretically, pick up the slack this year if manufacturing there remains depressed.

A total of 83.19 million metric tons of iron ore was discharged at Chinese ports during April, according to ship-tracking data compiled by Thomson Reuters Commodity Research and Forecasts.

This was up from the 81.76 mmt offloaded in March, suggesting that China’s iron ore import volumes will show an increase when preliminary customs data is released in the next few days.

Compare Prices With The April 2016 MMI Report

China is back to producing steel at a high rate. Even zombie mills have come back from the dead. While this might not be good for the oversupply situation, it is a good thing for construction estimators and procurement professionals looking for as many options as possible to fulfill orders and reduce prices via competition.

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