Articles in Category: Supply & Demand

In a surprise move, Andrew Harding, the head of iron ore at commodities miner Rio Tinto Group has been passed over as CEO to replace outgoing Sam Walsh on July 2 by relative newcomer to the group, Jean-Sebastien Jacques who only joined in 2011 and has headed up Rio’s copper and coal divisions, the Sydney Morning Herald reports.

Two-Month Trial: Metal Buying Outlook

Harding has been with Rio for 25 years and had been expected to replace departing Walsh in part due to his experience in iron ore which is central to Rio’s existence. The miner generates about half its revenues and around 90% of its earnings from iron ore sales, just 9% from aluminum and copper and the balance from diamonds and other minerals.

Rio Tinto’s Future

The move is seen as part of future plans for Rio to reduce reliance on iron ore and to divest itself of coal assets. Although the firm would argue otherwise — its cost of production for iron ore is a fraction of what it was five years ago — the firm’s expansion into an already oversupplied market is seen by many as a dead end.

Rio Tinto increased iron ore production by 11% last year to 327.6 million metric tons, and that should rise another 7% to 350 mmt by the end of this year, the Telegraph’s Questor column reports. The miner is not alone as rivals BHP Billiton and Fortescue also ramp up production to offset falling prices.

Source Telegraph

Source: Telegraph

This year, the policy appears to have paid dividends as Chinese demand has risen on the back of a short-term boost from a huge government backed loan splurge at the start of the year, but there are signs the economy there is slowing again. Read more

Vietnam and Thailand placed tariffs on Chinese steel exports. China’s Southeast Asian neighbors are joining an international effort to limit its massive steel industry’s influence on world prices led by Europe and the U.S.

Low oil prices forced OPEC’s accounts to dip into deficit for the first time since 1998.

China’s Neighbors Are Sick of Steel Dumping, Too

Countries such as Vietnam, Indonesia and Thailand are challenging a flood of imports from China. They are retooling their steelmaking technology and imposing tariffs as a construction boom spurs steel demand across Southeast Asia

Free Download: The June 2016 MMI Report

Steel from China is expected to dominate the market for many years, but swelling demand is driving efforts in countries such as Vietnam and Indonesia to build more modern plants, impose tariffs and better compete with China’s vast mills.

Vietnam imposed temporary anti-dumping tariffs ranging from 14% to 23% on steel imports from China and elsewhere in March. It recently slapped additional import duties of up to 25% on more Chinese steel products that will last until October 2019.

Thailand’s commerce ministry is working on the final draft of an anti-dumping law. The government there expects to propose the draft for approval by end-2016, according to a spokeswoman.

OPEC Accounts Fall into Deficit, First Time Since 1998

OPEC’s 2015 oil export revenues slumped 46% to a 10-year low, the group said in a report published on Wednesday, underlining the impact on producers’ income from a collapse in prices.

Two-Month Trial: Metal Buying Outlook

Oil prices are at about $50 a barrel, half their mid-2014 level after being pressured by oversupply. OPEC’s decision in November 2014 to not cut supply, hoping a drop in prices would curb supply from competitors, deepened that decline.

Nickel prices climbed to a six-week high, a nice recovery after May’s price sell-off.

Two-Month Trial: Metal Buying Outlook

The metal benefited from a positive swing in investor sentiment toward commodities in June, stemming from a weaker dollar and the ongoing recovery in oil prices. Nickel has climbed steadily after hitting multiyear lows in February, but the move isn’t big enough to impress the market yet.

3M LME Nickel hits 6-week high

Three-month London Metal Exchange nickel hits a six-week high. Source: MetalMiner analysis of FastMarkets.com data.

Chinese Ore Imports Falling

Nickel ore is the essential ingredient for China’s massive nickel pig-iron production sector. Imports for the first four months totaled 4.16 million metric tons, a 38% decline compared to the same period last year. Indonesian imports have been non-existent since the country imposed its exports ban on unprocessed minerals. Although the Philippines has managed to fill part of the gap, it hasn’t been enough. Read more

A recent Reuters article draws an interesting comparison between the Chinese aluminum and steel industries and then goes on to draw some not-so-encouraging conclusions for aluminum. Excess aluminum production there is damaging the prospects of aluminum producers in the rest of the world, purely because of the size of China’s massive aluminum industry.

Two-Month Trial: Metal Buying Outlook

Both metals face excess production at home due to rampant overinvestment and slowing domestic demand. Reuters lists a number of similarities between the two industries: China is the world’s largest producer in both markets, accounting for 51.5% of global steel output and 54.4% of global primary aluminum output in April.

Chinese Steel vs. Chinese Aluminum

In both industries, China has been exporting excess production of steel and aluminum in the form of semi-manufactured products, with steel product exports last year totaling 112.4 million metric tons, representing around 14% of the rest of the world’s output and aluminum product exports of 4.2 mmt representing 17% of the rest of the world’s output. In both cases, exports have damaged prospects for producers elsewhere, forcing closures, losses and delaying investments.

Source Reuters

Source: Reuters

In the case of steel, though, the threat of a delay to China’s application for market economy status by the World Trade Organization has forced a more conciliatory response by Beijing in recent discussions, and the promise of large-scale closure of older capacity in China.

Aluminum Overproduction Unabated

How effective this will be remains to be seen but, even so, it is in marked contrast to the position aluminum is in, where Beijing seems unable or unwilling to curtail new investment. As prices on the Shanghai Futures Exchange have risen this year, idled smelters have restarted and new capacity has continued to come on-stream.

Annualized run rates increased by almost 650,000 mt over the course of April and May, Reuters reports, with May’s average daily output of 86,290 mt the highest since November 2015 before prices fell below $1,518 (10,000 yuan).

The other factor apparently effecting Beijing’s attitude is the rapid rise in capacity is coming from new state of the art low cost aluminum smelters in China’s northwestern provinces. Aluminum is not seen as an old-fashioned, state-dominated industry operating polluting plants close to urban areas.

Free Download: The June 2016 MMI Report

China’s new aluminum capacity is cutting-edge, world-class technology and — at current prices at least — is making money. As a result, Reuters concludes capacity is unlikely to be trimmed anytime soon, at least by government intervention. For aluminum producers outside of China, that is not good news, and although recent rises in price to $1,600/mt are better than the $1,450-1,500/mt levels of late last year, it doesn’t offer much upside in the short- to medium-term if China keeps flooding the market with excess semi-finished products.

Aluminum price increases this year have been minimal compared to what we’ve seen in steel prices. However, the metal is rising slowly but steadily as investors see an opportunity to buy aluminum when prices fall short-term.

Two-Month Trial: Metal Buying Outlook

That’s exactly what happened this month, after prices sold off in May, investors are again jumping on the metal.

Aluminum hits 1-month high. Source: MetalMiner analysis of fastmarkets data

Aluminum hits a one-month high. Source: MetalMiner analysis of Fastmarkets.com data.

Demand Improves

A recovery in demand is a key factor supporting aluminum prices this year. China unleashed a renewed government stimulus in the form of credit expansion and infrastructure building in December, which has — at least momentarily — improved the demand side of the equation for industrial metals.

Trade figures this year showed China’s relatively strong appetite for aluminum. Higher demand means exporting less as Chinese companies are consuming more aluminum domestically. China’s exports of unwrought aluminum and aluminum semis were 420,000 metric tons in May. From January to May, exports are down 7.9% compared to the same period last year.

Overcapacity Still an Issue

China has committed to stop the expansion of steel capacity and to actively and appropriately wind down “zombie enterprises” through a range of efforts, including restructuring and bankruptcy. That’s not the case when it comes China’s equally giant aluminum sector. Read more

While Saudi Arabia’s grip on oil prices has waned and shale drillers have survived its attempt to undercut them with crude prices nearing $50/barrel, China might just be the new Saudi Arabia of metals markets.

Resilient Shale Drillers Investing Again

Two years into the worst oil price rout in a generation, large and mid-sized U.S. independent producers are surviving and eyeing growth again as oil nears $50 a barrel, confounding the Organization of Petroleum Exporting Countries and, particularly, OPEC heavyweight Saudi Arabia with their resiliency.

Free Download: The June 2016 MMI Report

That shale giants Hess Corp., Apache Corp. and more than 25 other companies have beaten back OPEC’s attempt to sideline them would have been unthinkable just months ago, when oil plumbed $26 a barrel and collapses were feared.

Is China Metals’ Saudi Arabia?

Speaking of countries that dominate the market for important commodities, is China doing for metals markets what Saudi Arabia used to do for crude oil?

Free Download: The June 2016 MMI Report

The world’s largest producer and consumer of industrial metals may be acting as a de facto, if unwitting, type of OPEC for metals, adjusting supply in response to price signals and balancing the market.

While nearly all of the metals markets we track were up in May, our June MMI has experienced what’s believed to be a broad market correction that has touched nearly every metal (only the specialized and range-bound Rare Earths MMI saw an increase this month).

MM-IndX_TRENDS_Chart_June2016_FNL-TOPVALUE100

The Automotive MMI was our second-biggest “winner,” thanks to holding its value from last month. The biggest loser was our Construction MMI, which fell nearly 10% as construction products such as rebar and copper tubing saw heavy losses.

Correction Drivers

Two factors dragged metal prices down in May: The Chinese government softened expectations of further stimulus while fighting speculation by increasing margins and fees for trading. Second, in the beginning of the month the U.S. dollar strengthened amid new expectations that the Federal Reserve might be more aggressive than previously thought in raising interest rates, but that quickly changed late in the game after a disastrous jobs report and the dollar is now falling again.

Chief Forecasting Analyst Raul de Frutos sees this movement as “a normal reaction as prices zigzag, and we don’t see enough evidence to turn bearish (on metals) yet.”

Two-Month Trial: Metal Buying Outlook

We are now very much back in a wait-and-see period, expecting a bounce back in prices, but also very understanding of the weakness many of the markets we track still face thanks to oversupply and waning stimulus in China.

U.S. Steel prices, however, are separating themselves from what’s happening in world markets as anti-dumping and countervailing duties orders have taken root.

While London Metal Exchange warehouse queues have all but disappeared, with the exception of Vlissingen in the Netherlands for aluminum and New Orleans for zinc, the even better news is physical delivery premiums have dropped back closer to historically lower levels and more importantly taken on a flat, stable pattern.

Free Download: The June 2016 MMI Report

As Reuters’ Andy Home points out in a recent article, the reasons for the horrendous spike in physical delivery premiums last year were always contentious and, in reality, multiple in origin but arguably long load-out queues played a part, although we always maintained they were as much symptom as cause of a deeper malaise in the physical aluminum market.

Aluminum Premiums Easing

Still, the return to a steady $170-180 per ton level for the Midwest premium and a stable range of $90-120 per metric ton range for Japanese Port premiums is a welcome relief for consumers after the sky high levels of 2014-15 when Japanese rates hit $425 and the MW premium was well over $500. Read more

Sounds counter intuitive, doesn’t it? Well, not really when the you look at the reality of the situation as the Financial Times has done in a recent article based on research and commentary by Australia’s Macquarie Bank.

2016 marked a turning point for most commodities. After 18 months of declines, prices have surged this year in a manner not seen since the 2009-10 Chinese stimulus. Plentiful Chinese liquidity has boosted sentiment and order books, the FT points out, across a range of industrial metals and oil, in spite of an underlying backdrop of excess production capacity and inventory overhang.

What Has China’s Stimulus Done?

Beijing has pumped liquidity into the real economy through property and infrastructure projects getting the latest new five-year plan off to a flying start.

However, despite the strong macro number the FT observes, there is a growing sense hopes for future demand are proving uncertain and that this year’s strength is proving to be just another mini-cycle around the much larger trend. Read more

Steel, aluminum, cement, what will China flood the world with next?

Free Download: The May 2016 MMI Report

Oh yes, refined petroleum products, or to be more exact diesel fuel is the prime culprit at the moment. According to the Financial Times, China has in the region of 100 million metric tons of excess refining capacity and is adding more. Read more