Articles in Category: Supply & Demand

U.S. construction spending increased in March to its highest level in more than eight years and our Construction MMI shot up 10% 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.


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.

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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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As if to underline just how much of the recent froth in commodity prices has been speculative, it took nothing more than a tightening of rules to bring the market off the boil.

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Iron ore, steel and non-ferrous metal markets in China — and by association the London Metal Exchange after opening — dropped following a decision by futures exchanges in Dalian, Shanghai and Zhengzhou to increase trading margins and fees. The most-traded contracts were down up to 4.6% in response.

Some Commodities Are Actually in Short Supply

Not all commodities dropped. Some experienced genuine supply tightness, such as coking coal wherein many of the domestic mines and ovens closed last year due to low prices, and bucked the reversal. Coking coal continued to rise and although iron ore did fall back. The fundamentals are a little more supportive following announcements by producers that they will limit output, but, in truth, even iron ore’s price increases are more due to speculative bullishness than a genuine tightness of supply. Read more

The Financial Times wrote this week that a key driver of bullish sentiment for many asset classes, particularly emerging markets and commodities, has been the U.S. Federal Reserve lowering its estimate of policy tightening this year, but for metals the knock-on effect of that has been a weaker U.S. dollar which — as my colleague Raul De Frutos has written recently — remains a key driver of both price direction and sentiment.

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Equally, if not more important, though, has been the sugar rush of China’s not-so-mini fiscal stimulus, initiated late last year which has really picked up momentum in the first quarter. Across a number of metrics, China’s economy has surged this year driving a risk on sentiment among investors, the strength of which has caught many by surprise.

Stimulus-Driven Bull Market

Chinese speculative investors have piled into the country’s commodity markets betting the upturn has the potential to boost demand for those materials. Wider sentiment has helped, according to the London Telegraph, new home sales jumped 64% in March from a year earlier. Housing prices have risen 28% in Beijing, 30% in Shanghai, and 6% in the commercial hub of Shenzhen. Read more

It would seem Iran is not the only major Middle East economy on the cusp of radical change. If the espoused wishes of deputy crown prince Mohammed bin Salman al-Saud (or MbS as the media have got into the habit of calling him) are realized, the desert kingdom is in for a period of change over the next decade that would be unprecedented in it’s recent history.

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Certainly, oil has transformed the kingdom since it was first commercially extracted in 1938 but the culture of Saudi society has been carefully nurtured, protected, even shielded — one might say — from the corrupting influence of the outside world.

Group of big fuel tanks. Ras Tanura oil terminal, Saudi Arabia

A group of fuel tanks in the Ras Tanura oil terminal in Saudi Arabia. If Prince Mohammad has his way, this will someday be a thing of the past in the kingdom. Source: AdobeStock/eugenesergeev.

Yet the days of a close compact between the House of Saud dynastic monarchy and the religious Wahhabi clerical establishment that, in exchange for control over education and the judiciary, has provided the rulers with legitimacy, may be seeing the beginning of its end.

The Prince’s Plan

The new King Salman’s son, Prince Mohammad, believes Saudi Arabia has been addicted to oil, an addiction that has cost it dearly in terms of economic development and progress. Trying to look into the future, he clearly feels Saudi Arabia needs to face up to the march of time before it is too late. Read more

Mitchell J. Krebs. Source: Coeur Mining.

Source: Coeur Mining.

Mitchell J. Krebs has been the President and CEO of Coeur Mining, Inc., the world’s ninth-largest silver producer, since 2011. Coeur is also a major player in gold mining and has some 2,005 employees in the U.S., Mexico and Bolivia. Coeur markets its silver and gold concentrates to third-party refiners and smelters in the U.S., China, and Japan. From 2013 to 2015 Krebs oversaw a 22% year-over-year all-in sustaining cost reduction that significantly lowered the Chicago-based company’s bottom line. Those moves are being credited with helping Coeur stock take off since the Q1 2016 surge in silver prices. He recently spoke with MetalMiner’s Jeff Yoders on the phone about the silver market and what is impacting prices on both the supply and demand sides.

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Jeff Yoders: It’s been a good quarter for Coeur, how have the recent price increases impacted the company?

Mitch Krebs: We have seen strong returns. Our business and our financial results are very tightly wound with the prices of silver and gold. In the first quarter, we saw silver go up about 11% and gold up about 17%, that goes right down to our bottom line. We have been really successful at reducing our costs over the last three years, so our revenue line is going up as our cost line is going down, our cash flow has gone up in multiples as a result our stock price climbing 120% on the year-to-date. That leverage in the change in the silver price is significant. Read more

The World Steel Association painted a gloomy picture of future global demand this week saying finished steel consumption this year is likely to reach just 1,487 million tons, a fall of 0.5% from last year… which, in turn, was 3% lower than 2014.

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Just last October the association was predicting an uptick in demand saying consumption this year would be 1,523 million tons, so the reversal has sent tremors through and already depressed global steel market.

Source: Platts

Source: Platts

The countries that led the supercycle up 10 years ago are largely the same that are now leading it down. China, Russia and Brazil are all showing down, only India, of the old BRICS acronym, is boasting growth, the world’s third-largest steel consumer is still bucking the trend and on a roll. Indian demand is expected to rise by 5.4% both this year and next reaching 88 million tons in 2017. Read more

And we don’t mean in terms of facing closures. A report by Reuters quoting Chinese sources paints a picture of an industry on the cusp of shooting itself in the foot.

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Prices on the Shanghai Futures Exchange (SHFE) have risen from a low of CNY 9,710 per metric ton ($1,504) in November last year to CNY 11,945 today ($1,850), a 23% rise in just a few months.

In part, the rise has been due to an announcement by six Chinese smelters last December that they would stockpile one million metric tons of metal expressly to support prices. This came on the heels of wider plans to shut some 4.6 million mt of capacity or about 10% of output, a move encouraged by Beijing and, no doubt, sweetened with promises of financial assistance if they did.

Stockpiling Plan

Both steps added to sentiment, even though the stockpiling plan has yet to be implemented and it is unclear how much of the 4.6 mmt of capacity has been closed. Certainly, loss-making plants such as Chinalco’s Liancheng smelter, all of which had high production costs, were closed. Liancheng ishighly unlikely to reopen but production costs across the Chinese market vary widely.

Reuters quotes Xu Hongping, an analyst at China Merchants Futures, in saying production costs for the majority of the idled capacity are about CNY 11,000 per mt but added restart expenses would push up the breakeven mark to about CNY 12,500. The suggestion is that should the price reach about CNY 12,000 per mt, idled smelters could be encouraged to come back onstream.

The 1 mmt stockholding plan has been quietly sidelined for now. If the market is rising on the back of suggestions then the smelters probably figure they don’t need to go to the pain of actually implementing the plan.

Why Are People Speculating?

An issue not addressed in the article, though, is the speculative element in last year’s dramatic falls. The underlying fundamentals were undoubtedly dire for aluminum and that hasn’t changed markedly since the low point last November. But November’s low was plumbed to no small extent because of the actions of highly aggressive short speculators on the SHFE.

Andy Home, writing in Thomson Reuters this week about copper, noted that aluminum had also suffered mass bear raids, with volumes and open interest spiking to previously unseen levels in November. Although the spikes lasted only a few days, the action drove down prices, without which it is debatable if aluminum would have hit its CNY 9,710 per mt low.

Of course, there is nothing to stop the speculators coming back, they have taken repeated hits at copper over the last 12 months or more and the fundamentals for aluminum look no more solid than for copper. Sentiment has been helped by the rise in price on the back of mills’ stockholding plan and promises of smelter closures, but if the stockholding doesn’t happen, and a number of smelters are brought back onstream, that narrative could be fundamentally undermined.

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The most likely outcome is China’s aluminum producers are going to self-cap prices by raising production if prices move much higher. They have shown poor discipline in the past and there is nothing to suggest that has changed.

In a recent market review webinar for our subscribers, we talked at some length about the impact the oil price has had on metal prices and it made me think that, in many ways, the drop in the oil price has been a bit of a disappointment.

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Not that lower gas prices aren’t welcome, of course they are, but the expectation was that lower oil prices would be a major boost for the global economy. Not so long ago, the the International Monetary Fund calculated that every $20 per barrel fall in the oil price would increase global gross domestic product by 0.5%, rising to 1.2% if there were associated improvements in confidence.

Economists had widely predicted two effects from cheap oil. First, there would be a huge transfer of resources from oil producers to consumers, both within and between countries. And at the same time, the gains from lower oil prices would outweigh any losses from lower investment and activity in oil producing regions.

The theory went that, with their massive cash buffers, oil producers would continue social spending and infrastructure investment in spite of lower oil revenues. But maybe the extent of the fall, down almost 70% since 2014, coupled with continued anxiety about the future path of global growth has spoiled oil’s party.

Low Oil and Lower Growth

As a result of this turn of events, predictions of global growth — in large part predicated on lower oil prices — have been reduced from 3.5% to 2.5%, only marginally above the level of 2%. Anything below that and global growth is considered to be on the threshold of a recession.

Certainly, the deflationary environment in many net oil-importing countries (aided and abetted by the collapse in oil prices) has encouraged consumers to save their money rather than go out and spend the windfall.

In the US, personal savings rates rose to 5.4% in February, while spending growth was a modest half of that figure. It’s true to say consumers have responded to lower fuel costs by buying more SUVs and by driving further, a record 17.5 million vehicles in 2015 in the U.S. and 3.2 trillion miles, but it would seem that has limited impact in a country of approaching 250 million adult consumers.

Source: Financial Times

Source: Financial Times

Cheap oil is estimated to have lifted GDP by just 0.2% in the US and has probably had no more effect in Europe. Indeed, Europe has seen a deflationary environment as a result of lower oil prices actually encouraging consumers to hold off buying in the expectation prices would be lower a month later. The same effect is probably dragging on consumer spending in China, exacerbated by slowing growth and excess capacity encouraging manufacturers to slash prices as they fight for market share. Read more

The Rare Earths MMI was flat at 16 this month, continuing to trade in the narrow band we’ve seen it vacillate in since 2012.

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Apparently, a rising tide does not always lift all boats as Rare Earths bucked a price increase trend that touched all the metals we track this month. Stable supply from China ever since export quotas were lifted could either be blamed or thanked for the price stability, depending on which side of the buying fence you’re on. Substitution is also a factor, as less-tracked REs such as scandium are being used in alloys by more multinationals such as Airbus.


No major supply disruptions have materialized in the last few years and elements such as niobium and neodymium have appeared to be more price stable than their publicly traded, base-metal cousins. The only thing that could be construed as affecting rare earths this month was the announcement that the Indian government, quite cautiously, might open up a few RE mining blocks to companies sometime later this year.

According to a senior official in the Mines Ministry, the Indian government is looking at at least one rare-earth deposit in the central Indian desert province of Rajasthan to be put on the block, on an experimental basis, to widen the number of rare-earth miners in the country and ramp up production to pose a challenge to China, the undisputed top global supplier of REs.

State-owned Indian Rare Earths Limited is currently the sole miner and producer of REs in India, and it has joint ventures with Toyota Tsusho for production of mixed rare earth chloride.

The new supply would be welcome, if not entirely necessary right now, to companies that produce motors, magnets, light-but-strong structural steel and other RE end uses. Prices are so low right now that even Japan, which famously dealt with a de facto Chinese RE embargo in 2010 and 2011, is seeing its leading domestic RE producers pull back or abandon production entirely.

In February, Showa Denko President Hideo Ichikawa hinted at a further overhaul of its RE metals business, raising the prospect of either merging with another company or just getting out of REs entirely.

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While our other prices have risen, it’s still a great time to be an RE buyer and this most niche of markets shows little to no sign of catching up with the pack.

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