Articles in Category: Supply & Demand

While our Renewables MMI is the only major index that showed positive growth this month, essentially erasing last month’s loss and increasing 1.8% to 55 from a score of 54 in September, it’s still mired in the low price trend it’s been stuck in for the last 5 months.

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That mini-trend, itself, was a drop from the renewable materials’ previous price range when it fluctuated in the 60s, itself a low-price trend. That string of monthly prices lasted all the way back to 2012.

As we have noted before, the renewables MMI is a bit of an outlier index. Its supply and demand picture hasn’t changed that much since we began tracking it, with demand for wind turbine metals, electrical transmission raw materials and solar silicon still operating as fairly niche markets.

Renewables_Chart_October-2015_FNLHow the Lockout GOES

A lot of the component metals of the index continue to suffer price problems due to market gluts that have nothing to do with end user adoption, particularly steel plate. We also can’t discount the fact that supplies may be a bit more constrained this month, at least for US grain-oriented electrical steel, due to the now 7-week-long worker lockout by Allegheny Technologies, Inc., 1 of only 2 US GOES producers. ATI claims that production is carrying on as usual, but work stoppages such as these rarely happen without some in production. Even a perceived lack of supply of GOES could cause buyers who need it to stockpile the metal.

On the demand side, another application of silicon solar photovoltaic panels is being attempted in California, using the solar power generated from them to heat, desalinate and clean used farm water for irrigation in the Golden State’s water-deprived central valley, the source of much of the produce enjoyed by the rest of the nation. It’s another of many promising applications that we don’t see affecting prices anytime soon. We’ve been there before.

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We expect renewables to continue to trade in this range for the rest of the year and likely for much of the next until commodities, as a class of investments, experience a wider market recovery. If you are a buyer of silicon, GOES or other renewables we would caution against buying forward as prices have shown no sign that this is a bottom and another shoe could drop at anytime, even in this low range.

TThe Renewables MMI® collects and weights 8 metal price points used extensively within the renewable energy industry to provide a unique view into renewable energy metal price trends over a 30-day period. For more information on the Renewables MMI®, how it’s calculated or how your company can use the index, please drop us a note at: info (at) agmetalminer (dot) com.

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There appear to be 2 bright spots on the copper market landscape on which producers and analysts are focusing.

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The first is the possibility miners will cut back production sufficiently enough that raw material supply will become restricted and, as a result, prices will stabilize and then rise next year.

Glencore has announced the temporary closure of 300,000 mt of production capacity in the Democratic Republic of the Congo and Zambia and there has been talk about output cuts in Chile.

Reuters reported the country’s second-largest copper mine, Collahuasi, owned by Anglo American and Glencore, planned to cut output by 30,000 mt. But, in truth, we are unlikely to see a massive curtailment in supply, not like the 700,000 mt we saw back in the late ’90s and early 2000s, simply because the supply market is so fragmented now, making it tougher to orchestrate wide-scale cutbacks.

According to Goldman Sachs, the top 5 producers control only 35% of global production, compared to iron ore, where the top 4 producers control more than 60%. At the same time that cutbacks appear here, increases appear somewhere else. Copper output in Peru, the world’s third-largest producer, rose 30% in August, according to the paper.

Wither Demand

Meanwhile, demand is softening further. Data last week showed activity in China’s factory sector shrank again in September as demand softened at home and abroad. Goldman Sachs forecasts no copper demand growth in the country this year. Nor are other emerging markets likely to provide the boost China’s cooling demand has lost, China consumes 45% of the world’s copper compared, say, to India that consumes just 2%.

So if supply cuts hold out only limited scope for supporting the copper price what else could make a difference? Well, back to China and the long-anticipated stimulus that commodity producers have hoped Beijing would instigate looks like it may be much more targeted than previous programs.

China’s Power Plan

Copper producers are pining their hopes on power transmission as the next big thing for the copper market, saying China will spend at least 2 trillion yuan ($315 billion) to improve its power grid infrastructure over the 2015-2020 Five Year Plan period, according to another Reuters article that cites government sources.

Apparently, despite falling power consumption growth, China is working to upgrade its cross-country power transmission capacity in order to reduce coal consumption along the smog-hit eastern coast and provide markets for energy producers in the resource-rich far west, where local electricity demand is considerably weaker.

The paper says China has already built long-distance ultra-high voltage power lines connecting giant thermal power and hydroelectric stations in the west to eastern coastal regions like Shanghai, but now needs to extend them even further. The 2015-2020 investment, it is hoped, will provide a boost for copper consumption.

Demand from the power sector accounted for nearly half of China’s estimated 8.7 million metric tons of refined copper consumption last year, Reuters says, with more than 1 mmt of it used in power transmission alone. So far this year, investment in the sector is very slightly down compared to last year but the State Grid is said by the Financial Times to have issued new tenders in anticipation of greater investment in the next five year plan.

Copper or Aluminum?

The fly in the ointment for copper producers, though, is the switch to much cheaper aluminum, both for power transmission and factory and city distribution networks. Switching to aluminum alloy could potentially replace up to 2 mmt of copper demand annually, or two-thirds of the roughly 3 mmt of copper currently consumed by cable manufacturers, according to the FT reporting International Copper Association data.

It is roughly half as expensive to wire up factories with aluminum alloy as it is copper, making the switch attractive for cost-conscious Chinese manufacturers. Even though the FT reports the shift will be expensive in the long term, since aluminum alloy deteriorates faster than copper.

Not surprisingly, there is furious lobbying going on in China between copper and aluminum producers. Apparently both industries are appealing to nationalism. Domestic aluminum smelters point out that China is a net importer of refined copper so substitution can help bolster Chinese industry and reduce imports.

In addition, China has plenty of excess aluminium capacity, although 1 mmt of additional aluminum demand will not put much of a dent in up to 8 mmt of excess aluminum-smelting capacity – depending on whose figures you accept.

The copper industry counters that investments by Chinese miners overseas mean that, globally, Chinese corporations control more reserves of copper ore than of bauxite, the FT says. To be fair 1 mmt of copper demand would have a much more profound impact on the copper market than the additional aluminum demand on the aluminum market – if that is Beijing’s desire. You have to ask, though, why would Beijing want to push up prices for cables? It will simply make the infrastructure projects more expensive.

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Simple economics is likely to win and with aluminum so much cheaper on a per-project basis. Both the National Grid and local municipalities and factories are likely to favor aluminum. Still, any increase in copper demand due to the power industry would no doubt be welcome, particularly if the disparate copper miners can achieve some level of coordination and actually deliver meaningful cuts rather than the simple closure of high-cost production we have seen so far.

The Automotive MMI fell again in October, inching down 1.4% from its previous all-time low of 73.

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It’s more of the same for an automotive metals market that, while strong on both the supply and demand sides here in the US, is being dragged down by falling demand in other large markets. Automotive specialty metals have been cited as the savior and the future demand driver for many a steel or aluminum company in this bear market.

Automotive_Chart_October-2015_FNLGerdau is practically staking its entire Indian business on it. Aerospace and automotive are also regularly cited as the growth markets for stainless and aluminum overseas, too. The aluminum-bodied Ford F-150 continues to be the darling of the US automotive market with its lighter corporate average fuel economy (CAFE) load and its Denis Leary commercials about “military-grade” aluminum. Even the Super Duty is getting in on aluminum. The emerging markets were on the aluminum train before Ford was, too, and that trend is only growing.

US, European Auto Sales

So, what gives?

In September, US vehicle sales topped a SAAR (seasonally adjusted annual rate) of 18 million vehicles. Leading automakers reported the healthy year-over-year increase in sales number thanks, in part, to big gains over the Labor Day holiday weekend.

It wasn’t just us yanks buying cars constructed cold from specialty metals, either. The Czech Republic will report its highest car sales ever this year. The Volkswagen scandal might be hurting platinum prices but it’s clearly not denting overall vehicle sales, even in Europe where the scandal hits close to home with more diesel cars on the road.

VW has a market share of around 48% in the Czech Republic, a country of roughly 10.5 million people, with the company’s domestic maker Skoda Auto the top seller.

Chinese Demand Collapses

The fly in the automotive metals ointment is demand in China. Like steel, aluminum and other markets, the economic collapse in China has eroded what was once healthy automotive – and automotive metal – demand there.

The urbanization that economists counted on to fuel more Chinese car purchases went away with housing demand there, as well as the un-manipulated renminbi. Beijing is looking entirely to exports now (hence the purposeful devaluation) to pull its economy out of the doldrums, and isn’t even trying to goose those domestic markets much.

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Sad to say, but no matter how strong the US or European automotive markets are, they can’t make up for the loss of Chinese demand, which numbers sales (and people) in the neighborhood of a billion. That’s one of the reasons so many steel companies are looking to India, with its large population, to make up for that demand. The problem there is India’s urbanization isn’t as far along as China’s was. Still, automakers and steel companies such as Gerdau are digging in there for the long haul. Here’s to hoping it’s not as long as some predict.

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The monthly Aluminum MMI® registered a value of 76 in October, a decrease of 1.3% from 77 in September.

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Aluminum prices were more stable in September, only falling slightly from the previous month. This price stabilization is normal after 4 consecutive months of declines. Upside momentum is still lacking and it seems like the bears are firmly in control of this market. The aluminum trend keeps pointing down with no sign of a turnaround.

Aluminum_Chart_October-2015_FNLChina is Still Overproducing

The Aluminum Association expressed strong concern when the China Non-Ferrous Metal Industry Association (CNIA) called for the removal of a longstanding 15% tax on exported primary aluminum. This would increase the margins of Chinese exporters, potentially exporting more aluminum to international markets. Even with the tax in place, some in the US believe that aluminum producers in China are illegally mislabeling extruded products as semi-finished to avoid exports on billet.

Aluminum exports are up 22% on the year-to-date. Exports dropped over the past 2 months but production still looks high in China, so the drop in exports likely relates more to weaker global demand. Some analysts are waiting for a rebound in exports when final reports from last month come out.

Another interesting highlight of September was that Alcoa, Inc. will split itself into 2 companies. The firm has found that its legacy smelting business, the company’s vertically integrated structure, is not the advantage it once was.

One half retains the Alcoa name and comprises the legacy business of bauxite mining, alumina production and primary aluminum smelting. The second half of the business, or the “value add” business, is yet to be named, although it’s believed to include much of Alcoa’s specialty aluminum business and recent acquisitions such as titanium fabricator RTI.

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Two months ago we mentioned the slide in Alcoa shares. Even though the company made good acquisitions and investment in downstream value-added activities, its stock couldn’t buck the falling trend in aluminum prices. On top of that, premiums fell in September below $0.07/lb for the first time since January 2012, hurting the margins of Alcoa and the rest of the US aluminum producers.

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Tin producers would obviously like to think so and recent developments may suggest they have grounds for optimism in 2016.

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According to the World Bureau of Metal Statistics (WBMS) the global tin market recorded a deficit in the first 6 months of the year of 18,500 metric tons. Both refined Asian production and Chinese consumption were down for a number of reasons, but in spite of the deficit the price took a hammering along with the rest of the commodity sector.

The Tin Dynamics

Chief among the reasons for this battering, it would be easy to say, was a selloff across all metal categories due to the slow down in Chinese growth and fears over the state of the Chinese stock market. Yet, tin has some specific dynamics all its own that have contributed to price falls of nearly 40%.

Source: Kasbah Resources

Source: Kasbah Resources

Exchange inventory though has, at least since summer, been falling just as fast. To say this alone is a sign of a tightening market is too simplistic, especially for such a small niche market as tin, but it suggests there may be less metal around should refined supply be reduced in the future.

Tin has, arguably, been even more polarized over the years than any other metal. Supply from Indonesia and demand from China were, until recently, the beginning, middle and end of the supply demand equation, but much has changed in recent years. Not the least of which is Indonesia’s raw material export ban. Read more

US construction spending in August was up 0.7%, to a seasonally adjusted $1.09 trillion, reaching its highest level in 7 years, according to data from the Commerce Department.

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Government projects and home building were big contributors to the gains, even as office and shopping-center projects declined.

Construction_Chart_October_2015_FNLThe construction sector added 8,000 jobs, and the unemployment rate remained steady at 5.1% here in the US. Increased employment and a 7-year high spending high should be good news for construction product prices eventually rising, yet oversupply in steel, aluminum and copper is still keeping materials prices low.

China’s Housing Collapse

The flip side to the positive US growth numbers is the continued collapse of the Chinese construction industry, based heavily on stalled urbanization in the world’s second-largest economy.

This month, China tried some new measures to jump-start home buying and, hopefully, construction there. The central bank and banking regulator said they would be lowering minimum down payments for first-time home buyers to 25%, from the previous 30%, in cities that do not have restrictions on purchases.

The problem immediately facing China’s construction industry, however, is production, there, to be entirely export-oriented as construction activity has fallen there.

Global steel production fell by 3% in August, according to the Brussels-based World Steel Association (WSA), its biggest fall this year, which was led by a decline in Chinese production.

Lower Your Expectations

It’s still difficult to envision US construction offering much more than shelter from the storm going on in China right now. Chinese growth and urbanization fueled a boom in construction there that we likely won’t ever see again. That being said, if the current oversupply situation can be dealt with, prices of steel, aluminum and copper could increase in 2016. Oversupply is the biggest problem for products such as H-beams, rebar and steel pipes.

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We echo the sentiments of analysts who are advising caution before investment in construction materials.

MetalMiner co-founder and editor-at-large Stuart Burns had this to say recently: “It’s definitely a bullish tone that bank and senior research analysts have taken…in our view, there’s still plenty of excess capacity out there, demand is weak, and the dollar is strengthening.”

While US construction might be a safe haven as compared to the markets in other parts of the world, investors should temper their expectations.

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Debate is increasing about whether we have reached peak steel. What that means is have we reached peak Chinese steel production? Because with China producing over half the world’s steel, minor rises elsewhere would be nothing compared to a significant drop in China.

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Global steel production fell by 3% in August 2015, according to the Brussels-based World Steel Association (WSA), its biggest fall this year led by a decline in China’s steel production. World steel production went down to 132 million metric tons last month, as China registered a 3.5% drop in steel output to 66.9 mmt. The global decline came in spite of number 2 producer Japan, and both Germany and India, posting double digit gains.

Global Decline

Globally, though, steel production is struggling and, more importantly, so are steel producers. The WSA said the crude steel capacity utilization ratio for the 65 countries it coordinates data from (covering 98% of global steel production) in August 2015 was just 68%. This was 3.6% lower than August last year and a decline on the month before. Read more

Palladium and platinum prices have been volatile after investors heard of the Volkswagen Group scandal.

Industry reports are suggesting that this could be the end of diesel cars. With 40% of platinum demand coming from the making of auto catalysts for diesel cars, that’s pretty bad news for the precious metal. Platinum fell 4% after the news, although it recovered some of its losses yesterday.

Palladium (in red) and Platinum (in black) decoupling

Palladium (in red) and Platinum (in black) decoupling. Source: MetalMiner analysis of data.

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On the other hand, palladium would benefit from the switch to gasoline engines and it looks like palladium investors liked the news. Palladium prices jumped 8% to a 2-month high after the news.

What This Means For Metal Buyers

It will take some time until we see the real impact that this will have in the demand for both metals. But based on how investors reacted to the news, we’ll likely see both metals trending in opposite directions in the short-to-medium term.

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The upside potential of palladium might be limited by the bear market in precious metals. What seems clear is that platinum will continue to be the worst performer among precious metals for a while.

Glencore will sell off some of its zinc assets to pay down debt and SSI UK has shut down its Northeast England Redcar steelmaking facility.

Redcar Shuttered

SSI UK, Britain’s second-largest steelmaker, said on Friday it was halting operations at its Redcar plant in England, calling into question the future of its business and putting 2,000 jobs at risk. The company, a unit of Thailand’s largest steelmaker Sahaviriya Steel Industries said a sharp decline in steel prices had hurt its business.

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Our own Stuart Burns wrote that since the Thai company purchased Redcar in 2012, it has reportedly already lost $1 billion of its own money propping the operation up and racked up debts of a further billion.

Glencore To Sell Zinc Assets

Substantial amounts of zinc could be released onto world markets, weighing further on fast falling prices, as major producer Glencore PLC implements a plan to liquidate some of its commodity inventories to help pay off debt.

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Reutersoilchart_585Brent crude oil dropped below its support level of $46.85 on Monday. October Brent lost $1.77, or almost 4%, on Monday. The gap between the US West Texas Intermediate crude and Brent crude futures benchmarks fell to its smallest since the start of the year. Source: Reuters