Articles in Category: Supply & Demand

Most base metals will finish the first quarter up, but nickel is one of those exceptions to the rule.

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The metal has traded up and down to finish the first quarter close to flat. Nickel prices are significantly higher than they were one year ago and traders are now finding little reason to be any more bullish than bearish due to a mix of news that helps both positions.

Nickel prices finish Q1 close to flat. Source: Fastmarkets.com.

Philippines Threatens to Stop All Mining

On March 13, The Philippines’ president Rodrigo Duterte, threatened to stop all mining in the country while reiterating his support for Department of the Environment and Natural Resources Secretary Regina Lopez. Philippine lawmakers recently opted to postpone a decision to confirm or reject the ardent environmentalist as the head of the department. Further confirmation hearings are expected to take place in May. The country’s miners hope Duterte won’t reappoint Lopez and instead find someone more moderate.

Indonesia to Restart Exports

Despite additional closures last month and the potential for more, nickel prices fell this month. It could be that traders doubt that Duterte will enforce such strict regulations, but it also has to do with fears that the resumption of exports from Indonesia will compensate for any supply shortfall in The Philippines. Read more

US Cold-rolled coil prices since 2012. Source:MetalMiner IndX

U.S. Cold rolled-coil prices rose to their highest levels since March of 2012 this week. Spot steel prices saw some upward action in January, however, prices really came under pressure in early February.

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In March, U.S. steel mills are pushing for another round of price hikes. So far, they seem to be succeeding.

China Steel Prices

Hot-rolled coil price spread. Source: MetalMiner IndX

Back in November, we predicted a surge in steel prices as we moved into the new year. When international steel prices rise, U.S. mills can more easily justify a price hike. Chinese prices set the floor for international prices. Last summer, U.S. steel prices declined sharply while Chinese prices held well. That caused the international price arbitrage to come down to normal levels.

The price arbitrage started to widen again this year as momentum in U.S. steel prices picked up. However, the arbitrage is still relatively narrow compared to historical levels, especially in hot-rolled coil. Therefore, U.S. mills still have some room to hike prices. Still, for the rally to be sustained throughout the year, Chinese steel prices will need to keep rising.

Falling Chinese Steel Exports

In January, Chinese steel exports fell near 24% compared to the same month last year. In absolute terms, January steel exports were at their lowest level since June 2014. Exports fell by double digits in the last four months of 2016. While more countries act against the threat of a flood of Chinese steel, we could see further moderation in exports this year, which bodes well for global steel markets. What’s surprising is that exports have falling despite rising output.

According to the data released by the World Steel Association, China’s January steel production rose 7.4% to 67 mmt while global steel production rose 7% from a year ago. In addition, China’s operating steel capacity increased in 2016, since most of the announced cuts in capacity were already idle.

So far, solid demand in China has absorbed the increase in output, or at least most of it. The Caixin Manufacturing PMI in China rose to 51.7 in February, beating market expectations and marking the eighth-straight month of growth. In addition, there are rumors that China is stocking its excess steel production. According to SteelHome, hot-rolled coil and rebar inventories in China have surged so far this year.

All About Production Cuts

In conclusion, U.S. mills could continue to raise prices in the short-term. However, for a sustained bull market in steel prices, Chinese steel prices will have to rise as well. China’s domestic demand looks strong, but it won’t be enough to support a rising price trend in the face of rising output.

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Beijing has ordered curbs on steel and aluminum output in as many as 28 northern cities during the winter heating season, as it steps up its fight against pollution, but we need to see if those cuts actually materialize this year. China will need to intensify its efforts to curtail excess steel capacity. Otherwise, if production continues to grow unabated, it could hamper this price recovery.

3-Month London Metal Exchange zinc price. Source: Fastmarkets.com.

Zinc prices climbed last week. The metal is now trading near the milestone of $3,000 per metric ton. The last time prices hit this level was in September 2007.

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Zinc has doubled in price since it hit bottom in January of last year. As prices climbed, many buyers probably made the mistake of thinking prices were too high, missing this spectacular rally. However, buyers that subscribe to our monthly outlook, didn’t miss this rally. We recommended buying forward starting in April of 2016. Ever since, prices have risen without looking back. Read more

Speaking at S&P Global Platts’ recent Steel Markets North America conference, noted trade attorney Alan Price of the Washington law firm Wiley Rein said the World Trade Organization case that the federal government filed on behalf of aluminum producers against Chinese overproduction of the light metal in January, will essentially serve as a guide for other industries looking to challenge state-subsidized companies’ overproduction for export in the People’s Republic.

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“The solutions to Chinese overcapacity are to follow the money and see who’s subsidizing it,” said Price, who has represented several U.S. industries in anti-dumping and countervailing duty legal actions against Chinese producers, as well as WTO disputes. “China has not fundamentally reformed its excess capacity. The rest of the world’s production has remained stable, but the explosion in Chinese capacity is still there.”

Alan Price

Alan Price, image courtesy of Wiley Rein

Price said the aluminum case fundamentally attacks the mechanism China uses to back up failing businesses, the availability of subsidized money in China known as “money for metal” on the municipal, state and federal level there.

“The WTO case involving aluminum, challenges, fundamentally, the Chinese subsidization system,” Price said. “It goes after the financial systems of China and how everything is financed. In aluminum you can track all the companies involved. There are around 10 and it’s a much more understandable beast, much more understandable problem than the vastness of the Chinese steel industry. This case will fundamentally decide if China will be allowed to prop up failing businesses.” Read more

If you can’t beat them, then join them? That may be the gist of UC Rusal’s latest proposal for dealing with Chinese aluminum overproduction: an OPEC-like organization for the global aluminum industry.

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In a Reuters article the world’s largest aluminiu producer outside of China was quoted by the TASS news agency at an economic conference in Russia’s Black Sea resort of Sochi as suggesting that Industry ministers should get together and explore ways and means of creating a producers club.

Liquid metal

The Chinese aluminum industry has been able to cut costs by essentially selling liquid metal to nearby product manufacturers. Source: Adobe Stock/Kybele.

The trade minister quoted by TASS, Denis Manturov, talked of creating a single policy in the area of standards and technology but, in reality, there would be little to be gained if that was the sole purpose. More attractive to western smelters in general, and Rusal in particular, would be any mechanism that curbed China’s growing dominance of the primary aluminum market.

Rusal was, until a few years ago the world’s largest aluminum producer. In 2016 Rusal produced 3.685 million metric tons, according to Reuters, but China now produces over half the world’s aluminum with Chinese producers overtaking the Russian firm. China’s Hongqiao is now the world’s biggest aluminum producer overtaking Rusal in 2015 and again in 2016. Read more

Following two consecutive hearings last week, the Philippines’ mining industry expressed its confidence that the Commission on Appointments (CA) will reject Gina Lopez as the Environment secretary, emphasizing that she was unable to persuade the members of the committee. Lopez is among just a few of President Rodrigo Duterte’s appointees yet to be confirmed by lawmakers. Nickel prices fell 10% as bears believe there will be a rejection.

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Nickel’s bull market started when Duterte became president of the Philippines in June. Prices gained throughout the year as Lopez led an environmental crackdown on the Philippine mining industry.

Developments in the nickel industry. Source: Raul De Frutos/MetalMiner analysis of LME data.

The Philippines is the top nickel ore exporter and Lopez’s approval would probably sustain worries over supply disruptions that could lift global prices this year. On the other hand, a rejection would give miners a key win in the battle against environmentalists, adding pressure to nickel prices.

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President Duterte continues to throw support to Lopez, but at the same time he is hoping for a happy compromise between environmentalists and the mining industry, amid rising concerns over job and revenue losses. Read more

Just a few weeks ago, the future looked bright for the oil price. Back in November, the Organization of Petroleum Exporting Countries and a number of non-OPEC producers agreed to cutbacks intended to reign in surplus global oil stocks and, in so doing, support the oil price.

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Initially, the agreement met with considerable success. Hedge funds and speculative investors went long on oil and the price rose. But, this week several comments and statistical reports coincided to remove some of that optimism and resulted in steep price falls. The West Texas Intermediate benchmark fell under $50 for the first time since December while Brent Crude was also down to $52.41 a barrel, its lowest level since November.

Source: The Financial Times.

According to the Financial Times, Wednesday’s decline came after the Energy Information Administration said inventories of U.S. crude stocks climbed by 8.2 million barrels, far more than analysts expected, as refinery oil purchases declined. If the rise in inventory was solely down to refineries slowing or delaying purchases, the impact would not have been as dramatic but the fear among investors is U.S. shale production is roaring back.

Reshalience Explained

Even Saudi Arabia’s oil minister, Khalid al-Falih, is quoted as saying OPEC’s agreement and the corresponding price increase has helped the U.S. shale market to recover and, perversely, undermined efforts to stabilize crude prices. U.S. shale producers have responded to low crude prices by innovating and cutting costs. Breakeven for many is now $40 a barrel, with some said to be as low as $25. Rig counts have doubled since the Spring of last year and output has continued to rise, contributing to the increase in WTI inventories.

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The oil price faces two major headwinds the FT reports. The first is little or no evidence the global oil market is really coming into balance as signatories to the agreement continue to cheat, and the second is an overhang of speculative length in the futures market. Part of this week’s price falls are said to be due to speculators bailing out of long positions after the realization that the market may not be coming back into balance as hoped late last year.

Where to, Brent?

Where the oil price goes from here is anyone’s guess but with even Saudi Arabia threatening not to renew the cutback agreement in the summer if global inventories do not fall back as expected — if other members of the agreement continue to cheat — the probability is the market overhang could get worse in the second half of the year.

U.S. shale oil producers appear to be enthusiastically ramping up production which will likely add do U.S. oil inventories and further depress the price. The oil price has a level which realistically reflects supply and demand but it’s almost certainly below $50 a barrel in today’s market.

After rising aggressively, some would argue that lithium prices have already peaked.

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Reuters quotes Paul Robinson, director at consultancy CRU Group saying that prices have little upside because demand growth has been met with aggressive supply build up, similar to rare earths and vanadium in past cycles. Even though demand is projected to soar 60% to 300,000 metric tons of lithium carbonate equivalent (LCE) annually by 2020, the newspaper quotes a National Bank Financial report saying new players could flood the market.

Strong Demand is Company, 60% Growth is a Crowd

“It’s crowded, no doubt about it, and it will get culled,” said Jon Hykawy, president of Stormcrow Capital, calling lithium, the “latest bubble sector.”

An indication of extent to which lithium fever has gripped investors and junior miners is illustrated in a Bloomberg article which reports that in the wake of President Mauricio Macri’s decision to remove currency and capital controls and taxes introduced by his predecessors, about 40 foreign companies began to consider opportunities in Argentina’s mining industry. More than half of those planning to mine lithium. Read more

Aluminum led industrial metals in February. Prices on the London Metal Exchange rose above $1,900 per metric ton for the first time since May 2015.

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In February, China finally approved its Air Pollution Control regulations, which came into effect on the March 1.The world’s largest nation-producer of the metal will force about a third of aluminum capacity in the provinces of Shandong, Henan, Hebei and Shanxi to be shut down over the winter season, which runs from the middle of November through the middle of March.

Aluminum MMI

The idea was first proposed in January and initially there was skepticism. Markets know that in the aluminum industry it takes time to ramp down and ramp back up production with smelters taking significant losses. This time, China is committed to enforcing the new law and it will prevent local authorities from protecting local smelters.

Capacity Crunch

Some 40% of China’s total capacity is potentially affected and analysts estimate that a 1.3 million mt of output will be lost. However, this figure could be larger since the new law will also impact the supply of raw materials such as alumina and carbon anode plants. Other industry analysts see a loss of 3 mmt of aluminum capacity.

The previous years of supply surplus might provide some cushion against the sort of disruption planned by Beijing. However, this potential supply shock is unprecedented in the aluminum industry and could translate into a complete game changer in terms of aluminum’s fundamentals.

Chinese citizens have previously protested about pollution issues, but tensions are getting much worse. In February, more than 200 people chanted and held banners outside the Daqing city government headquarters to protest against a new aluminum plant. Although the plant would produce more than 30,000 jobs to locals, they now prioritize pollution reduction over employment. As we’ve warned in previous reports, it’s hard to put a limit to aluminum’s price potential as smog moves to the top of Beijing’s policy agenda.

Midwest Premiums Hit $0.1/Pound

Midwest premiums rise to $0.1/pound. Source: MetalMiner IndX.

Midwest premiums continued to climb in February, hitting an almost three-year high. As we warned last month, in addition to higher aluminum prices due to supply cuts, we could see higher aluminum premiums this year due to ongoing trade tensions, just as we saw the spread between domestic and international steel prices widen.

The U.S. experienced a sharp contraction in aluminum smelting capacity over the past year. This has created a case of supply shortfall within the U.S., which now depends on aluminum imports to satisfy its rising domestic demand.

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This year, the U.S. launched a formal complaint against the Chinese government with the World Trade Organization over subsidies it says Beijing provides to the country’s vast aluminum industry. The fight against imports is getting more serious and this is something that could support domestic aluminum premiums this year.

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Steel prices have been on a tear since November. However, prices came under pressure in early February.

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After having lost some ground over the past month, U.S. steel companies now seem to be pushing for another round of price hikes. But, can U.S. steel prices rise from current levels?

Production Rises

In February, new findings by Greenpeace East Asia and Chinese consultancy Custeel stated that despite China’s high-profile efforts to tackle overcapacity, China’s operating steel capacity increased in 2016. The report suggests that 73% of the announced cuts in capacity were already idle — in other words the plants were not operating. Only 23 million metric tons of cut capacity involved shutting down production plants that were operating. For 2016, China saw a net increase of 37 mmt of operating capacity.

Raw Steels MMI

According to the data released by the World Steel Association, China’s January steel production rose 7.4% to 67 mmt while global steel production rose 7% from a year ago.

These numbers give us reason to doubt that China can deliver this year in terms of capacity caps. Given the country’s pollution issues, China is now under pressure to demonstrate progress on capacity cuts, but financial and legal incentives to keep marginal firms running will cause regulators to struggle to enforce capacity cuts. Can the steel price rally continue just on promises of supply cuts?

Will Demand Growth Support Prices?

Despite resilient output, investors have focused on China’s increased appetite for steel. Thanks to the country’s stimulus measures, demand for metals rose there. As a result, Chinese steel exports have fallen double digits for five consecutive months.

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China exported 7.4 mmt of steel products in January, down 23.8% from the same period last year. In addition, January steel exports were at their lowest level since June 2014.

Iron Ore Prices Surge

Steelmakers are using the argument of rising iron ore, coal and other raw material prices to press steel buyers to pay more for their steel products. Iron ore is currently trading in the ballpark of $90 per dry mt, the highest since mid-August 2014. After an 85% rise in 2016, the price of iron ore has improved by more than 16% so far this year and has more than doubled in value since hitting near-decade lows at the end of 2015.

What This Means For Metal Buyers

It might not be prudent to draw a conclusion based on January’s steel data alone. But given current trends, China may need to intensify its efforts to curtail excess steel capacity. Demand growth alone might not be a strong argument for U.S. mills to continue to hike prices at the pace the did over the past few months.

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