Commentary

Welcome back to the MetalMiner week-in-review. This week, the aluminum world got together in Washington to discuss the threat of overcapacity and the particular problem of Chinese overproduction.

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The U.S. International Trade Commission is involved now. Read our investigation of Chinese overproduction and how it affects aluminum companies around the world while the ITC deliberates.

Source: Thomson Reuters Datastream/China Customs 8/9/2016

We’ve seen Chinese steel exports consistently climb. Source: Thomson Reuters Datastream/China Customs 8/9/2016.

Oil Overproduction

Speaking of overproduction, the Organization of Petroleum Exporting Countries has finally agreed to its first production cuts since 2008. Read more

A lighted underground tunnel in a nickel mine

A lighted underground tunnel in a nickel mine.

Nickel price news from the Philippines as the top nickel producer now has three-quarters of its mines reeling from an audit with 20 mines facing suspension and 10 already in suspension, according to a recent report from Bloomberg.

The mines under fire account for 56% of nickel production by value last year, Leo Jasareno, environment undersecretary, told reporters this week, according to Bloomberg.

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“They have to get their act together,” Gina Lopez, environment secretary told the news source. “We cannot allow any mining company to operate and make millions while the people is suffering. That’s against the law.”

Meanwhile, nickel climbed as much as 2% this week on the London Metal Exchange, its peak since Aug. 12.

“The impact, or the potential impact, warrants a premium,” Daniel Hynes, senior commodities strategist at Australia & New Zealand Banking Group Ltd., told the news source, regarding the Philippine mines audit.

Crackdown Boosts Nickel-Ore Prices

In addition to the boost in nickel prices, the Philippine mine shutdowns also highlight worries of how to secure dependable sources of key industrial ores used to make metals, notably in Asia.

“I have no beef against mining, but I am vehemently against what is happening,” Lopez said at a news conference, according to The Wall Street Journal. “There are mining companies that have passed…it can be done.”

How will nickel and base metals fare for the remainder of 2016 and into 2017? You can find a more in-depth copper price forecast and outlook in our brand new Monthly Metal Buying Outlook report. For a short- and long-term buying strategy with specific price thresholds:

 

Much is being made of a mega merger between the publicly traded arm of Shanghai Baosteel Group Corp., the second-biggest Chinese steel mill by output, and the listed unit of Wuhan Iron & Steel Group Corp., its No. 6 steelmaker.

Profitable Baosteel will issue new shares to swap with the loss-making smaller firm. The Chinese press is full of the deal, saying it will rival ArcelorMittal in size and hailing it as an example of Beijing’s drive to consolidate the steel industry and tackle overcapacity.

Why the Urge to Merge?

ArcelorMittal, produced 97 million metric tons of steel last year and has a market value of $17.2 billion. Baoshan and Wuhan were worth $16.3 billion combined as of the June 24 close and produced about 60 mmt last year. Baoshan is a profitable enterprise and generally acknowledged to be well run. Wuhan, on the other hand, is loss making, carries too much debt and, probably in the newly combined group, ripe for plant closures and rationalization.

With 1.2 billion mt of crude steelmaking capacity but 803 mmt of steel production, China clearly has a massive overhang of unproductive capacity, causing some firms to be heavy loss makers. Estimates put combined losses for the industry at $10 billion last year.

But, for Beijing, it is as much a desire to clear up these loss-making companies before the market pulls them down into bankruptcy than it is to cut excess steel capacity. There is little doubt it has taken Beijing’s arm-twisting on profitable firms like Baoshan to take over loss makers like Wuhan that they would probably otherwise steer well clear of.

Beijing wants to avoid a domino collapse of lesser steel firms, like Dongbei Special Steel Group, owned by the Liaoning state government that finally filed for bankruptcy this month after eight, yes eight, defaults.

“If they can merge with others, they merge,”  Li Hongmei, an analyst at S&P Global Platts is quoted in the Financial Times as saying. “If not, they will ask the banks if they can change debt for equity. If that fails, then they will choose the last resort — that will be bankruptcy.”

But bankruptcy is bad for publicity, bad for workers, bad for the banks left holding the debt. Better, in a state-directed world, to have a profitable firm swallow them up and quietly rationalize the loss-making operations.

What’s China’s Real Plan for Loss-Making Steel?

The Economist reports on the wider trend, saying China aims to establish two major steel groups, one in the north and one in the south. The northern union of Hebei Iron & Steel Group with Shougang Group would be the nation’s biggest producer, with output of 76 mmt last year for a share of national production at 10%, topping Baosteel-Wuhan’s 8% share in the south, according to 2015 figures.

Meanwhile, there are rumors Ansteel Group Corp., the country’s fourth-biggest producer, could merge with regional peer Benxi Steel Group Corp. but, apparently, the firms are not confirming discussions are ongoing.

What About Those Steel Closures?

The aim is to close 150 mmt of capacity by 2025 but that will hardly put a dent in the 400 mmt of excess capacity in the country, more importantly for Beijing it may take the worst of the basket cases out of the public eye swallowed up by larger, state-directed groups.

The FT, though, offers a cautionary note: The drive to preserve and promote high-end, coastal steel production capacity while cutting off low-end, inland capacity is present throughout the restructuring plans, including the headline Bao-Wu merger.

“Coastal capacity is growing, and that’s the main trend of the next two years,” the FT reports. “Baosteel has a plant in Guangdong. Wisco has one in Guangxi, and they are ramping up to just under 10 mmt of capacity a year each by the end of 2017. What international steel producers really should be asking is what’s happening with the extra 50 mmt of capacity being commissioned on the Chinese coast in the next two years.”

That new capacity is better placed to service export markets than the plants being closed inland, how much of this drive is really to address overcapacity and how much is it to improve profitability and avoid the trauma of bankruptcies.

At the presidential debate Monday night, Democratic Presidential Nominee Hillary Clinton, when asked how she would create jobs by moderator Lester Holt, said, “Here’s what we can do. We can deploy a half a billion more solar panels. We can have enough clean energy to power every home. We can build a new modern electric grid. That’s a lot of jobs; that’s a lot of new economic activity.”

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It has often been said that the truth is the first casualty in the world of politics and the democratic party’s long-term commitment to battling the very real scourge of climate change is more dogma than policy these days wherein its adherents are committed to stopping what President Obama called “the rise of the oceans,” no matter what the cost and no matter how effective the tools it currently has really are — in this specific case, solar silicon photovoltaic panels. That’s just how so many business ventures lose sight of the bottom line and fail.

Solar Ahead of Wind?

It was actually rare to hear Clinton specify solar as a technology to “create jobs” as the usual dogma is to tout “wind and solar” with little specifics about how either of these generation technologies — which don’t require raw materials to be dug out of the ground as with the fossil fuels that currently provide most of the country’s electricity. That would mean a lot of former miners and drillers either selling or installing the estimable sum of half a billion solar panels and, once that install base is set, where do those “new jobs” go from there?

gtm_research-SolarGrowth_092816_550

The growth in solar, in the last two decades, has been heavily dependent on the solar investment tax credit. Source: GTM Research.

If Clinton is really talking about jobs in production of crystalline silicon photovoltaic panels, she may be surprised to learn that the production end of solar has been a mature industry for decades now. There’s already a booming industry with plenty of skilled workers producing panels quickly and efficiently.

Booming Solar Production

According to GTM Research, nearly 209,000 Americans already work in solar today — more than double the number in 2010 — at more than 8,000 companies in every U.S. state. By 2020, that number is expected to double to more than 420,000 workers, but that’s a total of 211,000 jobs by the end of a potential first Clinton administration. That’s not that much job growth, all things considered. Modern factories are already able to churn out large volumes of panels quickly and efficiently. Read more

At the International Manufacturing Technology Show in Chicago, the Reshoring Initiative‘s Harry Moser laid out what he called the “reshoring roadmap” of what congress and the next president need to do to bring manufacturing jobs back to the U.S.

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Moser said that rapid job loss has been stemmed in the U.S. but more needs to be done to bring manufacturing jobs back to the U.S. The roadmap included corporate tax reform to make the U.S. more competitive with countries like Ireland, which boasts a 2% corporate tax rate. Republican presidential nominee Donald Trump has said he will lower the corporate tax rate of 39.1%. Democratic nominee Hillary Clinton has said she will raise taxes on “corporations and wealthy individuals.”

Don’t Drown in the VAT

Another part of Moser’s roadmap is a value-added tax in the U.S. A VAT is a type of general consumption tax that is collected incrementally, based on the “value added,” at each stage of production and is usually implemented as a destination-based tax, where the tax rate is based on the location of the customer. If I purchase something from the U.K, I would have to pay the vote to get it imported into the U.S.

16-RSI-0482-IndustryToday-FP.indd.pdf

Companies are reshoring jobs to the U.S. Source: The Reshoring Initiative.

Moser said the rest of the world has a VAT of about 15% whereas the U.S. has no VAT. 159 of the 193 countries in the world have a VAT.

There are two main methods of calculating VAT: the credit-invoice or invoice-based method and the subtraction or accounts-based method. Using the credit-invoice method, sales transactions are taxed, with the customer informed of the VAT on the transaction, and businesses may receive a credit for VAT paid on input materials and services. The credit-invoice method is the most widely employed method, used by all national VATs except for Japan. Using the subtraction method, at the end of a reporting period, a business calculates the value of all taxable sales then subtracts the sum of all taxable purchases and the VAT rate is applied to the difference. Read more

Let’s set aside Donald Trump’s one-track talk on China as a currency manipulator for just a sec, and focus on a slightly less understood, and arguably bigger, issue — the role of Chinese state subsidies and state-owned enterprises.

Using the steel industry as an example:

Top 10 Chinese Steel Companies in 2014

top 10 list china steel companies

With the exception of Shagang Group, China’s biggest steel companies are owned — therefore subsidized and otherwise supported — by Beijing. Courtesy of the American Iron and Steel Institute (AISI).

Because nine of the top 10 steel companies in China are SOEs, which get special support (read about it in our new project,China vs. the World,” here) — it ultimately spurs trends like these:

growth-china-steel-industry-vs-US-2000-2015

Almost immediately after China joined the WTO in 2001, the country’s steel industry began its exponential rise. Courtesy of AISI.

china-steel-exports-2005-to-2015

The Great Recession nipped Chinese exports a bit, but state-owned enterprises continued to be incentivized to produce by the Chinese government while domestic growth stagnated within the last few years, leading to a flood of Chinese steel being pushed outside the country’s borders. Courtesy of AISI.

A Special MetalMiner Project: Learn why China getting market economy status may just be the biggest trade issue of our time – and how it impacts the U.S. steel industry – in “China vs. the World.

china shipping port title

Traders love volatility.

They say that today’s electronic trading platforms play to that desire of investors to make a buck, regardless of the fundamentals, allowing investors to play each twitch up and each slip down at the touch of a button.

Oil Prices: Perception vs. Reality

Indeed, if you can shape the perception of those fundamentals so much the better, and that seems to be what has been happening in the oil market this year. In reality, the world is as awash with oil today just as it was six months ago. As it dawns on the market that nothing much has changed, prices fall and producers make statements like a cutback deal is near, or an output freeze is being discussed — bingo! up goes the market by several dollars a barrel and you can bet producers and investors alike are rubbing their hands in glee.

Then, news comes out reminding us of the reality of the situation: the Environmental Protection Agency reports that gasoline stocks are up 600,000 barrels and distillates like diesel up 4.6 million barrels. The news that refiners are drawing on crude reserves only to process it into unwanted downstream products depresses the markets and prices fall again. Read more

In a previous post about procurement-led inventory finance, we explained how in a zero-sum game, large buying organizations — when engaging directly with suppliers — often deploy forceful if not arbitrary rules around payment terms, delivery terms and even the reduction of inventory levels. These tactics, used to reduce working capital, each bring additional, mostly unnecessary risks and buyers working with sellers as a team could be more effective in assuaging such concerns.

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New techniques and business practices based on inventory financing tied to broader procurement and supply-chain strategies have started to become more mainstream and they can help your business reduce its exposure to commodity price swings, long production times and other risks in the metals supply chain.

If you’re a large manufacturer, a metals service center or a metal producer, you can take advantage of these techniques and essentially link the buyer, seller and financing institution to lower financing costs to improve business efficiency.

Metals-Manufacturing_inventory_chart_550_092616

Supply chain financing connects financial transactions to value as it moves through a supply chain. Instead of all parties working to maximize their profits and efficiency individually, supply chain financing links the chain financially, allowing it to work together as a team, maximizing value at each link and speeding products and transactions along. It’s the difference between individual companies working in silos and all of them truly functioning as one unit. Read more

Sometimes firms take solid commercial decisions that have laudable environmental side effects, and sometimes firms take environmental decisions that they seek to justify as being cost neutral or occasionally even saving them a little money.

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But the miner, Anglo American Platinum, has an investment division that makes hard-nosed commercial investments that hold out not the dim and distant prospect of eventual impact but the imminent probability of strongly positive environmental benefits. The firm is helped by its positioning as a major miner of platinum group metals (PGMs) and the pivotal role those metals play in catalyst technologies.

Catalyst Demand

Catalysts, like modern day alchemists, turn waste into something of value, a pollutant into an environmentally beneficial product. In this case, environmentally damaging flare gas, produced in the processing of crude oil and from drill rigs, which is often flared or burned as a waste product can be turned, with the help of catalysts, into something of value.

Burning flare gas produces carbon dioxide (CO2), nitrogen oxides (NOx), carbon black, and other pollutants such as methane, which, according the Environmental Protection Agency, as a greenhouse gas is 25 times more potent than CO2. The World Bank estimates that, globally, approximately 140 billion cubic meters (5 trillion cubic feet) of natural gas is flared annually, resulting in the emission of more than 300 million tons of CO2. Eliminating these emissions would be the equivalent to removing more than 77 million cars from the road or the combined total car fleets of Germany and the U.K., according to the firm’s statement.

Anglo American’s Future

Anglo American has been actively investing growth capital in companies that can demonstrate the commercial viability of their products or technologies since 2013. Anglo American Platinum’s Platinum Group Metals Investment Program holds investments in Hydrogenious Technologies and United Hydrogen Group, and has just added another, Greyrock Energy — whose catalyst-based system converts liquids and gasses such as flare gas, natural gas, bio-gas and similar feedstocks into clean liquid transportation fuels with hydrogen as a by-product.

The hydrogen production is seen as supporting Anglo’s efforts to help develop fuel cell technologies and fuel cell feedstock supply. For Anglo, this is seen as a solid investment in a growing technology but environmentalists extol the fuel cells’ ability to produce electrical power and produce nothing worse than clean water.

In a recent press release Anglo announced its investment in Greyrock while strongly promoting the potential environmental benefits of both the process itself and the growth of technologies that lower costs would support but, make no mistake, Anglo is making these PGM technology investments with the intention of buying into a rapidly expanding industry from which it will augment its mining revenues in the future.

Black lead zinc ore closeup rocky textureA recent report from the International Lead and Zinc Study Group found the global market for refined zinc was in deficit from January to July, with total reported inventories declining over the same time frame.

Global zinc mine production declined 6.1% during the same period, which mostly was due to substantial reductions in India, Australia, Ireland and Peru. Meanwhile, world refined zinc metal output fell 3.9% due to a significant drop off in Indian production and a decline in the U.S.

Want a short- and medium-term buying outlook for aluminum, copper, tin, lead, zinc, nickel and several forms of steel? Subscribe to our monthly buying outlook reports!

The report stated: “A rise in global usage of refined zinc metal of 0.7% was driven mainly by an increase in Chinese apparent demand of 6% that more than balanced sharp declines in the United States and Taiwan (China). European usage increased by 1.9%.”

Last, Chinese zinc imports contained in zinc concentrates fell 34.5% while the Far East nation’s net imports of refined zinc metal climbed 96%.

Zinc on the Rise?

Our own Raul de Frutos recently wrote that a year ago today, zinc was anything but bullish.

“Global zinc markets were in surplus and prices were heading lower while sentiment in the mental complex was pretty bearish. But the picture quickly turned around earlier this year. For zinc buyers, the right time to hedge/buy forward was in April, when prices were still below $1,900 per metric ton, as we pointed out in our Monthly Outlook,” de Frutos wrote.

How will zinc and base metals fare for the remainder of 2016 and into 2017? You can find a more in-depth copper price forecast and outlook in our brand new Monthly Metal Buying Outlook report. For a short- and long-term buying strategy with specific price thresholds: