Commentary

After a recovery late last year, the oil market seems to have settled with a price around $55 a barrel… at least for now. That level is not likely to dissuade consumption but most Organization of Petroleum Exporting Countries members seem to feel it justifies their oil output cut agreed to late last year.

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A few producers, such as Venezuela, that are running massive budget deficits have targeted $70 or more, but most analysts would agree that if oil can hang onto recent price gains for the next six months it will be doing well. Read more

Indonesia issued significant new mining rules last Thursday that will relax its ban on exports of nickel ore. Over the weekend, I went to check analysts’ opinions on this new development. Not surprisingly, almost everyone thinks this is bearish news for nickel prices.

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I am often a contrarian and this time, of course, I have a different opinion. I think the outcome of this revision is bullish for prices. What’s more, I think this is a great opportunity to buy nickel since prices might trade above today’s levels for the rest of the year.

Indonesian Nickel Ban

Before we get to analyze the price impact of the new rules, let’s quickly review what the ban was about in the first place:

Indonesia imposed an export ban for unprocessed material — essentially raw ore — back in 2014. A year before the ban kicked in, Indonesia exported around 60 million metric tons of nickel ore. Nickel ore contains an average of 1 to 3.5% of nickel. Indonesia banned exports to encourage downstream investment as this would eventually be better for the country, as it would make more revenue as the material is processed domestically and it would build a local processing industry. Read more

Well we all knew that the Volkswagen admissions scandal was the story that was going to run and run, so it should come as no surprise that the media is full of the latest allegations being made against Fiat Chrysler by the Environmental Protection Agency.

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The Washington Post, the Economist and the Financial Times all report the EPA’s announcement that they are in discussions with the automaker over software which they say, might be illegal. The EPA has held back from calling the technology a “defeat device” in the terms used in last year’s cases against VW.

But in broad terms the operation of the software appears to work in a similar way to that of VW’s in that it also has the characteristics of the emissions controls under certain circumstances. Contrary to what many others believed, in fact, emission control equipment is allowed some pretty wide parameters of operation.

Diesel’s Easier… To Pollute With

In Europe where the rules are less rigorous, the testing regime allows diesel cars up to 14 times more noxious gases on the road under test conditions. According to the Economist, they are allowed to shut down their emission controls on the grounds that not doing so might damage engines when the ambient temperature is low. But in some cases this ambient threshold could be as high as 17 degrees, a temperature not reached for months in many Northern European countries. Read more

tin-ore

S_E/Adobe Stock

Last week, tin prices on the London Mercantile Exchange increased but the real story has been overall commodity pressure to begin 2017.

According to a recent report from the Economic Calendar, tin has ebbed and flowed in a narrow range to begin the year with last week’s upward move attributed to “a slight pullback in the value of the U.S. dollar.”

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Donald Levit wrote: “Tin experienced a positive performance in 2016 amid solid demand from China with idled domestic tin capacity resulting in the need for higher imports. However, concerns are that China will start to ramp up its idled capacity, and that will change the market.”

China’s manufacturing PMI registered higher than expected recently, adding to tin’s momentum. In November, China imported more tin ore and concentrates with refined tin imports falling off substantially, the news source stated.

How will tin and base metals fare in 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:

A 2014 Bureau of Labor Statistics report showed that companies in the top quartile of inventory turnover tend to have no more than three to four days of raw materials on hand. For metals suppliers this could lead to shortages and disrupt customers’ supply chains.

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Supply chain financing, though, can help buyers and sellers work to manage supply and cost issues. The role of supply chain finance is to optimize both the availability and cost of capital within a given supply chain by aggregating, packaging, and utilizing information generated during supply chain activities and matching this information with the physical control of goods.

If you’re buying metals for product manufacturing, for example, it can be beneficial to have the cash-flow flexibility of supply chain financing, especially if you’re a smaller manufacturer. In supply chain finance, an agreement is made between the buyer and supplier to use credit facilities or other financial instruments to bring down costs and risks for both parties.

Buyers can utilize “buy now, pay later” open account transactions which can be counted as regular payments for a continuing flow of goods rather than specific transactions or set prices and quantities. Buyers can extend payment terms with their suppliers. Suppliers, such as metals service centers, can use their credit ratings to bring in customers who, without support from banks, might otherwise not be able to do business with them. Other third-party financiers can also join in the agreements and assist either side with loans or other financing instruments.

In aerospace and defense, this could mean optimizing purchasing across a global supply chain. SCF provider Taulia recently announced a partnership with Exostar, which provides cloud-based solutions to the sector, as well as to the life sciences and health care sectors. There are more than 100,000 aerospace and defense corporate buyers using Exostar’s solutions that now have access to Taulia’s supply chain finance offerings. Taulia’s SaaS product is being integrated directly into the Exostar interface so if you’re a small manufacturer providing electronics or metal parts, you could have the same buying advantages of a larger organization.

Earlier last year, TradeRocket and Hitachi Capital America entered a similar agreement. TradeRocket provided Hitachi Capital with a pool of mid-market buyers (companies with annual revenues of $25 million to $500 million) who, once underwritten, would be able to use TradeRocket’s early pay invoice option to its entire supplier network.

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Giving buyers payment flexibility and suppliers access to new markets is a win-win for both bottom lines.

As the new year dawns, we turn our eyes toward the metal markets of 2017. Will the bull run of 2016 continue? What will be the standout performer of the metals we track? Will New Coke finally make a comeback as Even Newer Coke? Only to re-reintroduce Coke Classic in all its aluminum-encased glory? We have predictions. Lots of them.

Steel on Wheels

That’s right, the North American steel market is picking up steam and chugging toward expanded production and renewed profitability for many of the companies we track. Contributor James May said this week that flat products will enjoy higher demand while hot-rolled coil capacity will expand thanks to a combination of new capacity going online (Big River Steel‘s plant is set to open) and the trade policies of the incoming Trump Administration.

Iron Ore Overseas

China consumes over 70% of the world’s seaborne iron ore and a strong year for the Chinese economy bolstered the steelmaking raw material from from $40 per metric ton to $70/mt in global markets last year, an increase that helped re-energize the bottom lines of mining majors Rio Tinto Group, Vale SA, BHP Billiton and Fortescue Metals Group.

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This week, Sohrab Darabshaw pointed out that that was cold comfort to smaller miners in India who are still hamstrung by high export taxes and can’t get their ore into China or other lucrative world markets. That could change soon, but MetalMiner Co-Founder Stuart Burns was even more cautious, reminding us that physical iron ore prices were influenced by a rampant futures market last year.

Source: Adobe Stock/Geargodz

“The interplay of the futures market, physical demand from steel mills, and seaborne iron ore supply has too many variables to predict 2017 and ’18 with any certainty,” he said.

Trumping Trade

While some of the markets are still murky, one thing we all agreed on this week was, once Donald Trump is installed as President of the United States, 2017 certainly won’t be boring when it comes to international trade. Read more

After more than four years of languishing, some hope’s been rekindled in India’s iron ore mining sector.

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Ore production jumped 22% between April and October, according to figures released by the government. Iron ore production stood at 100 million metric tons during the resurgence, against 81 mmt during the same April to October period a year ago. What’s brought even more cheer is the news that exports, too, jumped 9 times their previous level, to 9 mmt from last April to September, as compared to 1 mmt, the same period last year.

Export Taxes

With a steep price hike in global markets aided by protectionist measures for the domestic steel industry, will India see a resurgence in iron ore exports? Not so fast.

India has plentiful iron ore stockpiled but taxes are holding up exports. Source: Adobe Stock/nikitos77.

The protectionist measures imposed by India’s government previously included an export duty tax of 30% on high-grade iron ore. Many within the mining sector are of the opinion that the export tax must go, or at the very least be reduced, to boost exports. Read more

By anyone’s reckoning, iron ore and coking coal had a stellar year in 2016. Driven by infrastructure investment and a robust construction market, Chinese imports of our iron ore could top 1 billion metric tons for the first time in 2016. Prices more than doubled in the space of 12 months and the supply-demand situation seemed to be largely in balance for much of the year.

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After topping $80 per mt in early December, prices eased back a little toward the end of the year prompting many to ask “have we seen the peak in iron ore prices?” Mills typically cut output during the quieter winter months when construction demand slows. Many steel mills have already curbed output due to chronic smog alerts across northern China.

Chinese Demand

Seasonally, it would not be unusual if iron ore prices remained subdued up to the Chinese New Year and then picked up in preparation for the peak production months of late spring and summer. But, while Chinese demand defied many expectations of a slowdown in 2016, the recent softening of both iron ore and coking coal raw material prices, and the price of some finished steel products over the last week or 10 days, has lent support to some analysts’ predictions that we could be seeing markedly lower Iron ore prices throughout this year and next. Read more

There are many in the business community who share a sense of anxiety as to what trade policies the new administration of President-elect Donald Trump will introduce in the year ahead but, if it’s any consolation, the U.S. is not alone in pandering to populist calls for limits on free trade.

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Here in Europe there is a quieter but no less disturbing war being fought between the European Union Commission and the European Parliament and the E.U. member states. Historically, the European Commission handled trade negotiations on behalf of the single market, but the 2009 Lisbon Treaty, intended to make the EU more efficient and transparent, also gave all the EU’s 38 National and regional parliaments essentially the right of veto on any new trade accord.

Anyone Can Veto… Anything

As Carnegie Europe in a recent post observed the sheer complexity of trade deals, which cover many topics that are not included within the European Commission’s powers, means that ratification is becoming a de facto requirement of any new trade deal. As politics becomes more populist in the E.U., as in the U.S., an array of interest groups can challenge any deal on the grounds of environmental, health, cultural, employment concerns, or any combination of the above. Read more

Even in today’s price competitive global market place there are a few industries in which the United Kingdowm can be said to punch above its weight. Automotive is one, it accounts for 10% of the UK’s trade in goods, and over 50% of UK manufactured cars go out for export.

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Defense is another. The U.K. is the world’s fourth-largest arms exporter after the US, Russia and China. But maybe the crown jewel of U.K. manufacturing is the aerospace sector. It doesn’t come much more value-add than aerospace and the U.K. ranks fourth in the world behind the US, Germany and France for export values. However, France’s numbers are distorted by the fact Airbus aircraft are receive their final assembly in Toulouse. So, although 75% of the aircraft is imported as major components — fuselage, wings, tail, engines, etc. — the total value of the aircraft is reflected in France’s export earnings even though most isn’t made there.

And therein lies the problem for the U.K. post-Brexit. The wolves are gathering around the gates slavering at the prospect that the majority of the citizens’ decision to leave the E.U. means the position of U.K. aerospace manufacturers in the Airbus supply chain is up for grabs.

According to the Financial Times, Airbus will face political pressure to bring jobs back to France, Germany and Spain as a result of the U.K.’s decision to leave the single market. BAE Systems has played a leading role in the development of wing technology, designing and manufacturing virtually the entire wing for Airbus’ super jumbo jet, the A380. But there has been a constant move by Germany to get as much wing work out of the U.K. because it is one of the most lucrative parts of the supply chain. The bottom skins of the wing for the new A350 went to Spain and Germany, both keen to secure further work as new models come up for bidding.

Last year, the U.K. aerospace sector grew by 6.5% to £31 billion ($38 billion) 87% of which was exported. The industry fears a clampdown on free movement of labor and political influence over trade regulations could combine to raise the cost of business for U.K. companies in the sector.

Although aircraft and their parts are exempt from tariffs under World Trade Organization rules, the FT reports there is a fear the competitors could encourage their governments to find loopholes during exit negotiations that would create barriers or raise the cost of business for U.K. companies. For Rolls-Royce, the U.K.’s premier aero-engine manufacturer, the major concern is that a block on free movement of labor would inhibit the company’s ability to move workers between Europe and the U.K. at short notice as production issues demand.

About a quarter of Rolls-Royce’s workforce is based in the E.U. outside the U.K. Despite the U.K.’s reputation for engineering excellence, the country is desperately short of engineers. As a result, the manufacturing sector has been at the forefront of lobbying government for exemptions to a blanket block on immigration.

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The future prosperity of U.K. manufacturing was probably not at the forefront of voters’ minds when they opted to leave the E.U., but if it is found that highly paid jobs are lost as a result of the U.K.’s exit from the single market, economic issues me yet come back to become a focal point in any post-Brexit analysis.