Commentary

Lead ore. Source: Adobestock.

Lead prices, along with tin, lost some ground on the non-ferrous metals market on April 18, due in part to stockists selling as the result of subdued demand in the user industries.

According to a report from the Business Standard, lead fell slightly lower than tin with copper dropping by an even smaller margin.

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Elsewhere in the realm of non-ferrous metals, lead’s sister metal zinc has seen its prices fall off sharply over the past several weeks.

Our own Raul de Frutos warns that now is the time to buy, although it’s important not to panic and view this as the end of zinc’s bull run. In fact, this is nothing more than a great opportunity to purchase the metal at an attractive price.

de Frutos wrote: “After doubling in price since the beginning of 2016, prices are now struggling in the $3,000 per metric ton level. However, the price weakness seems to come from long position buyers exiting those positions rather than shorts coming to the market. This suggests that sentiment hasn’t shifted to bearish for now. At the same time, we see strong support near $2,500/mt, which could provide a good opportunity to time purchases.”

Lead Price Outlook for 2017

How will lead 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:

Think of Indian automotive manufacturing and you may think of a Japanese auto parts hub for the southeast Asia region, like Thailand only less successful. Or, you may think of failed projects like the home grown Tata Nano, but one sector that has been a rip roaring success story is motorcycles.

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According to the Financial Times, more than 16 million motorcycles and scooters were sold in India during the 2016 financial year, far more than in any other country and nearly six times the number of passenger cars sold. For many people, the motorcycle is their first and often only form of motorized transportation.

It’s a motorcycle or nothing. A car is still too much of a financial stretch for millions. So, a strong home market is to be expected but it is the growth of domestic brands and manufacturers that is the most encouraging. Those same manufacturers have been far more successful than their automotive peers in export markets. Indian motorcycle exports in that same 2016 period reached 2.5 million, up from 1.5 million five years before.

Venu Srinivasan, chairman of TVS, a particularly innovative and successful Chennai-based manufacturer, is quoted by the FT as saying “We’re hoping that within the next three years, exports should be 35 to 40% of our sales,” up from 20% today.

Image courtesy of www.bikepanthi.com.

Siddartha Lal — chairman of Eicher Motors, owner of motorbike producer Royal Enfield — has overseen the opening of showrooms in London, Paris and Madrid, hoping to capitalize on the retro appeal of the world’s oldest surviving motorcycle brand. The first Royal Enfield motorcycle was made in the U.K. in 1901, and while production in the U.K. ceased in 1970, it thankfully continued at the company’s Indian joint venture.

Royal Enfield image courtesy of www.motorivista.com.

Royal Enfield’s international ambitions have been fueled by surging sales at home of its relatively expensive (by Indian standards) bikes. The popular Classic 350 retails for about $2,000 (Rs130,000), compared with the even-less-expensive Hero Motocorp Splendor, the Indian market leader. Royal Enfield sold 60,113 motorcycles last month, compared with fewer than 52,000 in the whole of 2009. As the technology used in Royal Enfields improves, particularly the reliability of the electric motorcycles, the iconic brand is appealing to retro buyers in mature markets looking for something different, as much as poorer buyers looking for a rugged if simple motorcycle.

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But the TVS range is appealing to an altogether different buyer. Price is key, but in order to compete with its more sophisticated Japanese competitors, such as Honda Motor Co. and Yamaha, in its home market TVS has invested heavily in product development, outsourcing design to the U.K. and made extensive use of robots on the production line. Even BMW has outsourced production to TVS for motorcycles to be sold under the BMW brand in Europe. That’s confirmation, if any was required, that motorcycles are becoming one of an increasing number of industries in which India is making its mark as a global, not just domestic, player.

Beijing is caught in something of a quandary.

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On the one hand, an admirable, and increasingly important social imperative, the Chinese government’s focus on air pollution, has resulted in a crackdown on a range of polluting industries. Coal-fired power stations around Beijing and other major cities have been closed. Steel capacity has been targeted for cutbacks, although not universally.

Reports suggest rebar production used in construction has been prioritized over other product areas and that’s just one example of selective enforcement. A recent report by Reuters states new aluminum production capacity has been halted. What China fails to meet capacity cutback targets — an issue one suspects would have been “worked around” a year or two back when environmental considerations where less of an imperative?

This crackdown on output comes at the same time as the economy is performing quite well. Official data released last week showed China’s economy grew by a better-than-expected 6.9% comparing the March quarter to the same period in the previous year, Australian Financial Review reports. That is up from 6.8% in the final quarter of 2016. Industrial production was also far better than forecast, growing at 7.6% in March compared to 6.3% in first two months of the year. Read more

India’s renewable energy sector just got bigger thanks to an investment from U.K.-owned CDC Group  of up to $100 million to support renewable energy projects.

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The announcement was made by the U.K.’s Secretary of State for Business, Energy and Industry Strategy Greg Clark at the inaugural India-U.K. Energy for Growth Dialogue in New Delhi on April 6. He also met with India’s Minister for Power, New & Renewable Energy, Coal and Mines, Piyush Goyal, to talk about large-scale, private sector investments between the two countries in the area of energy.

The two ministers agreed that on the power and renewables front, the focus will be on the introduction of performance-improving smart technologies, energy efficiency and accelerating the deployment of renewable energy.

For some time now, CDC Group Plc, the U.K. government’s development finance institution, has made its known that it seeks to set up its own renewable energy platform focused on the eastern part of India, and even neighboring countries such as Bangladesh.

The finance institution is contemplating leveraging its experience in running Globeleq Africa, a company in which it acquired a majority stake in 2015, for green energy investments in Asia. Globeleq has a 1,200-megawatt gren power generation capacity spread across Côte d’Ivoire, Cameroon, Kenya, South Africa and Tanzania.

As reported by MetalMiner, India aims to generate over half of its electricity through renewable and nuclear energy by 2027. The world’s largest democracy published a draft 10-year national electricity plan in December, which said it aimed to generate 275 gigawatts of renewable energy, and about 85 gw of other non-fossil fuel power such as nuclear energy, by the next decade. This would make up 57% of the country’s total electricity capacity by 2027, more than meeting its commitment to the Paris Agreement of generating 40% of its power through non-fossil fuel means by 2030.

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India has been taking massive forward strides in the renewable energy sector. Already, as per one estimate, it is set to overtake Japan as the world’s third-largest solar power market in 2017.  Taiwanese research firm EnergyTrend predicted that the global solar photovoltaic demand was expected to remain stable at 74 gw in 2017, with the Indian market experiencing sustained growth. The country was expected to add 14% to the global solar photovoltaic demand, the equivalent of the addition of 90 gw over the next five years.

As requested by Japan, the World Trade Organization (WTO) has set up a dispute settlement panel to decide the row over India’s imposition of a safeguard duty on imports of iron and steel products.

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MetalMiner has reported on this case in the past. Japan’s request was made after New Delhi imposed safeguard duties on several iron and steel products, which India claimed violated global trade rules.

India’s finance ministry imposed definitive safeguard duties on imports of hot-rolled flat products of non-alloy steel in coils to counter a surge in imports from several countries, including Japan. India’s stand has been that such cheap imports “caused injury to domestic steel industries.”

As both the nations failed to arrive at a solution, Japan petitioned the WTO for the formation of a dispute resolution panel.

Soon after the WTO announcement, though, India objected to Japan’s WTO request for a “prompt’’ resolution of its dispute against India’s duties on steel imports.

India’s contention is that there’s “no rationale” for treating the dispute any more urgently than other WTO disputes it’s involved in and the same standard should be applied to all disputes.

In December, Japan dragged India to the WTO against measures taken on imports of iron and steel products. Incidentally, Japan is the second-largest steel producer in the world.

The dispute assumes some amount of significance as both India and Japan signed a comprehensive free trade agreement, meant to avoid this type of arbitration, in 2011.

This was Japan’s second attempt to ask the WTO to set up a panel after the first was blocked by India in March. India expressed disappointment over Japan’s insistence on the WTO panel despite its “sincere efforts” to resolve the matter in a bilateral manner.

It normally takes about 20 months to settle a dispute at the WTO, but according to WTO rules, in cases of urgency, the parties to the dispute, panels and the Appellate Body make every effort to accelerate the proceedings.

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The Japanese government reportedly estimated that the tariffs could cost Japanese steel companies about $220 million through March 2018.

The safeguard duties imposed by India also gave rise to complaints from other WTO members.

Set of copper pipes of different diameter lying in one heap

The copper industry is still reeling from its crisis of plummeting prices, but hope is on the horizon and a recovery is underway albeit a gradual one.

According to a recent report from Reuters, falling prices led to a reduction in output, but industry executives announced this week in a meeting in Chile, a top producer nation of the metal, that any recovery will be a slow one.

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“The market seems to have left behind its worst moment, although it’s very premature to anticipate a new cycle of high prices,” Chilean Mining Minister Aurora Williams told the conference, according to Reuters.

Arnaud Soirat, copper and diamonds unit chief at Rio Tinto added that copper prices could receive support from external factors, including pending mine closures and ore grade decline.

“Copper’s long-term fundamentals are quite positive, and we expect to see further demand growth from emerging markets,” he told Reuters, forecasting a small deficit this year.

Copper Prices on Upward Trajectory?

Reuters also reported that copper consultancy CRU is projecting copper prices to trend upward over the next 3-4 years.

Said Vanessa Davidson, director of copper research: “We expect pressure on costs to continue…but we see copper prices rising faster than operating costs, ensuring that profit margins increase.”

How will copper 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:

The rising trend of aluminum processors seeking protection from Chinese imports may be just the beginning if a recent Reuters article is correct.

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Encouraged by a growing delta between the London Metal Exchange and Shanghai Futures Exchange aluminum price quotations, China’s aluminum makers are expected to step up exports in coming months, aided and abetted by a healthier global manufacturing climate and declining world aluminum stockpiles, the article explains.

Should this prove right, higher exports of semi-manufactured aluminum products would depress prices on both the LME and processors conversion premiums in the rest of the world. That would be bad news for producers, but good news for consumers who have been experiencing rising prices of both the underlying LME and conversion premiums for the last six months.

Chinese exports of semi-finished aluminum products fell last year as both LME and SHFE prices collapsed but production has rebounded more than 20% during the first two months of this year as the rising LME has made exports more profitable for Chinese producers benefiting from a relatively weaker SHFE domestic price. According to Goldman Sachs, the profitability of China’s semis exports has jumped 20% this year, encouraging the surge in exports we have seen in Q1 and portending a further increase in the months ahead.

How long the increase in exports is likely to last, and therefore how persistent the negative impact it will have on prices, remains to be seen. Despite the anticipation of rising exports, many still think the surge could be short-lived. Last month, Beijing ordered aluminum producers in 28 cities to slash output by 30% during winter months to limit coal use and curb pollution. In the mean-time, those producers are pumping out every ton they can adding to domestic availability, inventories and depressing the SHFE price. Come autumn, however, if cutbacks are enforced and the physical market tightens that surplus could turn to deficit and prices could rise. In which case exports will become less attractive and the tap will be turned off.

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This isn’t the first time the global aluminum market will be dancing to China’s tune. Consumers could do well to use a dip in prices this summer to cover forward for what may be a winter in which prices rebound.

One of the toughest calls over the last six months has been guessing which of President Donald Trump’s many campaign pledges would be implemented once his administration came into power, and more to the point if they would live up to the rhetoric on the campaign trail.

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Apart from diehard supporters, most commentators expected pledges to be watered-down when Trump got into power and have since been surprised at the vigor with which he has continued to pursue many of those objectives. Now, vigor is one thing, impact is another. His moves on healthcare were largely blocked by Congress but some other policies may gain greater support and Adam Posen, President of the Peterson Institute for International Economics is quoted in the Telegraph as saying, in the Institute’s estimation, the market is seriously underestimating the consequences of some of his more likely polices. In particular he is concerned about Trump’s fiscal stimulus coinciding with a tightening by the Federal Reserve causing a severe spike in the U.S. dollar.

Whether Pozen is right or wrong only time will tell, but for any business with involvement in imports or exports somewhere in their supply chain a significant strengthening of the U.S. dollar could have a significant impact.

“The Fed is going to be far more aggressive than people think. Our view is that there will be three to four more rate rises this year,” Pozen is quoted as saying.

The institute’s primary concern is about the consequences for emerging market debt of Fed tightening. Pozen said the resulting drain on dollar liquidity from the international financial system would have profound consequences after the surge in dollar-denominated debt over the last decade. Our concern here is more about the other implication of rising U.S. Federal Reserve rates and the impact they would have on the exchange rate.

The promise of rising rates has caused the dollar to spike in the past as markets have anticipated rate rises, but Pozen believes investors have become inured to Fed guidance and are discounting the probability of rate rises this year. Yet the economy continues to grow steadily. Employment is high — the U.S. economy is near full employment, and inflation is picking up. If President Trump comes through on his promises rates rises are inevitable, which brings onto the second issue, radical tax cuts combined with fiscal stimulus would cause U.S. federal borrowing to rise.

Quoting from the article, Posen believes there is enough Republican support for corporate tax rate to fall from 35% to 25%, along with income tax cuts for the wealthy and the middle class, and more generous tax deductions for business. Such a policy at this late stage of the business cycle will cause the economy to overheat, forcing the Fed to jam on the monetary brakes, which would send the dollar through roof. The institute suggests this could result in a 15% spike in the dollar hitting exports and undermining domestic manufacturers at the mercy of import substitution.

Two-Month Trial: Metal Buying Outlook

There is the possibility that Pozen has this all wrong. It’s not a forgone conclusion that President Trump will achieve his tax cuts, although an increasingly hawkish Fed is already in evidence. But at the very least, the situation deserves monitoring with the awareness that such a combination could have a very detrimental impact on the dollar and potentially for firms trading internationally. Posen is a former rate-setter on Britain’s Monetary Policy Committee, and is known for his work with former Fed chief Ben Bernanke on Japan’s Lost Decade and inflation targeting, he has sufficient experience and credentials to make his warnings worth listening to.

This month, some of our metals reached new heights while others saw their rallies noticeably falter.

Aluminum and Raw Steels are still riding high, while complicated supply stories saw stainless and copper fall. Demand from manufacturers for almost all of the metals we track remains strong.

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17 Of the 18 manufacturing industries tracked by the Institute for Supply Management’s index of national factory activity reported growth and no industry reported a contraction last month. Buyers still might want to beware as metal markets are showing more pull-backs than we witnessed in March, despite the overall bullish behavior across the entire industrial metals complex.

This is the final of a three-part series on MetalMiner Benchmark. Here’s part one and part two if you missed them.

We recently launched MetalMiner Benchmark. Source: MetalMiner.

One question we often field from readers is this one: “how are other companies buying their X and how well are we buying X?” We have previously written that many buying organizations fall into one of several different “buy” scenarios that include the following:

  1. The pure spot buyer (e.g. otherwise known as 3 bids in a box): Here, the buying organization goes out to market with a specific requirement, obtains three bids and typically places the award with the most competitive supplier who can meet delivery and quality requirements.
  2. The contract buyer: Prefers nearly the opposite type arrangement. He or she likes to “lock in” all or close to all known requirements or use some formula based on 80% of last year’s demand. The contract buyer often uses a price contracting mechanism known as an index whereby the price adjusts quarterly or monthly to the index depending on the agreed-upon arrangement.
  3. The hybrid buyer: This buyer is more strategic in that he/she buys both on the spot market and also contracts for forward buys or hedges when prices warrant that action.

Pros and cons exist for each scenario. Often times, the contract buyer in scenario two actually looks more like the spot buyer in scenario one because when a buying organization uses an index like CRU Group‘s, they do, in fact, pay the market price. They don’t actually pay less than the market or avoid a cost run-up if prices rise. In that sense, the scenario two buyer is actually a spot buyer — ultimately paying the market price.

We’d argue there are tools today that allow the buying organization to take their metals purchasing to the next level. Innovative practices such as benchmarking can actually allow the buying organization to reduce its average or budgeted purchase price. Let’s see how.

There are a number of ways to this. We have identified a few below:

  1. By benchmarking your company’s current monthly metal spend, and by doing so regularly, buying organizations can walk into a supplier negotiation armed with current market price data and knowledge of how well the company buys vis-à-vis the market. Access to superior metal price intelligence gives the buying organization a leg up in negotiations and the ability to lower costs.
  2. By pairing the benchmark report with forecasting, buying organizations can better time contract purchases both to avoid significant price increases as well as to “float” when prices are dropping. In this way, the buying organization can apply a more strategic hybrid approach to metals purchasing thereby lowering average costs.
  3. Think of benchmarking as laser surgery. Buying organizations now have the means of pinpointing specific SKU-level opportunity areas while leaving other areas untouched.
  4. Stop wasting time on metal sourcing projects that have little to no ROI. Conversely, identify high-ROI metal sourcing projects. Educate your executive team with where and how the procurement organization plans on creating value within some of the largest metals purchase areas.
  5. Conduct alternative supplier identification on the fly by seeing alternative suppliers within your geography for the form/alloy/grade/size you buy. By conducting these types of analyses quickly and efficiently the long cycle time of implementing savings can be streamlined and shortened.

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Bonus benefit: improve your ISO certification scores by using benchmarking, which enables a fact-based approach to decision-making, a key requirement of certification.

The most innovative metal buying organizations will become the early adopters of this type of benchmarking capability. Just as Progressive Insurance and Kelley Blue Book created market access to greater pricing visibility, metal price transparency appears within reach. This innovation should significantly improve metal buying strategies.