Market Analysis

The recent steel rally seen in China is triggering some warning signs. Fitch Ratings recently announced prices for the metal increased, in part, due to rising speculation about an inevitable slump.

According to a report from Bloomberg, the sharp increase in steel prices isn’t sustainable as mills are expected to fall back on idled capacity, thus increasing supply. The steel price rally has been driven, in part, due to a seasonal recovery that was further supported by increased speculation in the futures market.

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“The rapid increase in Chinese steel prices so far this year is not sustainable, as it is largely due to a seasonal pick-up in construction and elevated speculation in the steel futures market,” the Fitch report said. “With prices now surging, many of the suspended plants have resumed production.”

Steel prices have risen dramatically in 2016 with rebar up 48% after Chinese policy makers touted growth and added stimulus, boosting property prices, according to Bloomberg. These gains have helped mills’ profitability bounce back.

Metals Round-Up

Meanwhile, aluminum prices have joined the broader metals rally, hitting a nine-month high this week. Our own Raul de Frutos wrote: “The data shows us that many signals suggest that this rally in commodity markets could continue. Aluminum prices are starting to pick up and so are other industrial metals. Watch oil prices, the U.S. dollar, commodities markets and the price performance of other industrial metals. Don’t get caught as prices find momentum. In this period it is extremely important to understand the big picture and have a defined purchasing strategy.

You can find a more in-depth steel price forecast and outlook in our brand new Monthly Metal Buying Outlook report. Check it out to receive short- and long-term buying strategies with specific price thresholds.

I know that the fundamentals for aluminum look poor: Sluggish demand and too much capacity with little to no willingness for production shutdowns. That doesn’t really make for a price uptrend. Or does it?

Aluminum price hits 9-month high

Aluminum price hits nine-month high. Source: FastMarkets.com.

It does if aluminum gets a tailwind, and that tailwind is a bull commodity market which is what appears to be in the cards right now.

Free Download: The April 2016 MMI Report

Aluminum might not need many mine shutdowns before we see higher aluminum prices. What aluminum needs is investors to believe that the slump in commodity prices is over and that China will drive demand with its stimulus measures. Read more

Zinc prices hit a nine-month high last week helped by a broad recovery in commodity markets and improving supply/demand fundamentals within the zinc industry.

3M LME zinc hits 9-month high

Three-month London Metal Exchange zinc hits a nine-month high. Source: Fastmarkets.com

Perhaps the Most Bullish Base Metal

Zinc (along with tin) has been the best performer among industrial metals this year. Zinc’s long-term outlook appears to be quite bright, thanks to the number of key larger-scale mine shutdowns over the past few years.

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The most recent shutdown, Century mine in Australia, stopped shipments early this year. Glencore, Nystar and others also announced significant production cuts. Combined, it’s estimated that around 10% of global zinc production has been taken offline. Read more

Adobe Stock/ Björn Wylezich

Adobe Stock/ Björn Wylezich

The International Lead and Zinc Study Group recently released new data that found the global market for refined zinc recorded a surplus during the first half of 2015, but was in deficit during the second half of the same year.

The London Metal Exchange, Shanghai Futures Exchange and Chinese State Reserve Bureau warehouse inventories — along with those reported by consumers, producers and merchants — decreased in 2015 with 79% of the refined zinc stored in LME warehouses in New Orleans.

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“Decreases in zinc mine output in Canada, China, Ireland and Namibia were partially offset by increases in Australia, India, Peru, the Russian Federation and Sweden resulting in an overall global fall of 0.7%,” according to the report. “A rise in global refined zinc production of 3.3% was primarily a consequence of higher output in Canada, China, India and the Republic of Korea that comfortably exceeded reductions in Iran, Japan and Namibia.”

Furthermore, increased demand for zinc in France, Germany, the Czech Republic, Poland and the Russian Federation was the main source of European usage with other increases noted in China. On the other side of the coin, usage in the United States, India, Japan and the Republic of Korea declined. Global demand overall increased by 0.7% in 2015, according to the ILZSG.

You can find a more in-depth zinc price forecast and outlook in our brand new Monthly Metal Buying Outlook report. Check it out to receive short- and long-term buying strategies with specific price thresholds.

Silver prices skyrocketed on Monday, hitting an 11-month high.

Silver price hits 11-month high

The silver price hits 11-month high. Source: MetalMiner analysis of @StockCharts.com data.

It is difficult to find a fundamental reason for such a price increase. It seems like silver is simply catching up with gold. Gold surged to a one-year high back in February and, ever since, the yellow metal hasn’t moved much, as if it was waiting for silver to close the gap.

Gold to silver ratio falls

The gold-to-silver price ratio falls. Source: MetalMiner analysis of @StockCharts.com data.

And the gray metal has done so. The gold-to-silver ratio has come down to more normal levels after rising to multiyear highs in February when gold prices surged.

Gold Gets Company

The truth is that gold is not moving up alone anymore, since this is not just about investors looking for safe haven. Commodity markets are showing the first signs of recovery.

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A weaker dollar and rising oil prices in Q1 lured investors into commodity markets this year. Not only gold but the rest of the precious metals, as dollar-denominated commodities are getting a boost over the past few months.

Platinum and Palladium Join the Party

Platinum (in red) and Palladium (in blue) recovering

Platinum (in red) and Palladium (in blue) are also recovering. Source: @StockCharts.com.

Will the Uptrend in Precious Metals Continue?

That will strongly depend on what the dollar and oil prices do from now on. The recovery in oil prices since February is encouraging, especially since prices are managing to hold their value this week despite bearish news after major oil producers supplying nearly half of global output ended their meeting in Doha, Qatar, over the weekend without reaching an agreement to cap production.

If oil prices continue to climb despite the bearish news, that would be a bullish development, suggesting that underlying supply/demand fundamentals might, indeed, be improving.

Dollar weakens in 2016

The U.S. dollar weakens in 2016. Source: MetalMiner analysis of @StockCharts.com data.

Another key factor to watch is the U.S. dollar, which will likely move in the opposite direction to oil prices. The interest rate stimulus policies that major world banks take through the year will be decisive in the value of the dollar and the rest of wold currencies.

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The U.S. dollar index is approaching new key support levels that if broken, would be another indication that commodity markets are set to continue improving.

lead-prices-L1The International Lead and Zinc Study Group released new findings that reveal in 2015, supply exceeded demand by 63kt in the global market for refined lead metal.

Over that same time frame, inventories reported by the London Metal Exchange (LME), Shanghai Futures Exchange (SHFE) and consumers and producers dropped by 83,000 metric tons, hitting 503,000 mt at the end of the year.

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Meanwhile, a global lead mine production drop off of 12.1% can be attributed to a significant 25.2% decrease in Chinese production. Elsewhere around the world, output in Ireland, Australia and the U.S. was by and large offset by increases in Sweden, Peru and India.

“As in the case of lead mine production, a 7.8% reduction in world refined lead metal output was almost exclusively due to a reported 18% fall in Chinese output,” according to the report, “to its lowest level since 2009. In Europe, there was a recovery in production in the U.K. after a fall in 2014 due to a disruption in lead bullion supplies. There was no production in Peru in 2015 as a result of the continued suspension of operations at the La Oroya plant.”

Lead Price Movements Since Q1

We’ve been keeping a close eye on steel price movements over the past several weeks, and how those movements relate to other industrial metals, including lead. Metals such as aluminum, copper, nickel and, of course, lead, haven’t moved all that much since hitting multiyear lows back in February. The key factor for their movements is oil, whose recent rally appears to be losing momentum.

You can find a more in-depth lead price forecast and outlook in our brand new Monthly Metal Buying Outlook report. Check it out to receive short- and long-term buying strategies with specific price thresholds.

 

It could be argued that one explanation for the recovery in oil prices since February was hope for a deal among major producers to limit output.

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However, a recent meeting of representatives of major producer nations disappointed. Major oil producers supplying nearly half of global output — including members of the Organization of Petroleum Exporting Countries and other producer-nations such as Russia — ended their meeting in Doha, Qatar, over the weekend without reaching an agreement to cap production. This new development now leaves some questions for metal buyers.

Why Did the Talks Fail?

Iran had ruled out limiting its own production. International sanctions against the country were lifted in January and now that the country is able to export, its goal seems to be to regain lost market share rather than to cap production to help out OPEC neighbors and fellow members. Tehran’s position is understandable, to an extent, as other regional powers took advantage — even fellow members of OPEC — of Iran’s sanctioned status and filled the gap with their own oil before the international community even thought of lifting Iran’s sanctions. Once Iran made its intentions clear, Saudi Arabia — the world’s second-largest oil producer — walked away from any agreement that didn’t include its geopolitical rival Iran.

Does This Mean Oil Prices Back Below $30?

Not necessarily. This development is, of course, bearish for oil prices but there is a difference between what’s fundamentally bearish and how markets react to it. As you probably know, we are not here to make predictions but to constantly monitor markets.

This news is the kind that could hit market sentiment, especially at a time when oil prices seem ripe for a pullback. However, OPEC actions might not be required to balance oil markets. Some might argue that low prices are already creating the necessary market rebalance. There is no clear answer on whether oil fundamentals are set to improve or not.

The supply/demand equation is complex and many factors could weigh on prices throughout the year. Production in the U.S. is already declining while weaker economic growth in places such as China and Latin America is expected to weigh on global oil consumption. One thing is clear, however, the failure of the Doha talks and the gap between the Iranian and Saudi position has damaged the credibility of OPEC even further.

Oil prices 1 year out

Oil prices, one year out. Source: @StockCharts.com.

This will be a huge test for global markets. So far, markets reacted as expected, oil prices fell on Monday on the news but not by that much. If oil prices weaken that could mean that the price rally seen in Q1 was only caused by expectations that didn’t materialize. However, if oil prices continue to climb despite the bearish news, that would be a bullish development, suggesting that underlying supply/demand fundamentals are indeed improving.

What This Means For Metal Buyers

This new development is something that could bring oil prices down… or it might not. Metal buyers should keep a close eye on the price of oil. If oil prices actually decline, that would probably have a depressing effect on global markets. Stock markets could suffer and sentiment on commodity markets would worsen.

Free Sample Report: Our April Metal Buying Outlook

The currencies of oil exporting countries would weaken against the dollar, that would help the U.S. dollar recover, driving metal prices down as well. On the other hand, if oil markets manage to pass this test, that would be bullish.

Screen Shot 2016-04-06 at 9.37.41 AMSteel prices continue to dominate metals news, and, for those readers who are looking to make long-term purchases in this commodities market, the Q2 update to our Annual Metals Outlook offers commentary and data to help you make those decisions. We provide the price points for the metals you source that will help guide your behavior. When a metal breaches long-term resistance levels or comes close (as we see in the present steel market) you’ll need to rethink your long-term strategy in the process. That is where this report comes in.

Claim your copy today!

Steel is being a different animal this year. While metals such as aluminum, copper and nickel are trading barely above multiyear lows, we are witnessing strong price momentum in domestic steel prices.

Free Download: The April 2016 MMI Report

Cold-rolled coil is a good example. Prices last week climbed above $600 per standard ton, the metal’s highest price level since April 2015.

US CRC hits 1-year high. Source: MetalMiner index

U.S. Cold-rolled coal hits one-year high. Source: MetalMiner index.

Why, in an Oversupplied Market, Did Steel Prices Get a Boost?

The duties imposed on steel products caused steel imports to taper down in a big way over the last three of months and U.S. steel mills now have the power to raise their base selling prices. U.S. aluminum markets didn’t enjoy this kind of protection. However, even if they did, which they might, aluminum prices wouldn’t get the same boost.

The reason is that aluminum (like the rest of base metals) is more global in nature than steel. U.S. steel prices can be much higher than in the rest of the world because prices are not decided on exchange-based trading unlike aluminum which is linked to London Metal Exchange reference prices. So, even if duties were imposed on aluminum products, aluminum producers couldn’t arbitrarily hike their selling prices.

Is This Rally Backed Up by Fundamentals?

In the short-to-medium term it is, whereas long-term it really isn’t since steel demand in China keeps contracting. The recent positive sentiment might help U.S. steel mills increase their spot offers even further, but we could see a revision later this year. Although there seems to be short-term scarcity of steel in U.S. markets, there is still plenty of steel overhanging in global markets. We’ll have to wait to see how much further mills can raise steel prices in Q2 before buyers turn to international suppliers for cheaper prices.

Chinese Exports Rise Sharply in March

Another factor driving global steel prices this year has been expectations of a decline in Chinese steel exports as earlier this year China committed to curtail its excess steel capacity. However, the latest data doesn’t seem to suggest that. In March, Chinese steel exports surged 30% compared to the same period last year. In Q1, Chinese steel exports are up 8% compared to the same quarter last year. That seems to suggest that rising steel prices have only ensured that Chinese steel mills produce more of the metal.

What This Means For Metal Buyers

Market dynamics are quite different for steel markets than to the rest of base metals. U.S. mills now have the power to increase their spot prices. Buyers should have, by now, locked in prices for the next one or two quarters.

Free Sample Report: Our April Metal Buying Outlook

Longer-term, there are still plenty of events that could change market sentiment later this year, limiting domestic mills’ ability to raise prices. We’ll have to keep monitoring markets to watch for more clues.

In the first two months of 2016, gold was the market’s MVP but, as we noticed in March, the silver price has started to play catch up.

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The gray metal recently hit a 10-month high after closing above $16 per ounce, while gold has traded flat over the past two months.

Silver hits 10-month high

Silver hits a 10-month high. Source @StockCharts.com.

Silver keeps outshining gold thanks to the same factor we pointed out in March: Oil prices making a comeback have boosted demand for silver’s industrial uses. Gold is not used nearly as much in cars, solar panels and gadgets as silver is.

Oil Holds Near $40 a Barrel

Oil manages to hold above $40-barrel

Oil is managing to hold above $40 a barrel. Source: @StockCharts.com.

Oil prices have, so far, successfully fought off bears when they were attacked earlier this month. Oil has a huge role in the world’s economy. Higher oil prices are giving relief to market participants who were worried by its continuous fall. That helped metal prices rise in Q1. Silver’s price strength is clearly coming from its economically-sensitive role as an industrial metal.

Stock Market Rally Remains Intact

S&P 500 rising non-stop. Will it overcome last year's levels?

The S&P 500 rising non-stop. Will it overcome last year’s levels? Source: @StockCharts.com.

Thanks, in part, to healthier oil prices global markets have been gaining since mid-February and while this rally lasts, money keeps rotating out of safe-haven assets such as gold and bonds. Silver is less impacted than gold in this way, and that also helps silver outperform it.

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Stock markets in the U.S. are acting particularly strong and, so far, they have avoided any price pullback. We will keep a close eye on stock markets and see if they can continue to go up from here as sellers could come into the market soon as prices approach last year’s levels.

Is Silver Set to Continue Gaining Against Gold?

The gold-to-silver ratio falling since March amid global stock market and industrial metals recovery

The gold-to-silver ratio has been falling since March amid a global stock market and industrial metals recovery.  Source: @StockCharts.com.

Not necessarily. But while the factors explained above keep moving in a positive direction, silver will continue to benefit. We’ll see if the rally in the base metals complex and the accompanying one in stock markets extends into Q2.