Market Analysis

As we pointed out last month, the US dollar is showing some weakness for the first time in almost a year. That dollar weakness has helped metal prices during the second quarter. However, the recent price movements aren’t reason enough to suddenly become bearish in the dollar.

Why Manufacturers Need to Ditch Purchase Price Variance

The dollar increased in value very quickly in 2014, so it’s not weird to see the dollar taking a breath before it continues on its way up. Technically, this is called a “correction within an uptrend.”The question now is whether the dollar has weakened enough already or if it’s due for further declines.

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The US dollar index has declined 6% since its peak in mid-March.

Why Manufacturers Need to Ditch Purchase Price Variance

This decline gave a boost to commodities and, of course, precious metals were not left behind. However, their upside moves look anything but impressive. Despite the weaker dollar, it seems as if precious metals are having a hard time moving away from their lows.

Gold prices rose a shy 6% since mid-May. The yellow metal is still near record lows. A bit more encouraging is the move silver is making, up 12% since mid-May. The grey metal, however, is still near record lows as well. The metal is trading at $17.71/oz and we’ll see if it can break medium-term resistance at $18.5/oz.

A bit more encouraging is the move silver is making, up 12% since mid-May. The gray metal, however, is still near record lows as well. The metal is trading at $17.71/oz and we’ll see if it can break medium-term resistance at $18.5/oz.

Platinum is up 7%. A very small movement compared to its huge decline since summer last year. The metal has a long way up to reach last year’s levels.

Palladium rose 8% after making a 1-year low in March. Palladium is clearly the best performer among precious metals but since summer of last year is also being dragged down with the rest of precious metals.

What This Means For Metal Buyers

Recent weakness in the dollar is giving a boost to precious metals. However, these price movements have been quite shy so far. It still makes sense to be long-term bullish on the dollar and bearish on precious metals.

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As coil import arrivals drop off (the arbitrage for speculative tonnage disappeared in 2015, but it takes 3-4 months for physical arrivals to catch up), we expect that metal service centers will be back in the purchasing game over the next quarter.

Why Manufacturers Need to Ditch Purchase Price Variance

Crucially however, they do not need to buy in big volume, but expect to see steadier business filling in holes in certain products rather than big blanket buys. That trend would be supported by a stronger economic environment than in Q1.

That will mean the initial going for a price increase in hot-rolled or cold-rolled coil will be tough sledding, but we expect prices in the short-term to hit the $470 per ton target by the end of this month.

Despite probable attempts by mills to increase the price again, we believe that coil will fluctuate around this price through the second quarter, as distributors have plentiful inventory and are well-stocked with lower-priced (import) coil that is competitive. Moreover, too aggressive a price move will bring imports back in as there is plenty of cheap coil around.

Once that inventory is cleared, however, thanks to lower imports and cuts in domestic production, we expect a moderate gain in pricing in the second half of the year – back over $500/ton.

One wild card that we would consider a trigger for further price gains is an anti-dumping filing against Chinese, Indian and potentially other sources on CRC and HDG. Chinese supply of CRC was 6% of the US market in 2014 while Chinese and Indian supply of HDG was a combined 8%.

This is not insignificant, but highlights that this will not be a cure-all for the sector, although we suspect that if the US mills do go for a filing, they will blanket the market and try to pick up other suppliers in their net, such as Korea, Taiwan, Brazil and Russia that will account for a few more percentage points.

Our view remains that anti-dumping action is “whack-a-mole” to some extent with other non-named suppliers popping up as alternatives. Nevertheless, the removal of China, in particular, would result in some of the really low-priced coil exiting the market and the Chinese are looking to some extent to develop a long-term customer base of end-users that would be detrimental to US mills.

As such, we believe that a filing would help US mill volumes (at least initially), although we believe that the pricing impact would be short-term at best.

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If there is a rock star among industrial metals, it’s zinc.

Why Manufacturers Need to Ditch Purchase Price Variance

The metal just rose 15% in only one month and it’s now hanging near a 4-year high. Zinc has been the only base metal able to fight this bearish commodity market that we have been in since 2011. While most metals in the group kept falling like dominoes, zinc has managed to hold its value well. We noticed this divergence just a year ago.

The metal’s fundamentals are mixed. Zinc is supposed to move in to deficit but most analysts say that it will take some time until that deficit materializes. Demand is expected to remain robust and the impeding closure of of the world’s two biggest mines (Brunswick and Century) could create supply constraints.

The technical picture tells a more positive story. The market is not letting prices fall and it seems like zinc takes every chance it gets to move up. Recent weakness in the dollar drove zinc prices up (and most base metals), but the metal will soon meet resistance near $2,400 per metric ton.

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With HR coil prices at $450 per ton in mid-April (although big buyers could get $420/ton), HR coil prices had dropped $250/ton since late summer. US mills blamed imports – which is true – but forgot to mention that they had kept steel prices at elevated levels for 9-12 months while prices in the rest of the world were tanking. What did they expect?

Why Manufacturers Need to Ditch Purchase Price Variance

It is our view that we are now at the bottom and in late April, ArcelorMittal led the industry with a $20/ton increase for June deliveries. Since then, transaction prices have edged up to $460/ton and slightly above. So where do we go from here?

Lead times across the industry vary from around 3-5 weeks for hot-rolled coil. The aim of the price increase was to extend those order books and lead times and therefore create momentum for further price gains. It certainly brought some buyers back in with any remaining May tonnage sold out quickly at the lower price.

Inventory Surplus

At this point in the cycle, the inventory situation is critical. Inventories remain elevated, but total flat-rolled stocks appear to have stabilized at just over 6 million tons (around 10-11 weeks of demand) and we expect them to begin to fall steadily over the next few months as service center order levels have been slack for much of 2015 as they received earlier orders – both domestic and import.

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For the first time in almost a year, the US dollar index is experiencing some turbulence.

Free Webinar: MetalMiner’s Q2 and Q3 2015 Forecasts

For the past two weeks the index is trading sideways. Still, the long-term trend is clearly up and we doubt this is a major top for the dollar. However, its sharp advance during 2014 certainly leaves the currency vulnerable to some profit-taking.

Weakness in the dollar is giving support to commodity prices. After a steep decline during the second half of 2014, commodities are now stabilizing. A weaker dollar during the past few months also explains recent upturns in stock markets tied to commodities such as Russia, Canada and Brazil.

Further weakness in the dollar throughout the rest of the year would give a bigger boost to commodities and these foreign markets.

Metals Still Bearish

Industrial metals haven’t really received a boost during the last few months. Although some base metals rose we also saw others recently fall to record lows. Worth mentioning, however, is oil prices climbing to their highest levels this year ($58 a barrel).

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Markets move in trends. We can observe trends in any financial market, in any time. The price of the metals you buy move in trends and as you well know, and industrial metals are in a downtrend since the spring of 2011.

Free Webinar: MetalMiner’s Q2 and Q3 2015 Forecasts

So why does the price of your metal trend? Is it that the starts align and that produces a trend in a commodities market?

Heck, no! Traders are the ones making prices move and behavioral finance can help explain why trends are formed. We’ll mention three human behaviors to explain it.

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Most analyst argue that lead’s fundamentals are set to tighten and that should make prices rise.

Free Webinar: MetalMiner’s Q2 and Q3 2015 Forecasts

However, that’s what they said a year ago (good thing we didn’t) and prices are now well below last year’s levels. The market is expected to move into a deficit of around 100,000 metric tons this year as supply shrinks and demand (sort of) improves.

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3-Month tin on the London Metal Exchange has fallen as low as $16,400 per metric ton, recording a new 5-year low. Tin prices have fallen 28% this year to date. Given Indonesia’s attempts to regulate supply, no one expected to see tin prices sinking like they have, well maybe we did expect something…

Free Download: Cut Your Tin Shipping Costs

Indonesia’s exports of refined tin totaled 19,700 mt in the first three months of the year, up almost 20% on the same period of 2014, so the raw ore export ban does, at least, seem to be doing what it was intended to do, increase local refining.

Why is Tin Falling?

Two major developments help explain tin’s steep price drop:

  • China managed to offset the drop in Indonesian exports. Chinese demand for imported refined tin declined as the country found a new source of mined supply. China increased its imports of ore and concentrates from Myanmar and the country has now moved from being a net importer of tin in recent years, to now be self-sufficient as it lifts its refined tin production.
  • Commodities continued to fall, driven by a strong dollar and low oil prices. As we’ve discussed before, a metal has a very hard time to move up while commodity markets fall. Tin is not the only metal falling to record lows this year. With tin’s drop and nickel prices recently plummeting, we might see these other two metals falling to record lows as well.

Tin prices now look oversold and bottom pickers might help lift prices during the second quarter, however, the long-term outlook is far from bullish, especially while commodities keep falling.

Remember to always buy on strength rather than weakness rather than try to pick bottoms. You never know how far a metal can fall in a market like this.

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Precious metals keep falling. We pointed out in October that the outlook for the precious basket of metals was bearish and that palladium was the only one holding its value. Today, the picture looks even more bearish.

Free Download: Cut Your Palladium Shipping Costs

Gold and silver are near their lowest levels, platinum recently made a 5-year low and palladium, the only metal that was showing some hope is now falling and marking a 1-year low.

Although last year we were bullish on Palladium, the picture is starting to look like a downward trend. The precious metal is now breaking a key support level after hitting deeper lows. This indicates that selling pressure is increasing as the metal declines, and its lower high points are a sign that there is diminishing buying pressure during those upward bounces.

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