Market Analysis

Earlier this week the London Metal Exchange announced that its clearinghouse would now accept offshore Chinese renminbi as collateral, effective immediately. MetalMiner Editors and Co-Founders Lisa Reisman and Stuart Burns discuss the significance of this announcement but more important, its potential impact on industrial buying organizations.

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Energy prices got hit the most with oil prices falling below $50/barrel, followed by precious metals. Gold prices hit a 5-year low, falling as much as 8% in July, silver of course, followed because metal price correlation is still an important factor to account for.

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This is your last chance to register for our webinar this Thursday – PREVIEW: MetalMiner™ Price Forecasts for August. Join us at 10 a.m. CDT as Lisa Reisman (CEO, Azul Partners and executive editor, MetalMiner) and John Conolly (managing director, Azul Partners with more than 20 years’ experience in trading commodities) walk you through the creation of our new 30-day metal price forecast, now available as a commercial offering.

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Another two metals fell last week into multi-year lows, aluminum and copper. The price drop is not surprising, commodities keep falling, the dollar remains and other industrial metals like Nickel, already fell sharply amid China’s stock market tumble.

3M LME Aluminum since 2012

Three-month London Metal Exchange aluminum since 2012. Graph: MetalMiner.

We recently wrote that aluminum would need to fall further in order to cause additional non-Chinese closures to balance the market. Chinese aluminum exports surged 35% year-on-year in the first half of the year, adding to global excess supply of the metal.

Three Best Practices for Buying Commodities

Three-month aluminum on the London Metal Exchange closed on Friday below $1,650/metric ton, hitting a six-year low.

3M LME Copper since 2012

Three-month LME copper since 2012. Graph: MetalMiner.

Copper prices keep doing the same thing over and over: lower peaks, lower troughs. Copper’s fundamentals are nothing but bearish, excess supply from mines and weak Chinese demand for the metal. We recently highlighted some Chinese numbers showing poor demand from key sectors.

During the first half, we questioned every copper rally. Three-month copper on the LME closed on Friday below $5,300/mt, the lowest level in six years.

What This Means For Metal Buyers

The outlook for base metals remains bearish. The buying strategy to take on aluminum and copper is pretty clear: don’t buy on weakness.

Free Download: July Metal Price Forecast

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July 2015 Monthly Metal Buying Outlook copy

Want a short-term buying strategy for zinc? Check out our complimentary July Metal Buying Outlook report!

Zinc Drivers

1. Dollar to Euro exchange rate

2. Global production

3. Global capacity utilization

4. Zinc refining capacity utilization rates

Market Commentary

Last month we reported the International Lead and Zinc Study Group suggested 2015 demand for refined zinc would exceed supply by 151,000 metric tons. Those numbers have turned out to be wildly wrong – in fact zinc is running a surplus to the tune of 181,000 metric tons. In addition, buying organizations will want to pay careful attention to the flow of metal into LME warehouses.

According to the most recent LME data available, zinc stocks declined in May by some 57k+
metric tons but some analysts believe that just the opposite will happen through July – more
inventory will make its way into LME warehouses than out of them. In addition, plenty of
extra inventory exists in non-LME warehouses throughout Asia and the United States.

Market sentiment toward zinc has hinged on the supply/demand equation and it has become a little less likely that any real zinc shortage will materialize.

The Outlook

Three-month zinc fell significantly in June, closing at $2,000/mt. As with lead, zinc’s rally this spring wasn’t sustainable in the face of a bearish commodity market. In the long-term we expect zinc prices to stay range-bound at best.

So What Should My Industrial Buying Strategy Be?

This zinc price forecast was excerpted from our brand new Monthly Metal Buying Outlook report. For a short- and long-term buying strategy with specific price thresholds, consult the July 2015 report!

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We always keep an eye on the commodity market as it has a huge impact on metal prices.

Free Download: July Metal Price Forecast

Commodities have been in a falling market since 2011, but, so far, this year has been more of a flat market for commodities. We expect to see some movement soon. The rising US dollar has been a key factor in driving commodities down and although the dollar still strong, it has been taking a break for the past seven months from its meteoric rise while posting a flatter trajectory. A more stable dollar this year clearly helped commodities to stay flatter as we can see in the next graph.

US Dollar (green) vs CRB Index (Blue) 1 year out

Dollar index (green) vs CRB Commodity Index (blue), one year out. Graph: MetalMiner.

Both, the dollar index (in green) and commodity Index (in blue) are within their one-year range. For the last couple of months, however, commodities are starting to fall again, approaching record lows while the dollar is rising again.

Free Download: Latest Metal Price Trends in the July MMI Report

We recently talked about a similar flat behavior in the stock market and how technology indexes could be leading stocks’ recent gains. Back to commodities, it seems like base metals are the ones taking the lead, and they are pointing down.

Industrial Metals ETF 1 year out

Industrial Metals ETF one year out. Graph: MetalMiner.

The recent Chinese market sell-off might explain the bad performance of base metals compared to other commodities, as they are more sensitive to buying activity on the ground level.

What This Means For Metal Buyers

The first half of 2015 has been relatively stable for commodities. However, as we see base metals recently sinking, we can expect to see more volatility across the board.

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Lead drivers:

July 2015 Monthly Metal Buying Outlook copy

Want a short-term buying strategy for lead? Check out our July Metal Buying Outlook report!

1. Dollar to euro exchange rate

2. Global production

3. Global capacity utilization

4. Automotive production Europea/NA/China

5. China lead prices

Market Commentary

Lead looked a little exciting in May but June has brought prices down on the back of soaring LME inventories (please note MetalMiner does not subscribe to the notion that inventory levels necessarily correlate with metal prices). However, in March a 100,000-ton surge in canceled warrants (metal to be taken out of LME warehouses) does not suggest sudden industrial demand but rather a storage arbitrage, similar to what has happened with
aluminum and to a lesser extent, zinc.

China lead prices (not SHFE but industrial trade prices) peaked in early May and have
declined ever since according to MetalMiner IndX™ data.

Last month we made mention of data that suggested a global balance between lead supply
and demand. The most recent data from the International Lead and Zinc Study Group
suggests demand is down across the board from Europe (4.2%), the US (3.9%), China (4.3%)
and Korea (9.8%). Nonetheless the market appears in somewhat of a balance. Regardless,
we don’t see lead’s fundamentals much differently than some of the other base metals.

The Outlook

Lead prices continued to fall in June closing at $1,761/mt. The rally that we saw in April has already vanished. Neither fundamentals nor technicals support a sustainable price rally. The long-term outlook remains bearish, especially while we see other industrial metals making record lows.

Lead price forecast 2015

So What Should My Industrial Buying Strategy Be?

This lead price forecast was excerpted from our brand new Monthly Metal Buying Outlook report. For a short- and long-term buying strategy with specific price thresholds, consult the July 2015 report!

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The US stock market is demonstrating resilience against economic worries such as the Greek Crisis, falling oil prices, weakness in emerging markets and the recent Chinese market sell-off.

Free Download: July Metal Price Forecast

Some argue that the bull market has already run for too long, and that concerns outside the US are putting enough pressure to make the stock market tumble. However, the opposite might be true.

The Tenacity of the US Stock Market

The unwillingness of domestic stocks to fall is a sign of strength and we could see stocks rise even further, especially if things start to calm down globally.

Dow Jones Industrial Average Index 1 year out

Dow Jones Industrial Average Index, one year out. Graph: MetalMiner.

Major market indexes like the Dow Jones Industrial Average, S&P 500 and the New York Stock Exchange remain range-bound since February. We recently pointed out that this trendless period was causing investors to hesitate. It was hard to tell whether the market is going to roll over or continue on its way up. Some new clues are pointing to the latter.

Nasdaq Composite Index 1 year out

NASDAQ Composite Index, one year out. Graph: MetalMiner.

The fact, that US stocks held their values well while Chinese markets plunged proves that Chinese financial news can only weigh on US stocks in the short term. In the longer term, China does not lead the US and its recent troubles do not appear to affect markets here that much.

What This Means for Metal Buyers

Moreover, the NASDAQ (a technology-focused index) recently hit an all-time high. The fact that technology stocks are leading the market is a positive sign. Lower oil and commodity prices are hurting the shares of energy and commodity producers, which helps explain why the other indexes are still range-bound. But, good earnings reports from leading tech companies are increasing the appetite of funds to buy stocks.

In conclusion, the US market is not immune to what happens outside the US. Further bearish news from outside could weigh on US shares, but, so far, things are looking good for US stocks in the second half of the year.

Free Download: Latest Metal Price Trends in the July MMI Report

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Gold and silver are heading into a risky zone. Both precious metals have fallen for the past four years but it looks like more declines might be around the corner.

Gold since 2014

LBMA gold since 2014. Graph: MetalMiner.

Gold tried to rally this year but the rally wasn’t sustainable. Gold is now back to $1,150 an ounce and seems ready to hit another multi-year low. Despite all the global economic uncertainty, “gold’s safe heaven thesis” is not really playing out.

Free Download: July Metal Price Forecast

A strong dollar and bearishness across commodities are what’s really driving gold prices down.

Silver since 2014

Silver since 2014. Graph: Metalminer.

Not surprisingly, silver is following the same pattern as the same price drivers are applying. Indeed, silver is already hitting a multi-year low. Interestingly, the same thing happened last year when silver fell and then gold followed.

What This Means For Metal Buyers

The outlook remains bearish not only for base metals but also for precious metals. Gold and silver at approaching key support levels and if not able to hold, we could see prices sinking. The buying strategy to take on gold and silver is pretty clear: don’t buy weakness.

Free Download: Latest Metal Price Trends in the July MMI Report

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Nickel Drivers

July 2015 Monthly Metal Buying Outlook copy

Want a short-term buying strategy for nickel? Check out our complimentary July Metal Buying Outlook report!

1. Dollar to Euro exchange rate

2. Stainless steel global production

3. Global capacity utilization

4. China coking coal prices (impacting Chinese nickel pig iron production)

5. China GDP & PMI data

Market Commentary

Nickel fundamentals do not tell a very good story if you are a stainless producer or service center. However, buying organizations likely feel differently about bearish metals. Nickel faces a number of headwinds that will continue to put pressure on prices.

Specifically, nickel suffers from weak global demand, excess service center inventory levels, an Indonesian export ban that failed to do what it intended to do (we’ll come to that in a moment) and increased stockpiles in China (although we do not accept the one-to-one correlation that higher inventory levels necessarily equate to lower prices and vice versa, lower inventory levels don’t necessarily equate to higher prices).

Service centers tell MetalMiner that inventory levels remain well above historical “healthy” MOH averages (about 2.4-2.6). Instead, inventory levels are up over 3.5 months, seasonally adjusted. This is a very bearish indicator. Demand has slowed for the typical summer slow-down. Service centers report transactional business is slow.

The Indonesian Export Ban

As many are aware the Indonesian government banned the export of unprocessed minerals back in January of 2014. Instead of having the desired effect of generating new investment for higher value added processing in country, exports have dried up and the government has begun tinkering with the ban to allow for some copper exports. The ban on nickel and aluminum exports remains intact but news reports suggest the ban for bauxite might be lifted which may be an indicator that the government could change its policy.

Regardless, this too is a bearish factor weighing on nickel.

The Outlook

Three-month nickel closed the month of June at $12,000/mt, sliding to a 6-year low. Nickel is in free-fall as shortage expectations faded. The long-term outlook remains bearish, especially while the rest of base metals keep falling. We expect to see high price volatility in the coming months.

So What Should My Industrial Buying Strategy Be?

This nickel price forecast was excerpted from our brand new Monthly Metal Buying Outlook report. For a short- and long-term buying strategy with specific price thresholds, consult the July 2015 report!

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