Market Analysis

The Stainless MMI fell by one point to 51 in February. Although nickel prices didn’t decline sharply in January, prices made a new 12-year low.

Free Sample Report: Our New February Metal Buying Outlook

Nickel was the worst performer among industrial metals in 2015. Interestingly, now analysts see nickel as having the greatest recovery potential. On average, analysts expect nickel prices to rise 20% this year and by almost 40% next year.

Stainless_Chart_February-2016_FNL

The main reason why analysts expect such a recovery is because nickel has fallen harder than any of its peers, being the only metal trading below the price lows of the 2008 financial crisis. However, to us, the fact that a metal has fallen in price is not reason enough to expect higher prices any time soon.

Shutdowns

Another factor making analysts turn bullish on nickel is that they believe nickel is likely to see immediate cutbacks. Brazilian miner Votorantim Metals announced in January its intentions to suspend two nickel operations, which would mark the first meaningful shutdown in the West.

Also, in Australia, Clive Palmer’s Queensland Nickel said it would lay off 240 workers near Townsville. These announcements are definitely a sign that mining companies are starting to struggle on low prices, but companies can struggle for a long time before shutdowns actually occur. The nickel market is facing the same issue as any other industrial metal: supply is doing anything it can before shutting down.

Believing that a wave of shutdowns is about to come among nickel producers seems like too much to expect from producers. Shuttering capacity remains challenging from both financial and social perspectives. In addition, non-China producers keep convincing themselves that Chinese nickel pig-iron producers will close first, partly because of the nickel ore constrains after Indonesia’s export ban and partly because of the perception that NPI makers are at the top of the global cost curve.

The issue with that prediction is that NPI producers have managed to cut costs and find a substitute to Indonesian ore — supply from the Philippines.

Compare Prices With the January 2016 MMI Report

We believe that shutdowns will probably come gradually since any individual closure will give hopes of survival to the rest of the market participants as they face less competition, encouraging those left over to keep running.

What This Means For Metal Buyers

Some people might see nickel as an attractive asset just because it looks “cheap” compared to historical levels. That could be true in the long term, but the timing could be way off. Right now, we don’t see any signs of a bottom. Nickel prices will likely turn around with the rest of the base metal complex, but that time hasn’t come yet. Stainless buyers should stay disciplined to their buying strategy.

Exact Stainless and Nickel Prices, Trends

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Our Rare Earths MMI held steady at 17 this month. This is not news to anyone who has followed RE prices for any extended period of time as the trend line for this sub-index has remained markedly flat in this bearish market and even in better times for commodities.

Free Sample Report: Our February Metal Buying Outlook

REs enjoyed some movement in 2011 during the China-Japan RE price struggle, but the sub-index has remained flat from the time we started tracking the MMI in 2012. The magnets, phosphors and other high-tech elements just have not shown any real

Rare-Earths_Chart_February-2016_FNL

Lately, RE producers are either up for sale out of bankruptcy court, as in the case of Molycorp, Inc., or struggling under heavy debt loads as they are undercut by Chinese producers who don’t have any of the set-up costs of western miners.

However, if a recent study is to be believed, that could all change dramatically. A new study, Popular Science reports, shows it might be possible to extract RE elements from coal in the U.S. by rinsing discarded coal in a chemical solution.

“Essentially, REEs are sticking to the surface of molecules found in coal, and we use a special solution to pluck them out,” says Sarma Pisupati, an author of the study. “We experimented with many solvents to find one that is both inexpensive and environmentally friendly.”

Chinese Mining Crackdown

China is also stepping up efforts to restrict illegal mining and exporting of rare earths by setting up a system to certify the origin of supplies from the country. Beijing is also poised to impose a bunch of new environmental regulations including green export certificates and new taxes that are based on the value of the minerals, rather than on volume as is the case at present.

Compare Prices With The January 2016 MMI Report

New processes and better policing of exports could help this index see some price recovery later this years. Figures from the China Rare Earth Industry recently showed that about 90% of China’s RE producers are currently operating at a loss.

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Screen Shot 2016-01-29 at 10.12.15 AMAre you making day-to-day metals purchases and spot buys? Or do you need a longer-term perspective for budgeting and planning, improved negotiation of contracts with customers and more effective SLAs and contracts with suppliers? We have the complimentary report that will do all that, plus help you manage your hedging strategy.

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After hitting an all-time low in December 2015 – dipping down into the 60s – the Global Precious Metals MMI rebounded a bit and is now hovering at 70 for the second consecutive month.

Free Sample Report: Our February Metal Buying Outlook

Of the three heaviest-weighted metal price points within this precious sub-index, gold bullion in both the U.S. in China, and silver ingot/bars in the U.S. all increased over the the last month, the primary drivers buoying the February MMI reading.

Global-Precious-Metals_Chart_February-2016_FNL

Gold Price Outlook

The longer-term outlook, though, may not be all that rosy for gold prices. “Despite talks of China and Russia buying gold, I still see main factors such as a strong [U.S.] dollar and a bear commodity market keeping a lid on gold prices,” Raul de Frutos, metals procurement specialist for MetalMiner, told me. “The price rally seen in January is way too small to consider that something is changing in the long-term picture.”

“I still have a neutral/bearish view on gold,” he concluded.

The Bigger Price Story: Palladium Downtrend

However, in a more interesting trend on the industrial metals side of the precious sector, two of the PGM price points we track on the MetalMiner IndX – for U.S. platinum and palladium bars – dropped 1.7% and 8.1% (!), respectively.

The U.S. palladium price has ticked up for a few days in a row since we took our MMI reading on Feb. 1, but it’s lost a whopping 26.3% in value since the beginning of November 2015.

So what’s going on in the palladium market?

The recent stock market selloff in China, which caused global tumult, is the real culprit hurting both palladium and platinum. A strong dollar is not helping matters, either.

Compare Prices With The January 2016 MMI Report

Strong car sales globally – in Europe, China and the U.S., with the latter two hitting all-time highs – did not correspond with stronger performances for platinum and palladium prices.

Despite analysts calling again for deficits in palladium and platinum markets this year, Raul has written that “it’s hard to imagine these two metals rising while China keeps driving everything down.”

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Our Renewables MMI regained some of the ground it lost last year and climbed back up to 52 this month.

Free Sample Report: Our February Metal Buying Outlook

However, renewables are still a market stuck in a low-price rut with little prospect of breaking out of the low range they’ve been settling into over the last four years. Seemingly paradoxically, renewable energy was the biggest source of new power added to U.S. electricity grids last year as falling prices and government incentives made wind and solar increasingly viable alternatives to fossil fuels.

Renewables Lead New Energy Capacity

Developers installed 16 gigawatts of clean energy in 2015, or 68% of all new capacity, Bloomberg New Energy Finance said in its Sustainable Energy in America Factbook released Thursday. U.S. clean-energy investments rose to $56 billion last year, up 7.5% from 2014. The majority, $30.2 billion, went to solar. Investors pumped $11.6 billion into wind energy and $11.1 billion into technology to improve grids, boost efficiency, develop storage systems and other ways to better manage power usage.

Renewables_Chart_February-2016_FNL

With so much investment in the technology, why such a gloomy outlook for the metal products, such as grain-oriented electrical steel and silicon, that go into them? Most are oversupplied and their individual markets have not yet hit bottom in this bearish commodities cycle. We’ve also often lamented that the recently extended tax credits for products that contain these metals actually help keep prices low and discourage any real price inflation based on value.

Low prices for both gasoline in cars and natural gas for electrical power generation will also discourage further adoption as those fossil fuels will look more attractive to investors.

Adoption Keeps Climbing

The good news is that with more adoption, green technologies are getting into the hands of more homeowners, in the case of solar, and more utilities in the case of wind. Some lesser-subsidized technologies such as biomass are also taking a bite out of the electrical power generation market where natural gas is now the dominant player.

Power from natural gas-fired plants accounted for 25% of capacity added to grids last year. Nearly one-third of all electricity in the U.S. is now generated by gas, putting it nearly on par with a declining provider, coal.

Compare Prices With The January 2016 MMI Report

The future is certainly bright for the metal inputs of wind turbines and solar panels. We just wouldn’t advise anyone to invest in these metals right now expecting a turnaround and an escalating market such as nickel’s 2014 climb. Slow, steady and subsidized will win this race.

Actual Renewables Prices

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The Raw Steels MMI held steady at 47 this month. Although international steel prices remained depressed in January, domestic prices drew a different picture.

US Mills Increase Prices

US steel mills began raising prices in December, leading to higher domestic prices in January. Domestic supply had declined significantly in 2015, with capacity utilization close to 60%.

Raw-Steels_Chart_February-2016_FNL

At the same time, with the uncertainty regarding anti-dumping actions, finished steel imports have slowed.

Free Sample Report: Our February Metal Buying Outlook

Finally, steel companies’ shipments were impacted over the past few months as service centers focused on destocking and now that inventory has finally come down, service centers will finally need to start restocking activity. This combination of factors left US mills in a sweet spot in 2016 to increase prices.

Sustainable Increase?

Domestic prices might continue to rise in the coming weeks. After the huge price slump in 2016, domestic prices deserve a bounce in Q1. However, mills won’t likely succeed in raising prices for too long.

The world remains oversupplied and demand is weak. Due to the political backlash from job losses spurred by mill closures, China wants to keep its mills running. With the ongoing Chinese yuan devaluation, Beijing has made its intention clear. China wants its exports even more competitive in global markets, especially in the steel industry as China continues to seek a home for its excess steel.

Compare With The January 2016 MMI Report

If domestic prices stayed higher, that would attract more imports, resulting in more material coming into the US and depressing prices as a result. In addition, it’s hard to imagine steel prices bucking the falling trend across the industrial metal sector. It will be hard for US mills to convince buyers to pay higher prices while commodities nearly universally fall.

Falling Raw Material Costs

Another important factor that will keep a lid on steel prices is the slump in input costs. In January, oil prices fell below $30/barrel. Falling energy prices will cause companies in the energy sector to reserve capital to keep on their balance sheets, rather than spending money on new exploration. This will continue to hurt steel demand from the energy sector. At the same time, while raw material prices keep falling, it will be difficult for US steel mills to justify their price increases for long.

Actual Raw Steel Prices

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Although other base metals made new lows in January, aluminum prices held steady. The aluminum MMI fell only one point to 71.

Free Sample Report: Our February Metal Buying Outlook

What didn’t fare well in January was Alcoa‘s stock price, which fell sharply to its lowest level since March 2009.

Alcoa stock plunges in 2016 hitting a 7-year low

Alcoa stock plunges in 2016, hitting a seven-year low. Source: MetalMiner analysis of @StockCharts.com.

Lower aluminum prices were the main cause driving the company’s shares down over the past months. In addition, the recent turmoil in stock markets is not helping matters. A combination of both caused Alcoa’s stock price to plunge in January.

Midwest Premiums

Rising domestic premiums have helped Alcoa improve its margins. Since September, premiums in the U.S. rose from the lows of $0.06 per lb., mainly because of the production cutbacks announced by domestic producers in Q4 2015. However, we haven’t seen falling stockpiles and we’ll probably not see a major bounce-back in premiums. Indeed, over the past couple of months, MW premiums have stabilized at around $0.09 per pound.

Aluminum_Chart_February-2016_FNL

There are a few factors preventing premiums from rising much more. First, some of the proposed cutbacks have been partially rolled back. Alcoa previously announced the closure of its Intalco smelter in Q1, but now the company will keep running until the end of Q2. Century Aluminum is running its Mount Holly smelter at half capacity despite its previous announcement of a complete shutdown.

In addition, domestic aluminum producers will find it hard to succeed in increasing their premiums while global sentiment remains negative. Despite the relative scarcity of material created by domestic producers, there is still a glut of material elsewhere in global markets. Finally, any significant increase in domestic premiums would attract more imports into the country, especially coming from China.

Stockpiles

The main problem with the aluminum industry is that smelters in China keep running and refuse to cut production. The other problem is high inventories. Even though official London Metal Exchange inventories have been trending lower since mid-2013, unofficial stocks have actually increased. According to CRU, global aluminum inventory including unofficial stocks stands at around 15 million metric tons.

Moreover, China wants to keep stockpiling instead of cutting production. In January, top aluminum smelters in China agreed to form a joint venture to stockpile aluminum. These measures will only keep Chinese smelters producing more aluminum while material only goes into financial deals. However, the market knows what China is up to, and investors won’t buy aluminum until shutdowns happen. The stockpiling game will only keep prices low for longer, potentially making the problem even worse once that aluminum enters the supply chain.

Free Download: The January 2016 MMI Report

For as long as China doesn’t change its approach, the best that aluminum producers can hope is for prices to stay at current levels.

Actual Aluminum Prices

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With aluminum prices falling over the past year, stock prices for companies that smelt the metal such as Alcoa, Inc., and Rio Tinto Group are suffering as a result, but more action will have to be taken on their part if they’d like to return to profitability.

According to a recent article from US News & World Report, aluminum smelters have already started to reduce production of the metal, but they may have to further cut back on output if they want to return to the black as aluminum demand is not expected to rise any time soon.

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“The price in general has gone lower even though we’ve seen industrial demand and some production cuts,” Michael Turek, a senior trader at BGC Partners, a New York-based global financial services firm, told the news source. “The fact that prices continue to go lower suggests the market feels that thus far, it’s been a cosmetic surgery rather than mainstream surgery.”

On the London Metal Exchange, aluminum prices have dropped about 20% over the past year with global demand slowing. China’s economic issues have spearheaded the decline, as has been the case with many commodities.

“In terms of pure fundamentals, (the aluminum industry) doesn’t appear to have a lot going for it,” Turek added. “I don’t have any major grand upside aspirations for the market. We’re going to need more production cuts, and they’re going to have to be sustainable.”

We here at MetalMiner™ agree with this sentiment.

How will base metals fare in 2016? You can find a more in-depth aluminum 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:

Real gross domestic product expanded by just 0.7% (seasonally adjusted annual rate) during the fourth quarter of 2015. This follows a 2% increase during the year’s third quarter and a 3.9% increase during the second quarter. For the year, GDP expanded by just 2.4%, matching the slow rate of growth seen in 2014. Without any support from real GDP growth, our Construction MMI keeps falling.

Free Download: Compare with January 2016 MMI Report

With no GDP growth it shouldn’t come as a surprise that prices of construction materials are still falling. Low prices are always the solution to low prices… except when they’re not.

Construction_Chart_February_2016_FNL

In the fourth quarter, overall inflation came in at just 0.8% with sharp declines in both import and export prices. The Federal Reserve’s benchmark Personal Consumption Expenditures Price Index (commonly known as the PCE deflator) came in at just 0.1% with both durable and non-durable goods’ prices registering a decline.

“The economy did not end the year well,” said Associated Builders and Contractors Chief Economist Anirban Basu. “Today’s GDP data adds weight to the argument that the US is in a corporate profits recession, an industrial recession, and was experiencing a softening of investments. With the exception of the residential building sector, business capital outlays have declined as corporations deal with a combination of sagging exports, competitive imports, declining energy-related investments, rising wage pressures and healthcare costs.”

All Construction-Sector Metals, Materials Down?

With the exception of scrap, no single product tracked in our Construction MMI showed much of an increase this month, a worrisome trend that’s carried on since the beginning of last year, except for a small increase in June.

New tariffs by the European Union on Chinese rebar might help producers there recover some market share, but won’t likely move prices on international exchanges. Globally, the deflationary environment is worse than it is for US producers.

Free Sample Report: Our January Metal Buying Outlook

Steel and aluminum markets are still not seeing anything close to a bottom and that’s being felt acutely in construction.

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Our Automotive MMI held steady for the third month in a row at 68.

Free Sample Report: Our January Metal Buying Outlook

Considering that other metals prices are still falling, it’s quite a feat that automotive has been able to even hold steady for this long. Prices of stainless, aluminum and copper are all down in their individual MMI sub-indexes this month and our Raw Steels MMI was flat.

Automotive_Chart_February-2016_FNL

Low prices simply have not been enough to entice larger raw material purchases by automakers. U.S. auto sales fell slightly in January because of the East Coast snowstorm, but analysts say end user demand remains strong and buyers will likely head back into dealerships this month. Sales fell less than 1% to 1.1 million, according to Autodata Corp.

Low gas prices and even lower interest rates are continuing to fuel sales and most automakers are optimistic that they can break last year’s sales record by the end of the year. The problem facing metal producers is that there is still so much oversupply out there that even the market hunger for new cars, trucks and SUVs can be sated several times over by the stockpiles that currently exist.

Producers Targeting Automotive

Automotive is still a coveted market for most producers. Nucor Corp. recently opened an office in Detroit as part of a push to increase its sales to the auto industry by 40% to 50% over the next two years. Charlotte-based Nucor saw its sales to the automotive industry increase 20% last year — 1.4 million tons of steel products — over 2014’s numbers.

Alcoa, Inc. is even coming closer to realizing its previously announced split by naming new directors for its new automotive and aerospace company, all of them with experience in the fields.

Free Download: The January 2016 MMI Report

The fundamental strength of the sector will likely still be there when stockpiles finally dwindle and we see prices rise. Many are predicting that rebound for later this year, but there’s very good reason to believe 2016 could be another low-price year as there is still no definitive deal to reduce oil production and many miners and metal producers are not curtailing production.

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