Market Analysis

stainless-nickel-L1Nickel, along with copper, rallied over the past week due in part to relatively mild demand from the consumer industries.

According to a report from the Business Standard, traders are accounting for scattered demand from these industries leading to the rise in both nickel and copper prices.

Want a short- and medium-term buying outlook for aluminum, copper, tin, lead, zinc, nickel and several forms of steel? Sign up for your free trial to our monthly buying outlook reports!

In a recent report from our own Raul de Frutos, all industrial metals have enjoyed a rally-intensive 2016 with the exception of one month: January. That was when the same metals hit new lows. So what is to account for this rebound? Is it worth noting or simply a mirage?

“Some metals — such as steel, zinc and tin — have gained significantly while others such as aluminum, copper, nickel and lead haven’t made much progress yet,” de Frutos wrote. “The price rally is not really being driven by supply cuts but by a combination of a weak dollar and the sugar rush of China’s stimulus, initiated late last year. We could be witnessing the end of this five-year-long commodity bear market, however, there is something rotten about this rally.”

Raul added that China’s stock market is the most accurate barometer for its economy and, ever since 2011, its stock market along with its commodity prices, have fallen. So what could appease our worry about this particular metals rally?

De Frutos concluded: “A good start would be China’s stock market rising above April’s levels. Otherwise, metal bulls can only hope for a choppy market.”

You can find a more in-depth nickel 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.

 

All industrial metals have rallied this year after they hit new lows in January.

Two-Month Trial: Metal Buying Outlook

Some metals — such as steel, zinc and tin — have gained significantly while others such as aluminum, copper, nickel and lead haven’t made much progress yet. The price rally is not really being driven by supply cuts but by a combination of a weak dollar and the sugar rush of China’s stimulus, initiated late last year. We could be witnessing the end of this five-year-long commodity bear market, however, there is something rotten about this rally.

Chinese Stock Market Has Yet to Find Traction

China stock market ETF weakening since April

China stock market ETF weakening since April. Source: @StockCharts.com.

China’s stock market is possibly the best benchmark for China’s economy or at least investors’ sentiment on China. The slowdown in the Chinese economy (weak demand while too much capacity) explains why industrial metals peaked in 2011.

Ever since, China’s stock market has fallen with commodity prices. Earlier this year we witnessed a rally in the Chinese stock market but the rally has been shy so far and it has, indeed, weakened since mid-April amid worries that Beijing might pull back on monetary stimulus while it steps up structural and financial reforms even as the economic recovery struggles to gain traction. The stock market weakness also comes after worse-than-expected economic data for April, suggesting that the financial stimulus package unleashed in China earlier this year could be losing its impact.

Base metals ETF (in brown) rising with China stock market ETF (in blue)

Base metals ETF (in brown) rising with China stock market ETF (in blue). Source: @StockCharts.com.

In the chart above we see how China’s stock market rose as China unleashed its stimulus program back in 2009 and how metal prices surged with it.

Free Download: The May 2016 MMI Report

While overcapacity is still a problem, we’ll likely need to see China’s stimulus measures make a significant impact and that should be reflected in its stock market. A good start would be China’s stock market rising above April’s levels. Otherwise, metal bulls can only hope for a choppy market.

Improvements in commodity markets made copper prices hold above the lows recorded in January but investors are not yet excited enough to trigger a bull run in copper prices.

Two-Month Trial: Metal Buying Outlook

We noticed in March that copper, aluminum and nickel were lagging badly in this year’s industrial metals rally, and they still are. Copper fell this week below $4,600 per metric ton, the lowest level in two months.

3M LME Copper hits 2-month low

Three-month London Metal Exchange Copper hits a two-month low. Source: Fastmarkets.com.

Overcapacity issues are still visible. Last December, a group of Chinese smelters announced intentions to cut refined copper output. However, recently, China’s largest copper producer,Jiangxi, said those output cuts have been offset by new capacity there.

More Expansion

Also, earlier this month, Rio Tinto Group approved a $5.3 billion expansion to more than double output at the Oyu Tolgoi copper mine in Mongolia, making it one of the world’s largest copper mines. Rio is also expanding its iron ore efforts. Even though almost everyone seems to agree that the market is oversupplied, copper producers seem quite optimistic on the long-term picture. Read more

lead-prices-L1The Standing Committee of the International Lead and Zinc Study Group held its Spring meetings last month, and revealed they anticipate global demand for refined lead metal to rise 2% in 2016.

Furthermore, increased usage in China by the automotive and telecommunications sectors could be offset by a reduction in demand in the e-bike market there, leading to slower sales growth and higher competition from battery production.

Want a short- and medium-term buying outlook for aluminum, copper, tin, lead, zinc, nickel and several forms of steel? Sign up for your free trial to our monthly buying outlook reports!

In Europe, demand is projected to grow 3.5% spearheaded by activity in Italy, Spain, the Czech Republic, and the U.K. This after demand fell 5.2% last year. Growth is also expected in Japan, Indonesia, India, Turkey and Thailand.

The ILZSG report stated: “An expected fall of 6.1% in ex-China production will be primarily due to reductions in Australia resulting from the closure of MMG‘s Century mine in August last year and cutbacks announced by Glencore, CBH Resources and Perilya.”

In 2015, Chinese imports of lead contained in lead concentrates reached a record 1.03 million metric tons, the ILZSG stated, and are projected to fall to just under 900,000 mt this year.

Global refined lead metal production is expected to grow 2.3% due in large part to increased output in the Republic of Korea. The ILZSG concluded: “Having taken into account all of the information recently received from its member countries, the Group anticipates that increases in refined metal supply, most notably in the Republic of Korea, will result in a global refined lead metal surplus of 76,000 mt in 2016.”

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.

US Steel plant in Granite City wide

The U.S. Steel Granite City Works captured by Google Street View in September, 2014 — a year and two months before the latest idling of the mill.

Dan Simmons has seen a lot during the 38 years he’s worked at U.S. Steel’s Granite City Works in Illinois, just outside St. Louis.

From starting out as a general laborer, to swinging hammers on the track gang, to “feeling like Mr. Haney from Green Acres” while trucking around the mill, Simmons took it all in. There were days “you were whistling when you came in, and whistling when you left,” he said.

But nothing compares to what he’s seeing now.

“I have grown men coming into my office, crying,” said Simmons. “You see the pain, the ‘what ifs,’ the blank stares…”

Simmons, who just turned 56, is now the president of the United Steelworkers Local 1899, and some of the grown men coming to him are pipefitters just like he had become during his long tenure, which began in 1978.

However, those men and women aren’t coming to him because they’ve been hurt on the job. They are coming to plead for help, because they have lost their jobs, and in many cases still don’t know when they’ll land their next one.

Cyclicality in steel production is nothing new, but it wasn’t until 2008 — when the global markets began crashing — that USS Granite City Works endured its first indefinite idling in its history.

“We had the unemployment office cycling 400 people through at a time,” Simmons told MetalMiner. “The biggest fear is not knowing. If I could have given them a definitive timeframe, they would’ve said, ‘OK, I can handle that.’ But after two to three months, people come to me and don’t know what to do with themselves.”

And now, after the mill went idle a second time in December 2015, some of those workers have been without a job for nearly half a year. Last December, 1,500 people were laid off — 75% of the mill’s total workforce. Across the country, a total of 13,500 steel workers have been laid off over the past year.

Simmons knows what it’s like to feel that fear firsthand. “I got a brother that works here, a brother-in-law that works here, so it’s personal. You worry about where your whole family will be.”

So what’s different today, compared to 2008?

For Simmons and scores of others in the country’s steel sector and other manufacturing industries, much of the pain can be traced back to one main source: China.

A History of Unfair Trade?

The world may have never encountered a more crucial Year of the Monkey than 2016.

That is, at least as far as global trade between China and the Western world is concerned. At the end of this year, China believes it ought to receive Market Economy Status (MES). This would allow China to enjoy the same market status as the U.S. and European Union when it comes to anti-dumping investigations before the World Trade Organization.

In its quest to grow its economy over the past two decades, China has become the leading producer — by far — of steel, aluminum, cement and other industrial materials. Read more

Tin and zinc are the best base metals performers this year.

Free Download: The May 2016 MMI Report

These two metals have risen on expectations of supply constraints. In the case of zinc, it’s about the number of key larger-scale mine shutdowns over the past months. Meanwhile, tin’s performance comes largely on the back of low first-quarter exports from Indonesia.

3M LME Tin trading flat after a big rally in Q1

3-month LME tin trading flat after a big rally in Q1: Source Fastmarkets.com.

Indonesian tin exports slumped by 50% in the first quarter of the year. Tin exports were low because of the application of new government environmental regulations, requiring smelters to provide new documentation. Moreover, the decline in exports was also because of extreme weather conditions that affected production during the first quarter. Read more

The broad metals rally continued in April with all but three of our MMI sub-indexes gaining value this month and two of those holding their value from last month. Only the GOES MMI lost value and that had more to do with its specialized market.

MM-IndX_TRENDS_Chart_May2016_FNL-TOPVALUE100

The Aluminum, Raw Steels, Global Precious, Renewables, Stainless Steel, Automotive and Construction MMIs all increased in April amid a broad commodities rally. The U.S. dollar continued to weaken, hitting its lowest point in 15 months, pushing oil and other key commodities up in value and helping metals see their boat rise with the tide.

Two-Month Trial: Metal Buying Outlook

In investments, both gold and silver are testing multiyear highs as investors look to them for a short-term safe haven from falling currencies.

Further dollar depreciation could increase demand for all dollar-denominated commodities and metals are currently in a sweet spot on the demand side, particularly because of China’s economic turnaround.

The China Front

Continued stimulus in China is increasing demand for steel, aluminum and other metals there. As we’ve previously reported, the People’s Bank of China has cut requirements for first-time homebuyers, cutting the minimum mortgage down payment from 25% to 20%, taking it to the lowest level of requirement ever.

This is just one of many stimulus measures that Beijing has undertaken in recent months. However, global steel and aluminum oversupply is still a top concern, and China’s role in that glut continues to be front and center.

Other Drivers

With U.S. home sales and the non-residential sector continuing to show strength, construction in both of the world’s largest markets has been a positive driver for metal, as has automotive demand.

Tin cansMalaysia Smelting Corp, which specializes in tin mining and smelting, announced its best quarterly performance in nearly two years.

Their performance was so substantial that it brought the company from red to black when compared to the previous year. Revenue improved by 7% when compared to the same period in 2015.

Want a short- and medium-term buying outlook for aluminum, copper, tin, lead, zinc, nickel and several forms of steel? Sign up for your free trial to our monthly buying outlook reports!

MSC claims the improved profit came, in part, due to higher sales volume of refined tin, a positive impact from foreign currency translations and a favorable valuation adjustment on tin inventory due to higher closing prices for the metal at the end of Q1 this year.

Talking about this year’s projections, MSC stated tin prices had improved to some degree, but market conditions are still a challenge with global commodity and resource sectors still unstable from the current volatile commodities market.

Stated the company: “Despite these challenges, the underlying operations of the group comprising Butterworth International Smelter and the Rahman Hydraulic Tin mine are expected to perform satisfactorily for the current financial year, but the board remains cautious that the group’s financial results will continue to be impacted by tin price and foreign exchange fluctuations.”

Speculative Metals Rally

The recent rally in metals prices has caused some analysts to claim that it’s just purely speculative. Our own Raul de Frutos has some thoughts on what they mean exactly by “speculation.”

“Speculation is the act of trading an asset, with the risk of losing part of all of the capital invested, in the expectation of a substantial gain,” de Frutos said. “For traders to trigger a price rally there must be a fundamental reason justifying that the risk of loss is more than offset by the possibility of a significant gain; otherwise, there would be very little motivation to speculate. So, in reality, every price movement, especially in commodity markets, is speculative.”

You can find a more in-depth tin 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.

 

Over the past few days, several analysts have said the recent metals rally was purely speculative, without a fundamental justification for the price swings. But what’s speculation?

Two-Month Trial: Metal Buying Outlook

Speculation is the act of trading an asset, with the risk of losing part of all of the capital invested, in the expectation of a substantial gain. For traders to trigger a price rally there must be a fundamental reason justifying that the risk of loss is more than offset by the possibility of a significant gain; otherwise, there would be very little motivation to speculate. So, in reality, every price movement, especially in commodity markets, is speculative.

Iron Ore and Steel Rebar Prices Fall

Steel and iron-ore futures traded in China have gone into sharp decline, reversing the huge price run-up seen this year. Analysts believe that the rally has retraced because of new measures taken by exchange officials. In late April, Chinese exchanges raised margin requirements on iron ore, hot-rolled coil and steel rebar. That is, they raised the amount that investors need to deposit to trade these assets.

Steel-rebar and iron ore prices year to date

Steel rebar and iron ore prices year to date. Source: Wind Info.

But are higher margins a reason for a price fall? I don’t think so. Higher margins only mean that investors enjoy less leverage, that’s not a justification for a sustainable decline in prices. Higher margins can reduce the volume traded (as investors need to deposit more money per trade) but that doesn’t necessarily cause a change in price direction. Read more

Source: Adobe Stock/ epitavi

Source: Adobe Stock/ epitavi

Disappointing trade data from China caused copper futures to fall 2.2% this week, contributing to an overall downward trajectory for futures this month.

Copper’s losses this week came after China, a top consumer of the metal, announced that exports unexpectedly dropped 1.8% in April on an annualized basis while imports decreased by 10.9% year-over-year, according to a report from Economic Calendar.

Want a short- and medium-term buying outlook for aluminum, copper, tin, lead, zinc, nickel and several forms of steel? Sign up for your free trial to our monthly buying outlook reports!

“Adding extra impetus to Monday’s losses was a stronger greenback,” wrote strategist Donald Levit of Economic Calendar. “The U.S. dollar climbed versus its rival currencies on Monday even after Friday’s disappointing jobs report. With copper a dollar-denominated commodity, a stronger greenback makes the metal more expensive for holders of international currencies.”

Levit added that overall, the forward momentum that propelled copper and other industrial metals higher during the first quarter of the year appears to be regressing. This can be partially attributed to the conclusion of China’s seasonal copper stockpiling coupled with the belief that China stockpiled most of the metal it imported earlier this year.

Copper MMI Holds Steady

According to our own Raul de Frutos, copper prices have trended higher since they hit seven-year lows in January, but this metal still hasn’t gained as much as other base metals like zinc or tin.

“Improvements in commodity markets made copper prices stop from falling but investors are not yet excited enough to trigger a bull run in copper prices,” de Frutos wrote.

You can find a more in-depth copper 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.