Market Analysis

Our monthly Global Precious Metals MMI dipped down a point in April from last month, losing 1.2% to end up at 83.

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Ultimately, most gold, silver, platinum and palladium price points from the U.S., China, Japan and India dropped off for the month, which led to the sub-index’s overall decline — but there was one price point that decided to blaze its own trail upward.

The U.S. palladium bar price rose 3.4% over the past month, the third straight month of increases on the MetalMiner IndX.

What’s Going on with Palladium?

Well, automotive sector demand for palladium, at least on a spot or short-term basis, would be a hard case to make.

As my colleague, Jeff Yoders, reported earlier this week, U.S. automakers’ sales figures for March came in below market expectations and gave early evidence that America’s long boom cycle for automotive sales may finally be losing steam.

Automakers sold 1.56 million new cars and trucks in March, a 1.6% decline compared with the same month a year ago.

For example, Ford Motor Company took the biggest hit among sales drops, seeing its March numbers fall more than 7% from February’s.

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According to a recent Seeking Alpha article, “going into 2017 the market was considering limited supply to be the primary factor supporting palladium prices,” with limited sector growth expected from the U.S. and European markets, and China being the only auto market to be counted on for buoyed sales.

The above has generally held true, while seasonality and investor interest in ETFs seemed to have been playing into palladium’s rise. This could well be the high point for palladium prices this first half of the year.

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Our Stainless MMI lost 3 points in March, essentially losing what it gained in February.

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Industrial metals continued their rally during the first quarter but nickel didn’t fare as well. Prices are still significantly higher than they were one year ago, but investors are now finding little reason to be any more bullish than bearish due to a complex supply narrative.

The Philippines

On March 13, The Philippines’ president Rodrigo Duterte, threatened to stop all mining in the country. Despite the potential for more closures, investors doubted that Duterte would enforce such strict regulations. Duterte reiterated his support for Department of the Environment and Natural Resources Secretary Regina Lopez. The Philippines’ mining industry hoped for the Commission on Appointments (CA) to reject Lopez as the Environment secretary in March.

However, Lawmakers opted to postpone a decision to confirm or reject the ardent environmentalist as the head of the department. Further confirmation hearings are expected to take place in May.

This will be an important thing to watch over the next weeks. A rejection would give miners a key win in the battle against environmentalists, potentially adding pressure to nickel prices.

Indonesia

According to an Indonesian Mining Ministry official, the ministry has issued export recommendations for state-controlled miner PT Aneka Tambang (Antam) to allow the company export 2.7 million metric tons of nickel ore over the next 12 months. The recommendation has yet to be officially issued by the mining ministry. Antam said in February that it had stockpiles of an estimated 5 million wet metric tons of low-grade nickel ore that was ready to ship.

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Indonesia was the world’s top nickel ore exporter before it imposed a ban on unprocessed nickel ore exports in 2014. This year, prices have felt downward pressure on reports that Indonesia’s partial lift of the export ban, announced in January, may result in higher volumes of ore hitting the market. Also in March, Hong Kong-listed China Hanking Holdings announced its intention to restart a low-grade nickel mine it closed in 2014. The restart is at a relatively small scale, but it rises concerns of further supply hitting the market.

What This Means For Metal Buyers

Nickel prices are struggling to make headway this year. Nickel’s supply narrative is rather complex and it’s exposed to significant changes depending on what policy makers in Indonesia and The Philippines do next. On the other hand, stainless buyers should continue to monitor their price risk exposure. Investors’ sentiment on industrial metals remains bullish and that could still trigger unexpected prices swings on the upside.

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Our Aluminum MMI rose again in March. London Metal Exchange prices rose above $1,950 per metric ton and, given the bullish sentiment among investors, aluminum might soon reach the $2,000/mt milestone.

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Prices were buoyed by confidence that China will implement their agreed-upon cuts. The world’s largest nation-producer of the metal will force about a third of aluminum capacity in the provinces of Shandong, Henan, Hebei and Shanxi to be shut down over the winter season, which runs from the middle of November through the middle of March, putting at risk about 1.3 million mt of production.

Aluminum MMI

It would be normal to see these producers to simply ramp up production ahead of the winter season to make up for lower output during the winter months. However, that won’t be the case.

China’s environmental crackdown is already affecting producers as inspection teams visit aluminum smelters on a regular basis to keep production in check. We suspect that China’s strategy to curb pollution will offer further support to prices.

Global Political Heat

While China tackles overcapacity in the form of an environmental clampdown, international pressure on China is rising. In March, global aluminum associations released a joint letter in advance of the upcoming G20 summit calling for the creation of a Global Forum to address aluminum overcapacity.

This is the first time that a global coalition of aluminum producers has called for such an effort to address Chinese overcapacity in the marketplace. In addition, earlier last month, The Aluminum Association (a trade organization that represents North American producers) filed a petition seeking anti-dumping duties on aluminum foil.

China Hongqiao in Trouble

The world’s biggest aluminum smelter was recently suspended from the Hong Kong Stock Exchange as the company is being forced to defend itself against allegations that it has inflated its profit.

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As my colleague Stuart Burns explains, part of the problem seems to be how China Hongqiao has been reporting its profits and handling internal transfer pricing. Like many of the new breed of Chinese aluminum producers, China Hongqiao has captive power production but, since 2010, the firms profit margins have diverged from most of its peers, maintaining in excess of an 8% margin even when many of its domestic competitors fell into periods of loss.

Even during periods when the coal price rose the reported cost of power produced by China Hongqiao dropped suggesting the firm was trapping profits in the smelting division while hiding losses in power generation. Likewise it has been suggested that China Hongqiao has declared transfer prices from its alumina production division roughly 20% below those of similar companies operating in the same provinces.

Ernst & Young will announce the results of the audit next month. Not just investors but the whole aluminum industry will be keen for a a peek behind-the-scenes into the sometimes murky world of Chinese aluminum producers. Proof of bad reporting would add more tensions to the global aluminum market.

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U.S. automakers’ sales figures for March came in below market expectations and gave early evidence that America’s long boom cycle for automotive sales may finally be losing steam. Automakers sold 1.56 million new cars and trucks in March, a 1.6% decline compared with the same month a year ago.

Ford Motor Company took the biggest hit among sales drops, seeing its March numbers fall more than 7% from February’s.

Industry consultant Autodata put industry Seasonally Adjusted Annual Rate at 16.62 million cars, trucks and SUVs for March.

That was below the 17.3 million analysts polled by Reuters had expected, and the first time since August that the SAAR – a crucial industry metric – had fallen below 17 million.

General Motors had the best month, reporting a 2% increase in sales to just over 256,000 vehicles, with sales of its Tahoe and Suburban SUV models seeing their best sales month since 2008.

Sales at Ford Motor Co. fell the aforementioned 7+% to 236,000 vehicles, with fleet sales to rental agencies, businesses and government entities down nearly 17% on the year. Sales of Ford’s F-Series pickup trucks rose 10% but that simply could not offset the losses elsewhere. Sales at Fiat-Chrysler Automobiles fell 5% in March. Automotive sales in the U.S. risen since end of the 2008 recession and hit a record last year of 17.55 million last year. Toyota Motor Corp. and Honda Motor Co. reported smaller losses.

The fall in new car sales is even more curious considering that consumer confidence is at its highest level since 2000. Could the level of vehicle replacement that had driven sales since 2008 finally be falling? Vehicle inventories at dealerships have risen to the highest point since 2004, according to Edmunds.com.

If auto sales have, indeed, plateaued, then prices for automotive steel and aluminum could as well, at least in the expansive U.S. market. Our Automotive MMI remained flat this month at 88.

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Editor’s note: We have restated the March Construction MMI to 80. An error in tabulation last month caused us to under-report it at 77. MetalMiner regrets the error.

U.S. developers opened up their wallets in February and construction spending increased to the highest level of spend in nearly 11 years, led by more building of homes, highways and schools.

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Our Construction MMI remained at its corrected score of 80 this month.

Construction MMI

Construction spending rose 0.8% to $1.19 trillion in February to the highest level since April 2006, after two months of declines, the Commerce Department said. New home sales remained strong despite a rather steady supply of newly constructed houses, apartments and condominiums coming onto the market.

Spending on new home building, as well as renovations, rose nearly 10% in the final three months of 2016, the most in a year.

The biggest move, though, came from government construction projects. State and local governments spent 0.9% more on construction, driven by roads, schools and recreational buildings.

The federal government actually cut construction spending for the second straight month and has cut back 9% from a year ago but that could soon change if an infrastructure plan emerges this year in Washington, D.C. President Donald Trump has pledged to boost infrastructure spending by $1 trillion over the next decade. Trump has focused on healthcare and now, apparently, tax reform.

Meanwhile, the Institute for Supply Management said its index of national factory activity fell to a reading of 57.2 last month from 57.7 in February, which was the highest since August 2014.

Any reading above 50 still indicates an expansion in manufacturing, which accounts for about 12% of the U.S. economy and construction materials such as steel framing and rebar are counted in ISM’s factory output numbers.

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17 Of the 18 manufacturing industries reported growth and no industry reported a contraction. Comments from factories were mostly upbeat, with machinery manufacturers saying that business was up 10 to 15%.

Optimism about relaxed regulation and the generally pro-business approach of the Trump administration still seems to be buoying both construction and consumer spending but if Trump cannot implement his agenda this optimism could quickly wane. An infrastructure plan that can make it through the Congress continues to be a necessary priority for metals manufacturers and the economy at large.

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Commodities and industrial metals have always moved in tandem. However, things have changed over the past few months. Industrial metals continue to rise in price while commodity indexes struggle to hit new ground.

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What’s up with that?

CRB commodity index (in orange) vs DBB industrial metals index (in black). Source: MetalMiner analysis of @Stockcharts.com data.

Two things have caused industrial metals to outperform the rest of commodity groups (agriculture, energy, etc) this year:

First, in November industrial metals got a boost as Donald Trump won the U.S. presidential election and his republican party kept control of both houses of the Congress. Investors now hope that a Trump-led GOP government will boost domestic infrastructure, which could be a boon for industrial metals demand. In addition, the new president has stated he is willing to institute more measures to protect domestic producers.

China’s Pollution Performance

Second, and more importantly in my opinion, Industrial metals have been benefiting from a tailwind since January when China’s pollution problems got worse and authorities asked 23 cities in northern China to issue red alerts as inspection teams scoured the country. Steel and aluminum are leading this year’s rally. This is because these two are the most energy-intensive metals and China has shown a commitment to cut output. Read more

China’s aluminum industry is under siege. You wouldn’t think so from the booming production figures, rising prices and howls of protest from aluminum producers in the rest of the world.

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But, arguably, China’s aluminum industry is the victim of its own success.

Liquid metal

The Chinese aluminum industry has been able to cut costs by essentially selling liquid metal to nearby product manufacturers. Source: Adobe Stock/Kybele.

On the one hand, the political heat is rising as China’s production capacity has exceeded 50% of global output even as a combination of low aluminum prices and the collapse of physical delivery premiums in recent years has forced producers in the rest of the world to rationalize production, mothball plants and shelve capital investment plans that do not seek to simply slash costs.

Rise of Semis Buoys Industry

The rise of Chinese semi-finished product exports has stimulated a wave of legal challenges around the world alleging unfair trade practices and causing considerable uncertainty for Chinese manufacturers with aspirations beyond their own shores. Read more

Aluminum prices have risen around 15% since the beginning of the year.

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The metal is currently trading at a two-year high, just below $1,950 per metric ton. A slow but steady rise.

The aluminum 3003-H14 Sheet price. Source: MetalMiner Price Benchmark.

This year’s rally comes as markets tries to price in Chinese anti-pollution capacity cuts next winter. The world’s largest nation-producer of the metal will force about a third of aluminum capacity in the provinces of Shandong, Henan, Hebei and Shanxi to be shut down over the winter season, which runs from the middle of November through the middle of March, putting at risk about 1.3 million mt of production. Read more

Most base metals will finish the first quarter up, but nickel is one of those exceptions to the rule.

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The metal has traded up and down to finish the first quarter close to flat. Nickel prices are significantly higher than they were one year ago and traders are now finding little reason to be any more bullish than bearish due to a mix of news that helps both positions.

Nickel prices finish Q1 close to flat. Source: Fastmarkets.com.

Philippines Threatens to Stop All Mining

On March 13, The Philippines’ president Rodrigo Duterte, threatened to stop all mining in the country while reiterating his support for Department of the Environment and Natural Resources Secretary Regina Lopez. Philippine lawmakers recently opted to postpone a decision to confirm or reject the ardent environmentalist as the head of the department. Further confirmation hearings are expected to take place in May. The country’s miners hope Duterte won’t reappoint Lopez and instead find someone more moderate.

Indonesia to Restart Exports

Despite additional closures last month and the potential for more, nickel prices fell this month. It could be that traders doubt that Duterte will enforce such strict regulations, but it also has to do with fears that the resumption of exports from Indonesia will compensate for any supply shortfall in The Philippines. Read more

US Cold-rolled coil prices since 2012. Source:MetalMiner IndX

U.S. Cold rolled-coil prices rose to their highest levels since March of 2012 this week. Spot steel prices saw some upward action in January, however, prices really came under pressure in early February.

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In March, U.S. steel mills are pushing for another round of price hikes. So far, they seem to be succeeding.

China Steel Prices

Hot-rolled coil price spread. Source: MetalMiner IndX

Back in November, we predicted a surge in steel prices as we moved into the new year. When international steel prices rise, U.S. mills can more easily justify a price hike. Chinese prices set the floor for international prices. Last summer, U.S. steel prices declined sharply while Chinese prices held well. That caused the international price arbitrage to come down to normal levels.

The price arbitrage started to widen again this year as momentum in U.S. steel prices picked up. However, the arbitrage is still relatively narrow compared to historical levels, especially in hot-rolled coil. Therefore, U.S. mills still have some room to hike prices. Still, for the rally to be sustained throughout the year, Chinese steel prices will need to keep rising.

Falling Chinese Steel Exports

In January, Chinese steel exports fell near 24% compared to the same month last year. In absolute terms, January steel exports were at their lowest level since June 2014. Exports fell by double digits in the last four months of 2016. While more countries act against the threat of a flood of Chinese steel, we could see further moderation in exports this year, which bodes well for global steel markets. What’s surprising is that exports have falling despite rising output.

According to the data released by the World Steel Association, China’s January steel production rose 7.4% to 67 mmt while global steel production rose 7% from a year ago. In addition, China’s operating steel capacity increased in 2016, since most of the announced cuts in capacity were already idle.

So far, solid demand in China has absorbed the increase in output, or at least most of it. The Caixin Manufacturing PMI in China rose to 51.7 in February, beating market expectations and marking the eighth-straight month of growth. In addition, there are rumors that China is stocking its excess steel production. According to SteelHome, hot-rolled coil and rebar inventories in China have surged so far this year.

All About Production Cuts

In conclusion, U.S. mills could continue to raise prices in the short-term. However, for a sustained bull market in steel prices, Chinese steel prices will have to rise as well. China’s domestic demand looks strong, but it won’t be enough to support a rising price trend in the face of rising output.

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Beijing has ordered curbs on steel and aluminum output in as many as 28 northern cities during the winter heating season, as it steps up its fight against pollution, but we need to see if those cuts actually materialize this year. China will need to intensify its efforts to curtail excess steel capacity. Otherwise, if production continues to grow unabated, it could hamper this price recovery.