As oil prices flirted with $55/barrel this week, U.S. shale drillers expanded production and most metals saw their prices rise as energy and transportation costs went up, too. What a better week to report strong price increases in the October MetalMiner IndX? But it wasn’t all climbing prices.
The breakout metals star this year, zinc, has started to fall. Our own Raul de Frutos warns that it’s nothing to be worried about. Don’t expect zinc to turn bearish or anything. Meanwhile, in China, manufacturing provinces have found a way to curtail power costs, no matter what the price.
Why sell parts manufacturers boring ol’ formed products when you can sell them liquid aluminum that they can make into anything they want? Source: Adobe Stock/kybele.
Aluminum prices have risen this year, but not as much as other base metals. Aluminum continues to struggle near $1,700/mt, a level that prevented prices from rising three times this year.
Three-month LME aluminum near stiff resistance levels. Source: MetalMiner analysis of Fastmarkets.com data.
Many analysts argue that this year’s rally is limited because they expect Chinese smelters to restart capacity in the fourth quarter. The argument is that now that aluminum prices are higher than at the beginning of the year, smelters making aluminum will be more profitable.
Some capacity has already been restarted, but the numbers are running short of analysts’ expectations. Despite all fears, it’s possible that aluminum output in China will not increase as most analysts are predicting. Why? Let’s look at the cost curve:
Energy Prices Rise
It takes a lot of energy to smelt aluminum. Indeed, energy accounts for around half of the cost for Chinese smelters to produce aluminum. While aluminum prices have increased 13% this year, thermal coal prices have surged near 70% this year. As energy prices increase, Chinese smelters are getting squeezed, making it tougher for them to expand production.
Oil prices near stiff resistance levels. Source: MetalMiner analysis of Fastmarkets.com data.
For this reason, it’s not a surprise that oil prices, the main benchmark for energy prices, look very similar to aluminum. Oil prices are currently at a stiff resistance level near $50/barrel.
What This Means For Metal Buyers
Most analysts expect capacity restarts to weigh on aluminum prices. However, higher energy prices could prevent Chinese smelters from restarting capacity. Oil prices are now trading near a key level. If oil prices manage to trade above $50/barrel, we would expect aluminum to finally break above $1,700/mt.
Like steel, there has been some positive news about aluminum consumption in India. A research report said aluminum intake is poised to grow from 3.3 million metric tons in 2015-16 to 5.3 mmt in 2020-21.
The report, “Indian Aluminium Industry: Geared for Growth,” is by global research and ratings agency Crisil and Mtlexs. It forecasts growth based on a combination of government initiatives such as “Make in India,” Smart Cities, Housing for All, and an increase in the transport of freight across the country.
Electrical Power Demand
The analysts say aluminum’s main demand would come from the power sector, since the white metal was now often used as a cost-effective, lightweight substitute for copper in transmission and distribution. In the coming five years, investments from state utilities and central government schemes worth millions of dollars are being planned to expand India’s transmission and distribution network.
The other sector that would drive the uptake is the automotive sector. The tightening of vehicular emission standards has forced automakers to look at aluminum to reduce vehicle fleet weight. India’s automobile sector is poised for heavy growth in the next five years.
As has become the norm, any news of increased consumption is accompanied by a downside: cheap imports. Like producers in the U.S., whose interests are being harmed by China’s exports of semi-finished products, India’s aluminum sector, too, as reported earlier by MetalMiner has been dogged by such imports. In India, imports make up almost 50% of the total consumption, largely from neighboring China. Just between 2011-2016, imports of aluminum increased 14%.
Smelters Want Tariffs
Aluminum majors such as Hindalco, Vedanta and Nalco have been urging the Indian government to impose a Minimum Import Price (MIP) to enable the domestic industry to take on what is being called as a “foreign economic invasion.”
Hindalco’s Managing Director Satish Pai was quoted saying such a government move would help the domestic industry compete with the cheap imports. He was addressing the recent World Non-Ferrous Conference 2016.
He said in the last five years, the imports from the ASEAN (free-trade agreement countries including Brunei Darussalam, Myanmar/Burma, Cambodia, Indonesia, Laos, Malaysia, Philippines, Singapore, Thailand and Vietnam) had increased from 6% of the total refined imports to 31%. The Indian Mines Secretary has indicated that the government is examining the aluminum sector’s demand and would make a decision on the imposition of an MIP in the next 15 days.The Mines Ministry already held several rounds of discussions with aluminum industry leaders.
A recent CRU note shined some useful light on how the reporting of aluminum inventory in China has been distorted by changes in the supply chain between smelters and downstream consumers. Our reporting of primary metal inventory generally measures exchange stocks of ingot, sows and t-bars, and adds in an estimate for off-market stocks held by trade buyers and the reported inventory held by smelters.
It is a process that has generally held us in good stead for decades — with the one glaring omission of off-market stock and finance trade inventory running into millions of tons that we have no visibility on, but that’s another matter! Well add to that, says CRU, the changing nature of the Chinese aluminum manufacturing industry.
China’s Shadowy Aluminum Industry
Lured by cheap coal and, as a result, low-cost power, Chinese smelters have relocated in droves to the north and north east provinces, remote from traditional downstream clients on the east coast.
Is the future of aluminum liquid? Source: Adobe Stock/kybele.
Transportation costs are high and can be unreliable, particularly in winter. So, Chinese customers have come to their metal suppliers, relocating cast-house and direct casting facilities adjacent to the smelters. The products they, in turn, produce are higher value and better able to absorb those transportation costs. So far, so good. Read more
With the closure of western aluminum smelters and widely reported global growth in demand of 5 to 6% per year, why have London Metal Exchange aluminum prices remained rangebound in the mid-1600s per metric ton? Why do physical delivery premiums continue to fall?
Thomson Reuters recently reported that Japanese buyers have agreed quarterly premiums of $75 dollars per ton over the LME cash price for the shipments in the fourth quarter of this year. This will be the lowest premiums have been since Q3 2009 and a massive drop from the level Japanese buyers were paying in Q1 2015 when premiums reached $425 a ton. Read more
It wasn’t all bad news for Alcoa, however, as the company reported profit improvement on a year-over-year basis.
Still, it is becoming more evident that conditions for the aluminum market remain challenging.
“Alcoa has moved to trim the costs of its aluminum production by shuttering its higher-cost U.S. facilities. Cheaper, more plentiful aluminum production from Chinese aluminum smelters have caused major struggles for North American aluminum companies. This has resulted in many cutbacks, and now North American production of primary aluminum is running at its lowest levels since 1983,” wrote Donald Levit for the Economic Calendar.
Aluminum MMI up in September
Our own Raul de Frutos wrote this week that our Aluminum MMI climbed 4% last month with prices for the metal rising above $1,600 per metric ton.
“However, we still need to see if this will surpass stiff resistance at $1,700/mt, a level that aluminum hasn’t overcome in more than a year,” de Frutos concluded.
How will aluminum and base metals fare for the remainder of 2016 and into 2017? You can find a more in-depth copper 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:
However, we still need to see if the will surpass stiff resistance at $1,700/mt, a level that aluminum hasn’t overcome in more than a year.
Why have prices struggled to get above $1,700/mt? The simple answer is overcapacity. Upside momentum was limited this year because many analysts expected Chinese smelters to ramp up production during the second half. However, Chinese aluminum production continues to fall in the second half.
According to data released by the International Aluminum Institute, Chinese production declined 0.8% in August from the same month last year. For the first eight months, production in China has fallen 2.8%.
Demand Up (For Now)
Global aluminum demand is expected to grow 3-5% this year. The key factor here is higher Chinese aluminum demand thanks to a rebound in China’s property market due to government stimulus. On the other hand, some people fear that the impact of these stimulus measures might be fading. Having said that, the possibility of rising supply is a much bigger threat than a slight moderation in demand.
Rising demand combined with falling supply means one thing, falling exports. For the first eight months of the year, Chinese aluminum exports have fallen 4%. Any increase in China’s aluminum supply would cause exports to come back, denting market sentiment. However, as we mentioned above, we haven’t seen that yet.
Japanese Premiums Fall
Japanese Premiums, the price that Japanese aluminum buyers will pay over the London Metal Exchange cash price, fell to $75/mt. This price will serve as the benchmark for Asian physical markets in the fourth quarter, down 20% from the previous quarter and the lowest level since 2009.
What This Means For Metal Buyers
Aluminum markets will record a deficit this year unless Chinese production rises sharply in the remaining four months of the year. That, combined with the ongoing bullish sentiment in the metal complex could put aluminum prices finally back above $1,700.
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Construction spending dropped 0.7% in August after a 0.3% slip in July, the Commerce Department reported Monday. It was the third decline in the past five months. Our Construction MMI fell 3% from 70 to 68 as well.
The unexpected drop hit all sectors of U.S. construction. Residential construction decreased 0.3%, while non-residential activity was down 0.4%. Spending on government projects fell 2%, dragged down by a sharp drop in activity at the state and local level, which has fallen to the lowest point since March 2014.
Infrastructure spending continues to be a key issue in the presidential campaign and these numbers back up arguments, from both candidates, that our roads and bridges are crumbling while governments at all levels turn a blind eye to the problem. The question the democrats and the republicans disagree on, and Hillary Clinton and Donald Trump are no different in this regard, is where will the money for a federal construction spending plan come from?
The Construction MMI saw prices drop nearly across the board. A week-long National Day holiday in China crimped copper prices as demand wasn’t even that strong in the world’s largest consumer before the shutdown. The cities of Guangzhou and Shenzhen are the latest to impose new measures to cool overheated real estate markets in China, including higher mortgage down payments and home purchase restrictions.
The Slowdown Lowdown
While U.S. prices weren’t expected to drop as much as they did, a slowdown was certainly expected at the end of the summer construction season and during China’s shutdown. As winter arrives in the U.S., a traditional slowdown in purchasing usually takes place. Ultra-low interest rates and a growing economy are what many economists say will keep the slowdown a short one. If that was the case, though, why wasn’t spending more robust in the summer months? The Construction MMI, like the overall U.S. economy, has been mired in slow-to-no-growth for most of the year with only a few strong months keeping it net positive (especially May).
That the “natural rate” of interest has fallen to low levels could mean the economy is stuck in a low-growth rut that could be hard to escape, Federal Reserve Vice Chair Stanley Fischer said on Wednesday. It’s hard to expect builders and contractors to buy more steel I-beams and copper wiring when they, themselves, are not increasing the number of projects they’re billing clients for.
Private construction is barely making up for public shortfalls. The strongest sector over the past year has been non-residential activity, which is up 4.2% from a year ago, followed by residential construction, which has risen 1.4%. Total public construction, however, is actually down 8.8% from last October, reflecting a squeeze on spending from efforts to control budget deficits at all levels of government.
This is where economists such as the Associated General Contractors of America‘s Chief Economist, Ken Simonson, say a federal infrastructure spending plan would help.
“While demand for construction remains robust, it is no longer growing like it was earlier this year,” Simonson said. He also said the building industry could get a welcome boost if government policymakers moved to upgrade “our aging infrastructure.”
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Before the hearing, executives from Scepter, Inc., Novelis North America, Hydro Metals USA and the Aluminum Association gave members of the press a preview of what the industry’s testimony before the ITC will sound like.
According to Aluminum Association President Heidi Brock’s testimony, the Commission should focus on 5 key areas:
Needless production: Produce findings on the nature and extent of continued use of inefficient and antiquated facilities and the continued unwarranted expansion of greenfield capacity.
Transparency: Highlight the need to obtain information and transparency about policies that encourage overcapacity including information about state-owned enterprises (SOEs) operating in the aluminum industry as well as SOEs that provide the industry with supplies, electric power, and services.
Tax Policies: Investigate China’s tax policies on aluminum exports. Chinese traders are “gaming” the system such that primary aluminum that does not qualify for the tax rebate is making its way into the U.S. market disguised as a semi-fabricated product. How can China tighten its enforcement of the 15% export tax on primary aluminum and crack down on fake semis?
Enforcement: Review the enforcement of countervailing duties/anti-dumping orders and research the impact of transshipments through third countries that circumvent those orders or other tariffs.
Environmental Impacts: Examine the role of China’s aluminum industry in meeting the commitments China has made to reduce carbon emissions. China cannot meet its carbon reduction commitments without both eliminating energy subsidies and curtailing outdated, carbon-intensive production in the aluminum industry.
When MetalMiner asked Brock about how much data and information the AA currently has on Chinese state-organized enterprises and subsidization practices, per the second bullet point on transparency, her answer indicated that the domestic industry may still largely be in the dark regarding the details.
“It’s going to be a long process,” Brock said. “Compared to the U.S. industry, where we’ve been collecting and reporting [data] for decades now, our hope is that our Chinese colleagues commit to transparency in their markets.”
She mentioned that it is “frustrating” when China says they plan to cut capacity, and then turn around and go back on their word. For example, according to her testimony, one of the largest aluminum producers in China announced in October 2015 that it would curtail all of the capacity at one of its largest smelters due to low aluminum prices and the resulting losses. But the decision was reversed only a few weeks later when the local government offered significant discounts on critical inputs, such as power, in order to avoid the loss of local jobs.
“We are out there selling our product, and we have seen low prices coming from outside,” said Marco Palmieri, president of Novelis North America. “That has caused significant issues — and [those issues are] real.”
The Commission is expected to deliver a final report based on this investigation in summer 2017.