China

Beijing is caught in something of a quandary.

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On the one hand, an admirable, and increasingly important social imperative, the Chinese government’s focus on air pollution, has resulted in a crackdown on a range of polluting industries. Coal-fired power stations around Beijing and other major cities have been closed. Steel capacity has been targeted for cutbacks, although not universally.

Reports suggest rebar production used in construction has been prioritized over other product areas and that’s just one example of selective enforcement. A recent report by Reuters states new aluminum production capacity has been halted. What China fails to meet capacity cutback targets — an issue one suspects would have been “worked around” a year or two back when environmental considerations where less of an imperative?

This crackdown on output comes at the same time as the economy is performing quite well. Official data released last week showed China’s economy grew by a better-than-expected 6.9% comparing the March quarter to the same period in the previous year, Australian Financial Review reports. That is up from 6.8% in the final quarter of 2016. Industrial production was also far better than forecast, growing at 7.6% in March compared to 6.3% in first two months of the year. Read more

Coking coal has more than doubled in two weeks on the back of disruption to Australia’s coal exports associated with Cyclone Debbie, which caused the evacuation of several mines and damaged coal trains supplying export terminals, forcing some miners to declare force majeure on their deliveries.

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It is estimated that shipments accounting for 50% of the global coking coal supply will be delayed and that Australia will need at least two months to regularize its coking coal exports following the natural disaster.

Australian coking coal’s free-on-board price in US dollars per metric ton. Source:mining.com.

Coking coal prices rose sharply in the second half of last year when China reduced allowable work days at the country’s coal mines, which reduced output and tightened the global coking coal market. These events added fuel to rising steel prices in China. But a slump in coking coal prices since December added pressure to steel prices, especially in China since the country strongly depends on the commodity to make steel.

Can Higher Coking Coal Prices Give a New Boost to Chinese Steel Prices?

The Chinese cold-rolled coil price. Source: MetalMiner IndX.

Australia is the world’s biggest coking coal exporter and is China’s largest supplier. The recent disruptions are forcing China to look for alternative supplies. Russia, Mongolia and Indonesia are other potential sources of coking coal for China’s hungry mills. Meanwhile, North Korea is out of China’s exporter list after Beijing ordered an import ban following North Korean missile tests.

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Higher coking coal prices translate into higher input costs, particularly in China. Chinese steel prices set the floor for international steel prices, a topic that we discussed recently. Steel buyers should monitor the recent surge in coking coal prices closely as  since steelmakers will potentially pass on the increase to consumers, giving a boost to weakening steel prices in China.

The rising trend of aluminum processors seeking protection from Chinese imports may be just the beginning if a recent Reuters article is correct.

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Encouraged by a growing delta between the London Metal Exchange and Shanghai Futures Exchange aluminum price quotations, China’s aluminum makers are expected to step up exports in coming months, aided and abetted by a healthier global manufacturing climate and declining world aluminum stockpiles, the article explains.

Should this prove right, higher exports of semi-manufactured aluminum products would depress prices on both the LME and processors conversion premiums in the rest of the world. That would be bad news for producers, but good news for consumers who have been experiencing rising prices of both the underlying LME and conversion premiums for the last six months.

Chinese exports of semi-finished aluminum products fell last year as both LME and SHFE prices collapsed but production has rebounded more than 20% during the first two months of this year as the rising LME has made exports more profitable for Chinese producers benefiting from a relatively weaker SHFE domestic price. According to Goldman Sachs, the profitability of China’s semis exports has jumped 20% this year, encouraging the surge in exports we have seen in Q1 and portending a further increase in the months ahead.

How long the increase in exports is likely to last, and therefore how persistent the negative impact it will have on prices, remains to be seen. Despite the anticipation of rising exports, many still think the surge could be short-lived. Last month, Beijing ordered aluminum producers in 28 cities to slash output by 30% during winter months to limit coal use and curb pollution. In the mean-time, those producers are pumping out every ton they can adding to domestic availability, inventories and depressing the SHFE price. Come autumn, however, if cutbacks are enforced and the physical market tightens that surplus could turn to deficit and prices could rise. In which case exports will become less attractive and the tap will be turned off.

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This isn’t the first time the global aluminum market will be dancing to China’s tune. Consumers could do well to use a dip in prices this summer to cover forward for what may be a winter in which prices rebound.

A recent Financial Times article lays the blame for falling iron ore prices in China firmly at the door of Australia’s Department of Industry Innovation and Science, whose latest quarterly report predicted average prices in China would fall to $65 per metric ton this year before ultimately declining further to $51 per mt.

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The FT quoted the department’s report saying prices would be weighed down by the combined impact of ongoing growth in low-cost supply and soft demand.

Source: Financial Times

While we don’t doubt that investors will have taken notice of the department’s report, the fact is analysts have been calling for a fall in the iron ore price for months now. Indeed, the rising tide of supply has been expected to weigh on prices for much of the last six months, such that continued price resilience and robust demand have caught some by surprise. 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.

Benchmark Your Current Aluminum Price by Grade, Shape and Alloy: See How it Stacks Up

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

The seesaw battle between steelmakers in China and India took a new twist recently with a report in a Chinese newspaper calling the Indian government on its “protectionist” stance on steel.

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The state-run Global Times newspaper said in a report, referring to India’s decision to award its first bullet train project to Japan, that India needed to have a “sober” look vis-a-vis China when it came to solutions for India’s proposed railway network revamp or its entirely new high-speed rail project.

The high-speed “bullet train” project is likely to commence in 2018 on a 315-mile (508-kilometer) route between Mumbai and Ahmedabad. It’s slated to be completed by 2023.

India has been waging a war against cheap steel imports into the country for some time now, with Chinese steel companies high on their bad guy list. The government imposed taxes in various forms not to protect its own steel industry, but to equalize import prices to production costs. Over 80% of the funding for the project is coming from Japanese investments. Read more

As one might misquote Mark Twain, we have been here before.

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In 2016, analysts were queued up to predict the iron ore price was going to collapse only for it continue its relentless rise. The recent pull back from $90 per metric ton has brought a fresh crop of dire predictions. Yet maybe, just maybe, there is more validity this time around for caution as to future price direction. There are a number of factors, each of which individually does not signal a price reversal but collectively suggests iron ore prices later this year could be lower than they have been in the first quarter.

Why Iron Ore Prices Might Really Fall

An article in the Australian Financial Review quotes analysts saying, the strength of recent pricing is encouraging Chinese domestic production to increase. In the first half in 2016 it was averaging a 220 million mt per year run rate, but rose to 280 mmt per year in the second half of the year. At the same time, global supply continues to rise with not just increased shipments from Australia but also number three miner Vale SA expanding supply from its $14 billion S11D mine. Read more

Rainbow Rare Earths, which owns a rare earths mining project in Burundi, was listed on the London Stock Exchange at the end of January, according to the Financial Times. This has prompted speculation in mining and trading circles that China’s dominance may finally be challenged. We’re not holding our breaths, and China likely isn’t either, but it wouldn’t be the first time that the abundance of resources in Africa had been underestimated.

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The U.S. Geological Survey said in 2015 that China’s annual production of the key battery, magnet and conductor elements was slightly more than 100,000 metric tons. Australia came in second with 10,000 mt. Only three other countries produce more that 1,000 mt of rare earths a year. The US produced 4,100 mt but that’s sure to go down after the 2016 closure of the Mountain Pass mine, Russia produced 2,500 and Thailand checked in with a respectable 1,100 mt contribution to the production of cell phones, military hardware and wind turbines.

Rare Earths MMI

The FT points out that despite China’s dominant market position in refined exports, the same is not true of rare earth deposits. It’s estimated that China has no more than 30% of global deposits of the quite abundant, despite their name, elements. The problem that all new rare earths projects run into is the cost of bringing new deposits into production and the ability of one country with such a dominant position to flood the market and bring down prices, hitting the viability of new projects.

What’s Left of China’s Previous Challengers

Remember what happened to Molycorp, Inc. and how the Japanese threw a lifeline to Australia’s Lynas Corp.? Yet, the fact that Lynas is still trudging along and investment is still being made by a Japanese government and industrial culture that wants nothing to do with China’s rare earths industry may, paradoxically, be what sets Africa apart and its low-cost resource sector apart from others who have taken on the dragon.

Japan was de facto banned by the Chinese government from receiving any shipments of rare earths back in 2011 after the Japanese Navy detained a China fishing trawler captain. Since then, Japanese industry has not only aggressively replaced rare earths in its supply chains, depriving China of customers, but also supported Lynas and other non-Chinese manufacturers even to the point of keeping them in business. There is little doubt that both public and private Japanese money would automatically flow into African projects if significant deposits of rare earths are found.

Grudge Match

That China has lifted export quotas and prices have fallen to a low range means little to nothing to Japanese businessmen and women who remember having their supply chains cut off in 2011.

According to the FT, it is widely acknowledged that, outside North America and Australia, southern and eastern Africa offer the greatest potential for rare earth production, especially in South Africa, Tanzania, Malawi, Mozambique, Kenya, Burundi, Zambia and Namibia.

Rainbow Rare Earths’ IPO is premised on its Gakara project in Burundi. The project is not yet producing and further exploration will be needed. The risks described in the IPO prospectus are a reminder of the difficulties of developing such projects, including pricing and environmental challenges and the need to produce ore at the required levels of concentration.

Rainbow raised $9.77 million (₤8 million) at its IPO.

The Rare Earths MMI broke eight straight months of flat performance and increased 1 point (5.9%) to 18 this month.

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A recent article from news service Reuters raises concerns over the continued strength of the aluminum price.

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Global aluminum prices have risen over the last six months, led by a strong rebound in the Chinese market. From a low of just over 9,000 yuan (electric town) in November 2015, the Shanghai price as risen steadily to above 14,000 yuan today as this graph from Thompson Reuters illustrates.

Source: Reuters

Spurred by healthy demand and the rising price, smelters have responded with gusto. As primary metal production in the rest of the world has fallen by an annualized 182,500 metric tons per year, output in China has surged. Although monthly figures are subject to considerable swings, Reuters reports January hitting a record of 2.95 million mt according to figures from China’s non-ferrous metals industry association. That is equivalent to an annualized rate of 34.7 mmt or 56% of global output, a staggering 19% year-on-year growth. Read more

Stock markets in China are up nearly 10% this year, outpacing a 4% gain in the S&P 500.

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President Donald Trump’s election victory in November raised worries that his administration would pursue more aggressive policies toward Asia’s biggest economy. On the campaign trail, Trump had threatened to increase tariffs on Chinese exports and label the country a currency manipulator.

FXI China shares attempt to breakout. Source: MetalMiner analysis of @stockcharts.com data.

While these threats haven’t materialized yet, fund managers have focused on healthier Chinese corporate earnings and stable economic data, rather than worrying about protectionism.

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