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.
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.
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 toMolycorp, 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.
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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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.
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
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.
The Trump administration is exploring the idea of classifying currency manipulation, such as when China sets the value of the yuan/renminbi deliberately low to promote exports, as an unfair trade government subsidy that U.S. manufacturers can then petition the Commerce Department for redress against.
The Wall Street Journal reported that, under the plan, the Commerce Secretary (Trump has nominated Wilbur Ross for the job) would designate the practice of currency manipulation as an unfair subsidy when employed by any nation. This plan would not single out China, or any other country, but rather give U.S. companies the opportunity to pursue trade remedies such as countervailing duties on imports from nations that artificially set currency values low.
The value of the renminbi against the US dollar has consistently fallen since China removed its peg. Chart: Jeff Yoders/MetalMiner.
Last year, we created an interactive narrative experience showing how China has changed its currency values since it joined the World Trade Organization. Many countries and the WTO, itself, have wrestled with how to deal with Chinese exports in recent years but no country has considered creating a currency manipulation category for dumping of foreign exports that would, presumably, be enforceable under current WTO rules.
The currency plans, according to the WSJ, are part of a China strategy being put together by the White House’s National Trade Council, led by economist Peter Navarro. The policy seeks to balance the administration’s dual goals of challenging China on trade while still keeping relations — and most trade — with the massive country on a fairly even keel. That’s why the policy does not single out China and would apply to all nations that reset the values of their currency without direction from an independent body such as the European Central Bank or Federal Reserve.
The copper market has been sending mixed messages for the last year and the start of 2017 is no different. Consumers had gotten used to lower prices and the narrative of new mine investment swamping lackluster demand growth, only to be surprised on the upside last year by strong demand – both physical and speculative – out of China.
As Andy Home of Reuters commented this week, maybe more surprising was the lack of supply disruption. Usually the copper market can expect something like 5% of annual production to be disrupted by labor disputes, bad weather, government interference, power outages or simply falling ore grades impacting production, but 2017 saw a low level of unscheduled production losses, in the region of 3.5%, and yet copper prices continued to rise.
Where is Demand Really at?
Demand on the other hand has also surprised on the upside, according to HSBC demand in top consumer China last year was stronger than anticipated due to a greater government stimulus impact on the power grid investments and higher end use demand, particularly for appliances and consumer goods. A tax incentive on small cars boosted Chinese auto sales in 2016 and since the government extended the initiative to 2017 at slightly higher tax rate (7.5% vs 5% in 2016) this stimulus is thought likely to continue. Read more
By anyone’s reckoning, iron ore and coking coal had a stellar year in 2016. Driven by infrastructure investment and a robust construction market, Chinese imports of our iron ore could top 1 billion metric tons for the first time in 2016. Prices more than doubled in the space of 12 months and the supply-demand situation seemed to be largely in balance for much of the year.
After topping $80 per mt in early December, prices eased back a little toward the end of the year prompting many to ask “have we seen the peak in iron ore prices?” Mills typically cut output during the quieter winter months when construction demand slows. Many steel mills have already curbed output due to chronic smog alerts across northern China.
Seasonally, it would not be unusual if iron ore prices remained subdued up to the Chinese New Year and then picked up in preparation for the peak production months of late spring and summer. But, while Chinese demand defied many expectations of a slowdown in 2016, the recent softening of both iron ore and coking coal raw material prices, and the price of some finished steel products over the last week or 10 days, has lent support to some analysts’ predictions that we could be seeing markedly lower Iron ore prices throughout this year and next. Read more
The incoming Trump administration campaigned on and has, since winning the election, robustly promoted an anti-free trade platform saying the North American Free Trade Agreement is “the worst trade deal maybe ever signed anywhere,” bullying GM, Ford Motor Company and various other multinationals into rethinking strategic investments planned for Mexico and forcing them to be shelved or amended. Read more
Welcome to the first MetalMIner Week-in-Review of 2017!
This week, trade issues came to the forefront as President-elect Donald Trump, now just two weeks from his inauguration, named veteran trade lawyer and former Reagan administration official Robert Lighthizer as his U.S. Trade Representative.
Who gets hurt the most by a bunch of fair trade hardliners coming into office with Trump? It might look like Mexico right now — Ford Motor Company just pulled up stakes on a new facility there and instead invested in Michigan — but it’s actually China, as the U.S. trade deficit with them is our largest and the director of Trump’s National Trade Council, Peter Navarro, is a longtime critic of the way the People’s Republic trades with the U.S. and the entire world. Expect Navarro, Lighthizer and Commerce Secretary nominee Wilbur Ross to set their sights squarely on China’s trade with the U.S.
President-elect Trump has had mostly good things to say about Russia and he’s even boasted that he’d “get along well” with Russian Federation President Vladimir Putin, despite intelligence community accusations that Russia “hacked” the recent election by providing information from the Democratic National Committee and Democratic Nominee Hillary Clinton’s campaign manager, John Podesta, to organizations such as Wikileaks for wide distribution and dissemination. Trump may get tested early on that Russian reset, anyway, because Russia is already reclassifying its biggest shale oil find to avoid sanctions placed on the federation when it annexed Crimea.
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.
See the latest multimedia version of this story here.
This is our final top-rated post of 2016. Chinese market economy status was a huge issue for the entire year and this interactive package, originally published in May, put all facets of the problem into one package. How China will change its economy to compete with the rest of the world without overproduction for export is still an open question and a major threat to market stability. — Jeff Yoders, editor
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