The U.S. and the European Union filed a joint World Trade Organization challenge against China on July 19 over its use of duties and export quotas to control shipments of metals such as tin, tantalum, lead, copper, chromium, cobalt and others.
The E.U./U.S. effort comes after the U.S. government’s original request for consultations filed on July 13. It also comes after the European Union failed to resolve a dispute with China over its use of duties and export quotas during bilateral meetings with China last week.
Chinese export quotas are being challenged by the U.S. and the E.U. Source: Adobe Stock.
The new request adds challenges to export duties on chromium to the original list of antimony, cobalt, copper, graphite, indium, lead, magnesia, talcum, tantalum and tin. The new request also includes China’s export quotas imposed on antimony, indium, magnesia, talc and tin.
Trade Rep Speaks Out
During last week’s announcement, U.S. Trade Representative officials said export duties on the raw materials ranged from 5 to 20% and enabled Chinese companies to produce lower-priced goods than their U.S. competitors. China also used the lower cost of raw materials to encourage U.S. companies to move production to China, the office of the U.S. Trade Representative charged. Read more
The U.K.’s decision to leave the E.U. hasn’t really scared investors away from industrial metals. The metal complex continues to rally. As we explained in a webinar yesterday, Brexit had little to no impact on the supply and demand dynamics of industrial metals.
On the demand side of the equation, it is — not the U.K or even Europe — that is the world’s biggest consumer of industrial metals. Supply cuts amid low prices and this year’s boost in Chinese demand for industrial metals, thanks to stimulus measures, continue to be the key factors to watch. In this post we’ll look at the recent bullish price moves of individual base metals that appear to confirm that the bull market that we identified earlier this year is for real. In addition, we’ll look at the recent improvement in investors’ sentiments about China, which favors rising metal prices.
Aluminum Hits a One-Year High
Three-month LME aluminum hits a one-year high. Source: Fastmarkets.com
Aluminum overcapacity is still an issue. In June, China and the U.S. failed to reach an agreement on how to address excess global aluminum capacity. But that hasn’t stopped prices from rising. On Tuesday, aluminum prices hit a one-year intraday high. Read more
Yes, by some accounts nickel swung into deficit this year after five years of surpluses as global demand rose by some 4% and supply has been constrained by a lack of new investment, Indonesia’s export ban on nickel ore exports and, more recently, a fall in exports from challenger Chinese supplier, the Philippines where low prices have reduced output.
Investors Are Cashing In
The euphoria among investors is not simply due to a change in outlook. Nickel prices have surged this year by some 13% according to the Financial Times with the latest boost coming from the Philippines’ new environmentalist mining minister Gina Lopez, who has announced plans to audit domestic mines for compliance with environmental standards, the expectation is up to 70% could fail resulting in them potentially having their licenses revoked. Two have already lost their licenses. Read more
You wouldn’t expect the ripples to have spread quite this far, but Britain’s Brexit from the E.U. is lapping on the shores of the South China Sea and has forced the People’s Bank of China (PBOC) to intervene to “stabilize” the yuan in the face of a slump in the pound and euro and a surge in the U.S. dollar.
Chinese policymakers have guided the yuan to a 5.6% decline against an index of its trading partners this year as exports fell every month apart from March. The 13-currency gauge fell to a 20-month low last week as the PBOC continued its policy of “stability” while maintaining responsiveness to market forces — plainly such a policy can be contradictory at times, especially in times of volatility as we are now facing.
The PBOC, after years of gradual appreciation, has presided over a period of depreciation again in an attempt to help exporters, but an unexpected downward adjustment last August spooked markets and caused shares to fall causing an estimated $1 trillion capital outflow from the country as investors panicked, fearing the prospect of their assets falling in dollar values. Read more
A recent Reuters article draws an interesting comparison between the Chinese aluminum and steel industries and then goes on to draw some not-so-encouraging conclusions for aluminum. Excess aluminum production there is damaging the prospects of aluminum producers in the rest of the world, purely because of the size of China’s massive aluminum industry.
Both metals face excess production at home due to rampant overinvestment and slowing domestic demand. Reuters lists a number of similarities between the two industries: China is the world’s largest producer in both markets, accounting for 51.5% of global steel output and 54.4% of global primary aluminum output in April.
Chinese Steel vs. Chinese Aluminum
In both industries, China has been exporting excess production of steel and aluminum in the form of semi-manufactured products, with steel product exports last year totaling 112.4 million metric tons, representing around 14% of the rest of the world’s output and aluminum product exports of 4.2 mmt representing 17% of the rest of the world’s output. In both cases, exports have damaged prospects for producers elsewhere, forcing closures, losses and delaying investments.
In the case of steel, though, the threat of a delay to China’s application for market economy status by the World Trade Organization has forced a more conciliatory response by Beijing in recent discussions, and the promise of large-scale closure of older capacity in China.
Aluminum Overproduction Unabated
How effective this will be remains to be seen but, even so, it is in marked contrast to the position aluminum is in, where Beijing seems unable or unwilling to curtail new investment. As prices on the Shanghai Futures Exchange have risen this year, idled smelters have restarted and new capacity has continued to come on-stream.
Annualized run rates increased by almost 650,000 mt over the course of April and May, Reuters reports, with May’s average daily output of 86,290 mt the highest since November 2015 before prices fell below $1,518 (10,000 yuan).
The other factor apparently effecting Beijing’s attitude is the rapid rise in capacity is coming from new state of the art low cost aluminum smelters in China’s northwestern provinces. Aluminum is not seen as an old-fashioned, state-dominated industry operating polluting plants close to urban areas.
China’s new aluminum capacity is cutting-edge, world-class technology and — at current prices at least — is making money. As a result, Reuters concludes capacity is unlikely to be trimmed anytime soon, at least by government intervention. For aluminum producers outside of China, that is not good news, and although recent rises in price to $1,600/mt are better than the $1,450-1,500/mt levels of late last year, it doesn’t offer much upside in the short- to medium-term if China keeps flooding the market with excess semi-finished products.
While Saudi Arabia’s grip on oil prices has waned and shale drillers have survived its attempt to undercut them with crude prices nearing $50/barrel, China might just be the new Saudi Arabia of metals markets.
Resilient Shale Drillers Investing Again
Two years into the worst oil price rout in a generation, large and mid-sized U.S. independent producers are surviving and eyeing growth again as oil nears $50 a barrel, confounding the Organization of Petroleum Exporting Countries and, particularly, OPEC heavyweight Saudi Arabia with their resiliency.
That shale giants Hess Corp., Apache Corp. and more than 25 other companies have beaten back OPEC’s attempt to sideline them would have been unthinkable just months ago, when oil plumbed $26 a barrel and collapses were feared.
The world’s largest producer and consumer of industrial metals may be acting as a de facto, if unwitting, type of OPEC for metals, adjusting supply in response to price signals and balancing the market.
Oh yes, refined petroleum products, or to be more exact diesel fuel is the prime culprit at the moment. According to the Financial Times, China has in the region of 100 million metric tons of excess refining capacity and is adding more. Read more
Lead is now 5% down year to date while sister metal zinc has scored 18% gains over the same period.
Global lead production has joined usage in flattening recently. Source: MetalMiner.
Demand for lead looks less appealing than zinc this year. Provisional data reported to the International Lead and Zinc Study Group indicate that lead is still in surplus, with world refined lead metal supply exceeding demand by 29,000 metric tons during the first quarter of 2016. Two factors have weighted down on demand and prices this year.
A Hit to Chinese Electric Bike Demand
Amid concerns about safety, Chinese municipal authorities imposed new regulations on electric or e-bikes this year, which account for about one-third of the country’s demand for lead-acid batteries.
New Tax on Lead-Acid Battery Makers
Lead depends on lead-acid batteries for about 80% of demand in top consumer China. The Chinese lead-acid battery sector has been struggling due to heavy price competition and was further hit after China imposed the 4% tax in January on batteries.
What This Means for Metal Buyers
Lead prices have become increasingly choppy this year. The metal has traded up and down in the price range of $1,570-$1,880 per mt for eleven consecutive months. Overall, lead fundamentals don’t look terrible but unless we see a major change in the macro-picture the supply surplus could continue to cap the upside.
I don’t know if any of you have been following the Sky Atlantic series “Billions” — it may be screened here in the U.K. later than the U.S. and is already history stateside — but after the first two episodes it is following an intriguing if well-worn path of the demon hedge fund manager pitted against the flawed but public-serving attorney general. Echoes of the big short and other films demonizing hedge funds come to mind, but it’s well done all the same.
This is not all Hollywood, or wherever Sky films its TV series, though. In the real world, we are seeing the impact of unbridled and largely unregulated hedge funds manipulating the market and our purchase costs, our cash flow, and, ultimately, our profitability every day. Read more
Owners of shares in nickel mines shouldn’t start popping the champagne corks just yet, it’s going to be a slow burn rise but the landscape appears to be shifting and it is because of, as usual, China. First and foremost, there is a trend among stainless producers this year, particularly in China, to produce more 300 series nickel-bearing grades than last year.
Real Demand is Up
Just as mills and consumers shifted wholesale from 300 to 400 series grades when nickel prices went through the roof in 2010-11, a prolonged period of falling prices has encouraged consumers and designers to switch back to higher-quality grades.
Macquarie Bank is quoted by Reuters saying global nickel demand will grow by 4.4% this year, largely on the back of a predicted 4% rise in Chinese 300 series stainless production. Likewise, the INSG estimates the global market will fall into a small 600-ton deficit in Q1 of this year, although it must be said the market remains well supplied by huge global stocks. Read more