Rumors abounded late last week about a really bad idea that the China Nonferrous Metals Industry Association suggested the state is planning.

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The, as yet officially unsubstantiated, suggestion is the State Reserves Bureau would buy 900,000 metric tons of aluminum, 30,000 mt of refined nickel, 40 mt of indium, and 400,000 mt of zinc, although there seems to be some uncertainty about whether zinc will or will not be included in the support program.

And make no mistake that is all this exercise is, a support mechanism, principally for state metals producers hit hard by falling prices and excess supply. Some feel it is akin to Beijing’s poorly thought-through intervention in the stock market last summer when they stepped in to buy shares to prop up the stock market, but although the sums involved would come to an eye-watering $1.5 billion it would be a drop in the ocean of excess supply to the Chinese market.

Back in 2009 the SRB stepped in to the market and purchased some 700,000 mt of copper, a move that contributed to an eventual rise in price from $3,000 per mt to a peak of $12,000 per mt. This time, the suggestion seems to be that the SRB will buy only from state metals producers and to pay prices based on state-owned smelters’ cash production costs rather than a market price.

Needless to say, prices on the Shanghai Futures Exchange have surged, up 5% this week in response, although how long this will last remains to be seen. Like a sugar rush, the effect quickly passes and if production continues to run in excess of demand prices will quickly fall again.

In 2009 a massive stimulus program drove double-digit rates of demand growth, that isn’t going to happen this time around.

Free Download: The November MMI Report

Fortunately, some parts of the industry are taking more sensible action with announcements by some 30 producers that they will cut capacity next year, particularly in copper, zinc, nickel and nickel pig iron, according to Reuters. Moves that will, in the long run, have wider benefits than just supporting prices by reducing the incentive for wasteful investment, less pollution and lower energy consumption.

The London Metal Exchange (LME) launched three new contracts this week — LME Aluminium Premiums, LME Steel Rebar and LME Steel Scrap, the first new contracts to be offered by the Exchange in more than five years.

You can now hedge aluminum physical delivery premiums using an LME contract. Source: iStock.

You can now hedge aluminum physical delivery premiums using an LME contract. Source: iStock.

The two steel contracts are cash-settled against physical Turkish scrap and rebar price indexes as opposed to the current steel billet contracts that are settled by physical delivery and have largely proved to be  a failure since launch.

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Why, we might ask, would these new contracts prove anymore successful? Well acknowledging the failure with billet, the LME has worked assiduously to garner industry support both in the shaping and specification of the new contracts. Goldman Sachs, for example, is on the LME’s steel committee and major trading firms like Stemcor have publicly stated they intend to be actively involved from day one, although they still add the caveat “subject to market conditions and liquidity.”

Liquidity was always a major issue for the billet contract. It never secured anywhere near enough interest from the trade to generate sufficient volume and, hence, a fair market price.

Rebar and Scrap

The steel scrap and rebar contracts will be traded on LME Select in small lots of just 10 metric tons making them more accessible for smaller market players, while, at the same time, the LME is offering discounts for volume trades to encourage liquidity. Read more

The Midwest aluminum premium has risen as fears about costs set in after Alcoa’s announcement that it is shuttering much of its North American smelting capacity. Despite cuts in China, zinc is still massively oversupplied.

Midwest Premium Rises on Alcoa Shutdowns Announcement

The US Midwest aluminum premium has risen to its highest level in six months, traders told Reuters on Tuesday, but the current forward curve and Alcoa‘s plans to save a US smelter from curtailment were seen pressuring prices in the near-term.

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The premium, paid on top of London Metal Exchange (LME) futures prices for physical delivery in the US, has risen to around 8.75 cents a lb., the traders said, citing the continued impact of Alcoa’s plans to shutter the bulk of its US smelting capacity, announced Nov. 2.

Chinese Cuts Fail to Balance Zinc Market

Output cuts announced by Chinese zinc smelters last week will do little to tighten next year’s global supply-demand balance in refined metal because already-known mining cutbacks would have forced smelters to reduce production anyway, Reuters reported.

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On top of that, hard-hit prices will fail to get much of a lasting boost in coming months due to a glut of world inventories, although there may be spikes of short-covering, analysts and investors said.

In honor of Throwback Tuesday, we are revisiting MetalMiner’s Top 50 posts with an eye toward illuminating what’s happening in metals today. #TBT This post, originally published Feb. 26, 2009, about the production of primary aluminum, is as relevant to the LME’s new aluminum contracts as it was to explaining aluminum’s price drop at the time.

Since the aluminum price on the LME dropped below $1500/ton, it has been repeatedly stated that some 60-70% of aluminum smelters are losing money.

What goes into producing aluminum? Source: Adobe Stock/Pavel Losevsky

What goes into producing aluminum? Source: Adobe Stock/Pavel Losevsky.

Electricity alone is generally accepted as representing about a third of the cost of aluminum ingot, although at what sales price that metric is judged is open to debate. We thought it would be interesting to explore what the true costs of production are for a ton of primary aluminum and thereby test to what extent the smelters’ claims that they are losing money are correct.

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As with the steel industry, many of the industry’s woes may have as much to do with low plant capacity utilization as they do with low sales prices.

How Much Does it Cost to Produce One Ton of Aluminum?

Although the newest smelters can be closer to 12,500 kWh per ton, let’s say most smelters are consuming electricity at 14,500-15,000 kWh/ton of ingot produced. With the LME at $1,300/metric ton, that means electricity should be costing a typical smelter $0.029/kWh.

Needless to say, smelters are rather coy about their power cost contracts so it’s hard to verify how prevalent this number is though many smelters are on variable power cost contracts with their electricity suppliers such that the power generators are paid a fixed percentage of the world ingot price. If we take that as one-third, then it’s not only smelters that are losing money – many power generators must be, too.

When US national average industrial and commercial electricity consumers are paying $0.0706/kWh and $0.1013/kWh, respectively, according to the Energy Information Administration, to be selling power to smelters at $0.029/kWh represents a huge subsidy. In reality, power costs to the smaller US smelters are probably higher than this and explains why many have been cut back or idled, but interestingly the same source gives specific power costs for the Pacific Northwest of only two-thirds the national average, suggesting that many NW smelters may indeed still be getting power at ingot-price-related levels.

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Chinese steel prices hit record lows and caused at least one major closure Tuesday and aluminum delivery premiums leveled off in Europe.

Closures in the Chinese Steel Sector

Chinese steel prices hit record lows on Tuesday amid prolonged worries over shrinking demand in the world’s top consumer that market sources say has forced one of the country’s largest private producers to cease output.

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The shutdown by Tangshan Songting Iron & Steel, with an annual capacity of 5 million metric tons, would be one of the biggest in the sector’s years-long downturn as the world’s No.2 economy slows, traders and analysts said.

Aluminum Surcharges Fall in Europe

Surcharges for physical delivery of aluminum in Europe leveled off after recent gains and may come under pressure from additional supply if Chinese exports rebound and some inventories are liquidated.

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The surcharges, or premiums, which consumers pay on top of the London Metal Exchange (LME) cash price for immediate delivery of metal, have gradually climbed over the past couple of months amid tighter availability.

In case you’ve been in a cave, sheltered from the aluminum market’s precipitous dive, here’s a timeline snapshot:

  • September 28th: Alcoa announces the company would split in two. The firm found that its legacy smelting business, the company’s vertically integrated structure, is not the advantage it once was.
  • October 28th: 3-month London Metal Exchange aluminum falls as low as $1,460 per metric ton, the lowest price since June 2009.
  • November 2: Alcoa announces it would reduce aluminum smelting capacity by 503,000 mt and alumina refining capacity by 1.2 million mt, beginning in Q4 2015 and completed by the end of Q1 2016. The announcement is one more step by Alcoa to remain competitive in one of the toughest periods for aluminum producers in history.


According to Reuters, Alcoa’s cuts, coupled with recent announcements by Century, make up 30% of US aluminum production and will leave just 4 smelters operating in the nation, with capacity to produce 759,600 mt per year. That’s the lowest output since the 1950s.

Import Glut

Aluminum prices have plummeted thanks, in part, to a glut of Chinese exports. Despite low prices, analysts still remain skeptical that Chinese producers will cut production as local governments are very determined to keep smelters open. Although some high-cost smelters have cut production, China continues to add production in the west side of the country, where coal-based power is cheaper.

On top of that, American producers are suffering even more as aluminum midwest premiums have dropped more than 70% on the year to date. Alcoa’s cuts might be a step in the right direction to combat the global surplus and could also give some support to premiums since Alcoa’s latest round of supply cuts are from its US smelters and the 500,000 mt represent around 10% of annual consumption in the US.

What This Means For Metal Buyers

Although the cuts could impact MW premiums, they won’t likely have a long-term impact on aluminum prices. With a strong dollar and the huge amount of aluminum leaving China every month, any major upside in aluminum prices currently looks dim. Even if these production cuts make prices rise, Chinese exports would likely just start rising again, putting pressure on prices.

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The Automotive MMI bounced 1.4% this month but we would caution metal buyers to wait a bit longer before calling this anything close to a market bottom.

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As MetalMiner co-founder Stuart Burns adroitly pointed out this week, no two metals’ bottoming out experiences will be the same. Some will be sharp and some, particularly steel, could be fat and flat. It should come as no surprise to our readers that steel and aluminum were, again, the laggards in our automotive metals index.

Automotive_Chart_November-2015_FNLA mini-surge from copper and relative strength in platinum and palladium were able to collectively raise the index to its small gain this month. Therein lies the true problem for long-term Automotive MMI growth: there are signs that PGM prices will not be able to hold the modest gains they’ve made in recent weeks.

Eeek… TFs

Platinum- and palladium-backed exchange-traded funds tracked by Reuters were facing their biggest monthly outflows at the end of October since the data series began in 2010.

Platinum flowing out of ETFs is good news for the dollar and bad news for dollar-denominated commodities, such as precious metals. The bulk of the selling was seen from the Johannesburg-listed NewPlat ETF operated by Absa Capital, which saw its holdings fall 134,000 ounces in October, according to Reuters.

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While the Volkswagen scandal did not cause the price losses some expected for exhaust system metals such as platinum and palladium, the muted market reaction may still be growing. ETF outflows have also pushed gold to 4-week lows, too, and we would expect more losses for automotive metals as aluminum and steel have very little upside right now and the rug very much looks like it’s finally being pulled out from under PGMs.

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Copper demand has picked up in China recently but it’s unlikely to last and low prices have forced Alcoa to shut down three US smelters, the aluminum giant said.

Chinese Copper Demand

Stronger Chinese demand for copper in recent weeks is unlikely to last or to signal a broader recovery for the metal often regarded as a bellwether of economic growth, according to industry sources and a delve into data.

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A surge in Chinese imports of copper is mainly due to buyers taking advantage of low prices to restock, rather than representing increased industrial consumption of the metal widely used in the power and construction sectors.

Alcoa Close Smelters

Alcoa, Inc. said on Monday it will idle three of its four active US aluminum smelters, slashing annual capacity by 500,000 metric tons.

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The company said in a statement it will suspend its Intalco and Wenatchee smelters in Washington state and the Massena West smelter in New York state. It will also permanently close Massena East, also in New York, which was shuttered in 2014.

This is part two of a series on market bottoms. Check out part one if you missed it.

Prices for many metals are probably close to a bottom simply because the current market price is below the cost of production. Glencore has not curtailed production of copper and zinc out of altruism, they have done it because the mines closed are not economic.

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Without courting innuendo I am not going to enter into a long evaluation on the shape of bottoms and whether we can expect a sharp pointy one or a big fat, flat one. The reality is the shape will depend on the particular metal’s supply and demand fundamentals, and investors’ view of those fundamentals.

Some commodities, such as oil, may already have begun to turn as swing producers like the US shale industry stop drilling and OPEC huddles to consider how much further they can afford to drive prices down. The big unknown remains Iran. If the spigots are opened following a relaxation in sanctions then OPEC may have to come to some kind of accommodation on production to stop the market reversing recent rises but that market looks like it’s going to be the big, fat bottom kind.

Shale Oil Production

Shale producers will come back to the market if prices exceed $60 per barrel effectively halting any further significant rise. The FT quotes sources saying production cuts in zinc, nickel and copper may mean those markets have also bottomed, but one issue the market is only slowly coming to realize is that some of that massive Chinese investment boom in response to China’s 2009 stimulus package went into the mining and refining of base metals.

Chinese Production

China has built itself massive new capacity and is moving from a consumer to exporter of metals, a trend accelerated by the slowdown in domestic demand as the economy moves away from resource-hungry industry toward domestic consumption growth.

Think steel, aluminum, and stainless steel; oversupply from china in these commodities will ensure we have a dead cat bounce kind of bottom, prices of these commodities aren’t likely to rise far or fast for years to come.

Currency Effect

Another trend that is perpetuating the situation is that, at least in some commodities, currencies are shielding producers from the worst effects of falling global prices. For the sake of example, take soybeans. Over the past five years, the price of soybeans has dropped by 28% in dollar terms, the FT reports. But price in the Brazilian real’s depreciation against the dollar and soybeans have actually gained 64%.

Source: Financial Times

Source: Financial Times

A US agricultural attaché in Brasília is quoted as saying “Despite lower global soybean prices, the weak Brazilian real is compensating with higher domestic prices and is encouraging farmers to increase area.”

Different Places, Same Overproduction

The attaché foresees a record 97metric ton Brazilian soybean harvest next year.

This is true, too, of oil In Russia, to an extent, where the ruble has collapsed against the dollar. It is true of ferro alloys in South Africa as we wrote recently, and to a more limited extent it is true of China following revaluations of the renminbi, now a major exporter of many base metals and steels. In all such cases it reduces producers need to curtail production to support prices. Indeed, in some it encourages greater production.

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So if we are near the bottom for many metals we have little to fear by way of a sharp rebound in any. To a greater or lesser extent they are all plagued by oversupply, in some cases active steps are being taken to address this such as with copper, and for those metals a recovery next year is a probability but generally high inventory levels will dampen the rate and timing of any upswing giving consumers plenty of time to adjust to a new trend and act accordingly.

For others, such as aluminum and steel there is a an opportunity to take a longer-term view and consider material substitution or design changes to take advantage of what could be long-term price changes. A flat bottom if that is your wish, or a new normal if you prefer.

Last week, aluminum prices on the London Metal Exchange fell below $1,500 per metric ton for the first time in more than 6 years.

Traders fretted about the likelihood of large surpluses of LME aluminum this year and next and the lack of substantial output cuts to balance the market.

LME 3M Aluminum 550

3-Month London Metal Exchange aluminum price falling to a 6-year low. Source: MetalMiner analysis of data.