Aluminum

Gold and most precious metals are still gaining from the bounce they received after the U.K. voted to leave the European Union and most bankers and analysts expect that to continue. In contrast, European aluminum premiums are falling.

Poll: Gold’s Brexit Bounce Has Legs

Britain’s vote to leave the European Union has led analysts to raise their gold price forecasts again this year, after the decision shook up financial markets and sparked a rally in the precious metal to two-year highs.

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A poll of 25 analysts and traders over the last two weeks returned an average price forecast for this year of $1,280 an ounce, up from $1,209 in a similar survey in April, and nearly 15% higher than a poll at the start of the year.

European Aluminum Surcharges Keep Falling

Surcharges for physical aluminum in Europe are expected to gradually extend their recent decline due to sluggish demand as metal is released from warehouses when finance deals become less lucrative.

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The premiums, which consumers pay on top of the London Metal Exchange cash price for immediate delivery, were quoted at $115-$120 a metric ton for duty-paid metal in Rotterdam, down some $10-$15 in recent months and from $140-$150 in early February.

The U.S. warned China on Thursday that it had not done enough to qualify for market economy status, especially in steel and aluminum and pushed the two trading partners closer to a full-on trade war between Washington and Beijing at the end of 2016.

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U.S. trade diplomat Chris Wilson told the World Trade Organization meeting that the expiration of a clause in China’s original petition to join did not require other WTO members to automatically grant China market economy status on Dec. 11.

Instead, China must establish under each WTO member country’s domestic law that it is a market economy, he said, according to an outline of his remarks seen by Reuters.

“Second, there is little doubt that China’s market reforms have fallen short of the expectations that were held by many members when China joined the WTO,” he said. “This is particularly evident in the steel and aluminum industries where China’s pervasive interventions have led to a significant overcapacity of global supply that is threatening the viability of competitive firms in these industries around the world.”

The two giant trading partners have been locked in a war of words about China’s ascension for more than a year now.

The EU and China Announce ‘Bilateral Mechanism’

Meanwhile, China and the European Union agreed to establish a bilateral mechanism to deal with overcapacity in steel, Chinese Foreign Minister Wang Yi said on Thursday.

China is by far the world’s biggest steel producer and its annual output is almost double that of the 28-nation EU.

Rival producers have accused China of selling into export markets at below cost after a slowdown in demand at home, causing a crisis for the industry that has led to job cuts and plant closures.

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“Through this bilateral mechanism, the two sides can have … in-depth discussions to find solutions acceptable to both parties and in this way maintain free trade and sustainable development of the global economy,” Wang said.

Wang did not provide details on the planned mechanism.

Six little letters have dominated the political and economic news cycle over the past month or so: BREXIT. While the long-term effects of Britain’s vote to exit the European Union won’t be felt for awhile, the surprising result has already roiled global markets, including commodities in general and metals specifically.

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Our biggest winner of the Monthly MMI series, the Global Precious Metals MMI, gained the most from June to July, primarily driven by gold prices (themselves driven by near-term investor moves over to safe-haven assets brought on by the Brexit vote).

MM-IndX_TRENDS_Chart_July2016_FNL-TOPVALUE100

Some have indirect Brexit connections, such as our Renewables MMI and the consequences of the U.K. announcing it won’t make E.U. 2020 climate reduction goals… which it won’t need to if it completes its exit before 2020 (likely). Others, like our GOES MMI, were not affected at all.

The value of the U.S. dollar, China’s import/export activity, and international trade cases (especially those in the ferrous realm should continue to be watched by industrial metal buyers during these dog days of summer. However, we wish our British colleagues well in these politically uncertain times and offer our recent webinar to help them navigate the newly choppy purchasing waters.

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.

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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

3M LME Aluminum Hits a 1-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

Rarely do a government’s stated aims and the aspirations of industry align quite so perfectly as they do in today’s India regarding steel.

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Prime Minister Narendra Modi’s government has been championing a “Make in India” mantra since coming into power in 2014. It has manifested itself in various ways and most intensely with the state-run enterprises who are more open to government pressure. Even so, it has become a pervasive theme across the entire national economy, coercing companies to finds ways of buying domestically in rupees rather than directly importing materials and paying in foreign currency. Read more

China, this year, is becoming more than just the world’s largest metals consumer, it’s also taking a larger role in setting metals prices. While oil prices have crept up this summer, another selloff could be caused when refined products in storage finally come to market.

China is Taking a Bigger Role in Setting Metals Prices

The prices of metals from aluminum to zinc have long swayed to the beat of the world’s largest manufacturing nation, Reuters’ Andy Home writes.

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But this is the year that China has emerged from the limelight to take center-stage in the trading of those metals. On one day alone, March 10, trading volumes on the Dalian Exchange iron ore contract exceeded one billion metric, more than the combined annual output of the world’s biggest three producers, Rio Tinto Group, BHP Billiton and Vale SA.

Another Oil Glut is Likely Due to Products in Storage

In its July Oil Market Report, the International Energy Agency warned about shockingly high levels of refined oil products sitting in storage. Gasoline, diesel and heating oil are built up to such high levels in so many parts of the world, that a sharp rise in crude oil prices is unlikely in the short run, oilprice.com reported.

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The IEA said that “the fact that crude oil has in the past two months moved within a range in the high $40s/bbl should be a relief for some producers.” But it went on to caution that “the existence of very high oil stocks is a threat to the recent stability of oil prices.”

Goldman Sachs has revised its base metal outlook for the year and Alcoa, Inc., has opened earnings season by reporting lower-than-expected Q2 profits.

Goldman Sachs Joins Base Metal Bulls

Goldman Sachs on Monday raised its outlook for zinc, aluminum and nickel prices anticipating supply inequalities to continue across the metals sphere throughout the second half of the year.

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“In our view, the impact of the prior stimulus is still set to result in sufficient demand growth such that we will continue to see supply differentiation across the metals space during the second half of 2016,” the bank said in a note to investors.

Alcoa Reports Lower-Than-Expected 2Q Profit

Alcoa, Inc. on Monday reported a lower quarterly net profit, with falling aluminum and alumina prices pressuring revenue while plant operations have been scaled back ahead of a spinoff of its traditional smelting business later this year.

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Alcoa reiterated its forecast for global automotive production growth in 2016 of 1% to 4%, but said continued weakness in the North American market would offset anticipated growth in heavy-duty truck, trailer and bus production in China.

Shiny aluminum ingots with a crane in the background while a plane is flying over

Shiny aluminum ingots with a crane in the background while a plane is flying over

Spot aluminum prices on the European market traded slightly lower last week as worries over Brexit and its impact on future demand influenced buyers.

Wrote Donald Levit of Economic Calendar: “While there is not expected to be a huge shift in aluminum demand as the U.K. slowly decouples itself from the European Union, a general air of uncertainty is pressuring the sentiment around aluminum demand and prices are responding by dropping slightly.”

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Levit added that Brexit is not expected to have a sudden impact on demand for aluminum but prices for the metal could fluctuate as the result of currency valuations. Forecasts currently call for a depreciation of the pound, but other factors stemming from Brexit — including slow economic growth and lagging U.K. vehicle sales — could team up to put further pressure on aluminum prices.

Meanwhile, in China…

MetalMiner reported that Chinese aluminum output has recovered, following a price rebound with a run up in Shanghai aluminum prices spurring an increase in Chinese aluminum production and exports in recent months.

We encourage North American manufacturers, especially those that source internationally, to keep a close eye on the Brexit fallout as it will sure to have a major impact on metal prices, including aluminum in the months to come.

You can find a more in-depth aluminum price forecast and outlook in our brand new Monthly Metal Buying Outlook report. Check it out to receive short- and long-term buying strategies with specific price thresholds.

 

Our Aluminum MMI rose 3% to 79 points. Despite a stronger dollar following U.K’s decision to leave the European Union, aluminum prices continued to rise in June finishing the month above $1,600/mt.

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Aluminum prices have yet to make a significant upside move, although prices have held well this year, we haven’t seen gains like in the cases of steel, zinc or tin. But the industrial metal complex is in bull mode since early this year and that is giving aluminum a tailwind.

Overcapacity Still an Issue

The reason why aluminum is lacking that upside momentum is that overcapacity hasn’t really been addressed like in the steel industry. China has committed to stop the expansion of its steel capacity and has at least tried to actively and appropriately wind down “zombie enterprises” through a range of efforts, including restructuring and bankruptcy. That’s not the case when it comes China’s equally giant aluminum sector.

Aluminum_Chart_July-2016_FNL

In June, China and the U.S. failed to reach an agreement on how to address excess global aluminum capacity. Although aluminum and steel markets have some similarities, there are also some key differences that explain China’s willingness to engage with its steel critics but not its aluminum critics.

First, China’s steel industry represents an old economic model that keeps losing money due to poor profitability. In contrast, China also has some of the most modern and low-cost operating aluminum smelters in the world, although China’s aluminum industry has its own loss makers, too. It’s understandable that China is more focused on getting rid of old, high-cost capacity in its steel industry, rather than removing its new generation of aluminum smelters.

Second, China wants to achieve market economy status in the World Trade Organization. But this goal is jeopardized by steel organizations and policymakers unhappy with the prospect of even heavier Chinese exports and less freedom in dealing with them.

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The U.S.-based trade body Aluminum Association has also been fighting against China being granted market economy status, but it’s mainly doing it alone. The aluminum sector is simply not as important for European and U.S. politicians as the steel sector.

On the other hand, the International Trade Commission (ITC) launched an investigation into the global aluminum trade to impose tariffs of up to 50% on primary unwrought aluminum. This proceeding could have a significant impact on global aluminum producers, particularly from China, and U.S. importers and users of aluminum products. The ITC will likely release its findings any day now.

This trade case is something to watch in the second half. It could be the tipping point from which China starts tackling the aluminum overcapacity issue for real. The demand side of the equation is just as important. Furthermore, China’s stimulus measures later this year would continue to support demand for aluminum, while investors could be disappointed if China fails to spur growth.

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The Construction MMI held steady at 66 in July, as spending remains stubbornly low during the traditionally strong East Coast construction season.

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Construction spending during May reached a seasonally adjusted annual rate of $1,143.3 billion, 0.8% below the revised April estimate of $1,152.4 billion, but 2.8% above the May 2015 estimate of $1,112.2 billion, according to data from the U.S. Census Bureau. Construction spending in the first five months of this year, construction totaled $438.5 billion, which is 8.2% higher than the $405.4 billion for the same period in 2015.

Construction_Chart_July_2016_FNL

It’s difficult to quantify the lack of spending increases in what outwardly looks like a robust U.S. construction sector.

Spending Struggles to Stand Pat

Residential construction was at a seasonally adjusted annual rate of $451.9 billion in May, virtually unchanged from the revised April estimate of $451.7 billion, while nonresidential construction was at a seasonally adjusted annual rate of $407.4 billion in May, a mere 0.7% dip from the revised April estimate of $410.1 billion.

Ken Simonson, chief economist at Associated General Contractors of America, a construction industry trade group, noted that the latest data affirms complaints that contractors are having an increasingly hard time finding skilled workers to hire.

“Mild winter weather in many regions early in 2016, followed by extreme rains in some locations in May, has probably distorted monthly spending patterns but shouldn’t mask the robust widespread growth in demand for construction so far this year,” Simonson said. “It appears there will be plenty of activity in the remainder of 2016 — if contractors can find the workers they need.”

We have, indeed, documented the lack of skilled labor in the U.S. market for more than two years now. Labor costs are increasing so much that they are outstripping the savings many general contractors had captured from low commodity prices for construction products. While it’s true that many are also cutting costs by using more efficient construction methods, the drop in spending is still highly concerning since most sectors look like they should be growing with strong demand and, supposedly, lots of design work on the boards.

Chinese Spending Grows

There is, however, good news from abroad. In China, the Caixin/Markit services purchasing managers’ index for June rose to 52.7 from 51.2 in May on a seasonally adjusted basis. Readings above 50 indicate an expansion on a monthly basis, while readings below signal contraction.

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Beijing has fast-tracked planned infrastructure spending this year to boost growth, and a strong run-up in housing prices as buying restrictions were loosened helped turn around a slowdown in property development. Like many of our sub-indexes this month, it will be interesting to see what effect the U.K.’s vote to leave the European Union has on construction prices when markets have had a month to settle.

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