Our monthly MMI saw a boost in October as three metals tied for the biggest gain and markets seemed to tighten as manufacturers started to make decisions for their end of year and early 2017 spending.
There seemed to be a Q4 tightening across most of the metal markets we follow. Sure, the Rare Earths and Renewables MMIs were flat as a board yet again, but Copper, Aluminum, Stainless and Raw Steels all saw strong gains. Our Global Precious MMI gained again but almost immediately suffered a pullback after talk of a Federal Reserve interest rate hike in December and renewed strength from the U.S. dollar.
The data showed a 10% fall in China’s exports last month and a greater than expected drop in imports sent copper down nearly 3% late last week before a slight recovery on Friday. The FT quotes Caroline Bein analyst at Capital Economics saying “ to drop in exports is negative for industrial commodities raising concerns about weakness in the manufacturing sector and import figures raise concerns about domestic demand.”
Copper was not alone in reacting to the poor trade figures, although the Shanghai market seemed remarkably sanguine, European and U.S. stock markets dropped sharply, driving stocks lower and boosting gold, bonds and safe haven currencies like the Yen.
Are the trade figures quite as bad as they seem? And do they justify the markets sharp reaction? There are broadly two issues at work here. First, the wider issue of China’s trade data. Back to the FT, China’s trade data showed that the country’s exports last month were down 10% from a year earlier — following a 2.8% contraction in August — suggesting that global demand was decidedly weak. Read more
Set of copper pipes of different diameter lying in one heap
Copper prices could soon see significant pressure due to what many are calling ‘a wall of supply.”
A recent report from CNBC, citing commodity analysts at Goldman Sachs Group, reveals a supply glut could translate to reduced copper prices for the foreseeable future. In fact, the weakness of copper (in addition to the strength of zinc) has been one of Goldman Sachs’ focal points this year.
“Over the next three to six months we believe that copper will continue to underperform zinc, with copper about to hit a wall of supply, while the zinc concentrate market continues to tighten,” Jeffrey Currie of Goldman Sachs and his team of analysts said in a note.
This week, three-month copper on the London Metal Exchange slipped following weak export data from China. The metal recently reached a two-month high as recently as the end of September, the news source stated.
“In copper, we expect the main catalyst for the downside will be accelerating oversupply, but we are also conscious that we are entering a weak seasonal period for demand during which period inventories tend to build and prices often come under pressure,” the team added. “In zinc, the catalyst for further upside is that we expect a further substantial tightening of the concentrate market over the winter, which should result in zinc smelter production curtailments in China.”
Q4 Copper Price Forecast
How will copper and base metals fare for the remainder of 2016 and into 2017? You can find a more in-depth copper price forecast and outlook in our brand new Monthly Metal Buying Outlook report. For a short- and long-term buying strategy with specific price thresholds:
Pretty simple, because all base metals rose in September. Copper’s fundamentals still look pretty bearish and nothing relevant within the copper industry occurred in September. Investors bought copper as improving sentiment in the industrial metals complex is keeping each individual metal alive, even those without a bullish story, like copper.
In Q1, China’s copper imports were running at record levels, but over the past few months imports are coming down. In August, China imported 350,000 mt of unwrought copper and copper products. This is the fifth consecutive month that imports have declined on a monthly bases and the lowest figure in a year.
Now, as Chinese refined imports start to taper down, we are witnessing inventory build up in the London Metal Exchange‘s warehouse system. In September, LME copper stocks rose to 380,000 tons, the highest levels in more than two years.
Global production of copper concentrates rose by 6% in the first half and much of this abundance of raw material is going to China because it is where most smelter and refinery capacity is located. This means that if prices were to increase to attractive levels, China’s capacity would be able to absorb more raw material, increasing its refined copper exports.
Unlike other metals where we’ve seen supply disruptions, there is not much going on with copper. However, copper buyers need to keep an eye on those macro drivers that could move copper prices.
One of the drivers supporting copper prices is crude oil. Oil prices rose to near $50 per barrel this week. In September, the Organization of Petroleum Exporting Countries reached an understanding that a crude-oil-production cut is needed to lift prices. The cartel could start to tackle the supply in November, which might help lift prices in Q4, improving investors’ sentiment on metals too.
The duties are set at between 13.2 and 22.6% for hot-rolled flat iron and steel products and at between 65.1 and 73.7% for heavy-plate steel, according to a filing in the European Union’s official journal.
Anti-Dumping Duties on Phosphor Copper
Not to be outdone, The Department of Commerce placed tariffs on allegedly dumped imports of phosphor copper from the Republic of Korea yesterday.
Commerce found, preliminarily, that dumping occurred by mandatory respondent Bongsan Co. Ltd. by a dumping margin of 3.79%. All other producers from South Korea also received 3.79% anti-dumping duties. U.S. Customs and Border Patrol will now collect cash deposits upon import of the copper. The petitioner is Metallurgical Products Company of Pennsylvania.
Construction spending dropped 0.7% in August after a 0.3% slip in July, the Commerce Department reported Monday. It was the third decline in the past five months. Our Construction MMI fell 3% from 70 to 68 as well.
The unexpected drop hit all sectors of U.S. construction. Residential construction decreased 0.3%, while non-residential activity was down 0.4%. Spending on government projects fell 2%, dragged down by a sharp drop in activity at the state and local level, which has fallen to the lowest point since March 2014.
Infrastructure spending continues to be a key issue in the presidential campaign and these numbers back up arguments, from both candidates, that our roads and bridges are crumbling while governments at all levels turn a blind eye to the problem. The question the democrats and the republicans disagree on, and Hillary Clinton and Donald Trump are no different in this regard, is where will the money for a federal construction spending plan come from?
The Construction MMI saw prices drop nearly across the board. A week-long National Day holiday in China crimped copper prices as demand wasn’t even that strong in the world’s largest consumer before the shutdown. The cities of Guangzhou and Shenzhen are the latest to impose new measures to cool overheated real estate markets in China, including higher mortgage down payments and home purchase restrictions.
The Slowdown Lowdown
While U.S. prices weren’t expected to drop as much as they did, a slowdown was certainly expected at the end of the summer construction season and during China’s shutdown. As winter arrives in the U.S., a traditional slowdown in purchasing usually takes place. Ultra-low interest rates and a growing economy are what many economists say will keep the slowdown a short one. If that was the case, though, why wasn’t spending more robust in the summer months? The Construction MMI, like the overall U.S. economy, has been mired in slow-to-no-growth for most of the year with only a few strong months keeping it net positive (especially May).
That the “natural rate” of interest has fallen to low levels could mean the economy is stuck in a low-growth rut that could be hard to escape, Federal Reserve Vice Chair Stanley Fischer said on Wednesday. It’s hard to expect builders and contractors to buy more steel I-beams and copper wiring when they, themselves, are not increasing the number of projects they’re billing clients for.
Private construction is barely making up for public shortfalls. The strongest sector over the past year has been non-residential activity, which is up 4.2% from a year ago, followed by residential construction, which has risen 1.4%. Total public construction, however, is actually down 8.8% from last October, reflecting a squeeze on spending from efforts to control budget deficits at all levels of government.
This is where economists such as the Associated General Contractors of America‘s Chief Economist, Ken Simonson, say a federal infrastructure spending plan would help.
“While demand for construction remains robust, it is no longer growing like it was earlier this year,” Simonson said. He also said the building industry could get a welcome boost if government policymakers moved to upgrade “our aging infrastructure.”
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With the top six U.S. market leaders reporting, deliveries fell 0.6% from last year, but sales were still strong at 17.8 million vehicles on a seasonally adjusted annualized basis.
GM, the top-seller in the U.S., posted a 0.6% decline. Ford reported an 8% drop, and Fiat Chrysler Automobiles was down 1%.
The drops for individual automakers weren’t as steep as last month‘s and our Automotive MMI held its value from September despite the drop-off in end-use sales. Automakers are still on track to sell the second-most cars and trucks in any year in U.S. history, but evidence that sales plateaued in August is affirmed in the September numbers. There’s little chance that 2015’s sales record will fall in December.
Investors Abandoning PGMs?
More troubling for automotive metals is this week’s fall in investment demand for the catalyst metals, platinum and palladium. People are not snapping up the incentives that automakers are offering and inventory is, naturally, piling up. The average industry incentive increased by more than $400 in September compared with the same month a year ago, according to executives at two automakers.
The increasing cost of PGMs was keeping the Automotive MMI in positive territory for most of the first three quarters of 2015. The pullback in precious metals prices could pull the rug out from under automotive, too. The catalyst metals never took off for investors the way that gold did and that’s bad news for their prices as supply was never really in much doubt without more investor interest.
Steel and aluminum both posted increases this month, but face stronger headwinds as the year winds down. Construction, another market that uses similar metals and products, saw new home sales, which usually correlate closely to pickup truck sales, fall 7.6% in August, the Commerce Department said on Monday.
Copper has been on a bit of a roll this month. After a quiet summer, investors have been looking at growing concentrate imports in China and increased refining to pure copper as signs that Chinese demand is picking up.
A recent article by Reuters throws some light on what is going on behind the scenes that suggests while demand from refiners is robust, it does not mean demand from China’s consumers is equally as strong and rising imports should not necessarily be seen as a bullish sign for copper.
The metal had hit a four-week high last week, approaching $4,800 per metric ton after better-than-expected Chinese data lifted sentiment. Read more
Chinese authorities have frozen money invested by commodity trader Trafigura in a copper smelter there and Venezuela claims that an Organization of Petroleum Exporting Countries (OPEC) agreement to curtail production will come together soon.
Trafigura Sees its Chinese Copper Smelter Stake Frozen
Chinese authorities have frozen part of commodity trader Trafigura’s investment in a Chinese copper smelter as part of a years-long probe into the Swiss firm’s oil trading, according to documents from the police and banks reviewed by Reuters.
In October, police in the northern Chinese city of Cangzhou, froze $32.9 million Trafigura Pte Ltd had injected into the metals project, a joint venture with Chinese metals producer Jinchuan Group Co Ltd in the southwestern city of Fangchenggang, documents dated Oct. 28, 2015 show.
OPEC Output Deal Imminent?
Venezuelan President Nicolas Maduro said on Sunday that OPEC and non-OPEC countries were close to reaching a deal to stabilize oil markets and that he aimed for a deal to be announced this month.
OPEC members may call an extraordinary meeting to discuss oil prices if they reach consensus at an informal gathering in Algiers this month, OPEC Secretary-General Mohammed Barkindo said during a visit to Algeria, the country’s state news agency, APS, reported on Sunday. Venezuela’s economy has been facing complete collapse for more than a year now as oil prices have seen prices fall by more than half during that time.
The industrial metals complex saw prices slip nearly across the board in August as volatility returned to stock markets and investors lost confidence in central banks’ ability to increase growth.
Even the vaunted Global Precious MMI, which has enjoyed large gains this year due to safe haven status, dropped this month. It experienced a 4.5% loss. Our Construction MMI and the Grain-Oriented Electrical Steel MMI indexes saw increases this month, but every other sub-index either saw a 2-5% loss or held flat.
This was somewhat expected as metals such as steel and aluminum remain in a global oversupply situation and metal prices don’t move in a straight line. They zig-zag. Our metal price benchmarking service has thousands of transaction prices to reference as evidence of that.This could be merely a one-month correction or it might signal that the weakness in metals markets is finally denting the bull run of strong price performers such as gold and platinum. Stay tuned next month for more.