We noticed in March that copper, aluminum and nickel were lagging badly in this year’s industrial metals rally, and they still are. Copper fell this week below $4,600 per metric ton, the lowest level in two months.
Three-month London Metal Exchange Copper hits a two-month low. Source: Fastmarkets.com.
Overcapacity issues are still visible. Last December, a group of Chinese smelters announced intentions to cut refined copper output. However, recently, China’s largest copper producer,Jiangxi, said those output cuts have been offset by new capacity there.
Also, earlier this month, Rio Tinto Group approved a $5.3 billion expansion to more than double output at the Oyu Tolgoi copper mine in Mongolia, making it one of the world’s largest copper mines. Rio is also expanding its iron ore efforts. Even though almost everyone seems to agree that the market is oversupplied, copper producers seem quite optimistic on the long-term picture. Read more
The broad metals rally continued in April with all but three of our MMI sub-indexes gaining value this month and two of those holding their value from last month. Only the GOES MMI lost value and that had more to do with its specialized market.
The Aluminum, Raw Steels, Global Precious, Renewables, Stainless Steel, Automotive and Construction MMIs all increased in April amid a broad commodities rally. The U.S. dollar continued to weaken, hitting its lowest point in 15 months, pushing oil and other key commodities up in value and helping metals see their boat rise with the tide.
In investments, both gold and silver are testing multiyear highs as investors look to them for a short-term safe haven from falling currencies.
Further dollar depreciation could increase demand for all dollar-denominated commodities and metals are currently in a sweet spot on the demand side, particularly because of China’s economic turnaround.
The China Front
Continued stimulus in China is increasing demand for steel, aluminum and other metals there. As we’ve previously reported, the People’s Bank of China has cut requirements for first-time homebuyers, cutting the minimum mortgage down payment from 25% to 20%, taking it to the lowest level of requirement ever.
This is just one of many stimulus measures that Beijing has undertaken in recent months. However, global steel and aluminum oversupply is still a top concern, and China’s role in that glut continues to be front and center.
With U.S. home sales and the non-residential sector continuing to show strength, construction in both of the world’s largest markets has been a positive driver for metal, as has automotive demand.
Disappointing trade data from China caused copper futures to fall 2.2% this week, contributing to an overall downward trajectory for futures this month.
Copper’s losses this week came after China, a top consumer of the metal, announced that exports unexpectedly dropped 1.8% in April on an annualized basis while imports decreased by 10.9% year-over-year, according to a report from Economic Calendar.
“Adding extra impetus to Monday’s losses was a stronger greenback,” wrote strategist Donald Levit of Economic Calendar. “The U.S. dollar climbed versus its rival currencies on Monday even after Friday’s disappointing jobs report. With copper a dollar-denominated commodity, a stronger greenback makes the metal more expensive for holders of international currencies.”
Levit added that overall, the forward momentum that propelled copper and other industrial metals higher during the first quarter of the year appears to be regressing. This can be partially attributed to the conclusion of China’s seasonal copper stockpiling coupled with the belief that China stockpiled most of the metal it imported earlier this year.
Copper MMI Holds Steady
According to our own Raul de Frutos, copper prices have trended higher since they hit seven-year lows in January, but this metal still hasn’t gained as much as other base metals like zinc or tin.
“Improvements in commodity markets made copper prices stop from falling but investors are not yet excited enough to trigger a bull run in copper prices,” de Frutos wrote.
You can find a more in-depth copper 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.
Mining giants BHP Billiton and Rio Tinto Group are both shifting to a growth strategy after years of cost cutting and oil’s rally may be over.
BHP Joins Rio in Growth Shift
BHP Billiton has talked up its future growth options, joining fellow mining giant Rio Tintoin marking a shift in focus after four years of aggressive cost cutting. While big miners are still looking to sell assets to help cut debt or to exit businesses like nickel and coal, they are also preparing for a pick-up in demand as looming supply gaps in at least some commodities sow the seeds for higher prices.
While the big miners are still looking to sell assets to help cut debt or to exit businesses like nickel and coal, they are also preparing for a pick-up in demand as looming supply gaps in at least some commodities sow the seeds for higher prices.
Oil Rally Loses Momentum
The rally that carried oil prices up by more than $20 per barrel between the middle of January and the end of April seems to have run out of steam for the time being. Spot crude prices, time spreads and refining margins have all showed signs of weakening since the start of this month.
Freeport-McMoRan Inc.has agreed to sell its majority stake in the Tenke copper project in the Democratic Republic of Congo to China Molybdenum Co. Ltd. for $2.65 billion in cash, reducing the U.S. miner’s debt and handing the Chinese company one of the world’s prized copper assets.
The deal is a vote of confidence in copper, which many consider a bright spot among base metals.
LME Sells Voice-Brokered Steel Scrap Contract
The London Metal Exchangehas recorded the first voice-brokered trade of its LME Steel Scrap contract. The trade was executed on May 4 by INTL FCStone Ltd. on behalf of Stemcor.
The new additions to the LME’s ferrous suite — LME Steel Scrap and LME Steel Rebar — have seen considerable support from the market since their launch in November 2015. 35,990 metric tons (3,599 lots) of scrap and 9,600 mt (960 lots) of rebar have been traded since the contracts launched.
A new single-trade record of 1,000 mt (100 lots) of scrap was set in last Wednesday’s voice-brokered trade. The new cash-settled futures contracts can be traded monthly out to 15 months and have a lot size of 10 mt.
Improvements in commodity markets made copper prices stop from falling but investors are not yet excited enough to trigger a bull run in copper prices.
Overcapacity issues are still visible. Last December, a group of Chinese smelters announced intentions to cut refined copper output. However, recently, China’s largest copper producer, Jiangxi, said those output cuts have been offset by new capacity in the country. Therefore, everyone seems to agree that the market is oversupplied even as producers slash costs.
Can Prices Only Fall?
The outlook for copper is still challenging and many of the industries are still facing overcapacity. However, there are a couple of factors pushing commodity markets up and copper prices could still rise.
Momentum Picks Up in China
China’s manufacturing activity has shown signs of improvement in 2016. China’s manufacturing PMI came in lower than expected in April but the numbers were still above 50 for the second consecutive month this year.
The Chinese automobile sector also saw improvements this year. A tax reduction on smaller vehicles last September helped a seven percent growth in Chinese passenger vehicle sales in the first quarter.
In real state, the numbers also showed positive improvements. China’s investment in fixed assets rose by 10.7% in Q1 while new construction starts have also risen by 19.2% in the same quarter after falling for two consecutive years. Finally, Chinese copper imports in March jumped 39% from the same period last year and have hit an all-time record.
The Federal Reserve is not hiking rates as fast as markets had expected. On top of that, there are many questions regarding the ability of banks in Europe and Japan to lower interest rates more from here. This caused the U.S. dollar to weaken this year, having a bullish effect on commodity markets. If the dollar keeps weakening this will play in favor of copper prices.
What This Means For Metal Buyers
Copper prices have held well this year but we haven’t seen a significant rally yet. Copper prices are now running up against resistance and the question is whether prices are just consolidating before they move higher or we will see another sell off.
If monetary policies keep driving the dollar down and the upturn in Chinese demand is for real (at least for an extended period of time) then we could see higher copper prices this year. However, in a year full of global uncertainties, bears might not be out of sight for too long.
U.S. construction spending increased in March to its highest level in more than eight years and our Construction MMI shot up 15.9% along with it. Gains in home building and nonresidential construction offset a drop in government projects.
Construction spending rose 0.3% in March after a 1% gain in February, the Commerce Department said Monday. The back-to-back increases raised total spending to a seasonally adjusted annual rate of $1.14 trillion, the highest level since October 2007.
Residential construction grew at a 14.8% annual pace in the first three months of the year. It was one of the few sources of strength in a quarter in which the economy grew at an annual rate of just 0.5% — the slowest pace in two years.
Aluminum, steel scrap and copper all saw gains on the index, moves that are in line with the broad metals mix used in nonresidential and residential construction here in the U.S. In China, numbers are similarly positive.
Chinese housing data for March showed another increase in home sales, putting a dent in China’s housing oversupply and helping the construction reset there. As lower rates and yields work with a lag, sales growth could stay strong in China this year. A reduction in the requirement for a down payment by the central government is also underpinning increasing sales.
While China’s manufacturing purchasing managers index from Caixin Media and Markit Economics fell to 49.4, missing economists’ estimates for 49.8 and down from 49.7 in March, the construction numbers in the People’s Republic remain strong and could, theoretically, pick up the slack this year if manufacturing there remains depressed.
A total of 83.19 million metric tons of iron ore was discharged at Chinese ports during April, according to ship-tracking data compiled by Thomson Reuters Commodity Research and Forecasts.
This was up from the 81.76 mmt offloaded in March, suggesting that China’s iron ore import volumes will show an increase when preliminary customs data is released in the next few days.
China is back to producing steel at a high rate. Even zombie mills have come back from the dead. While this might not be good for the oversupply situation, it is a good thing for construction estimators and procurement professionals looking for as many options as possible to fulfill orders and reduce prices via competition.
U.S. new car and light-truck sales returned to the fast lane in April, setting a monthly high that put Detroit automakers back on track to claim a record for 2016 profits and our Automotive MMI increased as well.
Industry volume hit 1.5 million vehicles last month, a 3.6% increase year-on-year, according to data provider Autodata Corp., for a seasonally adjusted annualized pace of 17.4 million vehicles. That puts U.S. automakers on track for a second consecutive annual sales record.
Honda led major automakers with a 14.4% sales increase as both its cars and SUVs sold well, while Nissan‘s sales rose 12.8%. Fiat Chrysler was up 6% on record Jeep sales, and Ford rode an April record for SUV sales to a 4% increase. Toyota sales rose 3.8% largely because of the RAV4 small SUV, which broke a monthly record with sales up nearly 32%.
Only General Motors and Volkswagen saw sales declines with GM blaming a 3.5% drop on a strategy of cutting low-profit sales to rental car companies. VW sales fell almost 10% as its emissions-cheating scandal continued.
The U.S. isn’t the only auto market on an upswing. European sales have been steadily rising for a few years and many of the markets in the Asia-Pacific region are growing, although at a more tepid pace than earlier this decade.
This month, we saw U.S. Steelfile a section 337 case, alleging hacking and theft of intellectual property, against China. The suspected hacker stands accused of stealing the formula, production setup and even melting temperature for high-strength, automotive alloy Dual-Phase 980. U.S. Steel contends that the alloy showed up as a Baosteel product shortly after it was hacked.
While individual cases like this one are not likely to affect the fundamentals of the automotive steel market, it does illustrate just how coveted a market automotive has become for high-strength steel, even as aluminum has not been as widely adopted as many predicted it would be by now, after Ford became the first automaker to make the jump.
The Environmental Protection Agency insisted it did follow its own rules in blocking the new toxic mercury role and heavy rain in Chile of affecting copper production.
The Environmental Protection Agency Friday issued an updated cost analysis, defending its issuance of the first-ever federal regulations requiring power plants to cut mercury emissions and other toxic air pollutants.
The agency’s move was prompted by a Supreme Court ruling last year that said the agency hadn’t taken into account the costs to industry, as it was required to do, before deciding to adopt the rules.
The Supreme Court, in a 5-4 opinion last June, said the EPA must reconsider the mercury rules because of that omission. The rules, however, have remained in effect during that process.
The EPA initially adopted the mercury rules in 2012 and they took effect in April 2015. The agency initially concluded that costs weren’t a relevant consideration when it was deciding on the need for the mercury regulations.
Later, as it was writing the rule, the agency estimated an annual cost to the utility sector of $9.6 billion, compared with public-health benefits of at least $37 billion. The Supreme Court, however, said the agency should have made that calculation earlier, as it was deciding whether to adopt the rules in the first place.
Chilean Rains Halt Copper Mining
Heavy rains in central Chile have prompted global miner Anglo American Plc. and state-owned producer Codelco to temporarily suspend operations at two major copper mines with combined annual capacity of 880,000 metric tons.
There’s a big meeting of the Organization of Petroleum Exporting Countries this weekend and all signs point to a continued freeze in production, at least among major producers Russia and Saudi Arabia so many speculators and market watchers are becoming bullish on oil. Oh, how quickly they turn!
Oil and Inflation
A direct knock-off of this oil mini surge is price inflation of everything that oil is used to produce, whether as a base material or for transport and production costs. What’s our favorite industrial metal that also has investment potential and is still considered so downright precious?
That’s right, silver! Despite being mined with just about every other metal in the world silver is still a precious metal and its industrial uses combined this week with investors grabbing it up to create a sweet spot for the gray metal. As of this writing it’s riding a 10-month high and looking to gain even more.
Aluminum Still Lags
However, not all metals are enjoying a healthy rebound. Alcoa, Inc. reported first quarter results this week and things weren’t so good for the aluminum smelter. How bad was it? Profits fell 92%. So, yeah, pretty bad.
Our own Stuart Burns put virtual pen to paper and explained that, thanks to Chinese overproduction and stockpiling, smelting aluminum simply isn’t a good business to be in right now. He even called it “an industry on the cusp of shooting itself in the foot.”
If there’s a better example of why Alcoa will soon split itself into two and CEO Klaus Kleinfeld will join the new aerospace, titanium and value-added products half, I haven’t seen it.
Copper Loses All its Gains
My colleague Raul de Frutos also examined why copper has underachieved this year, even amidst the Q1 base metals rally. Dr. Copper is apparently only starting on the back nine and didn’t do any real work in Q1. We’ll monitor the situation with the rest of the base metals in Q2.