Copper

Our Automotive MMI held steady for the third month in a row at 68.

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Considering that other metals prices are still falling, it’s quite a feat that automotive has been able to even hold steady for this long. Prices of stainless, aluminum and copper are all down in their individual MMI sub-indexes this month and our Raw Steels MMI was flat.

Automotive_Chart_February-2016_FNL

Low prices simply have not been enough to entice larger raw material purchases by automakers. U.S. auto sales fell slightly in January because of the East Coast snowstorm, but analysts say end user demand remains strong and buyers will likely head back into dealerships this month. Sales fell less than 1% to 1.1 million, according to Autodata Corp.

Low gas prices and even lower interest rates are continuing to fuel sales and most automakers are optimistic that they can break last year’s sales record by the end of the year. The problem facing metal producers is that there is still so much oversupply out there that even the market hunger for new cars, trucks and SUVs can be sated several times over by the stockpiles that currently exist.

Producers Targeting Automotive

Automotive is still a coveted market for most producers. Nucor Corp. recently opened an office in Detroit as part of a push to increase its sales to the auto industry by 40% to 50% over the next two years. Charlotte-based Nucor saw its sales to the automotive industry increase 20% last year — 1.4 million tons of steel products — over 2014’s numbers.

Alcoa, Inc. is even coming closer to realizing its previously announced split by naming new directors for its new automotive and aerospace company, all of them with experience in the fields.

Free Download: The January 2016 MMI Report

The fundamental strength of the sector will likely still be there when stockpiles finally dwindle and we see prices rise. Many are predicting that rebound for later this year, but there’s very good reason to believe 2016 could be another low-price year as there is still no definitive deal to reduce oil production and many miners and metal producers are not curtailing production.

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One of the largest tractor manufacturers in the world and one India’s top automakers, Mahindra & Mahindra Ltd. is reportedly building an SUV for the American market.

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A recent report in The Wall Street Journal said the company has cobbled together an engineering team to set up a unit near Detroit, home of much of the US auto industry. Mahindra’s new staff has been carefully poached from US giants such as Ford Motor Co. and Tesla Motors Inc.

Genze_20_Mahindra_550_012116

Mahindra’s new Genze 2.0 is a scooter designed for the North American market. Source: Mahindra.

The same report claims Mahindra was already testing the large SUV, said to be comparable to the BMW X5, on the streets of metropolitan Detroit. The SUV will have to meet stiff US safety and fuel economy regulations, and cater to the whims of American buyers if it wants to be successful.

Mahindra’s US Ambitions

This isn’t Mahindra’s first attempt to crack the US automotive market. About a decade ago, the $16.9 billion conglomerate, which controls about 40% of the SUV market in India announced partnerships with US dealers, with the promise of delivering vehicles by 2009. But Mahindra claimed it had trouble meeting US vehicle regulations and canceled its plans in 2010, and the entire episode ended up in US courts as at least 5 automobile dealers from the US filed a lawsuit accusing M&M accusing it of fraud, misrepresentation and conspiracy.

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Just like Oprah giving out cars, our January Metal Price Trends report was generous with the dead cat bounces this month. You get a dead cat bounce, copper! You get one, too, aluminum! You get a dead cat bounce, raw steels! Everyone gets a dead cat bounce!

Free Sample Report: Our January Metal Buying Outlook

Okay, not everyone. Construction, stainless steel, renewables and rare earths all lost ground and automotive was merely steady.

MM-IndX_TRENDS_Chart_January2016_FNL-TOPVALUE100

Still, it’s the most positive movement we’ve seen for many of these metals since early last year. We say they’re dead cat bounces — a cruel-sounding investment term for a temporary recovery from a prolonged decline or bear market, followed by the continuation of the downtrend (sorry, kitties) — because there is little reason to be optimistic that any of these gains will continue.

Stop Me Before I Bounce Again!

The main driver of commodity, and now stock market losses, has been the slowing Chinese economy and it’s looking worse this year than it did at the end of last. Financial institutions such as RBS are even advising clients to sell everything, save bonds, that’s not tied down.

This is great news for buyers but exactly what metal producers don’t want to hear. What’s worse, for them, is that everything the Chinese government is doing to try to turn their economy around, including a panic button system for its stock markets that actually caused more panic, isn’t working. My colleague Raul De Frutos also pointed out that purposely devaluing the yuan actually hurts metal prices.

How Low Can it Go?

The other big driver of the commodity price rout, the price of oil, shows no signs of turning around, either. Oil hit $30 per barrel this week stoking bankruptcy fears among US energy companies and it even temporarily created some nervousness among OPEC nations who clamored for an emergency meeting.

So don’t expect these price increases to continue as transportation and production costs follow oil’s race to the bottom. My colleague at our sister site Spendmatters, Kaitlyn McAvoy, reported that Goldman Sachs is predicting $20 per barrel for oil this year.  It’s not a very happy new year for metal producers… or cats.

Our copper MMI scored a one point gain to 61 from 60. Like other base metals, after sliding in November, copper prices stabilized in December.

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Similar to aluminum, copper prices have fallen more than 30% since May and the fact that prices aren’t able to bounce after such a decline should have copper producers worried. The low pricing environment has depressed producers’ earnings and liquidity causing their stock prices to plunge this year.

Freeport McMoRan stock price 1 year out

Freeport McMoRan stock price, one year out. Source: MetalMiner analysis of @StockCharts.com data.

Freeport McMoRan’s stock price is down 76% on the year to date, falling to its lowest level since 2003. The company recently undertook cost cutting measures. When Freeport announced spending cuts in August 2015, its stock soared more than 28% but announcements of further cuts in December didn’t help boost shares this time, indeed shares are down 25% since the announcement a few weeks ago.

Copper_Chart_January-2016_FNL

The company also announced the suspension of its $0.20 per share annual stock dividend. By suspending dividends, Freeport expects to save around $240 million annually, helping the company to raise cash under the weak current market conditions. Although some long-term investors might see the reasoning behind this move, dividend cuts are very discouraging for investors looking for a constant stream of income. The decision shows the challenging business situation that Freeport and other mining companies are in.

In December, The International Copper Study Group reported a market surplus of 35,000 metric tons for the first nine months of 2015. This compares with a market deficit of 450,000 mt for the same period last year. Weakening demand and the unwillingness of miners to cut production continues to generate surplus copper. Despite low prices, we are not seeing big production cutbacks from copper producers as companies don’t want to leave market share open to competition. What’s even worse is that copper producers including Rio Tinto Group, BHP Billiton and Southern Copper are still going ahead with their 2016 production plans.

Will Copper Producers Manage to Stay Alive?

Thanks to cost reduction measures and the suspension of dividends, Freeport expects to generate cash flows of $600 million in 2016. However, Freeport’s estimates are based on assumptions that might not materialize. In the math, the company assumed that copper will be at $2 per pound while crude oil at $45 in 2016.

Free Download: The December MMI Report

It only took copper prices a week to already trade below $2 per pound and we’ve already seen crude oil at $32 per barrel in January. Some say it might hit $20 per barrel by the end of the year. Although Freeport is not facing any short-term debt maturities, the company is prone to financial stress if the slump in energy and copper prices doesn’t stop. We feel that many companies like Freeport are being too optimistic about 2016 and we suspect that prices still have room for more declines. Many producers will need to give up believing in those rosy outcomes to support prices and help other producers survive this bearish commodity market. A dose of reality is necessary.

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Today in MetalCrawler, shipments of steel from US producers were down in November while China’s state stockpiler is looking to buy more copper.

AISI Says Still Shipments Down in November

The American Iron and Steel Institute (AISI) reported today that for the month of November 2015, US steel mills shipped 6,457,870 net tons (nt), a 12.4% decrease from the 7,369,472 nt shipped in October 2015, and a 15.5% decrease from the 7,638,086 nt shipped in November 2014.

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Shipments on the year-to-date in 2015 are 79,990,315 nt, an 11.4% decrease vs. 2014 shipments of 90,270,336 nt for the first 11 months of 2015.

China to Stockpile More Copper?

China’s state stockpiling agency is expected to start buying up domestic copper supply this month after local smelters urged it to intervene in order to support prices, industry sources said. The State Reserves Bureau has already invited at least one large copper smelter to sell refined copper cathode in a tender, said a source at the smelter, who declined to be named by Reuters due to the sensitivity of the matter.

Free Download: The December MMI Report

The SRB plans to buy as much as 150,000 metric tons of copper, the source said.

Source: Adobe Stock/ epitavi

Source: Adobe Stock/ epitavi

Low copper prices have claimed another victim in the form of a once-profitable mining operation.

Imperial Metals Corp. announced it will be laying off more than a third of its workforce located at the Huckleberry mine in the northwestern section of British Columbia, Canada. The reason? You guessed it: continually falling copper prices.

“While HML has made significant efforts to reduce operating costs at the Huckleberry mine, the realized savings have not been sufficient to offset declining copper prices,” the company stated, according to a report from The Globe and Mail.

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Imperial Metals Corp. also owns the Mount Polley and Red Chris mines, and announced that while they’ll suspend pit operations at Huckleberry, they will continue milling stockpiled ore, the news source stated.

Copper future contracts are trading at about the same level they were back in mid-2009 when the global economy was still in the throes of a significant recession. Today’s low copper prices can be mostly attributed to the economic crisis in China, a top consumer of the metal.

Chinese Data Continues to Worry Markets

Copper prices slumped further this week, according to The Wall Street Journal, because of weak Chinese manufacturing data. Factory activity in the Far East nation dropped in December, further cementing a situation rife with slow growth and weak demand.

“It’s been hard to sustain any rally,” Bob Haberkorn, a senior broker with R.J. O’Brien in Chicago, told the news source. “Copper has nothing but headwinds facing it right now.”

How will base metals fare in 2016? 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:

 

US car sales in 2015 jumped to a record level last reached 15 years ago as cheap gasoline, employment gains and low interest rates enticed Americans to buy new vehicles.

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Automakers sold 17.5 million cars and light trucks in the US last year, a 5.7% increase, and, on average, they paid more for each one. Americans overall spent about $570 billion on new vehicles, fueling an industry revival putting more money in the pockets of auto workers, dealers and executives.

Automotive_Chart_January-2016_FNL

In China, a tax cut helped auto sales as new car sales became one of the few bright spots of China’s sputtering economy.

The Hold Steady

The gains couldn’t help our Automotive MMI do any more than hold its value from last month, as the index began the year 68, exactly where it ended 2015.

Low steel, copper and aluminum prices are another driver of discounts on automobile prices as automakers have seen their material costs plummet in 2015. Many dealers have been authorized to discount the already low prices of new cars, accordingly. Global surpluses of steel, aluminum and copper have not yet seen a significant dent despite a recent rally in aluminum.

It will take a sustained recovery in its component metal prices for the Automotive MMI to start seeing significant gains. The Justice Department also filed a civil suit against Volkswagen AG this week, signaling that the ongoing emissions scandal there will continue to affect platinum and palladium prices. Justice is pursuing $48 billion in fines against VW and any settlement for the embattled automaker would be in the billions.

Steady as she goes is not all bad news for automotive metals. The Commerce Department recently slapped tariffs of 255% on Chinese anti-corrosive steel, meaning that hot-dipped galvanized and other US automotive metals will be competing on a more even playing field with subsidized Chinese imports.

January Monthly Metal Price Outlook

Perhaps 2016 will finally be the year that the tide of cheap imports is finally stemmed.

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As we’ve noted for much of the last month, commodities took a big hit in 2015. Mined raw materials, including iron and copper ore, had a rough year.

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At the end of December, coal was down 32% from its price at the end of last year; iron ore, down 24%; palladium, down 30%; copper down 25%; zinc was down 30%; and aluminum was down 19%.

BHP Billiton saw its stock decline by 44.76% in 2015, a number that’s likely to fall further as fallout from Brazil’s Samarco mining disaster continues to hurt BHP and its joint venture partner in Samarco, Vale SA. Iron ore miners may be the worst off of a bad lot in the mining sector. China’s steel production is expected to decrease to 800 million metric tons in 2016 and, with it, demand for the steelmaking ore. Shares of Vale hit their lowest mark in 12 years in early December.

Iron Ore Under Pressure

Anglo-American and Teck Resources are slashing payrolls facing such a dismal economic environment. Anglo American is cutting 85,000 jobs over the next few years and Teck has already announced that it’s laying off 1,000. Lack of demand in China and low prices are commonly cited as the culprits.

Source: Bloomberg

Values of major miners as the price of iron ore has fallen. Source: Bloomberg.

With iron ore hovering around $40 per metric ton, even the major producers are facing prices that are below their break-even point. Read more

The Organization of Petroleum Exporting Countries (OPEC) will not limit its oil production, an official said this weekend but there may be more cuts coming for Chinese copper smelters.

OPEC in the New Year

OPEC will stick to its decision on Dec. 4 to maintain a policy of not limiting production, despite the drop in global prices, Iraq’s oil minister said on Sunday, adding that any output reduction aimed at boosting prices would have to be coordinated with non-members.

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“‎We are in a real world, OPEC is not the only producer or the only player. So we have to see what the decisions of others should be — Russia and the United States and other producers,” Adel Abdul Mahdi told Reuters on the sidelines of an Arab oil producers’ meeting in Cairo.

Chinese Copper Smelters Might Cut More Production

9 Large copper smelters in China have agreed that they could deepen planned production cuts next year beyond 350,000 metric tons proposed earlier if prices and profitability deteriorate, an executive at one of the smelters told Reuters on Saturday.

Free Download: The December MMI Report

Source: Adobe Stock/ epitavi

Source: Adobe Stock/ epitavi

With 2015 drawing to a close, some good news for previously flailing copper as an increase in demand from top buyer China is providing an uptick in price.

According to a report from The Wall Street Journal, “the most actively traded copper futures contract, for March delivery,” is up 1.65 cents, or 0.8%, to $2.0675 a pound on the Comex division of the New York Mercantile Exchange.

“No doubt this is the only positive thing you’ve seen in quite some time in copper,” Charles Nedoss, senior market strategist with LaSalle Futures in Chicago, told the news source.

Want a short- and medium-term buying outlook for aluminum, copper, tin, lead, zinc, nickel and several forms of steel? Subscribe to our monthly buying outlook reports!

Chinese copper imports reached 460,000 metric tons last month, up 9.5% for the year, claims data from China’s General Administration of Customs. While this increase is welcome, context is important as copper imports from January to November 2015 were still down 2.8% compared to the same time period last year.

“There is still substantial appetite in China for this metal…prices are also quite difficult for miners to sustain,” Vivienne Lloyd, a base metals analyst at Macquarie, told the news source.

Dollar Declines

Last week, we reported some big news for currency markets as the dollar fell dramatically while other currencies, including the euro, saw a rise in value. Says our own Raul de Frutos: “So far, this is only a one-day decline and buyers need to focus on the big picture. Longer term, things are still pointing to a strong dollar and depressed commodity prices. A smaller stimulus by the ECB doesn’t seem to be enough to stop the dollar from rising as we move forward, but it is something to keep an eye on.”

How will copper and base metals fare for the remainder of 2015 and into 2016? 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: