Compared to molybdenum and cobalt contracts, as we laid out in Part One, the loser has been the steel billet contract (see graph above) — loser in the sense that while both steel and molybdenum contracts have declined, steel is the largest globally traded metal and as such, demand for a hedging product should be widespread.
For the LME to have lost traction and be slipping so badly suggests the contract is failing to meet the industry’s needs.
Worse for the LME, competitors are on their heels.
As if recent economic outlook reports for China’s domestic economy haven’t stirred the pot enough, now the country is dealing with the United States, the European Union and Japan banding together to bring WTO action against its restrictions on rare earth metal exports.
The rare earths exports news comes on the heels of another worrisome metals-related issue involving a faulty Chinese steel part used in mass transit here in the Midwest (which we’ll get into a little later).
Looks like Beijing can’t catch a break. But as far as breaks go — does it deserve one?
Rare = A Cool Red Center
The lead story from the Wall Street Journal yesterday outlined President Obama’s intent to announce a trade case specifically regarding rare earths being brought to the WTO against China. Clearly part of Obama’s renewed “Tough-On-China” approach — to compete with that of Mitt Romney’s and others’ — this move will hopefully kick-start immediate talks with Beijing on releasing export restrictions.
According to the WTO, the US-EU-Japan tripartite put through a request for “consultations” under the dispute settlement system, which means both sides can engage in talks to resolve the trade matter before any further litigation takes place. The consultations are specifically geared toward lifting restrictions on “various forms of” rare earths, tungsten and molybdenum. (Fuller details are as yet unavailable to the press.)
If the talks don’t go anywhere within 60 days, a formal WTO suit will likely be filed shortly thereafter.
China Not Happy
Chinese state-run media agency Xinhua ran a commentary about the issue, invoking the word “unfair” three times. Of course, they were claiming that “internationalizing” the dispute, rather than keeping talks between the interested parties behind closed doors, is what’s unfair, rather than the other way around — China’s purposely low exports of the REEs.
Xinhua spouts the party line, calling the export quotas reasonable. “To promote healthy development of the industry, besides imposing export quotas, China has also suspended the issuance of new licenses for prospecting and mining, adopted production caps and stringent environmental standards, and launched crackdowns on illegal mining activities,” their commentary reads.
“But China has never adopted discriminatory policies against foreign companies in terms of rare earth supplies, as policies and treatment for both domestic and foreign companies are the same.”
Folks in the non-Chinese arms of the industry say the request for talks is a good thing. “Raising the issue has great value,” Michael Silver, CEO of California-based American Elements Inc., told the WSJ. American Elements sources rare-earth materials in China and processes them in the U.S. and Mexico, according to the article, and Silver went on to say that regardless of the WTO outcome, “US action may lead to negotiations with China about how to narrow the pricing gap.”
This may be the crux of the issue: not how the countries’ governments tussle through the WTO, but how those governments (especially that of the US) create and enact an effective policy so that Western producers and processors can be set up with sustainable production models. As Jack Lifton notes on the Technology Metals Research blog, China’s domestic demand for the REEs is indeed rising just as fast or faster than the Western world’s, so perhaps continued dogging of China’s REE market is not a sound strategy.
China, as the world’s largest steel producer, is the world’s largest consumer of molybdenum. China is also the world’s largest moly-producing country (although North America is the largest producing region). According to the International Molybdenum Association, use of molybdenum in transportation, power generation, building and construction will likely increase by 6 percent each year through 2019. This view was shared by Roskill last year, who saw under-investment in molybdenum projects in 2009 and 2010 having consequences for supply as far ahead as 2015. So if demand is strong and supply is constrained, why have prices fallen this year, and could the predicted long-term price/demand trend be at risk?
One-year look at molybdenum stocks. Source: LME
Iron ore demand and steel production in the world’s largest steel market, China, have remained strong this year, yet molybdenum imports have not kept pace. As an article in the Tex Report states, the Chinese Iron and Steel Association (CISA) released data showing that steel production in September was up 3.1 percent from August.
The total annualized run rate of production is over 700 million tons, compared year-over-year with 2010, when China produced just over 550 million tons. The global steel production growth rate stands at 9.8 percent, although recent numbers suggest a distinct softening everywhere except Asia. China, however, has been pushing 13.8 percent this year. The continued strength of steel production in China would suggest that molybdenum, an essential in high-strength steel production, would also be equally well supported, but as the table below shows, China has swung to becoming a net exporter of moly oxide.
Source: The TEX Report
Although June and July saw imports exceed exports as domestic mines in China are brought on-stream, it is expected China will increasingly seek to rely on domestic molybdenum concentrate supply rather than imports, resulting in ongoing pressure on prices. Molybdenum has fallen to below $14/lb, and unless Chinese merchants decide to step back into the market to opportunistically import, global demand is likely to remain bereft of Chinese buying.
While domestic prices have followed the global trend in broad terms, this graph of ferro-moly prices in China taken from the MetalMiner IndX shows they have not been as volatile:
Source: MetalMiner IndX
With slowing demand in China inevitably feeding through into slowing steel growth, the chances of China resuming imports on a consistent basis looks unlikely. Good news for moly consumers in the West, who were harboring concerns earlier that supply constraints would prompt a return to higher prices next year.
Based on our content of this week, one might conclude we only cover aluminum. However, regular readers know we endeavor to cover the entire spectrum of industrial metals. Late last week, MetalMiner sponsor Supply Dynamics released its metals outlook (scroll halfway down the page to see it) for June December 2011. What makes the report interesting has less to do with the specific price direction per se (though we’ll get to that in a minute) but the fact that the company sits in the enviable position of supporting “16 of the world’s largest OEM and thousands of their affiliated part manufacturersÂ¦ according to the report, and that makes their take on the markets interesting.
Metal Forecast for H1 2011
More important to metal buying organizations forecast accuracy. Here Supply Dynamics published its own track record. The record looks pretty strong they called for nickel alloy, aluminum alloy price increases, increased stainless bar pricing, (flat pricing on stainless sheet), big increases for carbon steels as well as increases for copper alloys. The carbon steels increased the most, particularly flats. Going forward, the firm predicts nickel alloys to flatten, aluminum alloys to increase, stainless steels to remain flat (including both long and flat products), carbon steels somewhat mixed (flat products increasing but longs and structurals remaining flat) and copper alloys prices to increase.
Metal Price Drivers
The firm points to six factors impacting metal prices for the second half of this year. The first factor, global economic health and risks, contains many key elements, among them all indicators we regularly track and comment on as well the sovereign debt crisis, US debt, oil prices, China and slowing emerging market demand, the end of QE2 and consumer sentiment. Supply Dynamics provides a lengthy explanation of QE2 in context of the threat of rising interest rates. Of course, interest rates play a huge role in various metals markets, particularly aluminum and copper. The forecast also touches upon many other macroeconomic indicators, particularly around consumer sentiment and energy prices.
Readers will appreciate the “insiders insight on mill capacities and lead times. In particular, “highperformance alloy and stainless steel mills are beginning to fill and lead times are extending over the first six months of 2011. The lead times for nickel alloy bar products have extended from 27 weeks to 30 weeks and stainless steel bar lead times have extended from 17 weeks to 20 weeks. The report contains additional specific lead-time information for other key materials.
Aerospace Demand Drives Certain Markets
Titanium may see additional price increases as the metal has already increased by 45 percent from January through June of this year, according to Supply Dynamics. Moly, though, used by the aerospace industry, among others, will likely remain stable for the balance of the year.
Join us for a FREE upcoming webinar: “High Performance Metals & Alloys Market Outlook and Primer,” featuring speakers Scott Fasse of United Performance Metals and Jorge Vazquez of Harbor Aluminum. Click here for additional details and to register.
Disclosure: Supply Dynamics is a Sponsor of MetalMiner
BlackBerry uses it. So do many other technology companies, arguably more than other rare earth metals. There are reasons the metal is so pricey, and exactly why it makes a great investment vehicle. Stuart presents a great one-two punch covering the world of tin.
The words “Alaska, “gold and “salmon intrigued me. Alaska, because I consider myself a camping/hiking/all-around outdoors enthusiast and would cherish the chance to explore the state someday. Gold, because we cover it for MetalMiner. Salmon, because, well, it’s delicious. I love to eat it. But it wasn’t until I read the story that I understood the relationship between the three.
The problem: The massive watershed, made up of countless rivers and tributaries that funnel into Bristol Bay, is home to the largest spawning run of sockeye salmon in the world, not to mention one of the biggest king salmon runs. (Incidentally, the west end of the bay is home to Sarah and Todd Palin’s family fishing operation, and the namesake of their eldest daughter; Ina Bouker, one of the Palins’ “family members, according to a recent episode of “Sarah Palin’s Alaska, is pictured kissing a salmon in the NatGeo article.)
So, what we have in the NatGeo story is a classic iteration of the “environment vs. industry narrative. Locals don’t want one of the richest salmon fisheries to be tainted with acid mine drainage, among other potential threats; Pebble’s prospectors want to assure them this won’t happen, while making sure such a rich deposit doesn’t go uncovered. But, for MetalMiner purposes (I’ll save my personal treehugger response for another time and place!), let’s focus on exactly what Pebble Partnership is sitting on.
According to data available on Pebble’s Web site, the prospected mine is home to 80.6 billion pounds of copper and 107.4Ã‚Â million ounces of gold. There are also 5.6 billion pounds of molybdenum. In addition, the company detected significant amounts of silver, rhenium and palladium. These deposits lie underneath 180 or so square miles of land, on which Pebble holds the leases.
The company estimated the mines’ total value, at today’s prices, to be between $100-500 billion. By comparison, the estimated annual value of the Bristol Bay salmon fishery is $120 million, according to the article. If the mine were to produce metals for 25 years, and assuming the annual value of the fisheries remained the same, salmon fishing would rake in only $3 billion in the same time span.
That’s not to say Pebble discounts the economic and environmental impact of the salmon fisheries. John Shively, Pebble’s CEO, arrived in Alaska 40 years ago as a VISTA volunteer and used to be commissioner of Alaska’s Department of Natural Resources. He says the mine would provide 2,000 construction jobs and 800 to 1,000 operating jobs, and wants more than half of the operating positions to be filled by locals, according to the article. Shively also says that Pebble is taking steps in its proposals to ensure no net loss, and create a permanent power source for the residents of the Bristol Bay region.
The partnership has already thrust itself into community involvement and infrastructure building. They created the $5 million Pebble Fund to create “a sustainable future for the Bristol Bay fisheries and the native Alaskans who live and work in the area.
Pebble doesn’t expect to finalize a preliminary development plan and application for permits until 2011; construction likely wouldn’t even happen until 2017. But when it does, Pebble’s find should help US gold and copper production grow considerably.
If investor interest in nickel is anything to go by, prospects for the metal’s little brother, molybdenum, should be looking up next year. Admittedly, part of the attraction for nickel is the tightening supply market, but that is being driven by an increased demand for stainless this year over last. The same dynamic will be driving the molybdenum market. As usual with metals (and just about every other commodity) Asia demand last year rose as the rest of the world declined. Five percent up in China compared to a 9 percent decline globally according to a commodities-now.com report, but as consumption has begun to pick up in the rest of the world this year it has pushed even higher in China. Even though China prefers the chrome and lower nickel bearing stainless grades rather than the higher nickel/molybdenum grades, Chinese molybdenum consumption is expected to outstrip growth in the rest of the world, with an annual average rate of 9%pa for the next five years, compared to accumulated growth of 2%pa in the developed markets of Europe, the USA and Japan.
Contrary to common assumption, stainless steel is not the largest application for molybdenum, according to the LME which draws data from the International Molybdenum Association. Construction steel accounts for 35 percent of molybdenum used compared to 25 percent for stainless. China’s continuing demand can therefore be seen in light of the massive infrastructure and housing investments that have been going on and are likely to continue in that country well into the middle of this decade.
Even among stainless applications, the drive to reduce carbon dioxide emissions from coal fired power stations will provide a boost in consumption for the higher grades of stainless where molybdenum is key. Such plants are required to run at higher temperatures needing more sophisticated alloys. The energy markets, whether for coal-fired power stations, nuclear or oil and gas will drive specific demand for molybdenum bearing steels. A Rosskill report reviewing historic and future price trends agrees, saying between August 2008 and March 2009, molybdenum prices, responding to the global economic downturn, fell from US$34/lb Mo to US$8/lb Mo. This followed a four-year period when supply limitations and growing demand, principally from low alloy and stainless steels, sustained an average price of US$30/lb Mo. Through 2010 and 2011, market volatility is likely to continue but thereafter consumer demand for molybdenum in steel for process and power plant, as well as in oil and gas projects, will keep the market tight. Rosskill goes on to say the availability of project finance will remain a problem for potential new producers outside China. The consequent under-investment in molybdenum projects in 2009 and 2010 will have consequences for supply as far ahead as 2015. Interestingly a statement by Dow Jones regarding Freeport-McMoRan’s intentions for their Climax resource echo those observations. Construction was suspended at Climax in October 2008 in response to market conditions but Freeport are still spending $60 million to keep the project in a viable state to ramp up if prices remain sufficiently robust. At an annual capacity of 30 million pounds, Climax is a major resource and Freeport’s approach should underline both that they see long term demand for molybdenum and that they are not about to flood the market with additional supply.
While one would expect producers predictions to err on the bullish side, comments in Proactiveinvestor suggest there is widespread optimism that high-end stainless and super alloys like Hastelloy and Inconel demand coupled with ongoing construction demand will see molybdenum usage increase in 2011 and beyond. Quoting Bloomberg, the post says China Molybdenum Co estimates that Chinese consumption will increase 13 percent this year due to rising steel demand, with global demand to rise 7.3 percent. In the absence of major idled capacity coming back on stream and very little new mine development even being started, prices have more upside than down going forward.
The debate about adding ferro-chrome as an LME contract is not as far fetched as it may first sound. As Roskill advises, the stainless steel industry is by far the largest consumer of ferro-chrome. The industry is dominated by just three countries of supply – South Africa, Kazakhstan and India, with South Africa by far the largest of the three. Still those three supply over 65% of the world market and with supply so dependent on just three countries of origin and with power costs making up a large proportion of the cost of production each ton takes between 3.6 and 4.2 MWhr according to MetalBulletin the market price is highly volatile. The whole supply chain therefore operates in a market in which prices can move significantly over comparatively short periods of time. In such markets players typically work on wider margins to protect themselves in the event of price movements. The ability to hedge price risk therefore, in theory at least, offers the opportunity for cost to be lowered as the supply chain offsets its risks via hedging mechanisms.
The Reuters report last week that started the current debate was at pains to point out that no immediate plans exist. The steel billet contract started in 2008 has recently been merged from two contracts one for Mediterranean delivery one for Asian delivery into a single contract to boost volumes. Arguably although volumes are increasing significantly now it has still not reached critical mass, nor gained widespread acceptance as a hedging mechanism outside of the billet market itself. (It was hoped the steel billet contract would attract hedging business in a variety of downstream products as say aluminum and copper have for semi finished products in those metals). Cobalt and molybdenum launched this year and are a long way from becoming established, underlining that it takes considerable time to build sufficient liquidity for the industry to trust prices as being truly representative of the market. Like the chicken and egg conundrum, volume comes from trust and trust comes from volume.
Nevertheless in the same way that nickel is crucial to the stainless market so is ferro-chrome. A futures market could, in time, provide similar opportunities for producers, consumers and traders to hedge their exposure in a beneficial way.Ã‚Â Meanwhile, the ferro-chrome market is going through a current lull in line with stainless demand and price levels, but stainless demand is expected to pick up toward the end of the year and into next as we wrote yesterday. In a private investors report this year, HSBC expected that as stainless prices rise and demand growth resumes through next year, ferro-chrome prices will likely increase before capacity enhancements begin to ease supply constraints in 2012. Stainless steel is a highly cyclical business and after several years in the doldrums looks set to grow for at least the next couple of years. With power supply likely to be a problem for the world’s largest ferro-chrome producers, prices will remain volatile at best.
The LME’s minor metals contract has been up and running for two months now and although both are at a nascent stage they have already begun to exhibit diverging patterns of behavior. Molybdenum prices have stagnated whereas cobalt prices have picked up markedly. Although it is premature to be drawing any conclusions at this stage we thought it would be interesting to look into the more active to see if it is the contract or the background market that is driving the different behavior.
From a practical standpoint the cobalt contract trades 99.3% minimum purity, which is a highly tradable form of cobalt. The molybdenum contract is bagged or drummed roasted concentrate and from that aspect probably a little less flexible as a shape and storage would be more complicated. Cobalt metal is eminently usable in the metal form as it can be melted for the production of alloys and granules/powder, dissolved in acid to provide a precursor to a whole range of chemical products and many grades of fine powder or just kept in a drum as an investment. Cobalt also has a broad range of end uses and is not necessarily reliant on one main industry sector, although combined rechargeable batteries and super-alloys/hard metal/high speed steels take up over half of cobalt consumption.Ã‚Â So from a contract point of view it could be that cobalt is finding more favor with the market because it is more flexible and hence finds more takers.
The first prompt date isn’t until May 21st and trading from this point should give a better guide as to the level of trade interest, but the initial stages of the contract must be encouraging for the LME.
We interviewed Steve English of SFP Metals, Chairman of the Minor Metals Trade Association (MMTA), an acknowledged industry expert and broadly a supporter of the LME’s development of the minor metals contracts. Cautioning that any observations are at an extremely early stage nickel and aluminum both took many years to reach a tipping point and have become accepted industry price benchmarks, these minor metals will probably take a year, possibly three, according to Steve.Ã‚Â First, we cannot judge the success of these contracts until we see how stock levels develop on the exchange and that won’t happen in a meaningful way until after May 21. At the moment there is just 5 tons of cobalt on the LME. Any trader could pick that up and “corner the market by holding all the physical metal on the exchange. In reality, the market needs 1000 tons to function effectively and that won’t happen until the market develops a backwardation where spot is significantly over 3 months, attracting physical delivery onto the exchange. For the time being, metal is all being consumed by industry particularly in the US and Japan. Import figures for the US in 2010 are twice what they were in 2009 and the trend continues. January imports were 650 tons. February’s were 1096 tons according to Steve English. Stocks were run down severely in 2008/9 and now demand is coming back from aerospace, battery consumption and medical products. China by contrast has not seen any significant run up in prices this year as reported by our own MetalMiner IndX (free with registration) which tracks domestic China cobalt prices. So western physical demand rather than any impact of the LME contract is what is driving current price strength both physically and on the LME.
The market will be used by two kinds of players. On the one hand, there will be investors, for them at the moment the contract is not sufficiently liquid to make it an attractive market but open interest is increasing. Cobalt is clearly the more popular of the two metals in terms of open interest – currently 223 open contracts vs. 31 for molybdenum, but even so investor interest is light. The other user will be the participants for whom the contract was intended producers, consumers and in between the processors. For many in the industry the greatest benefit has always been seen as helping the processors. These are the businesses that rely on buying cobalt, putting it through a process which adds value and then selling that product on at a later date.Ã‚Â By hedging, the price risk element can be negated (though there are cash flow implications) so the business can concentrate on what it does best and that is to improve the margin created by adding value to their product. For the processors to take up the contract will require widespread acceptance of the LME price as being the industry benchmark, adopted by both producers and consumers back to the tipping point of widespread adoption.
So cobalt at least is off to a reasonable early start. Molybdenum for the time being does not appear to be going anywhere but as we implied at the outset, a lot of water needs to pass under the bridge before a valid judgment can be made. Our thanks to Steve English of SFP Metals and other industry experts interviewed in the process of this review.
It has been nearly a year since we last wrote about molybdenum. Molybdenum just doesn’t get the “airtime” that the other metals receive, mainly because it is used as an alloying element to make high-strength steels along with stainless steels, super-alloys and tool steel. However, 2010 could prove an interesting year for molybdenum as it, along with cobalt, will trade on the LME by the end of February, according to the LME website. Already, people believe the metal will make a “massive comeback if for no other reason in that the price has hit its five-year low and the arrival of the new futures contract will bring more market transparency and market participation. The contract will be priced in US dollars. Here is a five-year historical chart from InfoMine:
After just having done an interview with FoxBusiness yesterday, the final question came to us, “What do you think? Single stocks or ETF’s? Of course, working with metal-buying organizations, we probably don’t pay too much attention to the stock price of all the companies our clients buy from. But if we learned one lesson in 2009, it was this: once a market opens up for Ëœother’ market participants, the price tends to follow. We should also point out that metal-buying organizations have the opportunity to also take advantage of these contracts. As my colleague wrote on these pages a year ago, “Although the new market will allow producers and consumers to hedge their forward sales and purchases, the greatest beneficiaries will probably be the smaller processors in between who will be able to hedge their exposure on their WIP (Work in Process).
We’ll keep you posted on both the cobalt and molybdenum LME contracts.