Non-ferrous Metals

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.

Like most industrial metals, copper saw an increase in June. However, the metal is still lacking the strong upside action we have seen in other metals and it continues to struggle near the $5,000 per metric ton mark on the London Metal Exchange.

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The latest trade data showed a huge spike in Chinese copper exports, which increased by 256% in May from a year earlier. This raises fears about domestic demand. Domestic production is also rising strongly, up 7% year-on-year in May. With these figures, it’s tempting to view May’s export surge as a warning sign that the Chinese market is saturated.

Copper_Chart_July-2016_FNL

In addition, Chinese manufacturing data came in weak in June. The Caixin Manufacturing PMI, which focuses more on small-to-medium-sized private firms, stood at 48.6 in June. That reading missed estimates and was the weakest number since March.

Uncertainty Still Looms

Given the disappointing industrial data and the ongoing economic uncertainties after the U.K.’s decision to leave the European Union, the market is expecting more economic stimulus from China. That stimulus, if it happens, will be critical for copper prices to finally pick up steam.

On a side note, although most people focused on the export surge, China’s imports were robust. China has imported 1.77 million mt of refined copper so far this year, up 24% from the same period last year. Even with May’s high exports, net imports are also up by 22% for the first five months. That gives copper bulls hopes that China is starting to work off its previous glut.

But to make this issue even more complex, inventory levels also rose sharply last month. Copper warehouse levels in the LME system increased by almost 40% in June. Along with the LME copper inventory, bonded copper stocks held in free trade zones in China have climbed this year. Higher inventory levels are, perhaps, limiting the upside potential of copper prices.

Although copper rose in June, the outlook remains neutral and, due to all of this uncertainty, we could continue to see choppy price action in the coming months.

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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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The international mining and metals sectors didn’t take a break for Independence Day. Rio Tinto Group has made its first moves under its new CEO and India is reconsidering its steel tariffs.

Jacques Shelves Rio Iron Ore Project

Rio Tinto Group has shelved its $20 billion Simandou iron ore project in Guinea because of a sustained slump in prices, the company’s new CEO Jean-Sebastien Jacques said in an interview with The Times newspaper.

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The world’s second biggest miner by market capitalization had been seeking financing for Simandou, even after a $1.1 billion writedown on the project in February. Last month the Anglo-Australian company submitted a feasibility study to the Guinean government.

But global oversupply of iron ore made the project inviable at this time, Jacques told The Times.

India is Reconsidering Steel Minimum Import Prices

India may alter the list of steel items that attract a minimum import price if the country decides to continue with the measure beyond August, steel secretary Aruna Sundararajan said.

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India imposed the minimum import price on 173 steel products in February, helping cut inbound shipments last month to their lowest level in at least 14 months.

Alcoa, Inc. revealed a new name, Arconic, for its value-added business unit in a recent regulatory filing and Iranian oil exports are decreasing but still adding more supply to global markets.

Alcoa Reveals Spinoff Details, Names Value-Added Business ‘Arconic’

Alcoa, Inc. said on Wednesday it will spin off its traditional aluminum smelting business as part of its planned company split and the renamed company will serve the aerospace and transportation industries.

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The company to be spun off will be named Alcoa, Corp. The value-added business unit will take on the name Arconic, Inc., according to a recent regulatory filing. It will make engineered products for growth markets such as automotive and aerospace. Alcoa revealed its plans in a regulatory filing.

Iranian Oil Exports Fall From June High, Still Adding Supply to Markets

Iran’s oil exports in July will fall June levels as the country battles Saudi Arabia and Iraq for market share, but the Islamic Republic’s output is still about 70% higher than a year ago, a source with knowledge of the country’s crude oil lifting plans told Reuters Africa.

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Exports will be about 2.14 million barrels per day in July, down from about 2.31 million bpd in June, but still the highest since January 2012, the source said.

A recent Reuters article draws an interesting comparison between the Chinese aluminum and steel industries and then goes on to draw some not-so-encouraging conclusions for aluminum. Excess aluminum production there is damaging the prospects of aluminum producers in the rest of the world, purely because of the size of China’s massive aluminum industry.

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Both metals face excess production at home due to rampant overinvestment and slowing domestic demand. Reuters lists a number of similarities between the two industries: China is the world’s largest producer in both markets, accounting for 51.5% of global steel output and 54.4% of global primary aluminum output in April.

Chinese Steel vs. Chinese Aluminum

In both industries, China has been exporting excess production of steel and aluminum in the form of semi-manufactured products, with steel product exports last year totaling 112.4 million metric tons, representing around 14% of the rest of the world’s output and aluminum product exports of 4.2 mmt representing 17% of the rest of the world’s output. In both cases, exports have damaged prospects for producers elsewhere, forcing closures, losses and delaying investments.

Source Reuters

Source: Reuters

In the case of steel, though, the threat of a delay to China’s application for market economy status by the World Trade Organization has forced a more conciliatory response by Beijing in recent discussions, and the promise of large-scale closure of older capacity in China.

Aluminum Overproduction Unabated

How effective this will be remains to be seen but, even so, it is in marked contrast to the position aluminum is in, where Beijing seems unable or unwilling to curtail new investment. As prices on the Shanghai Futures Exchange have risen this year, idled smelters have restarted and new capacity has continued to come on-stream.

Annualized run rates increased by almost 650,000 mt over the course of April and May, Reuters reports, with May’s average daily output of 86,290 mt the highest since November 2015 before prices fell below $1,518 (10,000 yuan).

The other factor apparently effecting Beijing’s attitude is the rapid rise in capacity is coming from new state of the art low cost aluminum smelters in China’s northwestern provinces. Aluminum is not seen as an old-fashioned, state-dominated industry operating polluting plants close to urban areas.

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China’s new aluminum capacity is cutting-edge, world-class technology and — at current prices at least — is making money. As a result, Reuters concludes capacity is unlikely to be trimmed anytime soon, at least by government intervention. For aluminum producers outside of China, that is not good news, and although recent rises in price to $1,600/mt are better than the $1,450-1,500/mt levels of late last year, it doesn’t offer much upside in the short- to medium-term if China keeps flooding the market with excess semi-finished products.

Reuters_MetalMiner Chart of the Week 062216_550

Source: Reuters

Aluminum reached a one-month high this week as Chinese demand took up more supply at home. As the Shanghai Futures Exchange price has risen, idled smelters has restarted.

Aluminum price increases this year have been minimal compared to what we’ve seen in steel prices. However, the metal is rising slowly but steadily as investors see an opportunity to buy aluminum when prices fall short-term.

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That’s exactly what happened this month, after prices sold off in May, investors are again jumping on the metal.

Aluminum hits 1-month high. Source: MetalMiner analysis of fastmarkets data

Aluminum hits a one-month high. Source: MetalMiner analysis of Fastmarkets.com data.

Demand Improves

A recovery in demand is a key factor supporting aluminum prices this year. China unleashed a renewed government stimulus in the form of credit expansion and infrastructure building in December, which has — at least momentarily — improved the demand side of the equation for industrial metals.

Trade figures this year showed China’s relatively strong appetite for aluminum. Higher demand means exporting less as Chinese companies are consuming more aluminum domestically. China’s exports of unwrought aluminum and aluminum semis were 420,000 metric tons in May. From January to May, exports are down 7.9% compared to the same period last year.

Overcapacity Still an Issue

China has committed to stop the expansion of steel capacity and 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. Read more

A stronger dollar in May caused most base metals to weaken. However, in June, the dollar has pulled back, as expectations for rate increases recede.

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That helped to lift most base metals, so far, this month. But that wasn’t the case for copper, which continues to struggle on the upside.

3M Copper falls in June. Source: Fastmarkets.com

Three-month LME copper falls in June. Source: Fastmarkets.com

The red metal has held its value well this year, but it has found strong resistance near $7,500 per metric ton. Unlike other metals like zinc and steels for which we recommended buying forward earlier this year, we’ve kept recommending buying only small quantities of copper for quite some time now.

Rising Inventory Levels

60 Day LME Copper Warehouse stocks levels. Source: Kitcometals

    60-Day LME copper warehouse stocks levels. Source: kitcometals

Due to a surge in inventories at London Metal Exchange warehouses, the weaker dollar in June failed to provide a lift to prices. Copper warehouse levels in the LME system rose by almost 40% on the month to date after experiencing the highest two-day inventory surge since 2004.

Chinese Imports

China’s copper imports jumped 19.4% in May from the same period last year. Imports are running strong over the first five months, up 22% compared to the same period last year, after a weaker dollar boosted Chinese purchasing power.

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The increase in refined copper imports could be taken as bullish. However, reading the fine print, imports of copper concentrate for use by smelters jumped 45% from a year ago. The surge in concentrate imports suggests that China’s copper refined imports could ease further in June as rising  domestic smelting production will increase domestic supply and reduce import demand. That could keep a lid on prices for some time.