Non-ferrous Metals

Lead prices on the London Metal Exchange rose above $2,000 per metric ton, for the first time in 17 months. Just this week, the metal is up near 7% in only four days.

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At a face value, a combination of supply surplus and stable LME stocks doesn’t really support this bullishness. So what’s behind this price rally?

Lead hits a 17-month high. Source: fastmarkets.com

Lead hits a 17-month high. Source: fastmarkets.com.

Lead prices are playing catch-up. They have lagged behind zinc’s performance this year but, it’s not a surprise that lead prices are finally taking off.

The closure of mines caused zinc prices to rally this year but it seems like the market has ignored the fact that mine closures also affect lead supply. This may be because markets expected secondary production to make up for this shortfall.

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More importantly, a rising trend in the metal complex is adding fuel to lead prices. Lead prices are being driven by funds’ increasing appetite for industrial metals. Sometimes, a metal can rise significantly in price before the bullish story becomes clear. We warned earlier this month to hedge lead. If you are a lead buyer, don’t wait until the fundamentals of this metal look bullish because it might be too late…

The International Trade Commission is preparing new rules for tariff cuts and Alcoa’s board has approved the plan to split the company in two.

ITC Adopts New Rules for Tariff Cuts

The U.S. International Trade Commission said Thursday that it is adopting interim rules to create a way for companies to submit items for potential tariff cuts under the new miscellaneous tariff bill process, forgoing the normal rulemaking process to meet a mid-October deadline.

Alcoa Board Approves Split

Aluminum producer Alcoa Inc. said on Thursday its split into two publicly traded companies is expected to be effective Nov. 1, after the company’s board approved the separation.

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Alcoa said last year it would break itself in two, separating a faster growing aerospace and automotive parts business from the traditional aluminum smelting and refining operations, as shareholders sought higher returns amid a commodity slump.

At this time last year, there was nothing really bullish about zinc.

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Global zinc markets were in surplus and prices were heading lower while sentiment in the mental complex was pretty bearish. But the picture quickly turned around earlier this year. For zinc buyers, the right time to hedge/buy forward was in April, when prices were still below $1,900 per metric ton, as we pointed out in our Monthly Outlook.

In April buyers should have hedged zinc one year out

In April, buyers should have hedged zinc one year out. Source: Fastmarkets.com.

Zinc investors have been drawn in by a narrative of mine closures and a resulting tightening of the supply chain. As zinc prices weakened over the past three years, more than 1.5 million mt of mine capacity was either idled or closed permanently. These closures were further exacerbated when Glencore announced plans to suspend 500,000 mt of production last October.

According to the latest data compiled by the International Lead and Zinc Study Group, the global market for refined zinc metal was in deficit by 174,000 mt from January to July 2016 with total reported inventories falling by 17,000 mt over the same period.

Is Now a Good Time To Hedge?

Earlier this month, zinc smelter Nyrstar announced the initiation of a hedging program that would lock in prices six month forward. Is this a good move given that prices are on the rise and everyone is still buying into the tempting narrative of supply shortfall?

I think Nystar made a smart move. Now it seems like a good time for producers to hedge for the midterm while on the other side, zinc buyers might want to wait for more attractive prices to hedge again. Here is why:

Zinc migt struggle to build on gains as it faces strong resistance levels

Zinc might struggle to build on gains as it faces strong resistance levels. Source: MetalMiner analysis of Fastmarkets.com data.

Zinc has risen in almost a straight line since those January lows. Traders sitting on healthy profits may now be tempted to lock in a bit of downside protection. Moreover, prices are near key resistance levels, meaning that in 2014 and 2015, zinc fell as prices approached $2,400/mt. Traders might again find reasons not to chase prices higher from this point, especially given the spectacular rally seen this year.

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Moreover, a zinc rally could run out of steam if miners are tempted to bring production back quicker than originally planned. Chinese mines could respond to higher prices by lifting production and filling any supply gap. Also, bulls are concerned that Glencore could reactivate the 500,000 mt of mine capacity it has idled since late last year.

Bottom Line

Zinc is still one of the favorites among metal investors and this rally could continue into 2017. However, zinc has gone pretty ballistic so far this year and although fundamentals might back the story up, we could see a price pullback around the end of the year. Zinc producers might want to hedge some of their production now while zinc buyers might want to wait for better opportunities to time their purchases.

So, will aluminum receive a similar tariff shield as steel has enjoyed in India? The shield refers to a minimum import price (MIP) that is generally imposed on cheap commodities entering India, just like cheap steel from China.

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In the case of aluminum, too, the main “culprit” seems to be China. Yet, the stance of the Indian government vis-à-vis an MIP is still not clear, as various ministries concerned with the development have given divergent opinions. Read more

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.

MM-IndX_TRENDS_Chart_September2016_FNL-TOPVALUE100

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.

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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.

Copper prices have been on the decline this summer, depressed by reports of oversupply and, worse, an exodus of inventory from top consumer China.

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Indeed, we recently wrote about the rise of metal coming out of Shanghai bonded warehouses ending up in London Metal Exchange stocks around Southeast Asia, leading to a 60% increase in LME stocks last month.

Why Are Exports Slowing?

We speculated this was probably a result of slowing domestic demand and unwinding of financing deals. But a recent Reuters article reports that exports have slowed and imports of refined copper have picked up in China after the price plunged to 12-month lows last month.

Reuters suggests this is due to price declines taking copper into territory where investors once again feel it is oversold and, on the back of a pick-up in demand after the summer, ripe for restocking.

Source Reuters

Source: Reuters

The article states a flood of new supply will still prove too much for the copper price and 2017 will see prices remain under pressure. Read more

There are conflicting messages out there.

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Last month, Business Insider ran a piece saying “Recent movements in copper inventories highlight the lack of significant demand for the metal, particularly in the ever-important Chinese market.”

Shanghai Futures Exchange inventories are falling while, London Metal Exchange inventories are rising, suggesting metal is flowing out of Shanghai bonded warehouses into local Asian LME sheds. The contango has grown, allowing traders to store and hedge metal on the LME supporting the move but the fact that refined metal is flowing out China suggests industrial demand is weak. BMI calls the move a red flag and says it expects imports of refined metal to fall in the coming months.

Copper_Chart_September-2016_FNL

Copper supply in LME sheds might be up, but our copper MMI is down.

Yet, just last week, better-than-expected official industrial PMI numbers unexpectedly rose to the highest level since 2014, according to Bloomberg, resulting in a bounce in copper prices, share prices in Hong Kong  and London and a fall in bond prices.

What’s Up With Copper?

So, what does this mean for copper? Was the export surge a temporary phenomenon prompted by the market moving into contango? Or is this truly a sign of an underlying weakness in demand?

China imported a record amount of refined copper in the second half of 2015, partly fueled by a relaxation of credit controls and encouraged by Beijing’s stimulus plans. Domestic refined production also increased significantly, but refiners are now cutting back and appear well supplied with concentrate in what remains an oversupplied market. Read more

Our Copper MMI fell 5% during the month of August. The price drop is no surprise. Copper has struggled near $5,000 per metric ton multiple times this year and as we pointed out last month, buyers could expect prices to retrace in August.

Copper_Chart_September-2016_FNL

Weaker Chinese imports over the past few months and the bearish calls of some major banks have contributed to the recent price fall. Unlike other base metals, sentiment about copper is still sort of bearish, making this metal the worst performer among its peers this year. In our monthly outlook, we haven’t recommended buying copper forward yet.

Chinese Imports Lose Momentum

China isn’t self-sufficient when it comes to its copper needs and is the largest importer of the red metal. Rising Chinese imports signals increasing demand for the metal. In metals such as zinc and nickel, we’ve witnessed a surge in Chinese imports this year, adding fuel to the bull (market).

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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.

The Non-Ferrous Laggard

Unlike zinc and nickel, remember we pointed out earlier this year that the increase in Chinese copper imports in Q1 wasn’t exactly backed by end user demand. Some of the Chinese refined copper imports found their way into the Shanghai Futures Exchange system, with inventories rising to record levels.

Now, as Chinese refined imports start to taper down, we are witnessing inventory buildup in the London Metal Exchange‘s warehouse system, with copper stocks in the LME rising to a one-year high. Combining LME, SHFE and Chinese bonded stocks, most would agree that global copper inventories have risen this year, keeping a lid on prices.

Supply Runs High

Copper is among the metals wherein top consumer China actually gains if prices stay lower, unlike aluminum or steel. The country is the largest copper importer. Therefore, lower copper prices bode well for China. This also helps explain why Chinese copper imports rose earlier this year. When prices are low it makes sense for China to import more copper instead of producing more domestically.

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Another factor weighing down on investors’ sentiment is the recent bearish calls by investment banks such as Goldman Sachs. The bank notes that the majority of the major global copper producers have already increased output by 5% during the first half, and it estimates that those same producers will ramp up supply by 15% over the next year.

What This Means For Metal Buyers

Any price rally could continue to be limited this year, especially if Chinese demand does not pick up and we see the supply increase that some banks are forecasting. On the other hand, an improving sentiment in the metal complex this year should support and keep copper prices from experiencing significant declines.

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Our Aluminum MMI finished the month flat.

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Aluminum prices rallied into August but they failed to breach $1,700 per metric ton for the third time this year. Aluminum is up 7% this year but unlike other industrial metals, prices haven’t really made that much progress. With the ongoing debate of whether aluminum markets will be in deficit or surplus this year, investors seem hesitant to chase prices much higher.

China’s Exports Fall

Aluminum’s fundamentals look much better than at the beginning of the year, especially when we look at the supply side which has always been the biggest concern for the markets over the past few years. The biggest challenge for the aluminum industry was Chinese exports and they have started to come down.

Aluminum_Chart_September_2016_FNL

China exported 390,000 mt of unwrought aluminum in July, down 9.3% from July of last year. Chinese aluminum exports have fallen around 7% for the first seven months of 2016. Lower aluminum exports are supporting aluminum prices this year.

Chinese Aluminum Production Falls

According to data released by the International Aluminum Institute, China’s aluminum production declined 2.4% in July compared to the same month last year. For the first seven months, production in China has fallen by 3.1%.

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This is the first time the markets have witnessed a fall in China’s aluminum production since 2010. This fall in production is good news for aluminum bulls, which see a market headed for deficit in 2016. However, there is also the other side of the coin…

Fears of Rising Production

Fears of rising Chinese aluminum production in the second half seem to be putting pressure on aluminum prices, limiting any price rally. Whether markets are in a deficit or a surplus this year depends on China’s production. While producers such as Alcoa projecting a record deficit for 2016, Goldman Sachs sees a record surplus in the year.

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U.S. construction spending during July came in at an annualized rate of $1,153.2 billion, nearly the same as the revised June estimate, which was $1,153.5 billion, the Census Bureau reported ahead of the Labor Day holiday. Even so, the July 2016 figure is 1.5% higher than the July 2015 construction spending total.

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July’s numbers could be attributed to spending on private construction projects, which was up 1% compared to the revised June total. Public construction spending, by contrast, was down for the month by 3.1%. For the year, private construction spending gained 4.4%, while public spending dropped 6.5%.

Construction_Chart_September_2016_FNL

The Construction MMI reflected healthy U.S. demand for construction metals and jumped nearly 5%. Economists polled by Reuters had forecast construction spending rising 0.5% in July but keeping its gains from June is still good news for construction.

The upward revisions to the May and June construction spending data could see the second-quarter gross domestic product estimate revised up from the 1.1% annual pace reported last month and economic growth is good for construction and the economy as a whole.

Aluminum, Surcharges Up

Construction received a boost from the aluminum components of the sub-index, which posted strong gains despite the Aluminum MMI turning in an overall flat performance this month. Fuel surcharges were up across the board as oil’s taken a bit of wild ride lately. Products such as rebar and H-beam steel were also up.

Despite individual product strength, steel remains a very bifurcated market with prices up in the U.S. and down globally. Despite promises to wind down production in the second half of the year, China is buying up coal for steel production. The price of coal needed to make steel has surged more than 45% over the past three weeks, to its highest level since early 2013.

Major Shipper Close to Insolvency

South Korean shipping giant Hanjin Shipping Co. appears to be sailing toward oblivion as we’re writing this, a move that reflects weaker global steel demand or overall excess capacity. In the past week, creditors pulled the plug after $900 million (1 trillion Korean won) in support failed to keep the company afloat, forcing Hanjin to file for bankruptcy protection. Seoul Central District Court, which will decide the fate of the company, has set a Nov. 25 deadline for it to develop another restructuring plan, but many experts think liquidation will be the most likely outcome.

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Even though construction product demand looks strong, there are a lot of other factors that could plague these metals in the near future.

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