Non-ferrous Metals

Reuters’ Andy Home recently examined the correlation between Chinese copper exports and London Metal Exchange warehouse arrivals.

reuters_copper_imports_chart_of_the_week_083116_550

Source: Reuters, China Customs and the LME.

The Aluminum Association has not given up on the U.S. reaching a binding bilateral deal with China to reduce aluminum overcapacity, but the group is also holding out the option of pursuing anti-dumping or countervailing duty cases if market conditions fail to improve.

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The aluminum industry is gearing up for a Sept. 29 International Trade Commission hearing, which would serve as the first step in any future trade defense cases on aluminum. The industry has taken a less aggressive approach than steel in not more pursuing anti-dumping, countervailing duties or World Trade Organization action against China on aluminum, opting instead to try to reach a bilateral or multilateral deal, Aluminum Association Vice President of Policy Chuck Johnson told World Trade Online.

“The issues of overcapacity really came to a head in the middle of last year,” Johnson said. “Prior to that, we had not been active on this issue. We have not, as an association, pursued antidumping and other trade enforcement remedies for our industry as have steel and other industries that have been facing a more endemic and long-term conditions. … But we are not taking anything off the table.”

This is a shift for the association, which represents original aluminum manufacturers throughout North America.

The ITC hearing will look at Chinese trade practices including trade policies, export duties and industry subsidization. The goal, Johnson said, is to get better documentation on China’s industry than has previously been gathered.

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The ITC is currently collecting information and gathering public comments in preparation for the hearing. The commission is also circulating a questionnaire looking at the competitive conditions affecting the U.S. aluminum industry as a whole.

One of the causes of falling aluminum prices over the past few years was the rise in China’s aluminum exports. But Chinese exports started to calm down this year, helping aluminum prices to recover.

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China exported 390,000 metric tons 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 Chinese aluminum exports suggest stronger aluminum demand in China coupled with some supply cuts.

According to the latest figures released by the International Aluminum Institute (IAI), Chinese aluminum production has now fallen on a year-over-year basis in five out of the last six months. For the first half, Chinese aluminum production has fallen by 3.3% compared to the same period last year. This will be the first year where Chinese annual aluminum output declines if Chinese smelters don’t restart idled capacity. But, will they?

US Producers Warning Of Higher Chinese Supply in H2

During their second quarter earnings calls, some U.S. producers pointed to higher Chinese supply as one of the biggest risk for the aluminum industry in the second half. Century Aluminum believes that aluminum production in China could increase in the high single digits in 2016. For that to happen, we would need to see a sharp increase in China’s aluminum output in the coming months. Norsk Hydro also expects some of the Chinese capacity to come back later this year.

Prices: Not Too High But Rising Steadily

3M aluminum LME rising this year. Source: MetalMiner analysis of Fastmarkets data

Three-month aluminum LME price rising this year. Source: MetalMiner analysis of Fastmarkets data.

The ongoing fall in Chinese exports and a good-looking demand picture thanks to Chinese government stimulus are supporting aluminum prices this year. Unlike other metals, aluminum prices haven’t really skyrocketed but they are drawing a nice uptrend this year, signaling that investors’ sentiment on the metal is improving. If China doesn’t restart capacity, we could continue to see prices climbing higher.

We rarely see such positive growth in metal prices as we did in the August MMI Price Trends Report.

MM-IndX_TRENDS_Chart_August2016_FNL-TOPVALUE100

All the metals we track were up save for Aluminum, which fell only 1.3%, and renewables and rare earths, which held flat. The Stainless Steel MMI increased 9% amid uncertainty about Chinese nickel ore supply after mining crackdowns in top supplier, the Philippines.

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Meanwhile, the most bullish of bull runs continued for our Global Precious MMI which added a 7.2% increase to its jump last month to knock on the door of the top 10% of the IndX. The platinum group metals had strong increases along with gold and silver this month.

Wall Street Bull

“Hey metal buyers, remember me?” Wall Street bull courtesy of iStock.

Palladium, particularly, made higher highs and stumbled to lower lows in classic bull market fashion.

So buy quickly before prices increase more, right? Wrong. Our Raw Steels MMI posted a healthy 4% increase, but it’s still heavily dependent on China’s stimulus programs to keep demand up in the largest global consumer of steel products. If there is a pullback in stimulus, prices could fall dramatically. The same is true for copper.

Unlike diamonds, bullish trends in commodities and industrial metals don’t last forever. Continue to make informed buying decisions in this thriving market — watch China’s stimulus program and the strength of the U.S. dollar post- Brexit — and remember that today’s price strength might be tomorrow’s carpet getting pulled out from under your feet.

Our Aluminum MMI fell by one point for the month as investors seemed unwilling to chase prices much above $1,600 per metric ton.

Surplus or Deficit?

There is still a divided opinion over weather aluminum is in a surplus or a deficit this year. On one side, is the opinion that China hasn’t cut enough capacity and that its smelters are planning to increase output after a modest recovery in prices this year. Meanwhile, many others believe that aluminum markets will record their first deficit year in a decade.

Aluminum_Chart_august_2016_FNL

According to the latest figures released by the International Aluminum Institute (IAI), Chinese aluminum production has now fallen on a year-over-yeqars basis in five out of the last six months. For the first half, Chinese aluminum production has fallen by 3.3% compared to the same period last year. If things continue like this, this will be the first year where Chinese annual aluminum output declines.

Rising Aluminum Demand

While production is likely to fall this year, unless Chinese smelters decide to ramp up production, demand is also looking pretty good. Real state indicators in China for the first half are much better than last year. Also China’s car sales continued to climb in June, up 18% from June of 2015. Finally, the Caixin Manufacturing PMI in China rose above 50 points for the first time since February 2015.

Looking at the Chinese aluminum demand indicators, aluminum’s demand could grow in the ballpark of 5-6%, as most aluminum producers are projecting, especially if China continues to provide stimulus in the second half.

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So, for the first half of the year, China’s aluminum demand rose while production fell. This is also being reflected in exports this year. China’s aluminum exports rose by 10% y-o-y in 2015. However, for the first half of 2016, exports have fallen by more than 9%. Falling aluminum exports are a welcome sign for U.S. aluminum producers.

Midest Premiums Fall

For aluminum buyers, the all-in aluminum price consists of the aluminum price plus regional aluminum premiums. U.S. Midwest premiums fell slightly in July, with current quotes of $0.07 per pound. The picture doesn’t look any better in Europe where physical premiums are near their all-time lows.

The ongoing weakness in premiums this year might look surprising, given falling exports and a projected deficit this year. Some analysts attribute this weakness to the current flow of aluminum from non-LME-registered warehouses to physical markets.

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Our Copper MMI gained just one point. Unlike other base metals, Copper on the London Metal Exchange continues to trade up and down. The metal struggled near $5,000 for the ninth-consecutive month.

Copper Markets In Deficit

According to the International Copper Study Group (ICSG), the refined copper balance for the first four months of 2016 indicates a production deficit of around 119,000 metric tons (and a seasonally adjusted deficit of about 129,000 mt). This compares with a production surplus of around 13,000 mt (a seasonally adjusted surplus of about 12,000 mt) for the same period of 2015.

Copper_Chart_August-2016_FNL

Stronger apparent Chinese demand caused the deficit. In the first four months, Chinese apparent demand increased by around 14% and world apparent refined usage is estimated to have increased by around 6%.

Chinese Imports Surge

In June, China imported 420,000 mt of unwrought copper and copper products, up 20.3% from June of last year. For the first half of the year, imports increased 21% compared to the same period in 2015. The growth in imports has helped support metal prices, too. However, there are different opinions on whether those imports are actual demand or just stockpiling into warehouses.

An expected, new round of infrastructure spending in China should continue to keep copper demand and China’s imports strong in the second half.

Prices Struggle

So the whole metal complex is performing well. Markets appear to be in deficit (although with high stock levels looming), investors are optimistic that they’ll see more stimulus coming from China and copper imports are strong. This all sounds bullish for copper prices this month, but traders seem unwilling to chase prices much higher than $5,000.

We have yet to see that bullish shift in investor sentiment in copper. Unlike other base metals, it’s still early to call this a bull market.

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The Commerce Department said construction spending declined 0.6% to its lowest level since June 2015 after dipping 0.1% in May. June marked the third straight month of declines in outlays.

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Economists polled by Reuters had forecast construction spending increasing 0.5% in June after a previously reported 0.8% drop in May. Their June estimates were largely based on the government’s assumptions for private residential and nonresidential construction spending in the advance GDP report.

Construction_Chart_August_2016_FNL

Weak nonresidential spending and a pullback in home building were credited for the drop. Our Construction MMI still increased from 66 to 67 this month, largely based on jumps in still-in-demand steel products such as rebar and H-beams. Those prices made up for steep drops elsewhere to eke out the 1.5% increase.

However, weak U.S. economic growth seems to have finally hit the construction industry, previously a bright spot of the U.S. economy. A third straight month of declining construction spending will certainly be reflected soon in overall purchasing.

“It’s a deceleration process after two years of fairly decent growth,” Robert Murray, chief economist of Dodge Data & Analytics, told Reuters.

Compare Prices With The July 2016 MMI Report

The slowdown can be seen in construction payrolls. Adjusted for seasonal fluctuations, the number of people working in construction has dropped by 22,000 since hitting a post-recession peak in March of about 6.7 million.

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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.

Free Download: The July 2016 MMI Report

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.

Free Download: Compare Prices With The June 2016 MMI Report

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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