Non-ferrous Metals

Our Aluminum MMI inched lower in November. A rising dollar put some pressure but prices held well overall. Indeed, we see some potential on the upside.

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Something that has concerned aluminum investors throughout the year is the potential increase in Chinese aluminum production. However, restarts seem to be less than what the markets were expecting earlier. Rising costs of production will likely limit additional restarts.

Aluminum_Chart_December_2016_FNL

China’s clampdown on coal mining and supply disruptions in Australia has led to a spike in seaborne coal prices. Thermal coal prices in China have more than doubled this year. In addition, alumina, which is then processed to produce raw aluminum, has risen steeply in price over the last couple of months.

Meanwhile, even the most pessimistic estimates put the annual demand growth rate at about 4%. Not only that, but Chinese aluminum demand has been better than expected. Chinese demand from infrastructure and construction has been robust this year. The automotive sector, another big industry for aluminum demand, continues to look strong.

In October, China’s passenger car sales rose 20% from the same month last year, the sixth consecutive month that car sales have risen by double digits in China. Last year, China announced a 50% cut in the sales tax for cars with small engines to last until the end of this year. Some analysts expect that China will extend the tax cut to next year but if that’s not the case, we could see some moderation in China’s car sales numbers.

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Adding to the bull case for demand growth in China is the expected boost in U.S. infrastructure spending following republican nominee Donald Trump’s election victory. During the second half, aluminum prices took support above $1,600/mt from better-than-expected Chinese demand combined with lower-than-expected Chinese output. Trump’s election is helping fuel a rally across the industrial metals complex. It wouldn’t be a strange thing to see aluminum prices comfortably trading above $1,800/mt in 2017.

On another note, recently a massive stockpile of 500,000 metric tons of aluminum has been trucked out of the Mexican city of San José Iturbide and shipped to a remote port in Vietnam.The Wall Street Journal reports that the stockpile is believed to be related to the product of Chinese aluminum producer China Zhongwang. We don’t see this news impacting prices immediately but news like this could potentially bring up the case for increasing trade barriers between China and the U.S., especially under the lead of Trump, who has vowed to bring more jobs back home during his campaign.

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India’s mining sector has the potential to contribute as much as $70 billion to the country’s economy by 2030 and generate about 6 to 7 million jobs, believes the country’s industry association, the Confederation of Indian Industry.

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A report titled, Mining Opportunities – Realizing Potential was recently released by the CII, though with an added a cautionary note: clearances “still remain an impediment for a smooth transition from auction stage to implementation stage.”

Mining Reforms Having an Effect

The current Modi government initiated reforms in the mining sector, which underperformed during the previous regime, many say, due to red tape. One of the most important steps was the clearance of the National Mineral Exploration Policy (NMEP) by the government in.

NMEP has the following main features for facilitating exploration in the country:

  1. The Ministry of Mines will carry out auctioning of identified exploration blocks for exploration by the private sector on a revenue-sharing basis. If exploration leads to auctionable resources, the revenue will be borne by the successful bidder of those auctionable blocks.
  2. Creation of baseline geoscientific data as a public good for open dissemination free of charge.
  3. A National Geoscientific Data Repository was supposed to be set up to collate all baseline and mineral exploration information generated by various central and state government agencies and also mineral concession holders and to maintain these on a geospatial database.

While these policy changes have been welcomed overall, there has been some criticism over the implementation. The CII report, for example, talks of the “inordinately long time that is required for obtaining this clearance and the cumbersome process involved therein.”

Why Can’t Companies Start Mining Faster?

The report was recently released at the International Mining and Machinery (IMME) and Global Summit 2016. It said that the Environment and Forest clearance processes take a long time and added that there was significant room for improvement in the clearance system in terms of efficiency, speed of decision making, predictability and transaction.

There’s also unexpected criticism from another quarter on the new mining policy. A report in the DNA newspaper, quoting global miner Anglo American PLC, said the Indian auction system discourages foreign direct investment as the auction process does not provide adequate risk-reward incentive.

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In the report, John Vann, group head of exploration at Anglo, said the auction system makes it difficult to see India competing with other countries where Anglo American invests. According to him, the granting of licenses rather than auctioning off mines would give confidence to foreign investors.

Lead prices rose sharply last week, adding to the year’s gains. From its January lows, lead is up 52% on the year to date. Not bad for a metal whose fundamentals looked neutral at best.

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The International Lead and Zinc Study Group recently convened in Portugal to deliver its forecast for the coming year. The group anticipates that, through the end of the month and year, supply will exceed demand in the global refined lead metal market by 42,000 metric tons. In 2017, the group predicts a closer balance, but still a surplus of 23,000 mt.

3M LME lead price hits a three year high. Source: MetalMiner analysis of fastmarkets.com data

The 3-Month LME lead price hits a three-year high. Source: MetalMiner analysis of Fastmarkets.com data.

Perhaps if you narrowed your view to lead’s supply/demand fundamentals you missed this rally. However, if you payed attention to the ongoing monster bull market in the metal complex, you shouldn’t have. Read more

Just a few days after hitting a 15-month high, the aluminum rally cooled down as prices inched lower over the past few days.

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So, where are aluminum prices heading? Is it now a good time to hedge/buy forward? The short answers are: up and yes. But let’s explains this view a bit further.

A Bull Case

3M LME aluminum prices trending higher this year

3-Month LME aluminum prices trending higher this year. Source: MetalMiner analysis of Fastmarkets.com data.

Concerns about rising supply in China kept a lid on prices for most of this year. However, market dynamics have changed somewhat over the last few months. China’s aluminum supply has been in check, with data showing a slight decline in the country’s aluminum exports this year.

What’s Coal Got to Do With it?

Helping keep supply in check is the recent spike in coal prices as coal is used in alumina refining. Thermal coal prices in China have more than doubled this year. As energy prices increase, Chinese smelters are getting squeezed, making it tougher for them to keep up with production. In addition, alumina, which is then processed to produce raw aluminum, has risen steeply in price over the last couple of months. Read more

Our November metal price trends report showed an industrial metals complex buoyed by strong Chinese demand and bullish on the future, thanks to the election of republican presidential candidate Donald Trump who promises to curtail regulations on metals producers and the energy suppliers that provide power for smelting, steelmaking and mining.

MM-IndX_TRENDS_Chart_November2016_FNL-TOPVALUE100

While some of the metals turned in a flat performance during the month of October, almost all quickly took off after the election. Now, as our lead forecasting analyst, Raul de Frutos, recently wrote, the industrial metal bulls are in full charge.

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The minor metals remained flat, but that’s no surprise to any buyer at this point. The fact that rare earth miner Lynas Corp. received a lifeline from a hedge fund and a Japanese state-owned enterprise was a minor (metals) surprise itself.

It’s a good time to be a producer of base metals as it looks like the bulls may continue to run in 2017. For more information on how to plan your purchases well into the New Year, consult our monthly metal buying outlook.

UPDATE: Ruling from Commerce detail on 5050 aluminum extrusions now included in this post.

The Department of Commerce is expected to launch a formal investigation today into whether Chinese steel companies are shipping steel through Vietnam to avoid U.S. import tariffs, a person familiar with the matter told the Wall Street Journal.

Steelmakers Asked for Vietnam Investigation

The decision to investigate follows a complaint in September from U.S. steelmakers, and is an escalation of U.S. efforts to stop a glut of China-made metal from flooding U.S. markets. The inquiry could result in new tariffs on steel imported from China via Vietnam, under rules designed to prevent such a tariff-evading practice, known as circumvention. Read more

Our Copper MMI held steady at 61 points in October. At first glance, it might appear that there is nothing bullish about that. Markets remain in surplus due to producers’ unwillingness to cut capacity.

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Copper prices have lagged the rest of the industrial metals this year and we’ve been pretty bearish on copper since 2011. But, although still early to make a call, there might be a bull lurking in the shadows. Copper prices might be setting up for a big run.

Copper_Chart_November-2016_FNL

Although prices didn’t rise in October, they showed resilience in the face of a rising dollar. Moreover, base metals continued to hit new highs. Even aluminum, a metal that has lagged this year, recently hit a 15-month high. With this bullish sentiment in the metal complex, it wouldn’t be surprising to see bulls going after copper sooner than later.

Strong Demand

China makes up nearly half of the world’s copper demand. Chinese demand from infrastructure and construction has been robust this year and the release of new manufacturing PMI data confirmed strong demand. The Caixin manufacturing PMI for October rose to 51.2, the highest reading since July 2014 and betting market expectations.

Surplus Now But Future Deficit

Copper is a very slow business in terms of new project development. Lead times can be more than a decade for new copper mines. Projects that started during the boom years have still been coming online, keeping markets oversupplied.

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However, current copper prices are way below incentive prices for new investments. Over the past 2-3, years miners haven’t committed to new developments. Consequently, even if prices rose to levels high enough to incentive new developments, it will take a long time for that new supply to hit the market. Read more

Our Aluminum MMI jumped to 83 points after London Metal Exchange aluminum prices hit a 15-month high. Not even a strong dollar could ruin aluminum bulls’ party last month.

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Aluminum rose above $1,700 per metric ton for the first time in over a year. Aluminum supply has increased this year as rising aluminum prices triggered the release of new capacity and restarts of idled capacity. However, other drivers have pushed prices into new ground:

Rising Costs

Energy accounts for around half of the cost for Chinese smelters to produce aluminum. Therefore, there is a close correlation between aluminum and energy prices.

Thermal coal prices in China have more than doubled this year. The price spike has been spurred by domestic mining cuts in China, with electricity generators and steelmakers making up for the shortfall via imports. Aluminum_Chart_November_2016_FNL

As energy prices increase, Chinese smelters are getting squeezed, making it tougher for them to keep up with production. In addition, alumina prices in China, another key ingredient for the making of aluminum, have increased around 50% so far this year.

Strong Demand

Aluminum output is running higher this year but so has demand for the metal. Chinese demand from infrastructure and construction has been robust this year. The automotive sector, another big industry for aluminum demand, continues to look strong.

In September, Chinese automobile sales rose 27% from the same period last year. This is the seventh consecutive month in which auto sales have risen and the third consecutive month where growth was above 20%. The growth rate this year is substantially higher than last year.

Investors Are Buying Metals

Industrial metals entered a bull market earlier this year and aluminum is finally playing catch up. Our historical analysis shows that a metal has far greater upside potential when the overall commodities market is in bullish mode while its chances of going down increase in a falling commodities market.

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When commodities are on the rise, aluminum investors tend to overreact on bullish news while dismissing bearish news. That’s what we are seeing right now.

What This Means For Metal Buyers

Industrial metals have been in bullish mode since early this year. Aluminum prices are finally jumping on the bandwagon. Aluminum buyers should minimize their price risk exposure if they haven’t done it yet.

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Automotive sales fell 5.8% in October, marking the first time since the beginning of the recession that sales of new cars and trucks in the U.S. declined for three consecutive months.

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The yearly rate of sales for October was 18.02 million, according to Autodata Corp. That’s in line with the 18.18 million in October 2015. Nearly every major automaker posted sales declines in October. Ford Motor Co. and Fiat Chrysler Automobiles NV both posted double-digit declines of 11.9% and 10.3%, respectively. General Motors Co. beat analyst expectations, with sales down only 1.7%.

We had warned last month that last month that while our Automotive MMI was flat, that could signal a plateau for end-user automotive sales and this month we saw the other side of that plateau, as the sub-index fell 4%.

Automotive_Chart_November-2016_FNL

Automotive metals are still a lucrative market for steelmakers and aluminum smelters, but the drop in sales could be a bit worrying as any prolonged drop in demand could for vehicles could eventually be felt down the supply chain.

However, most analysts are still bullish on automotive sales despite the fact that the sales record of 2015 will mostly likely not be met.

“Key fundamentals like job security, rising personal incomes, low fuel prices and low interest rates continue to provide the environment for a very healthy U.S. auto industry,” GM Chief Economist Mustafa Mohatarem said in a statement. “The U.S. auto industry is well positioned for sales to continue at or near record levels for the foreseeable future.”

Automotive demand is strong in Europe and other mature markets, too.

BMW AG recently reported higher profit in the third quarter even though a decline in sales in the U.S. and increased investment in electric vehicles and other technology eroded earnings at its automotive division. Fellow German automaker Daimler (maker of Mercedes-Benz automobiles) and BMW are benefiting from the strong recovery in Europe’s car markets and renewed demand in China.

Austria’s Voestalpine AG, a company that supplies both with automotive steel and hot-briquetted iron ore, recently held an event wherein its CEO Dr. Wolfgang Eder said that their automotive metal sales, most of which are to European customers, are strong.

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“We do not see it different than what we see and here in U.S. auto markets,” Eder said. “We do not see any weakness. These deliveries are lower than U.S. domestic production, and while we do WANT to do more business with American automakers, those customers (BMW and Daimler) are paramount right now because we know that people, especially in the U.S. market, like those cars.”

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Zinc prices jumped to a new five-year high on Monday, just as the International Lead and Zinc Study Group (ILZSG) released its 2017 forecast.

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The group continues to anticipate that the supply of refined zinc metal will be constrained by a sharp reduction in the availability of zinc concentrates and that global usage in 2016 will exceed production by 349,000 metric tons resulting in a further drawdown of both reported and unreported stocks. In 2017, the market is expected to remain in deficit with the extent of the shortage forecast at 248,000 mt.

Zinc prices hit a 5-year high. Source: MetalMIner analysis of fastmarkets.com data

Zinc hits a five-year high. Source: MetalMiner analysis of Fastmarkets.com data.

Over the past few weeks,  zinc struggled to build on gains, resting at $2,400/mt, a level from where investors stopped chasing prices higher in previous years.

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The fact that prices rose above this level despite the pressure of a stronger U.S. dollar is quite bullish. Investors are still buying on zinc’s bullish narrative of supply shortfall. Zinc market sentiment is poised to remain bullish.