Non-ferrous Metals

If you can’t beat them, then join them? That may be the gist of UC Rusal’s latest proposal for dealing with Chinese aluminum overproduction: an OPEC-like organization for the global aluminum industry.

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In a Reuters article the world’s largest aluminiu producer outside of China was quoted by the TASS news agency at an economic conference in Russia’s Black Sea resort of Sochi as suggesting that Industry ministers should get together and explore ways and means of creating a producers club.

Liquid metal

The Chinese aluminum industry has been able to cut costs by essentially selling liquid metal to nearby product manufacturers. Source: Adobe Stock/Kybele.

The trade minister quoted by TASS, Denis Manturov, talked of creating a single policy in the area of standards and technology but, in reality, there would be little to be gained if that was the sole purpose. More attractive to western smelters in general, and Rusal in particular, would be any mechanism that curbed China’s growing dominance of the primary aluminum market.

Rusal was, until a few years ago the world’s largest aluminum producer. In 2016 Rusal produced 3.685 million metric tons, according to Reuters, but China now produces over half the world’s aluminum with Chinese producers overtaking the Russian firm. China’s Hongqiao is now the world’s biggest aluminum producer overtaking Rusal in 2015 and again in 2016. Read more

Copper prices remained supported in February, trading in the ballpark of $6,000 per metric ton as a return to production at two top mines — which are combined responsible for some 8% of global output — looks increasingly doubtful in the near term.

Escondida Mine

A strike at the Escondida in Chile, the world’s largest copper mine, appeared far from ending during February. The strike increasingly turned more violent as protesters blocked roads and battled police. The events reflect the increasing bitterness and division between the two sides, as positions still appear to be far apart after almost four weeks of strike. Key differences include disagreement over changes to shift patterns and the level of benefits new workers receive.

Grasberg Mine

Meanwhile, Freeport-McMoran is under a concentrate export ban as it negotiates a new operating license from the government of Indonesia. Having limited storage capacity, the company will be forced to drastically cut output if Indonesia doesn’t give the company an export license to send material to its local smelter for processing.

Copper MMI

In late February, the company announced that it sees “no returning to business as usual,” as the miner cut output and laid off workers. Copper concentrate production at the mine has been stopped since Feb. 11, and ore output is being limited to stockpiling for future processing.

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In a memo, The company stated that during February it revised its operating plans, slowed its underground expansion and announced plans to drastically reduce manpower levels in an effort to cut costs as the company needs to survive while it works with the government to achieve a mutually viable solution to resume exports. So far, that agreement doesn’t seem close to coming together in the near term.

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This year, there will be other temporary suspensions at smaller copper mines such at El Soldado mine in Chile. In addition, some major contract negotiations in large mines are due this year.

What This Means For Metal Buyers

Copper prices might look expensive compared to what they were just three months ago, however sentiment in the industrial metals complex remains quite bullish and current supply issues could turn into large deficits if stoppages and disruptions are prolonged. It’s seems early to call for an end on copper’s bull market.

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The 3-Month LME aluminum price soars. Source: Fastmarkets.com.

Aluminum prices hit $1,900 per metric ton this week. Aluminum has surged 13% so far this year.

China Proposes Supply Cuts to Fight Pollution

We already predicted at the beginning of January that China’s supply would be the most important price driver to watch this year.

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In February, a Chinese government document proposed that about a third of aluminum capacity in the provinces of Shandong, Henan, Hebei and Shanxi be shut down over the winter months. If implemented, they would be some of the most radical steps so far to tackle air quality in the country of 1 billion’s most polluted cities. Read more

We warned last month that the mostly small losses the prices our MetalMiner IndX experienced were caused by investors taking profits.

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Our suspicions were confirmed when almost all of our sub-indexes had big price rebounds this month. The Automotive MMI jumped 12.2% Raw Steels 8% and Aluminum 6%. Even our Stainless Steel MMI only dropped 1.7% and has taken off since February 1 as nickel supply is even more in question now with both the Philippines and Indonesia’s raw ore exports in question.

The bull market is on for the entire industrial metals complex. Last month’s pause was necessary for markets to digest gains but the strong positive sentiment for both manufacturing and construction shows no signs of ebbing in the U.S. and Chinese markets.

Nickel was said to be in a supply deficit last year of 209,000 metric tons, according to Bloomberg, and is projected to remain in deficit this year to the tune of 188,000 mt.

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The Philippines has just ordered the closure of 21 mines and the suspension of another six. The island chain is a source of around half of the country’s nickel output. After Indonesia’s 2014 export ban, the Philippines became the world’s largest exporter of nickel ore and the primary supplier to China’s massive nickel-pig iron industry, raw material for the alloying of stainless steel.

Stagnant Prices

Yet, while there has been an uptick in prices, nickel’s performance can hardly be said to have been stellar. Since the middle of the summer the London Metal Exchange‘s LMEX index of six key base metals is up almost 18% yet nickel has risen by only 1.2%.

Deficit or not, the market does not seem to be in short supply yet. Between Indonesia and the Philippines the two countries produced about 700,000 metric tons of nickel a year in 2014 and 2015, with about 170,000 mt of that coming from Indonesia due to the export ban.

Chinese buyers simply switched to the Philippines as supplies dried up from Indonesia and drew down on extensive stocks they had amassed in advance of the export ban. Just as the Philippines’ new firebrand environment and natural resources secretary, Regina Lopez, moved to close environmentally damaging open pit mines, Indonesia is increasing exports again. Investors have their eye on a probable surplus towards the end of the decade as both countries return to some level of consistent supply. This graph illustrates the rise of the Philippines and since the export ban the relative decline of Indonesian shipments.

Nickel production

Nickel from major producers in the last nine years. Source: U.S. Geological Survey.

Of course, it’s not clear at this stage how quickly mining companies will be able to implement stricter environmental conditions that are likely to be applied by the new administration of Philippines President Roderigo Duterte, but it would seem that the action is not unjustified with comments in the Financial Times describing the Philippines’ nickel supply chain as an environmental disaster. Read more

One of the biggest social challenges facing the authorities in Beijing is that of environmental pollution. It’s not just the western media that is fixated by measures of particulate matter and images of impenetrable smog in Beijing, the general population has been moved to outright demonstration and the impact on the health of those living in the affected areas is an extremely serious issue causing widespread discontent. Beijing knows it must come to grips with this problem. Drastic action is required, and recent reports suggest the authorities are finally considering just that.

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According to CRU Group, the Chinese Ministry of environmental protection is consulting industry groups such as the China Nonferrous Industry Association about a proposal to shut down 30% of the aluminum smelting capacity and 50% of alumina refining capacity during the big winter heating period from November to March in an effort to reduce coal-fired power consumption. Rumous of this proposal contributed to recent rises in aluminum prices even though the impact would not be felt before the end of 2017 and there is still considerable debate on how viable such a policy would-be.

Shutdown Plan

The provinces in question are Shandong, Shanxi, Hebei and Henan, home to a significant portion of China’s aluminum smelting and alumina refining capacity. According to an article by Aluminum Insider, Shandong produces 11 million metric tons of aluminum per year, Henan turns out 3.8 mmt, Shanxi is good for 1 mmt, while Hebei puts out 100,000 mt a year. Those four provinces account for 37% of the country’s total output of aluminum. Shandong refines 23.5 mmt of alumina per year, Henan produces 12.6 mmt, and Shanxi produces 20 mmt each year, combining to produce around 78% of the country’s total alumina output. Read more

Copper prices rebounded to a 6% increase in January. The combination of a falling dollar and a potential work stoppage at the world’s largest copper mine lifted prices to test the psychological level of $6,000 per metric ton.

Base metals looked more bullish in January and strong Chinese data is no doubt driving that. China’s PMI was in growth territory for the seventh consecutive month. Here in the U.S., President Donald Trump signed executive orders to continue progress on two key energy pipelines, making good on his campaign pledge to rebuild the nation’s infrastructure.The new president also broke with protocol and expressed a desire for a weaker dollar.

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Trump’s words helped drive the value of the dollar down in January. This gave a boost to industrial metal prices and dollar-denominated commodities such as crude oil, which continues to remain supported above $50 per barrel.

Escondida Strike: New Catalysis?

Even though copper markets are still in surplus, investors know that copper is a very slow business in terms of new project development. Consequently, even if prices continue to rise enough to incentivize new developments, it will take a long time for that new supply to hit the market.

Supply concerns have recently risen due to a potential strike in the giant Escondida copper mine in Chile. Last week, the mine’s workers voted against the company’s latest wage offer, opening the door for a strike and potentially setting the case for wage negotiations across the industry since almost a fifth of global mine capacity is facing contract renewals.

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This is the largest copper mine in the world, supplying 5% of the world’s copper production. The potential stoppage at Escondida coincides with an interruption to supplies from Indonesia’s Grasberg, the world’s second-biggest mine where exports of concentrate have been halted.

What This Means For Metal Buyers

Copper prices might look expensive compared to what they were just three months ago. However, that rally might just be the beginning of a bigger move. Sentiment in the industrial metal complex remains quite bullish and there are factors currently playing out that could build the case for another rally in copper prices. Copper buyers should minimize their commodity price risk exposure accordingly.

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In January, aluminum prices broke through the $1,800 per metric ton level. That was an important development signaling that bulls are taking over. Just a month ago we pointed out that prices had upside potential.

We believe the key this year will be on the supply side and not as much on the demand side. These are some factors that could limit growth in aluminum output this year:

Pollution in China

A recent Chinese government document proposed that about a third of aluminum capacity in the provinces of Shandong, Henan, Hebei and Shanxi should be shut over the winter months. That sparked excitement among aluminum investors. These provinces account for over 20% of global aluminum output.

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In addition, late last month the country passed a law that will allow it to impose environmental protection taxes from January 2018, following an outbreak of hazardous smog in northern China where many industrial producers are located.

The takeaway is that China is taking air pollution seriously. Given that coal burning is the biggest contributor to air pollution in China, industrial metals supply could shrink this year, particularly steel and aluminum. Environmental closures are looking increasingly likely in China this year. What’s still up in the air is how much energy-efficient capacity will replace shutdowns in dirty capacity.

Trade Barriers

The fight against imports is getting more serious and this is something that could support not only aluminum prices but also midwest premiums, which rose to $0.09/pound in January. Recently, the U.S. launched a formal complaint against the Chinese government with the World Trade Organization over subsidies it says Beijing provides to the country’s vast aluminum industry.

In addition, U.S. customs officials seized $25 million worth of aluminum linked to a Chinese billionaire accused of stockpiling the metal across the world. The move is the most potent action yet by federal authorities probing whether U.S. companies connected to Chinese magnate Liu Zhongtian illegally avoided nearly 400% tariffs by routing the metal through other countries.

The same combination of domestic environmental and foreign trade imperatives already forced China to get serious about steel capacity closures. Is it possible that we see a similar outcome in aluminum? Quite likely.

Rising Raw Material Costs

Many analysts argue that cutbacks in China won’t happen because aluminum prices are well above last year’s levels, when prices were trading at $1,450/mt. However, it’s important to note that production costs are well above last year’s levels, too. The increase in production costs will limit additional restarts this year.

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Chinese coal production dropped 10% last year. Thermal coal prices doubled and hard coking coal prices quadrupled. China also proposed to close 50% of alumina refining capacity in Shandong, Shanxi, Hebei and Henan from November to March. Alumina prices already rose by more than 50% in 2016. Further shutdowns are likely to support prices of the raw material this year.

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Our Automotive MMI took off in February, surging 12.2% along with strong gains in steel prices and all of the base metals in the automotive index saw gains in the first full month of 2017.

Hot-dipped galvanized steel was a particularly strong performer along with the catalyst metals, palladium and platinum. The tough talk about U.S. automotive production that President Donald Trump started during the campaign has only ramped up since his inauguration. Automakers could have to significantly alter their purchasing and supply chains if a border tax is enacted.

House Republican leaders have proposed what they call a “border-adjusted tax,” which would place a levy on vehicles imported into the U.S. and fully exempt those exported. Though Trump initially deemed the idea too complicated, White House Press Secretary Sean Spicer recently said it was under consideration and could help pay for a wall along the Mexico border.

An overhaul of the U.S. tax system could hand an advantage to Ford Motor Company, Honda America and General Motors, which rely the least on imported vehicles among the major automakers. The shake-up, if it is a border-adjusted tax, would clearly undermine Toyota America, which relies on shipments of RAV4 sport utility vehicles from Canada and Lexus luxury models from Japan, and deliver an even more damaging blow to companies with zero domestic production, including Mazda Motor Corp.

“The border adjustment piece of this is very intriguing for us,” Ford Chief Executive Officer Mark Fields told analysts after posting a $10.4 billion pretax profit for 2016. “The reason for that is we are the largest producer of vehicles here in the U.S. We’re a top exporter.”

About 79% of Ford’s domestic vehicle sales were built at home last year, according to researcher LMC Automotive, second only to the much smaller electric-car maker Tesla Motors. Honda ranks just behind Tesla and Ford, with 68% of its U.S. sales coming from domestic plants, followed by GM with 65%.

If the first weeks of the Trump administration are any indication, though, initial action on a tax plan could happen quickly via executive order and the lengthy process of legislation could be a post-executive order action plan.

January is typically the weakest month of the year for U.S. auto sales, and last month appeared to be no exception. Sales fell 2% to 1.1 million, according to Autodata Corp. Supply chain executives are clearly more worried about supply chains and a possible import tax this month than end-product sales.

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Aluminum prices started the year on a strong note, finally overcoming the $1,800 per metric ton price level that had acted as a ceiling for more than a year.

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While robust demand has supported aluminum prices, investors’ eyes have recently turned to the supply side of the equation. In December, China’s share of global aluminum output was more than 56%. The giant producer’s share of supply is now facing some serious risks.

For years, Chinese cities have been choking on the smog spewing from China’s industrial production sector but things have recently gotten worse. Last month, authorities asked 23 cities in northern China to issue red alerts as inspection teams scoured the country. The scale of the red alert measure shows that the Chinese government is taking air pollution seriously… at least this time.

Investors are now speculating about capacity cuts in China as the country released a new policy document with plans to close around a third of aluminum capacity in the provinces of Shandong, Henan, Hebei and Shanxi over the winter months to help reduce emissions.

The cuts, of course, might not happen. Implementation of the document is subject to feedback and it will be normal to expect reasonable complains from both affected producers and regional governments.

Aluminum Premiums Pick Up

US aluminum premiums. Source: MetalMiner IndX.

For U.S. aluminum buyers, the all-in aluminum price consists of the aluminum price plus regional aluminum premiums. The premium is a surcharge that consumers must pay on top of prevailing prices in order to take immediate delivery of the metal from warehouses.

Not only the price of aluminum has risen, but premiums also picked up last month, trading now at $0.09/pound. The U.S. has also experienced a sharp contraction in aluminum smelting capacity over the past year. This has created a case of supply shortfall within the U.S., which now depends on aluminum imports to satisfy its rising domestic demand.

The fight against imports is getting more serious and this is something that could support domestic aluminum premiums. Recently, the U.S. launched a formal complaint against the Chinese government with the World Trade Organization over subsidies it says Beijing provides to the country’s vast aluminum industry.

In addition, U.S. customs officials seized $25 million worth of aluminum linked to a Chinese billionaire accused of stockpiling the metal across the world. The move is the most potent action yet by federal authorities probing whether U.S. companies connected to Chinese magnate Liu Zhongtian illegally avoided nearly 400% tariffs by routing the metal through other countries.

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The same combination of domestic environmental and foreign trade imperatives already forced China to get serious about steel capacity closures. It is possible there could be a similar outcome in aluminum. In addition to higher aluminum prices due to supply cuts, we could see higher aluminum premiums due to the ongoing trade tensions, just as we saw the spread between domestic and international steel prices widen.