Non-ferrous Metals

The rising trend of aluminum processors seeking protection from Chinese imports may be just the beginning if a recent Reuters article is correct.

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Encouraged by a growing delta between the London Metal Exchange and Shanghai Futures Exchange aluminum price quotations, China’s aluminum makers are expected to step up exports in coming months, aided and abetted by a healthier global manufacturing climate and declining world aluminum stockpiles, the article explains.

Should this prove right, higher exports of semi-manufactured aluminum products would depress prices on both the LME and processors conversion premiums in the rest of the world. That would be bad news for producers, but good news for consumers who have been experiencing rising prices of both the underlying LME and conversion premiums for the last six months.

Chinese exports of semi-finished aluminum products fell last year as both LME and SHFE prices collapsed but production has rebounded more than 20% during the first two months of this year as the rising LME has made exports more profitable for Chinese producers benefiting from a relatively weaker SHFE domestic price. According to Goldman Sachs, the profitability of China’s semis exports has jumped 20% this year, encouraging the surge in exports we have seen in Q1 and portending a further increase in the months ahead.

How long the increase in exports is likely to last, and therefore how persistent the negative impact it will have on prices, remains to be seen. Despite the anticipation of rising exports, many still think the surge could be short-lived. Last month, Beijing ordered aluminum producers in 28 cities to slash output by 30% during winter months to limit coal use and curb pollution. In the mean-time, those producers are pumping out every ton they can adding to domestic availability, inventories and depressing the SHFE price. Come autumn, however, if cutbacks are enforced and the physical market tightens that surplus could turn to deficit and prices could rise. In which case exports will become less attractive and the tap will be turned off.

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This isn’t the first time the global aluminum market will be dancing to China’s tune. Consumers could do well to use a dip in prices this summer to cover forward for what may be a winter in which prices rebound.

This month, some of our metals reached new heights while others saw their rallies noticeably falter.

Aluminum and Raw Steels are still riding high, while complicated supply stories saw stainless and copper fall. Demand from manufacturers for almost all of the metals we track remains strong.

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17 Of the 18 manufacturing industries tracked by the Institute for Supply Management’s index of national factory activity reported growth and no industry reported a contraction last month. Buyers still might want to beware as metal markets are showing more pull-backs than we witnessed in March, despite the overall bullish behavior across the entire industrial metals complex.

The London Metal Exchange aluminum price has risen steadily since this time last year and seemed at times like it may hit, if not breach, $2,000 per metric ton. Many consumers are asking how much further does it have to go? will it break that psychologically important barrier anytime soon? and if it does, how much further does it have to go?

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To understand this, we should consider what has caused price strength in recent months and that you will not be surprised to hear is easy to list, but harder to judge to what extent each factor has had an impact.

Why is Aluminum Up?

First, there are general commodity category price drivers, nearly all base metals have shown price strength over the period as industrial demand has remained positive and surplus supply markets have either tightened or gone into outright deficit. In the case of aluminum, there are several indicators suggesting the market deficit has increased over the last 12 months. Physical delivery premiums have increased not just in Asia, but in the U.S. with the Midwest premium currently trading just below ten cents per pound on the CME Group exchange, up from six cents per pound in the third quarter of last year. Japanese physical delivery premiums have been agreed at $128 per metric ton for the second quarter up from $95 per ton for the first quarter.

Source: Reuters

Meanwhile, LME inventory continues to decline with almost 400,000 mt electing to leave the system in February alone. Now it must be said that not all this metal is destined for consumption, as Andy Home in a recent Reuters article points out, the majority of metal leaving the LME system is almost certainly heading to off-market lower cost storage options. Read more

Our Aluminum MMI rose again in March. London Metal Exchange prices rose above $1,950 per metric ton and, given the bullish sentiment among investors, aluminum might soon reach the $2,000/mt milestone.

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Prices were buoyed by confidence that China will implement their agreed-upon cuts. The world’s largest nation-producer of the metal will force about a third of aluminum capacity in the provinces of Shandong, Henan, Hebei and Shanxi to be shut down over the winter season, which runs from the middle of November through the middle of March, putting at risk about 1.3 million mt of production.

Aluminum MMI

It would be normal to see these producers to simply ramp up production ahead of the winter season to make up for lower output during the winter months. However, that won’t be the case.

China’s environmental crackdown is already affecting producers as inspection teams visit aluminum smelters on a regular basis to keep production in check. We suspect that China’s strategy to curb pollution will offer further support to prices.

Global Political Heat

While China tackles overcapacity in the form of an environmental clampdown, international pressure on China is rising. In March, global aluminum associations released a joint letter in advance of the upcoming G20 summit calling for the creation of a Global Forum to address aluminum overcapacity.

This is the first time that a global coalition of aluminum producers has called for such an effort to address Chinese overcapacity in the marketplace. In addition, earlier last month, The Aluminum Association (a trade organization that represents North American producers) filed a petition seeking anti-dumping duties on aluminum foil.

China Hongqiao in Trouble

The world’s biggest aluminum smelter was recently suspended from the Hong Kong Stock Exchange as the company is being forced to defend itself against allegations that it has inflated its profit.

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As my colleague Stuart Burns explains, part of the problem seems to be how China Hongqiao has been reporting its profits and handling internal transfer pricing. Like many of the new breed of Chinese aluminum producers, China Hongqiao has captive power production but, since 2010, the firms profit margins have diverged from most of its peers, maintaining in excess of an 8% margin even when many of its domestic competitors fell into periods of loss.

Even during periods when the coal price rose the reported cost of power produced by China Hongqiao dropped suggesting the firm was trapping profits in the smelting division while hiding losses in power generation. Likewise it has been suggested that China Hongqiao has declared transfer prices from its alumina production division roughly 20% below those of similar companies operating in the same provinces.

Ernst & Young will announce the results of the audit next month. Not just investors but the whole aluminum industry will be keen for a a peek behind-the-scenes into the sometimes murky world of Chinese aluminum producers. Proof of bad reporting would add more tensions to the global aluminum market.

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Following the fortunes of Boeing and Airbus, you could be forgiven for thinking that aircraft manufacturers always run late, over budget, and the resulting end product can struggle to meet initial expectations.

Emrbaer E2

The Embraer E2. Source: Embraer.

But Brazil’s Embraer, the world’s third-largest commercial jet maker, has shown with its next generation narrow body regional aircraft, the E-2 series, that it doesn’t have to be that way. Embraer introduced the aircraft at the Paris Airshow in 2013 and it was first displayed last summer at the Farnborough Airshow just 45 days after its maiden flight. The aircraft is set to be delivered on time, on budget, and even slightly underweight.

Segment Dominance

Embraer has been very successful with their current E-jet series and the new E-2 program looks set to maintain the company’s 55% market share dominance of the regional jet market. The E-2 will commence deliveries in the first half of 2018 and variants will be capable of carrying between 70 and 130 passengers. An FT article notes that Embraer has a backlog of commitments from airlines for 690 E2 aircraft, including firm orders of 275.

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The company has struck a wide-ranging and exclusive arrangement with Alcoa Corp. for aluminum sheet and plate for the wings, skins and fuselages of the model, with other Alcoa products being used in key applications such as wing ribs, fuselage frames and other structural parts. The long-term collaboration is said by Aluminum Today to be worth $470 million to Alcoa. “PurePower” engines will be supplied by Pratt & Whitney. Read more

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