Non-ferrous Metals

Most aluminum consumers seem quite content with the range-bound behavior of the light metal over recent months.

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Aluminum on the London Metal Exchange has been trading broadly between $1,700 and $1,750 per metric ton for much of the fourth quarter. Maybe not to the same extent as copper or zinc, but aluminum along with most of the base-metal sector benefited from renewed investor interest as 2016 went on. Although net long positions have been trimmed back following some recent significant deliveries into LME warehouses, the consensus remains positive regarding prices for 2017. Read more

U.S. customs officials have seized $25 million worth of aluminum linked to a Chinese billionaire accused of stockpiling the metal across the world, the Wall Street Journal reported this morning.

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The Obama administration also launched a formal complaint Thursday against the Chinese government with the World Trade Organization over subsidies it says Beijing provides to the country’s vast aluminum industry.

The move against the stockpile of aluminum connected to Chinese billionaire Liu Zhongtian, the owner and CEO of aluminum company China Zhongwang, is the strongest action yet by federal authorities probing whether U.S. companies connected to the Chinese magnate illegally avoided nearly 400% tariffs by routing the metal through other countries.

An aluminum stockpile like this one has been seized by Homeland Security.

We previously reported the whereabouts of the aluminum stockpile as it curiously moved around the globe. China Zhongwang has denied any connection to the stockpile or its movements, but hundreds of shipping containers of aluminum were seized this week by the Department of Homeland Security. The containers are owned by Perfectus Aluminum, Inc., a California company founded by Mr. Liu’s son, Liu Zuopeng. Perfectus is now run by one of Liu’s close business associates, Jacky Cheung, who runs several companies with connections to Liu.

Homeland Security is conducting laboratory tests on the aluminum to determine whether the metal is restricted under U.S. law, according to federal court documents. The seized aluminum is in the form of pallets and court records don’t state which company manufactured the aluminum. The WJ saw shipping records which show that a separate company called Peng Cheng — which later became part of Perfectus in a merger—imported the metal from an affiliate of China Zhongwang in 2013 and 2014.

Homeland Security and the Justice Department are investigating whether the companies committed criminal or civil violations that could include smuggling, conspiracy and wire fraud. The WSJ reported that Homeland Security agents have also questioned former employees of the companies associated with Liu, according to people familiar with the investigation.

WTO Case Against Chinese Aluminum Subsidies

As for the subsidies case, the U.S. Trade Representative‘s office said in a formal complaint that China’s actions in the aluminum sector violate WTO rules prohibiting subsidies that cause “serious prejudice” to other members of the trade body. Read more

Copper prices retraced in December. After the huge price run in November we were expecting to see some profit taking as prices need to digest gains.

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So far, the decline has been limited, with prices holding above $5,500/mt. Although copper has lost some of its post-election gains, it still managed to end 2016 with decent yearly gains, suggesting that sellers are not totally in control.

Copper’s Bullish Narrative

One of the key factors supporting copper prices is the earlier-than-expected supply deficit. While most analysts were previously projecting the copper markets to move into deficit by the end of the decade, many of them are now expecting a deficit as early as this year.

Another factor supporting copper prices is higher energy prices. Oil prices, the main benchmark for energy prices, regained the $50/barrel level in December. Saudi Arabia said it could be ready to cut output more than originally agreed upon at the latest Organization of Petroleum Exporting Countries meeting. Non-OPEC countries, including Russia, also agreed to an output cut north of 500,000 barrels a day. Energy is key in the metals industry. For copper, energy can form almost 20% of the production costs.

President-elect Donald Trump’s proposed infrastructure investments are also positive for copper prices. However, in our view, the key demand driver continues to be China, by far the largest consumer of the red metal. China’s Caixin manufacturing purchasing managers’ index rose to 51.9 in December from 50.9 in November and beat market expectations. That figure marked the sixth straight month of growth and the strongest upturn in Chinese manufacturing conditions since January 2013.

What Could Add Pressure to Copper Prices

The better-than-expected demand from China explains the ongoing strength in industrial metal prices. However, there are concerns that the country’s demand growth rates could slow next year. The real estate and automotive sectors are the engine propelling this rapid growth. If the demand growth from these sectors slows, this could have strong repercussions on China’s demand for industrial metals.

Another factor to watch is the ongoing strength of the U.S. dollar. Copper is no different than other commodities that have a negative correlation to the dollar. Further appreciation of the dollar could negatively impact copper prices. Higher interest rates in the U.S. are among the factors contributing to a stronger dollar. In December, The Federal Reserve raised interest rates by a quarter point, as expected, but policymakers signaled a likelihood of three increases in 2017, up from prior expectations of two moves.

What This Means For Metal Buyers

The recent price decline in copper prices wasn’t that dramatic. So far, it seems like the bulls are still in control. A strong dollar and a possible slowdown in Chinese demand are factors that could bring prices down. Up until now, China’s demand looks strong and the dollar hasn’t had a big impact on metal prices. Therefore, we need actual reasons to turn bearish on copper.

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After surging in November, base metals fell across the board in December. That selling pressure spread into aluminum markets, limiting any upside moves into the year-end. Prices however didn’t give that much ground as aluminum’s fundamental story remains rather bullish. The drops look a lot like classic profit-taking.

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The auto industry is a key driver of aluminum demand. Auto sales in US and China (the world’s biggest car market) finished the year on a strong note. Total vehicle sales in the U.S. hit an 11-year high in December, aided by a fourth-quarter surge in demand that exceeded expectations. In China, car sales hit an all-time record in November, up 17.1% year-on-year.

Although the figures came in strong, they should be taken with a pinch of salt. In the U.S., cars were sold at an average 10% discount off the original asking price and that’s an incentive level not seen since the beginning of the financial crisis. Similarly, in Q4, China announced a 50% cut in its sales tax on automobiles with small engines. The tax cut was effective only until the end of 2016 although some analysts expect China to extend the tax cut into next year.

Chinese Supply

One of the factors supporting higher aluminum prices has been that there were fewer smelter restarts than expected smelter in China. In addition, we foresee limited additional restarts this year due to rising production costs and pollution issues in China.

First, alumina seems headed for a supply deficit this year following Chinese curtailments. Second, coal prices have surged since China reduced the hours for workers in its coal sector, supposedly in a bid to control pollution and curtail its excess industrial capacity. Truth be told, though, China really relaxed the mining day norm simply to control skyrocketing — some would say artificially high — prices. However, we expect the maneuvers will keep China’s supply of coal and aluminum in check this year.

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For years, China’s cities have been choking on the smog spewing from China’s industrial production sector but things have recently gotten much worse. Two weeks ago, 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. Given that coal burning is the biggest contributor to air pollution in China, industrial metals supply could shrink this year, particularly steel and aluminum.

What This Means For Metal Buyers

The massive existing overcapacity and questions regarding China’s ability to maintain its rate of growth are the main factors that could spoil the party for aluminum bulls. However, for the reasons explained above, it seems early to make a call on that. We still see upside potential in aluminum prices.

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U.S. auto sales set a new record in 2016. Automakers sold 17.55 million vehicles last year, as sales continued at a hot pace in December and topped analysts’ expectations.

Automakers eclipsed the record year of 2015 by some 70,000 vehicles or 0.4%, according to tracking firm Autodata Corp. Light truck sales totaled 59.5% of all sales last year, with cars representing 40.5% of the record. A year ago those percentages were 55.8% to 44.2% and each were about half just a few years ago.

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Another new sales record looked like a longshot just a few months ago, but a strong holiday sales period helped U.S. automakers forge ahead. Our Automotive MMI increased a point last month closing out a strong year.

Automotive metals are not just seeing robust demand from U.S. consumers. Automotive purchases in China are helping the strong economic recovery there, too. Sustainable growth in the world’s largest consumer of commodities is a bullish trend for all industrial metals and automotive alloys are no exception.

Ford Motor Company‘s recent decision to reinvest in a plant in Michigan rather than open a planned facility in Mexico may be the first salvo in an automotive trade war that has long been promised by President-elect Donald Trump.

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All good things come to an end and so, according to CRU, it is with Chinese steel producers, at least as far as export prices are concerned.

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A recent article by the firm suggests rising steel prices have hit demand from overseas clients. Rising trade barriers have had an impact but more significantly for sales into the Asian market, CRU reports Chinese exporters are also facing increasing competition from keenly priced exports from Indian, Russian and Korean competitors, eroding Chinese exporters’ market share.

As the graph shows, export premiums were strong in the Fall but collapsed in late November and early December before recovering as the year ended, but recent price movements have shown a softening of export prices and a rise in domestic prices suggesting the market is responding to greater competition on exports and an inability, due to input costs, to compete as effectively on exports.

Chinese mills have benefited from the fall of the yuan renminbi relative to the U.S. dollar but input costs have risen sharply as the principal input products —iron ore and coking coal are dollar-priced commodities — which have risen strongly in 2016 on the back of robust demand before dollar strength is factored in. Read more

Indian-born metals tycoon Sanjeev Gupta seems to be snapping up metals fast, whether those investments are aluminum, steel or other producers. Gupta’s investments come as competition is shying away from investing in the U.K. steel and other metals businesses.

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Gupta recently announced that he would be investing $148 million (around £120 million) in Britain’s last standing aluminum smelter. Gupta’s Liberty House along with his father’s SIMEC business will be paying $371 million (£330 million) to buy assets that include the plant at Lochaber in the western Scottish Highlands and two hydroelectric plants that power it.

UK Aluminum

The plan is to upgrade the equipment and turn it into an aluminum wheel manufacturing facility. Gupta’s Liberty and sister company SIMEC are part of the Gupta Family Group Alliance (GFG) , and, according to a report in the London Telegraph, “the move is part of the parent group’s strategy  to build what it describes as ‘a competitive and sustainable metals and engineering sector’ in the U.K.”

The Scottish government has supported the acquisition and has guaranteed the power purchases of the aluminum smelter for the next 25 years.

Liberty supplies parts to the U.K.’s automobile industry with clients including Jaguar Land Rover. Lochaber, with a capacity of 47,000 metric tons, was put on the block by Rio Tinto under its plan to dispose of its non-core assets.

The deal will immediately safeguard the existing 170 jobs, generate another 300 jobs directly and about 2,000 direct and indirect jobs in the overall supply chain.

This deal marks one of the largest single investments made by the GFG Alliance. It also marks a major step in GFG’s plan to forge a sustainable metals and engineering sector in the U.K. by integrating the supply chain.

Other Acquisitions

Liberty has spent at least $618 million (£500 million) in the past year on acquisitions. In November, it had also signaled its intention to buy some of Tata Steel UK’s specialty steel business.

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The Telegraph says the purchase of various steel furnaces is part of Gupta’s larger plan to complete his “green steel” vision, where scrap steel is recycled in the U.K. market.

Copper prices rose nearly 20% in November, a stellar rally that caught many by surprise… except us, of course.

Copper_Chart_December-2016_FNL

Following this sharp move, there were concerns about the pace of the metal’s gains. However, so far, the metal has shown resilience to giving those gains back. Indeed, it looks like copper still has fuel in the tank to move higher.

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Investors are pouring money into base metals as Chinese demand from infrastructure and construction continues to beat expectations. Momentum in copper is also being driven by hopes that U.S. President-elect Donald Trump will spend more on infrastructure. Stronger Eurozone and U.S. manufacturing PMIs also contributed support. Domestic PMI rose to 53.2 in November, the highest reading in five months and well above market expectations.

On November 30, OPEC agreed to curb its production to support falling oil prices. The news pushed crude oil prices above $50, providing support to commodity markets and metal prices.

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The International Copper Study Group (ICSG) estimates that global mined production will increase by 4% this year. But next year the ICSG is forecasting zero growth in mine supply. 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 incentivizee new developments, it will take a long time for that new supply to hit the market.

Despite analysts’ skepticism about copper’s rally, prices still have room on the upside. Given the ongoing price strength across the industrial metal complex, we see no reason not to remain bullish on copper.

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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.”

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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.