Precious Metals

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This afternoon in metals news, the U.S. renewable energy industry has reason to worry about the Republican tax proposal, union members at the Quebrada Blanca copper mine in Chile move closer to a strike, and precious metal prices fall.

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Renewables Market Pushes Against BEAT Tax

While the Republicans’ latest attempt at an overhaul of the U.S. tax system is receiving the usual praise and criticism, the renewable energy sector is concerned – and understandably so. As Dino Grandoni explains in the Washington Post, the bill may inadvertently end investment in wind and solar energy.

Currently, many companies have large multinational corporations finance wind or solar energy projects, and in return, give the latter the renewable energy credit that the government provides. But these credits may be cancelled out as part of the base erosion anti-abuse (BEAT) tax, which is meant to discourage multinationals from moving profits abroad.

According to the American Wind Energy Association’s Peter L. Kelley, the BEAT tax – if it is not amended to exempt renewables credits – could put an end to more than half of the country’s wind projects.

Strike Brewing at Quebrada Blanca Mine

A quarter of the workforce at the Quebrada Blanca copper mine in Chile moved closer to a strike, as the 106-member union rejected Canadian miner Teck Resources’ contract offer on Wednesday, Reuters reports. Ninety-six percent of the union voted to reject the offer and strike, said the president of the union. Read more

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This morning in metals, the U.S. dollar index is up, while gold and silver prices are on a downward trend and oil prices dip slightly from Monday’s high. In addition, there’s a very intriguing potential source of renewable energy on the horizon.

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A drop in U.S. oil inventories has helped oil prices stay more or less steady, Reuters reports. The biggest factor supporting oil prices has been Turkey’s threat to cut off oil exports from Kurdistan, and this past Monday, the price of oil came close to $60/barrel for the first time since June 2015.

U.S. Dollar Index Rises, Precious Metals Fall

Gold and silver prices fell to four-week lows as the U.S. dollar index climbed to a five-week high, fueled by the expectation that the Feds will hike up interest rates again, Reuters reports.

As Stuart Burns wrote earlier this morning, “Trump’s United Nations speech threatening annihilation on North Korea failed to support the gold price, as investors took a cue from central bank announcements that the Fed intends to start unwinding its multi-trillion dollar balance sheet in October.”

A New Renewable Energy Source?

Could 70% of U.S. energy come from plain old H2O? According to new research, energy from water evaporation could provide a staggering 325 gigawatts of power. Read more

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This morning in metals news, a recent report predicts the precious metal catalysts market will reach $19.4 billion by 2022, Reliance Steel and Aluminum Co. posted strong second-quarter numbers and   China’s Ministry of Commerce says it is willing to work with the U.S. on global aluminum market issues.

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Precious Metal Catalysts Market to Grow to $19.4B

Precious metal catalysts will prove to be especially precious on the market in the near future, according to a report from Research and Markets.

The report indicates the market will grow from $14.37 billion this year to $19.41 billion by 2022, at a compound annual growth rate (CAGR) of 6.19%.

Why is this metal sector set to become even more precious? Advances in automobile technology and pharmaceutical applications will see a rise in demand for this subset of metals, according to the research report.

“The newly developed emission standards demand additional improvements in catalyst technologies to successfully remove toxic substances from car exhausts, which will, in turn, drive the precious metal catalysts market growth through the automobile sector,” the report states.

A Good Q2 for Reliance

Reliance Steel and Aluminum Co. — the largest metals service center operator in North America,  headquartered in Los Angeles — posted strong numbers for this year’s second quarter.

According to a report on the Nasdaq website, the company reported a bottom line of $103.1 million, ($1.40 per share), compared with $99.5 million, or $1.36 per share, for Q2 of 2016.

The company’s revenue total also rose in Q2 by 12.7% to $2.48 billion, up from $2.20 billion last year.

China Signals Willingness to Work on Aluminum Market Issues

Ever since announcing Section 232 investigations of steel and aluminum, the Trump administration and the U.S. Department of Commerce have made it clear that Chinese excess capacity is the primary focus (notwithstanding the fact that Chinese steel and aluminum represent relatively small portions of U.S. imports).

On the heels of the U.S. International Trade Commission’s (USITC) Section 332 report on competitive factors affecting U.S. aluminum, China’s Ministry of Commerce suggested a global approach to tackling problems within the aluminum market, Reuters reported.

According to the Reuters report, Ministry of Commerce spokesman Gao Feng did not agree with the assessment that the USITC report accused China of “sponsoring” its aluminum industry.

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The results of the aluminum investigation will likely not be coming for some time, as the steel report is expected to come first. However, June came and went without a steel 232 announcement. Plus, if President Donald Trump’s comments earlier this week are any indication, steel trade policy doesn’t seem to be a top priority at the moment, particularly as the health care debate continues to heat up.

Palladium prices rose to a two-year high in April, making it the biggest gainer among precious metals. Last month we outlined some of the factors contributing to the palladium price rise: a growing auto sector; a strong South African currency; a falling dollar; and bullish sentiment across industrial metals. However, as prices continue to climb, it’s time to question how high prices can go. Despite a still solid outlook, there are some reasons to believe palladium prices could be nearing their peak:

Palladium prices hit 2-year high. Source: MetalMiner analysis of stockcharts.com data

Global Demand for Cars

Eighty percent of palladium demand comes from cars. China has the largest auto market, followed by the United States. Therefore, car sales in these two countries are very important for palladium’s demand outlook.

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Car sales in the U.S. fell short of expectations in March, down 1.6% compared with March 2016. After two years of record sales, the auto industry seems to have hit a plateau. The U.S. industry might have to come up with discounts and incentives to continue to increase sales.

US total vehicle sales. Source: tradingeconomics.com

Car sales in China rose 13.7% in 2016 compared to 2015. The astonishing performance of China’s auto market helped boost palladium prices last year. Sales are still running strong this year but not at the same pace as last year. According to the Wall Street Journal, sales of vehicles, excluding those typically used for commercial purposes, rose 1.7% to 2.1 million units in March from a year earlier.

Weaker sales-tax incentive have put pressure on demand this year and are expected to slow down demand even more next year. Buyers of cars with engines up to 1.6 liters paid a 5% purchase tax last year, but they are now paying a 7.5% rate. Buyers are still finding incentives to rush on buying cars this year since the rate will increase to 10% in 2018.

Palladium Nears Resistance Levels

Palladium nears long-term resistance levels. Source: MetalMiner analysis of stockcharts.com data

Palladium prices have risen steadily since the beginning of 2016, but the metal is now trading at historically high levels, which could play against this rally. Historically, palladium has peaked in the range of $850-$900. Prices closed last week at $827.

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This doesn’t mean that prices will necessarily peak at these levels again, but we suspect that the closer prices get to those levels, the stronger the fundamentals will need to be to lure investors to chase prices higher.

What This Means For Metal Buyers

Palladium’s outlook continues to look good, but a potential slowdown in global auto sales and stiff price resistance near $850-$900 could put a ceiling to palladium’s rally this year.

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.

Palladium has been the best performer among precious metals for some time now. Since the beginning of 2016, palladium is up 65%, easily beating the price increases seen in platinum, gold and silver.

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What factors made palladium outperform its peers and what should palladium buyers pay attention to this year?

Global Demand for Cars

According to Inside Advantage’s Outlook 2016 report, “the primary bullish factor might be the expansion of auto catalyst demand for palladium, particularly in China where air pollution problems are increasing. The auto sector accounts for around 80% of palladium demand.”

Chinese car sales for the first two months of 2017 beat expectations and were 8.8% higher compared to the same period in 2016. According to a Market Watch report, the pace is still weaker than the 14% increase reported last year by the industry as tax incentives urged customers to buy cars. In Q4 of 2016, China announced a 50% cut in its sales tax from 10% to 5% for small automobiles. The tax cut was effective until the end of 2016.

Most analysts were expecting a big slowdown in the largest automobile market this year, but China continues to surprise markets. The country agreed to extend the cut, although at a higher rate of 7.5%. In 2018 it will revert to 10%. Therefore, while auto sales might not beat the high levels reached last year, Chinese citizens will still likely take advantage of a lower tax in 2017.

According to a recent Reuters article, “March’s figures for the world’s second-largest automotive market came in below market expectations and gave early evidence that the growth in America’s car sales may be running out of steam. Sales in March fell by 1.6% compared with the same month a year ago.”

Overall, auto markets were really strong in 2016, contributing to a 50% rise in palladium prices last year. This market might surprise again in 2017 but signs of a plateau in the U.S. and uncertainties in China due to an extended but higher tax cut are factors to watch this year.

Strong South African Currency

South African Rand Index. Source:MetalMiner analysis of @stockcharts.com data.

South Africa is the largest producer of palladium, and controls around 40% of world output. The Rand (South African currency) has been one of the best performing currencies since 2016. A rising Rand makes South African exports more expensive to the rest of the world, limiting producers margins and potentially leading to a reduction of output. Read more

Our monthly Global Precious Metals MMI dipped down a point in April from last month, losing 1.2% to end up at 83.

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Ultimately, most gold, silver, platinum and palladium price points from the U.S., China, Japan and India dropped off for the month, which led to the sub-index’s overall decline — but there was one price point that decided to blaze its own trail upward.

The U.S. palladium bar price rose 3.4% over the past month, the third straight month of increases on the MetalMiner IndX.

What’s Going on with Palladium?

Well, automotive sector demand for palladium, at least on a spot or short-term basis, would be a hard case to make.

As my colleague, Jeff Yoders, reported earlier this week, U.S. automakers’ sales figures for March came in below market expectations and gave early evidence that America’s long boom cycle for automotive sales may finally be losing steam.

Automakers sold 1.56 million new cars and trucks in March, a 1.6% decline compared with the same month a year ago.

For example, Ford Motor Company took the biggest hit among sales drops, seeing its March numbers fall more than 7% from February’s.

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According to a recent Seeking Alpha article, “going into 2017 the market was considering limited supply to be the primary factor supporting palladium prices,” with limited sector growth expected from the U.S. and European markets, and China being the only auto market to be counted on for buoyed sales.

The above has generally held true, while seasonality and investor interest in ETFs seemed to have been playing into palladium’s rise. This could well be the high point for palladium prices this first half of the year.

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Gold prices have gained 9% this year, recouping a healthy amount post-U.S. presidential election.

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A stronger dollar and expectations for economic growth drove investors out of the safe-haven asset. What’s now sending investors back into gold? and, is this gold rally the beginning of gold’s revival or just a dead cat bounce?

Buying The Dip

Gold rises in 2017. Source:MetalMIner analysis of @stockcharts.com data.

Although a 9% increase might look impressive, it really isn’t. Gold previously lost $180 per ounce in less than two months. After such a big slump it’s normal see a price rebound since many investors will see the significant dip as an opportunity to buy gold at a discount.

To me, this doesn’t mean that gold’s underlying fundamentals have improved. Prices still have yet to test stiff resistance near $1,300 per ounce. This rally could lose steam in March.

The US Dollar

The US Dollar Index since March 2016. Source: MetalMiner analysis of @stockcharts.com data.

Perhaps, the single factor contributing most to this year’s gold rally is a weaker dollar. Weakness in the dollar also comes because the currency rose very fast in the last quarter of 2016. In addition, President DonaldTrump made comments that he desires a weaker dollar and that has also weighed down the currency.

Last week, Federal Reserve officials said they plan to raise rates “fairly soon,” but “they left investors doubting that the central bank will act at its March meeting,” according to a piece on Dow Jones newswires. “The Fed raised interest rates in December and cited plans to raise rates as many as three times in 2017,” according to that story. Gold usually suffers under higher rates, since the precious metal becomes less “less attractive compared with yield-bearing assets when borrowing costs rise,” according to Dow Jones.

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This month the dollar seems to be finding some support. We’ll have to wait and see if the currency can resume its bull market run, which would be quite bearish for gold prices.

Stock Markets

The S&P 500 hits all-time highs. Source: @Stockcharts.com.

As a CNBC.com article puts it, “Trump has frequently told U.S. citizens he remains committed on both tax reform and regulatory cuts since entering the White House, which has created optimism among investors.” We already presented the case for a bull stock market back in January.

A Trump administration for the next four years might be just what the doctor prescribed to keep this aging bull stock market going, even with seven-plus years of gains behind its back. At least that’s what it looks like thus far. U.S. stock indexes are trading at all-time highs, which is not helping gold as a safe haven.

What This Means For Metal Buyers

The recent strength in gold prices is something to keep an eye on. However, keep in mind that this rally might just be a dead cat bounce. A rising stock market, a healthy U.S. dollar and gold prices meeting resistance are factors that could keep a lid on gold’s rally.

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.

Well, perhaps these rebounds are not quite worthy of The Worm — but our Global Precious Metals MMI has hit its highest level since October 2016, climbing 7.9% to 82 for the February reading.

PGMs Lead the Way

Two of the biggest movers on MetalMiner’s precious metal sub-index were U.S. prices of platinum and palladium, rising 10.2% and 10.9%, respectively.

That palladium increase nearly got the price to the 18-month December 2016 high.

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Here’s the deal with palladium in a nutshell, from MoneyWeek:

“Both U.S. and Chinese car sales have been solid of late, with the latter rising at their fastest pace in three years (in 2016) and the former potentially set for another boost thanks to President Trump’s fiscal stimulus. China’s pollution problem is forcing it to tighten car emission standards, adds Chen Lin on Equities.com, which implies a steady rise in demand for palladium over the next few years.

“On the supply side, South Africa, the world’s top supplier, is not expected to increase mined output much. Analysts reckon that dwindling sales from Russia’s stockpiles means they are probably nearly depleted. TD Securities thinks the market deficit could double this year.”

What a Gold Mine!

Our intrepid editor at large, Stuart Burns — you might remember him from world-class macroeconomic coverage as it pertains to industrial metals, or (our) voice of James Bond’s Q — recently explored the wilds of India, and with him, he brought back gold.

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Or, to be more accurate, some gold coverage.
Soon we’ll publish Stuart’s take on the gold import situation in India. Here’s a taste:

“Although India has mines that go back more than 120 years, its annual gold production is miniscule. According to an article in the Hindu Times, that could be about to change. The Kolar gold field was forced to close in 2001 due to mounting losses at operator Bharat Gold. The state-owned company had been mining the Kolar reserves since independence in 1947 but the mines are deep, down to 3 kilometers, and Bharat was operating with outmoded technology and a large unproductive legacy workforce. But Mineral Exploration Corp. estimates show reserves to be worth $1.17 billion in the mines, with another $880.28 million in gold-bearing deposits estimated to be left over in residual dumps from previous mining operations.

India is never likely to rival South Africa, Canada or Australia as a gold miner, but that’s not the point — any contribution will lessen the impact gold imports have on the country’s balance of payments. With domestic reserves estimated at over 100 metric tons, there appears to be scope — with the right state and government backing — for miners to reduce some of those imports and create domestic employment.”

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