Our monthly MMI saw a boost in October as three metals tied for the biggest gain and markets seemed to tighten as manufacturers started to make decisions for their end of year and early 2017 spending.
There seemed to be a Q4 tightening across most of the metal markets we follow. Sure, the Rare Earths and Renewables MMIs were flat as a board yet again, but Copper, Aluminum, Stainless and Raw Steels all saw strong gains. Our Global Precious MMI gained again but almost immediately suffered a pullback after talk of a Federal Reserve interest rate hike in December and renewed strength from the U.S. dollar.
Our Stainless MMI rose 4% in September. The complexity and uncertainty of the supply equation is giving support to nickel prices, so far, this year.
Philippines To Close More Mines
Philippine nickel production is down 24% for the first seven months of this year. The Philippines had already suspended eight nickel mines in previous months and more suspensions were expected. On September 27th, the government announced that 20 more of its mines would be suspended for environmental violations.
The suspended mines and those at risk represent nearly 60% of output in the Philippines, the world’s largest producer of nickel ore and top supplier to top buyer China. China’s imports of nickel ore and concentrates from the Philippines fell 21.3% in the first eight months of year to 17.99 million metric tons.The uncertainty surrounding Philippines’s output is the bullish side of nickel’s story.
Indonesia in Play
Meanwhile, it looks like Indonesian production is now in recovery mode. Indonesian supply rose 30% in the first seven months this year. Ferronickel is an intermediate stage product between ore and refined metal, and Indonesian exports of ferronickel to China have surged this year.
At the same time as refined nickel production in Indonesia is rising, as the popualce wanted, Indonesia is also considering whether to resume raw nickel ore exports. The decision is expected within weeks. Nickel smelters now fear the rule changes as they could weaken nickel prices, especially those companies that make semi-finished and refined metal.
It’s worth noting that while nickel has performed strongly this year, it’s still well below the levels five years ago when the metal peaked near $29,000/mt. It seems that prices have room on the outside but more tightness is needed in nickel markets.
Indonesia relaxing the 2014 export ban could add pressure to nickel prices. On the other hand, prices might continue to get a boost while The Philippines keeps on punishing mines that don’t meet environmental standards.
In the countervailing duties investigation, Commerce found that mandatory respondent Steamline Industries Limited received countervailable subsidies at a rate of 3.13% and that mandatory respondent Sunrise Stainless Private Limited, Sun Mark Stainless Pvt. Ltd., and Shah Foils Ltd. (collectively, “Sunrise Group”) received countervailable subsidies at a rate of 6.22%. Commerce assigned a final subsidy rate of 4.65% for all other producers/exporters in India.
As a result of the affirmative final determinations, Commerce will instruct U.S. Customs and Border Protection to collect cash deposits equal to the applicable weighted-average dumping and subsidy margins.
Commerce preliminarily found that dumping occurred by mandatory respondents, Shanxi Taigang Stainless Steel Co., Ltd. and Tianjin Taigang Daming Metal Product Co., Ltd. Commerce also determined that the mandatory respondents are not eligible for a separate rate, and therefore part of the China-wide entity.
Commerce calculated a preliminary dumping margin of 63.86% for the non-selected respondents eligible for a separate rate. Commerce preliminarily assigned a dumping margin of 76.64% based on adverse facts available for all other producers/exporters in China that are part of the China-wide entity due to their failure to respond to Commerce’s requests for information.
As a result of the preliminary affirmative determination, Commerce will instruct U.S. Customs and Border Protection to collect cash deposits based on these preliminary rates.
The petitioners for this investigation are AK Steel Corporation, Allegheny Ludlum, LLC d/b/a ATI Flat Rolled Products, North American Stainless, and Outokumpu Stainless USA, LLC.
After gaining sharply in June and July, our Stainless MMI retraced last month. Nickel’s rally cooled down in August after a pick up in Indonesian ferronickel supply rekindled previous fears of a global supply shortage.
Philippines Supply Declines
In June and July, nickel rallied as the Philippines reviewed all existing mines in order to close those that had adverse impacts on the environment.
At least eight nickel mines have been shut down so far this year, cutting around 10% of the country’s capacity.
The Philippines is by far the largest nickel ore supplier to China since Indonesia imposed an export ban for unprocessed material back in 2014. Recent numbers are already showing this decline in production. For the first seven months, China imported 13.84 million metric tons from the Philippines, down 27% from the same period last year.
The current disruptions in the Philippines have no doubt tightened the market for nickel ore triggering a price rally this year. However, in August investors questioned whether this shortage in China’s nickel-pig iron industry will actually translate into a shortage of nickel in the global market.
Indonesian Refined Nickel Supply Picks Up
While supply of nickel ore to China is declining due to current disruptions in the Philippines, supply of refined nickel to China is rising as Indonesia ramps up production.
China’s imports of ferronickel from Indonesia came at a five-times higher-rate than the amount taken in the same month a year earlier. For the first seven months, China’s imports of ferronickel from Indonesia surged more than four-fold to 390,700 mt. Comparing apples to apples, the nickel content of the year to date of ferronickel exports equals about 4 million mt of nickel, slightly less than the 4.13 mmt loss in the Philippines so far this year.
For this reason, we hear some analysts saying that China isn’t importing less nickel, it is just changing the form in which it imports the metal. And, as prices retrace, it’s no wonder that this reminds us to what happened just two years ago when nickel prices soared to then fall precipitously.
Is This Time Different?
Back 2014, nickel prices surged as Indonesia prohibited ore exports. However, prices sold-off later on as miners in the Philippines moved into the trade. This time, it’s the other way around. Environmental restrictions are shrinking supply in the Philippines while Indonesia is making up for that loss.
While prices fell in August, we need to be reminded that prices don’t move in a straight line and that, so far, the decline seems like normal after nickel gained over 30% in June and July. Also, there are two other factors that make us think that the decline won’t be as severe as back in 2014:
Back in 2014, nickel prices rose independently while the rest of the industrial metal complex was falling. This time, it’s not only nickel but we also see many industrial metals rising. The bullish sentiment on base metals this year should help limit nickel’s fall.
It’s barely been a month since the Philippines started to shut down mines and volumes may be squeezed further after the shutdowns accounting for about 15% of output. Recently, the Philippines’ mining minister said that there will absolutely be more suspensions following the eight already suspended.
For these reasons, we wouldn’t turn bearish on nickel just yet…
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We rarely see such positive growth in metal prices as we did in the August MMI Price Trends Report.
All the metals we track were up save for Aluminum, which fell only 1.3%, and renewables and rare earths, which held flat. The Stainless Steel MMI increased 9% amid uncertainty about Chinese nickel ore supply after mining crackdowns in top supplier, the Philippines.
Meanwhile, the most bullish of bull runs continued for our Global Precious MMI which added a 7.2% increase to its jump last month to knock on the door of the top 10% of the IndX. The platinum group metals had strong increases along with gold and silver this month.
“Hey metal buyers, remember me?” Wall Street bull courtesy of iStock.
Palladium, particularly, made higher highs and stumbled to lower lows in classic bull market fashion.
So buy quickly before prices increase more, right? Wrong. Our Raw Steels MMI posted a healthy 4% increase, but it’s still heavily dependent on China’s stimulus programs to keep demand up in the largest global consumer of steel products. If there is a pullback in stimulus, prices could fall dramatically. The same is true for copper.
Unlike diamonds, bullish trends in commodities and industrial metals don’t last forever. Continue to make informed buying decisions in this thriving market — watch China’s stimulus program and the strength of the U.S. dollar post- Brexit — and remember that today’s price strength might be tomorrow’s carpet getting pulled out from under your feet.
Industrial metals entered bull market territory earlier this year and that puts the wind behind nickel’s back. Apart from the more bullish macro environment, we are witnessing two key developments within nickel’s industry that are undoubtedly adding fuel to this rally.
Tighter Environmental Rules
The Philippines isn’t joking around about tightening its environmental rules. On the first of the month, the Philippines new President, Rodrigo Duterte, used some bold words against his country’s miners: “We will survive as a nation without you. Either you follow strictly government standards or you close down.”
The country has so far suspended the operations of seven domestic nickel mines for failure to comply with environmental regulations. Moreover, the new mining minister, Regina Lopez — a committed environmentalist — recently vowed to close more nickel mines causing environmental destruction.
The Philippines is the biggest supplier of nickel ore to top consumer China since Indonesia banned shipments of unprocessed mineral ores back in 2014. The recent suspension of mines and the risk of more closures lifted nickel prices over the past few weeks.
Surge in Nickel Imports
Although the metal has benefited for the most part from a bull narrative of supply shortfall this year. The bulls are finding more reasons to bet on nickel amid growth in Chinese demand, which is being reflected in the surge in Chinese imports this year. Refined nickel imports in China have surged by 189% to a record 226,100 metric tons in the first half of the year.
What This Means For Metal Buyers
The Philippines is the top supplier of nickel ore to China and these new developments have sparked concerns about ore supply. Moreover, demand seems solid thanks to China’s stimulus measures. These two factors, combined with a bull sentiment across the industrial metals complex, have given buyers enough reason to take risk off the table as prices could continue to trend up.
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Allegheny Technologies, Inc. reported sales were up 7% for the second quarter over the year before, increasing to $811 million, with the company reporting an overall net loss largely due to its recent work stoppage.
ATI CEO, President and Chairman Richard Harshman described reason for cautious optimism to an uptick in orders in the aerospace market — both in engine components and airframes — and lowered capital expenditures in the near future ATI continues to ramp up production at its $1.2 billion Brackenridge, Pa., flat-rolled stainless production facility.
“Commercial aerospace market sales increased another 3% compared to the first quarter of 2016,” Harshman said. “Sales to the aerospace and defense market continued to drive ATI’s results, representing over 50% of total 206 sales. Our aerospace market is being driven, in large part, by the growth of ATI’s next generation mill products, forgings and castings.”
Harshman and other ATI executives described the nickel and titanium alloys — and powders that ATI sells for additive manufacturing — it provides to the defense and aerospace markets as the future of the company. Harshman also said the business momentum ATI is experiencing “certainly the best it’s been in quite a while.”
While flat-rolled stainless products are clearly not ATI’s future, ATI officials said the flat-rolled products division improved financially in Q2. According to the earnings report, officials expect the division to be “modestly profitable” in the fourth quarter. This opened up the possibility of ATI considering reopening its Midland, Pa., production facility. ATI officials had previously said the plant won’t return to production until the flat-rolled market improves.
“In our FRP segment, our second quarter results demonstrate that we are making progress in our journey toward a consistently profitable business, during a period of continuing low raw material prices, global stainless steel sheet and strip overcapacity, and uncertain end market demand,” Harshman said.
Base prices have increased three times since the beginning of 2016. Stainless buyers have already been paying a steady increase in base prices in the transactional market. By now, most contract stainless buyers are at base prices higher than their prior contract period. Master distributors are extracting premiums as metal buyers scramble to fill in any gaps in their supply chains. Another base price increase is expected to be announced after the September anti-dumping duty determination on Chinese cold-rolled, flat stainless steel.
US Mills Enjoying Price Increases
The U.S. mills have the momentum to capture another base price increase. Domestic mills have strong order backlogs. Domestic lead times continue to be longer than the normal six to eight weeks. The impact of the anti-dumping and countervailing duty lawsuits against Chinese cold-rolled stainless has finally occurred.
The latest U.S. Census statistics showed cold-rolled stainless imports into the U.S. from China dropped to under 2,000 metric tons in May, compared to almost 10,000 mt in April. Other Asian importing countries have not significantly increased activity into the U.S. Increased imports into the U.S. from Europe have amounted to less than a 1,500 mt-per-month increase.
The threat of trade cases has made many importers cautious about the U.S. market. Whether domestic or import, the metal buyer should expect to be paying higher overall prices in the upcoming months. Since publishing our July monthly outlook, nickel prices have climbed 12%.
Cover Your Volumes
Even though prices are on the uptick, stainless buyers need to ensure that their volumes are covered. Any manufacturer with spikes in stainless demand may have difficulty in procuring additional material quickly, especially in bright-annealed, polished and thicknesses less than .030 inches.
I strongly urge metal buyers to review stainless flat-rolled requirements to ensure that adequate volumes are secured with your suppliers. Whether import or domestic sources need to be utilized, your suppliers need more transparency than ever before in your flat-rolled stainless steel needs.
China’s Commerce Ministry said on Wednesday the U.S. deliberately misinterpretedWorld Trade Organization rules after the Commerce Department found that Chinese stainless steel sheet and strip was illegally subsidized. Some companies were hit with 193% import duties.
Commerce found in favor of countervailing duties for imports of stainless steel sheet and strip from China and said it had set a preliminary subsidy rate of 57.3% for a Chinese steel manufacturer, Shanxi Taigang Stainless Steel Co. Ltd. Many, many more were hit with 193% duties, in part because they did not respond to Commerce’s requests for information during the investigation.
Chinese Steel overproduction remains a global issue, even as China complains that other nations unfairly place tariffs on its steel.
China’s Commerce Ministry said in a statement it was not satisfied with the decision and that it would use the WTO dispute settlement process to defend its interests. That’s awfully rich, as China continues to overproduce steel — both carbon and stainless — at a rate that dwarfs every other country in the world.
China produced more steel than the rest of the world combined in May. According to the World Steel Association, China produced 70.5 million metric tons of crude steel products in May, up 1.8% from the levels of a year earlier and just shy of the record level hit in March.
The China Iron & Steel Association said March steel production hit 70.65 mmt, a record high, amounting to 834 mmt on an annualized basis. To China’s credit, Beijing is using both its clout and power to finally start an attempt to consolidate China’s massive steel sector, according to the Financial Times. However, that process is going along about as glacially as other changes in the People’s Republic.
Overproduction Leads to Frustration
It should come as no surprise to China that U.S. and other nations’ regulators are fed up with its overproduction. Read more