On Nov. 19, the Shanghai International Energy Exchange (INE), a subsidiary of the SHFE, started trading new bonded copper futures contracts. This contract addresses the second of “two” spot markets for copper — the tax-included domestic market currently supported by the dollar-denominated SHFE contract and the on-shore “bonded facility” market based in Shanghai to be denominated in RMB.
Not only does this create a new risk management tool for copper buyers, but it suggests China is now moving toward fulfilling its “dual circulation” strategy and bringing its currency more fully into the global market.
High demand incentivized production. Apparent stainless steel demand for 2020 is expected to rise by 6.4% to 25.5 million metric tons.
Besides producing stainless steel, China also imports significant quantities.
Most stainless steel imports come from Chinese mills in Indonesia such as Tsingshan Holding Group. China imported 1.1 million metric tons of stainless steel in the first three quarters of the year, a 24.3% increase compared to 2019.
Furthermore, China exported 2.37 million metric tons during the same period, a 12.4% decline from 2019.
South Africa chrome export tax
The world’s largest chrome producer, South Africa, proposed an export tax on chrome ore.
The export tax could have a significant impact for China, as 83% of its chrome ore imports came from South Africa in 2019.
The chrome export tax aims to incentivize the production of ferrochrome in South Africa. However, building or expanding chrome smelter capacity in South Africa could be challenging in the country, as smelters are highly power intensive.
The country already battles with unreliable electricity supply, which makes production more costly.
If South Africa approves the chrome export tax, stainless steel prices could go up as production costs rise.
The chrome export tax is not likely to impact stainless steel prices in 2020. However, the tax may have an impact on the first quarter of 2021.
U.S. steel prices continued to increase in October for the third consecutive month.
HRC, CRC, HDG and plate prices increased by 15.4%, 10.0%, 9.0% and 5.3%, respectively. As demand recovers, so have prices.
Wire rod, however, was the only form of steel that did not increase in price this month, as it instead remained flat.
In contrast, Chinese HRC, CRC and plate prices increased around 2% in October. Meanwhile, HDG prices remained flat throughout the month. For the second month,
U.S. prices surpassed Chinese HRC, CRC and HDG prices. No price arbitrage existed for Chinese buyers, as local prices were lower than imported prices. Chinese prices had a four-month uptrend before prices flattened. On the other hand, U.S. prices started their uptrend approximately 2.5 months ago.
For the past two years, Chinese prices have led U.S. prices. Will that relationship mean U.S. prices will flatten within the next month and half?
Domestic demand increases, supports U.S. steel prices
Steel demand in the U.S. seems to be getting stronger.
As we have reported for a few months now, U.S. automotive production is on the rise.
The LME aluminum price reached a 17-month high on Oct. 16 at $1,863.50/mt. The price has increased over 27% since its pandemic low of $1,459.50/mt. Prices dropped the last week of October but have since recovered sharply.
The aluminum price continues to rise along with demand.
According to the JP Morgan Global Manufacturing PMI, global manufacturing activity increased to 53.0 in October. The October reading marked the PMI’s best in 29 months. In the the North American market, the U.S. and Canada saw increases in new orders and production, along with Germany.
In Asia, manufacturing rose rapidly in China, India and South Korea.
The recent sharp increase in coronavirus cases — and consequent lockdowns — could be a risk to the improving manufacturing sector, particularly in Europe.
In the manufacturing sector, aluminum is used for construction, packaging and transport.
Strong demand in China
China continues to show signs of strong aluminum demand.
Unwrought aluminum and aluminum product imports remained high at 355,999 metric tons during September despite decreasing compared to 426,469 metric tons in August.
Analysts at Goldman Sachs believe that structural underinvestment, policy-driven demand and macro tailwinds from a weakening dollar and rising inflation risk may create a bullish outlook for 2021.
They estimated a Biden win would increase U.S. copper demand by 2% over the next five years. In addition, it predicted copper prices, which fell back to $6,800 on a general metals pullback last week, to be at $7,000 in three months. Furthermore, the investment bank predicts copper to hit $7,250 in six months and $7,500 by this time next year.
Besides the increase of electric vehicle demand, according to the International Energy Agency (EIA) energy investment is shifting away from fossil fuels, with renewables growing 80% by 2030.
Solar and wind energy projects are benefiting from government support and monetary policies. The expansion of transmission and distribution of those forms of renewable energy will require large amounts of copper.
The U.S. Department of Commerce reported the U.S. imported a total of 91,600 metric tons of all stainless products during September.
The September total marked a 76% year-over-year increase. In addition, the September total marked a 42% increase from the 2019 average of 64,600 metric tons.
The higher-than-usual import total is in line with the unexpected demand increase in major appliances, which use stainless steel sheets.
The U.S. market has a shortage in most appliances. This is due to customers storing larger amounts of food, plus shutdowns or personnel reduction manufacturers undertook for a few months. Additionally, manufacturers did not ramp up production to full capacity due to economic uncertainty.
These circumstances created a production backlog that might last well into 2021 and kickstart demand for stainless steel.
However, not all stainless products have recovered.
Outokumpu announced its intention to scale down its long products business, which includes wire rod, wire, bar, rebar and semi-finished long products.
The decision comes after the business made small net sales and negative adjusted EBITDAs. The scaledown measures include: personnel reduction, increasing operational efficiency and focusing on higher-value specialty grades.
E.U. imposes tariffs
Earlier we touched on U.S. stainless imports, which posted significant gains in September.
Meanwhile, the European Commission decided to impose import duties on hot-rolled stainless steel coil and sheets from China, Indonesia and Taiwan.
The tariffs from China are up to 19%. Meanwhile, they go up to 17.3% for Indonesian products and up to 7.5% from Taiwan. The tariffs kicked in Oct. 8.
The Commission made the decision after conducting an investigation. The probe ultimately determined the products were sold at artificially low prices, hurting producers from Belgium, Italy and Finland.
All U.S. forms of steel prices increased throughout September.
HRC, CRC and HDG prices increased rapidly by 20.4%, 16.4% and 15.4%, respectively. Meanwhile, the plate price increased 4.3%. The wire rod price increased by 1.5%.
However, the Chinese steel market showed the opposite trend or traded sideways.
The Chinese HRC price dropped by 4.4%. CRC increased by 0.22% and HDG had a 6.4% jump the first day of September but remained flat for the rest of the months and through the first two weeks of October.
The prices’ increase in the U.S. market were followed by an increase in capability utilization rate. By the week ending Oct. 3, raw steel production increased to 66.1%. As such, the year-to-date capability utilization rate rose to 66.2% according to the American Iron and Steel Institute.
Over in the Asian market, there are overcapacity concerns.
The South East Asia Iron and Steel Institute (SEAISI) reported that the region, particularly Chinese steelmakers and banks, might have overinvested in new basic oxygen furnace (BOF) integrated mills.
The region’s current capacity is approximately 151 million metric tons. The proposed investment could bring it up to 50 million metric tons, creating 60 million metric tons of overcapacity from BOF alone. It is important to note that BOF mills cannot operate at low capacity.
The Copper Monthly Metals Index (MMI) decreased 1.2% for this month’s value, even as the copper demand outlook shows signs of strength.
The MetalMiner 2021 Annual Outlook consolidates our 12-month view and provides buying organizations with a complete understanding of the fundamental factors driving prices and a detailed forecast that can be used when sourcing metals for 2021 — including expected average prices, support and resistance levels.
Prices and warehouse stock correlation
Our technical analysis focuses on price movement and volume to scrutinize supply and demand fundamentals.
However, this month MetalMiner carried out a correlation analysis between LME copper prices and LME warehouse stock levels.
The correlation analysis found an 86.06% inverse correlation between LME copper prices and its warehouse stock (at least, for the past year). That means that when prices rise, stock inventories decrease, and vice versa.
In this case, the correlation does not include any lag for either the price or stock inventories.
Copper inventories in LME warehouses decreased slightly to 73,625 metric tons, down for the fourth consecutive month. However, stocks spiked Sept. 28 and closed at 165,600 metric tons. During that time, LME copper prices traded slightly up but mostly sideways for most of the month. The copper price sharply declined Sept. 23.
Ultimately, the copper price dropped below the $6,600/mt mark. Another important event was the large number of deliveries that occurred Sept. 28.
This shows there is a strong relationship in the copper market between prices and stock inventory. As prices continued to go up, regular copper deliveries occurred from LME warehouses and stocks declined. As the price dropped, some buyers took advantage of the lower prices to cover their demand. However, that window closed in five days and followed the rapid increase in stocks.
The data suggest that, in the case of the copper market, prices and warehouse stocks follow the market’s demand. However, MetalMiner will continue to carry out another correlation analysis for a wider time frame to confirm that the correlation holds over time.
The SHFE aluminum price has traded sideways since mid-July. The price is averaging CNY 14,661/mt over the past three months.
By August, the LME aluminum price started to follow the sideways trend as well, averaging $1,777/mt since then.
However, the SHFE aluminum price continued to move higher than its LME counterpart.
Throughout September, SHFE prices were approximately $370/mt higher than the LME price.
The arbitrage continues to promote imports in China, making it a net importer for a second consecutive month in August. This trade flow indicates large demand for aluminum in the Chinese market, which is well on its way to economic recovery.
The current state of trade raises the question: how much longer can China continue to export semi-finished metal if its cost base is approximately $370/mt over the LME? Are mills selling at a loss (or are they subsidized)?
Tariffs against China
China accounts for approximately 55% of global aluminum production.
Despite it being a net importer for the past few months, China is still a huge exporter of aluminum downstream products. Chinese exports caused other large markets to contemplate restrictions on Chinese aluminum imports.
Currently, India is seeking to develop policies to protect its own domestic production. India’s first measure might require every importer to obtain a license from the government for every shipment. Even though the measure applies to exports from all origins, the Federation of Indian Mineral Industries pointed out most of the country’s imports come from China.
Meanwhile, the European Commission imposed provisional anti-dumping duties on aluminum products from China, with duties reaching as high as 48%. The Commission opened an investigation in February after it suspected China of dumping aluminum extrusions.
The director general of the European Aluminium Association said the duties were not only crucial for the survival of the domestic aluminum market but also for a greener regional economy.