Author Archives: Raul de Frutos

Gold prices have gained 9% this year, regaining much of the losses seen after the 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. The Fed raised interest rates in December and cited plans to raise rates as many as three times in 2017. Higher rates tend to weigh on gold, since the precious metal becomes less less attractive compared with yield-bearing assets when borrowing costs rise.

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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.

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.

US hot-rolled coil prices retrace. Source: MetalMiner IndX.

Since November — Coinciding with Donald Trump’s victory — U.S. steel prices have been on a tear.

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However, in February momentum started to cool down. It’s now buyers’ job to determine whether this is a major peak or just a pause within this bull market.

Chinese Steel Capacity Rises in 2016

In February, a report by Greenpeace East Asia and Chinese consultancy Custeel stated that despite China’s high-profile efforts to tackle overcapacity, China’s operating steel capacity increased in 2016. The report says that 73% of the announced cuts in capacity were already idle — in other words the plants were not operating. Only 23 million metric tons of cut capacity involved shutting down production plants that were operating.

Meanwhile, some 49 mmt of capacity that had previously been suspended was restarted, and 12 mmt of new operating capacity came online. That means that China added 37 million metric tons additional operating capacity in 2016. 

Hot-rolled coil prices in China also take a pause. Source: MetalMiner IndX.

This news is bearish for steel prices and it is likely contributing to lower steel prices in February, both in the U.S. and China. Read more

The 3-month London Metal Exchange lead price is still climbing. Source: Fastmarkets.com.

Lead has had a pretty wild ride over the past few months. After a big run in 2016, prices sold off in December, offering buyers a great opportunity to buy the metal as prices pulled back.

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Prices are now back near new highs as bulls seem to be taking control again. For reasons we’ll see below, we expect momentum to pick up again on the upside.

Global Lead Refined Production and Usage. Source: MetalMiner IndX.

According to the International Lead and Zinc Study Group, in 2016 refined lead supply exceeded demand by 11,000 metric tons in the global market. Read more

Source: MetalMiner IndX

Zinc hit a record shortage in 2016. According to the International Lead and Zinc Study Group, zinc registered a deficit of 286,000 metric tons last year. Global usage of refined zinc metal rose 3.6% while supply remained pretty much flat thanks to a number of mine shutdowns.

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The tightening in zinc’s raw material segment accelerated last year thanks to the closure of big mines such as Century, Lisheen and Glencore‘s suspension of 500,000 mt of annual mine capacity. These closures have impacted the supply of mine concentrates drastically and, for the first time, we are seeing an impact in the refined metal market.

In February, Korea Zinc Co. announced it will reduce its refined zinc output by 7.7% (or 50,000 mt) this year. The company attributed its decision to tight supplies of mined concentrate and the accompanying reduction in treatment charges, which have plummeted to multiyear lows.

Prices at Multiyear Highs

Zinc is trading near multiyear highs. Source: MetalMiner analysis of Fastmarkets.com data.

As a result of this narrative of supply shortfall, zinc is trading at the highest levels in more than eight years. Bulls have been in such a powerful position that prices have barely retraced during this run.

Will China Cut Output This Year?

Outside of China, mine supply of zinc fell by 10% last year. However, production increased inside China. In 2017 investors will be closely monitoring China’s numbers. Although output rose, imports slumped by 38% last year. This, combined with falling treatment charges, suggests that a raw material shortfall is building in China as well. China must get serious about controlling industrial metals output to solve its pollution problems.

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The conclusion: it’s only a matter of time before Chinese producers are forced to cut refined zinc output.

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

Stock markets in China are up nearly 10% this year, outpacing a 4% gain in the S&P 500.

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President Donald Trump’s election victory in November raised worries that his administration would pursue more aggressive policies toward Asia’s biggest economy. On the campaign trail, Trump had threatened to increase tariffs on Chinese exports and label the country a currency manipulator.

FXI China shares attempt to breakout. Source: MetalMiner analysis of @stockcharts.com data.

While these threats haven’t materialized yet, fund managers have focused on healthier Chinese corporate earnings and stable economic data, rather than worrying about protectionism.

Read more

When it comes to providing stimulus to meet growth targets, you can’t bet against China. But when it comes to cutting output, things can get obscure… literally.

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new report by Greenpeace East Asia and Chinese consultancy Custeel says that despite China’s high-profile efforts to tackle overcapacity, China’s operating steel capacity increased in 2016. The report states that 73% of the announced cuts in capacity were already idle — in other words the plants were not operating. Only 23 million metric tons of cut capacity involved shutting down production plants that were operating.

Meanwhile, some 49 mmt of capacity that had previously been suspended was restarted, and 12 mmt of new operating capacity came online. That means that China added 37 million metric tons additional operating capacity in 2016. 

Production Up, Prices Up

Chinese Hot-rolled coil price climbs. Source: MetalMiner IndX.

After falling in 2015, Chinese crude steel output is now rising again at a healthy clip — it was up 4% on the year in the fourth quarter. Meanwhile, hot-rolled coil prices in China rose near 70% for the year. Despite resilient output, demand growth has been much more significant. As a result, Chinese steel exports have fallen double digits for four consecutive months.

Can Just Promises Sustain Rising Prices?

Sentiment in the steel industry is also bullish thanks to expectations of lower output this year. In January, China unleashed its boldest reform plan so far for its bloated steel sector, saying it will eliminate all production of low-quality steel products by the end of June.

Eliminating excess steel capacity and restructuring the industry has enormous environmental significance because the steel industry is the second-largest emitter of air pollution in China. This is another reason to believe Beijing will strengthen its supply-side reforms this year.

However, according to the report most of the capacity elimination target set for the 2016-2020 period has, technically, already been achieved in 2016, meaning that capacity elimination in 2017-2020 will be much more modest unless targets are increased. Meanwhile, a 21 mmt capacity increase is still in the pipeline from new projects, and there is at least 42 mmt of existing idle capacity that could be used to fulfill the capacity elimination targets.

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These numbers give us reasons to doubt on what China can deliver this year. China is now under pressure to demonstrate progress on capacity cuts. But financial and legal incentives to keep marginal firms running will cause regulators to struggle to enforce capacity cuts. Chinese steel mills are so hard to get rid of as they are often a key source of local tax revenue and employment.

What This Means For Metal Buyers

The sustainability of the ongoing rising trend in steel prices will much depend on China. Buyers will need to keep a close eye on how much growth can China deliver and how much of the promised production cuts will actually materialize this year. The problem is that growth without controlling steel out will only translate into severe air pollution.

Last year, investors were wondering whether copper was worth more than $6,000 per metric ton or not.

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Late in 2016, prices were struggling to overcome this psychological level, but things are shaping up for 2017 to be a hot year for copper production, which could translate into a hot year for the copper price.

Upside momentum for copper prices picked up on supply disruptions. Copper rises above $6,000 per metric ton. Source: MetalMiner analysis of FastMarkets.com data.

Escondida Stops Production

Chile’s massive Escondida mine’s processing plants completely stopped supplying refined copper to markets on Thursday as no miners arrived for morning work. The mine produced around 1 million mt of copper last year, or 5% of global production.  Read more

Our Stainless MMI inched lower in January but it’s already working higher in February as nickel prices rebound.

That Other Ban

In mid-January, Indonesia issued significant new mining rules that will relax its ban on exports of raw nickel ore.

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The revisions to the earlier regulation will allow miners to only export low-grade ore (defined as metal content of 1.7% or less) as long as they express a commitment to build their own smelters within five years and are able to supply domestic smelters with enough low-grade ore to meet at least 30% of the country’s input capacity.

Stainless MMI

This distinction between low-grade and high-grade ore (1.7% or more metal content) is important. Lower-grade ore increases the cost base for Chinese nickel pig-iron. In addition, NPI and ferronickel are more energy intensive than the higher grade refined nickel. Therefore, the greater use of lower grade nickel leads to more pollution, an issue that China is currently tackling.

According to Indonesia’s mining minister, Indonesia produces 17 million metric tons of nickel ore per year, of which 10 mmt is low-grade. The country’s nickel smelting capacity is currently 16 mmt and may reach 18 mmt this year.

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As its mining minister puts it, Indonesia may export up to 5.2 mmt of nickel ore a year under the country’s new rules. This is less than 9% of what the country used to export prior to the ban. Although this is important information to take into account, Indonesia’s easing will not flood the global market as many feared.

More Shutdowns In The Philippines

On February second, the Philippines ordered the closure of 21 mines, and seven others could be suspended. The nickel mines recently ordered to shut down account for about 50% of the country’s annual output. Prices rose sharply on the news as the mining shutdowns in the Philippines seem likely to be a to greater driver of price movements than the easing of Indonesia’s export ban.

What This Means For Metal Buyers

If we narrow our view to the supply/demand fundamentals of the nickel industry, the picture looks bullish, but rather complex. However, we need to widen our view to the whole industrial metals spectrum, and that picture looks quite bullish. Industrial metals continue to rise on robust demand and shrinking supply. The bullish sentiment across the metal complex, combined with more nickel mine closures should support prices in the mid-term.

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Tin prices plunged 9% since the year started, hitting a five-month low. There are two factors driving this decline:

  • Profit taking: Prices rallied near 70% in 2016 and prices need to digest those gains.
  • Speculation that China has removed it’s 10% export duty on refined tin exports.

After this decline, we believe buyers can now take advantage to time some purchases.

Prices Near Support

Tin prices are trading near key support levels. Source: MetalMiner analysis of FastMarkets.com data.

Technically, the recent price decline seems normal within the context of a bull market. In bull markets, buyers can find good opportunities to buy metal after prices pull back.

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Tin prices are now nearing a support area where traders will likely lift prices, especially given the ongoing bullish sentiment across the metals complex.

The Removal of an Export Duty is Not That Bearish

Some say that China’s removal of its export duty could have a significant impact but we don’t necessarily agree. If China was a net exporter of tin, and prices in China were lower than in the rest of the world (as is the case with steel), then the removal of the export duties would have a significant impact on the market balance. However, that’s not the case.

Tin primary cash China vs LME. Source: MetalMinerIndX.

China is a net importer of tin. In 2015 China produced 146,600 metric tons while it consumed 175,842 mt. In addition, prices in China are lower than those on the London Metal Exchange. Moreover, China is trying to curb local output of metal, including tin, to fight pollution.

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For these reasons, we can’t see why removing the duty would result in a flood of metal coming out of China. In anything, it will just encourage more refining.

What This Means For Metal Buyers

Tin price levels look attractive. Now it could be a good time to minimize your tin price risk and buy forward.