Author Archives: Stuart Burns

As if aluminum buyers didn’t have enough to contend with, including long mill lead times and rising conversion premiums, they are also dealing with a rising Midwest premium.

Furthermore, Russia’s move to impose a 15% export tax on unwrought aluminum has had a profound impact on the Midwest delivery premium.

Are you ready for your annual aluminum contract negotiations? Be sure to check out our five best practices.

Midwest premium continues to soar

aluminum ingot stacked for export

Olegs/Adobe Stock

A recent Reuters article reports that the CME Midwest premium has jumped to a record high of $660 per ton ($0.30/lb). As a result, product manufacturers and their end users are facing an all-in price for unwrought raw material in excess of $3,000 per metric ton, even before conversion to product premiums are added in.

But the post goes on to explain that Russia’s export tax is not the sole reason for seriously elevated physical delivery premiums.

Over the last few years, the shift in exchange and off-market global inventory has been from North American and European markets toward Asia.

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The CME’s Comex and London Metal Exchange (LME) are squaring up for the industrial revolution that is electrification, according to recent posts by Bloomberg and the Financial Times.

Both exchanges are busy developing and, more importantly, marketing products that cater to industry’s need to hedge exposure to forward prices for key battery ingredients. Whether for car batteries, electronic goods or power grid storage, the key metals are demanded by a common technology: lithium-ion batteries.

Each month, MetalMiner hosts a webinar on a specific metals topic. Explore the upcoming webinars and sign up for each on the MetalMiner Events page.

Futures exchanges launch lithium hydroxide contracts

London Metal Exchange

dizain/Adobe Stock

Both exchanges have launched identical lithium hydroxide cash settled contracts based on the Fastmarkets prices for China, Japan and South Korea – the key battery-producing regions.

So far, volumes are light. But with lithium hydroxide prices up some 86% this year, the market is arguably crying out for a hedging mechanism.

Initially, miners were said to be reluctant to support such a product, preferring long-term mine-to-consumer contracts. The same is the case for aluminum.

Eventually, the industry came round.

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Reducing carbon emissions seems to be on the top of everybody’s agenda at the moment.

A recent post in The New York Times reports on proposals being discussed in the European Union to drive the region’s pivot away from fossil fuels over the next nine years.

Receive the latest short-term and long-term outlook for the full range of industrial metals (base and ferrous) at the annual MetalMiner Forecasting Workshop on Aug. 25

Tariffs for exporters with weaker carbon emissions regulations

carbon emissions

kamilpetran/Adobe Stock

According to the report, the most radical and possibly contentious proposal would impose tariffs on certain imports from countries with less-stringent climate protection rules.

The proposals would also include eliminating the sales of new petrol- and diesel-powered cars in just 14 years. They also call for a 55% reduction in greenhouse gas emissions by 2030 (compared with 1990 levels).

According to The New York Times, at the heart of the European road map is increased prices for carbon.

Nearly every sector of the economy would have to pay a price for the emissions it produces. In turn, that would affect things like cement in construction and fuel for cruise ships.

Proposed tariffs on imports of goods made outside the European Union, in countries with less-stringent climate policies, could invite disputes at the World Trade Organization. The cross-border carbon tax proposal could have the greatest impact on goods from Russia and Turkey, mainly iron, steel and aluminum.

We covered that topic recently following howls of protest by European steel and aluminum producers that overseas supplier could simply direct low-carbon production to Europe and sell their higher-carbon content production elsewhere. That would leave a net-zero reduction in global carbon emissions. Furthermore, it would damage European manufacturers’ home markets by allowing in low-tariff imports from producers they deem to be cheating the system.

The US perspective

The good news for U.S. exports to Europe is any impact would be far smaller.

Little in the way of raw material is shipped from the U.S. to the E.U.

Anyway, Democrats are looking at a similar tax, termed the “polluters tax” intended to have a similar impact.

The proposals, if passed, would see the last gasoline or diesel cars sold in the European Union by 2035. According to the post, they would require that 38.5% of all energy be from renewables by 2030. The proposals also call for a significant increase in the price charged for carbon emitted to make the use of fossil fuels increasingly expensive.

Role of China

China is the world’s largest polluter. However, it faces some unique challenges.

Its power generation industry is one of the youngest among major economies, with numerous new power stations coming onstream every month. To switch from that overwhelmingly coal-based capacity would entail eye-watering capital losses.

Ahead of the upcoming Glasgow-hosted COP-26 climate talks later this year, China has just announced it will launch its long-awaited carbon market. According to The New York Times, it would be the world’s largest by volume of emissions.

As with all carbon markets, though, its efficacy will in part be down to how generous Beijing’s get- out-of-jail-free cards it issues to polluters in the form of carbon credits.

Nonetheless, it would be a start.

Political process

Politically, this has some way to go.

It is estimated it will take two years for the European Union’s policies to be debated, negotiated and finally agreed across the E.U.’s 27 national governments and with Brussels.

Views differ widely as to priorities. Some countries, like Denmark, are already well on the way in the process of a huge switch to renewables. Others, like Poland and Germany, still rely heavily on coal for power generation. Hence, their industrial base would face substantial implications — unless carbon credits were so generous they would make the proposals meaningless.

Someone has to pay for such a colossal shift. It is always, in the end, the consumer.

Politicians at the local level are well aware of this and will to varying degrees look to push the consequences as far into the future as possible — if not for when they are no longer in power then at least when they are in different ministerial roles. Then, it’s someone else’s problem.

All the same, the flow of history is clear. Where governments fail, the market may well lead. Many firms, from automakers to electronics, are already seeing marketing opportunities in zero-carbon products. Those firms are shifting supply chains to be able to deliver that claim to market.

Politicians’ rhetoric on the issue is widely supported by the majority of the public (at least in Europe).

But that may change as the costs begin to bite.

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Shanghai steel futures extended gains to hit an eight-week high on Monday, according to a post on Nasdaq.com. Futures made further gains overnight, according to MetalMiner’s Insights platform.

Rebar and hot rolled coil both hit peaks last seen on May 19, when the market last spiked only to crash after dire warnings from Beijing about speculative activity and the threat of action against excessive rises in commodity prices.

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Chinese steel price fall off, then bounce back

China steel plant

gui yong nian/Adobe Stock

Since prices came off they have been making a steady recovery. Beijing’s pressure to curb excess production capacity as part of wider environmental targets raises the prospect of material shortages in the face of still robust demand.

 

Late last week, the People’s Bank of China announced it would cut the bank’s reserve requirement ratio by 50 basis points, effective from July 15. It would release around 1 trillion yuan to underpin an economic recovery that Nasdaq reports is starting to lose momentum.

The move supported further price rises. However, in reality, it would take months for the PBOC’s relaxation of reserve requirements to filter though into any increase in construction activity and, hence, demand.

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Government interference, even for the best of reasons, can have market-distorting effects.

Take, for example, calls by European aluminum producers to be excluded from the European Union’s Carbon Border Adjustment Mechanism (CBAM) carbon border tax proposal.

Do you know the five best practices of sourcing metals, including aluminum?

European aluminum producers want out of CBAM

E.U. flag

Andrey Kuzmin/Adobe Stack

According to a Financial Times report this week, European aluminum producers are calling for exclusion from the first phase of the E.U.’s CBAM. They claim the plan will put the industry at a competitive disadvantage to foreign rivals. The argue it will encourage firms to direct their low-carbon production to Europe and simply sell their high-carbon production elsewhere.

As such, the net effect will be little global reduction in carbon emissions but significant competitive damage to domestic European producers, whose own carbon footprint may not be as low as those foreign competitors.

Some European mills, like Norsk Hydro, have extensive hydroelectric-powered smelter capacity. However, smelters in Europe (including Norway) currently incur a carbon cost, which is part of their electricity prices, the Financial Times reports.

Even producers using hydro and nuclear power pay because of Europe’s marginal pricing system for electricity, which is usually set by coal-fired power stations.

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China’s steelmaking raw materials and finished steel markets are in a real state of flux at the moment.

Receive the latest short-term and long-term outlook for the full range of industrial metals (base and ferrous) at the annual MetalMiner Forecasting Workshop on Aug. 25

Recovery and a new dynamic impacting steel prices

China steel production

Zhao Jiankang/AdobeStock

On the one hand, a robust recovery from the pandemic has supported rapid price increases, both in raw materials such as iron ore and coking coal. Finished steel prices, such as rebar and HR coil, have also increased.

But Beijing’s recent policy initiatives around curbing steel output and controlling greenhouse gas emissions have created a new dynamic that should be supporting steel prices in the expectation of reduced output, yet depressing raw material prices in the expectation of reduced raw material demand.

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Just when European aluminum buyers thought the situation could not get any worse, the Russian authorities decided to slap export duties — set at 15% as a base rate or a specific minimum of $254 per ton — on exports of aluminium ingot and billet.

The export tariffs will apply to some 340 nonferrous and steel products, according to the official decree signed last month. For aluminum, it will cover those HS code products starting 760110.

Are you under pressure to generate aluminum cost savings? Make sure you are following these five best practices

European aluminum market

aluminum ingot

WestPic/Adobe Stock

The European aluminum market is already extremely tight for semi-finished aluminum products Many mills are booked out until the end of the year. Those that do have capacity for the fourth quarter are further increasing conversion premiums by up to 30% in just the last couple of weeks.

The rising cost of Russian ingot and billet supplies will add to the already elevated Rotterdam delivery premiums. In time, they will add to US Midwest delivery premiums and Main Japanese Port physical delivery premiums.

In Rotterdam, Fastmarkets reported that the P 1020 premium in warehouse duty paid Rotterdam price increased from $250-$260 per ton in late June to $280-$300 per ton last week.

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In a relatively rare example of disagreement — or, at least, such public disagreement — usually close allies Saudi Arabia and the United Arab Emirates (UAE) have failed to reach agreement last week on an extension to the oil output cuts scheduled to expire in April 2022.

Saudi Arabia and the other 23 members of OPEC+ are in agreement to increase production by a modest 400,000 barrels per day each month from August to December. They would then extend the current baseline cuts from the scheduled end in April 2022 to December 2022.

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UAE bristles at oil output cut schedule

oil barrels featuring flags of OPEC nations

Maksym Yemelyanov/Adobe Stock

But the UAE has been a standout dissenter, according to the Financial Times. Under the proposed OPEC+ deal, the UAE would proportionally cut its production by 18%. That compares with a 5% cut for the kingdom and a 5% increase for Russia.

The UAE said it has suffered with around 35% of its current production capacity shut for two years now, compared with an average of around 22% for others in the agreement.

Both the Financial Times and Middle Eastern news source Al Jazeera have pointed to a number of areas where the once close allies have diverged in the last couple of years.

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In one of its first tests as a free trading global economy after Brexit, Britain achieved a middling mark this past week.

Brexit

hakinmhan/Adobe Stock

Trade minister Liz Truss accepted its independent, newly established Trade Remedies Authority recommendation to scrap some quotas on imports that had been carried over from the European Union in 2019 prior to Brexit.

The MetalMiner Best Practice Library offers a wealth of knowledge and tips to help buyers stay on top of metals markets and buying strategies.

Brexit Britain scrap import quotas

The rules set quotas on some 19 steels whereby a 25% anti dumping tariff is applied if imports exceed pre set quarterly quotas.

Detail have been sparse, however, on what is included and what isn’t.

However, a UK government website lists what remains under the quota and what is to be revoked.

The list includes extensions for: non-alloy and other alloy hot rolled sheets and strips; non-alloy and other cold rolled sheets; metallic coated sheets; organic coated sheets; and tin mill products.

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Analysis, specifically what’s termed fundamental analysis of metal supply and demand, and its impact in driving metal prices, is often a blunt tool.

That is particularly true since the financial crisis. Then, traders and hedge funds discovered the wheeze of buying spot and selling far forward (typically from 18-month to a few years) when the market is in a strong contango (when the higher forward price is sufficiently above spot to more than cover the cost of storage, insurance and finance, leaving a profit for the company).

Are rising Midwest premiums causing concern? See how service centers take advantage of that

Metal stock levels don’t match price movements

aluminum ingot

WestPic/Adobe Stock

As we all know, this has at times driven the creation of off-market inventory, sometimes termed shadow stocks, in non-exchange warehouses (because rents are cheaper).

For some metals, like zinc and copper, this has, at times, been hundreds of thousands of tons. For aluminum, it has been in the millions, dwarfing the exchange stocks on the LME and SHFE.

Trying to take these stocks into consideration is a nightmare. The LME’s increased reporting regime has helped. However, even so so-called shadow stocks are in their entirety at best an estimate.

So, when commentators say LME stocks have fallen as a justification supporting increased demand — or, vice versa, rising LME stocks are proof of weak demand — take such comments with a pinch of salt.

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