Author Archives: Stuart Burns

Well, so far, the simple answer to the question posed in the headline is “no.”

On Tuesday, the White House announced the Department of Energy will “make available releases of 50 million barrels of oil from the Strategic Petroleum Reserve to lower prices for Americans and address the mismatch between demand exiting the pandemic and supply.”

Brent crude oil price chart

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Talk of a strategic reserve release did have a calming effect on markets in previous weeks. However, when it came to it 50 million, was too little and over too long a time frame to have any impact.

Prices actually rose, with the international benchmark Brent settling up 3.3% at $82.31 a barrel on Tuesday, the Financial Times reported.

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Oil reserve delay

In part, the aforementioned result is due to not just the limited size of the release — made in concert with the U.K., India, South Korea and China — but the delay.

About 32 million barrels will be delivered between mid-December and the end of April 2022 in a swap with oil companies, which then must return an equivalent volume by 2024. The other 18 million barrels accelerate sales that Congress had already authorized, and so have no net impact.

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Longtime readers of MetalMiner may recall a number of aluminum posts we have put out over the years since the financial crisis that explore shadow stocks or the “stock and finance trade” inventory that have referred to the murky world of “off-warrant,” or non-exchange, reserves of aluminum. Those reserves are often hard to determine in terms of location, volume or ownership.

They have remained an enduring feature of the global aluminum market. The market’s perception of their size and the possibility of their delivery back into circulation have been persistent influences on the market price.

See why technical analysis is a superior forecasting methodology over fundamental analysis and why it matters for your aluminum buy.

Aluminum after the financial crisis

aluminum ingot

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The stock grew in the immediate aftermath of the 2008 financial crisis, as the world went into a form of financial lockdown. All manner of downstream activities from automotive to household goods stopped consuming aluminum.

Recovery took many months, indeed stretched in 2010 before Chinese stimulus measures rippled out into the world, stimulating demand and facilitating a return to strong growth.

But primary aluminum mills — partially protected by power and alumina supply contracts linked to the ingot price and mindful of the huge cost to capital of shutting down major smelters — kept churning out the metal.

Stock and finance

Seeing an opportunity, traders and banks piled into the market.

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U.S. President Joe Biden on Monday signed the $1.2 trillion Infrastructure Investment and Jobs Act into law.

The bill includes funding to upgrade the country’s transportation infrastructure, electric grid and more. As such, the projects will certainly need metals like steel, copper and aluminum, among others.

infrastructure

Newport Coast Media/Adobe Stock

In that vein, we recently chatted with Mike Stier, Norsk Hydro vice president of finance and strategy, about the bill’s potential impacts on the aluminum market.

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Infrastructure bill’s impact on aluminum demand

Infrastructure investment has traditionally been viewed in the context of roads, bridges, airports, etc. However, the infrastructure bill has a forward-looking environmental component to tackle climate change, Stier noted.

Among those improvements include supporting the electrification of cars and supporting infrastructure and upgrading power grids. All of those projects will impact aluminium demand. From its conductive properties to its use in vehicle lightweighting to demand for products like road signs, walkways, or masts and towers, aluminum is likely to get a demand boost as a result of the bill.

Demand time frame

So, how quickly will the bill’s provisions and projects start to impact demand for metals like aluminum?

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Inflation is currently a hot topic on Wall Street and in Washington. For many, it’s a much more immediate issue than other major issues, like the impact of climate change.

A recent Financial Times post in the paper’s Trade Secrets newsletter posed a somewhat controversial but not inappropriate question: could removing tariffs be the answer to lowering inflation?

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Inflation and tariffs

inflation definition highlighted

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Tariffs are certainly in the spotlight, the Financial Times suggests.

U.S. Trade Representative Katherine Tai was apparently asked by reporters in a roundtable last week if removing the Trump-era tariffs on Chinese imports was now under consideration. The U.S. Consumer Price Index showed a 6.2% gain in October from the previous year, its fastest increase since 1990. Treasury Secretary Janet Yellen, the former Federal Reserve chair, acknowledged this week that removing the tariffs would provide a one-off supply chain cost reduction that would “make some difference.”

Inflation is clearly a concern. However, why would you conflate one issue – protecting domestic intermediate product manufacturing – with the separate issue of wider economic inflation?

Then and now

There is little evidence that the original Trump tariffs resulted in inflation in the wider economy. Certainly, within the metals supply chain costs were passed directly down the line. Costs filtered down from either importers or by domestic mills opportunistically raising prices to the level of imports. But the impact proved relatively minor on the cost of a finished washing machine or an earth mover, the Financial Times reported, citing research results.

In our currently much more supply chain constrained and inflationary economic environment, removing the tariffs would result in a one-off modest drop in prices for many goods. The post makes an observation that savings rates remain high. The public has not spent all the savings accumulated during the lockdowns. Furthermore, the inflationary global logistics constraints abated. As such, demand in a constrained environment is likely to persist for some time.

In short, inflation isn’t going away any time soon.

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The headline poses a rhetorical question — we can all see the rundown in LME inventory this year.

However, the question is intended to raise two issues.

London Metal Exchange

dizain/Adobe Stock

First, while in many cases analysts will point to falling inventory levels as a reason for rising prices, the current ultra-low levels of LME stocks support the point we have always made at MetalMiner: there is little direct correlation between inventory and prices.

Indirect? Yes, but falling inventory does not automatically suggest prices will rise. Today’s base metal prices are nearly all off peaks seen in Q3 despite even lower inventory levels on the LME.

Second, point covered by an interesting article in Reuters this week explores why inventory levels are so low and what steps, if any, the LME can do about it.

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Demand surges put strain on supply chains

The “why,” is as so often the case with base metals, is in large part due to China.

But while resurgent demand in the world’s largest consumer is certainly a part of the problem, demand elsewhere is also significant. A global rush to restock supply chains has put base metal supply under extreme duress. Overlaying that has been a highly constrained and chaotic global shipping market. Sky-high rates are not just delaying shipments but dissuading the normal flow of metal that would restock or resupply regions in response to arbitrage price differences.

Finally, in the second half of this year we have seen considerable disruption in China due to power constraints. Some of that has been self-induced by Beijing. However, some has come as a result of coal supply following flooding in some regions and earlier hydroelectric power supply rationing due to drought.

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Aluminum buyers just about everywhere have suspected their suppliers have been making the most of a tight market to maximize their returns this year.

Those fortunate enough to have fixed aluminum prices for the year back in early 2021 will be anxiously looking at 2022 renewals. The majority, however, will be licking their wounds following a relentless rise in aluminum prices, extended delivery times and a supplier landscape that in many cases has taken a “take it or leave it” attitude to both price and availability.

Do you use cost breakdowns in your aluminum negotiations? See other tips in negotiating with mills and service centers.

Novelis posts strong quarterly results

One of the U.S.’s largest aluminum manufacturers’ recent income announcement for Q2 2021 underlines just how well the mills have been doing.

Novelis Inc., a wholly owned subsidiary of India’s Hindalco Industries, reported a net income of $237 million during Q2 as compared to a net loss of $37 million in the prior year period.

aluminum scrap

pepebaeza/Adobe Stock

Net income from continuing operations reached $239 million against $144 million in the prior year. Furthermore, second quarter fiscal year 2022 net income jumped 54% to $244 million.

Novelis benefitted from readily available scrap input rather than the position for many of its competitors who rely on primary ingot or slab. As a result, Novelis could increase shipments, unconstrained by a tight primary metal market.

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When news of Russia’s export tax on primary aluminum came out in the summer, it caused an increase in LME prices. More significantly, however, physical delivery premiums — such as the Midwest premium, the Rotterdam premium and the Main Japanese Port (MJP) premium — also increased.

See why technical analysis is a superior forecasting methodology over fundamental analysis and why it matters for your aluminum buy.

Aluminum premiums surge

Russia exports

waldemarus/Adobe Stock

Of the three, the Rotterdam premium arguably had the biggest impact. Some European rolling and extrusion mills beginning to quote the Rotterdam premium – either duty paid or duty unpaid – as a separate component of their pricing structure.

That has long been a feature in the U.S. market, where the Midwest premium has been a sizeable component of the all-in price. However, it had never been a cost broken out for European consumers, with the mills absorbing the Rotterdam premium as part of their conversion premiums.

Russian aluminum export tax

 

Russia set its export tax at 15% or U.S. $254 per metric ton, whichever is larger, back in August for an initial six-month period. The move ostensibly aimed to dissuade primary metal exports in an effort to support domestic consumers facing rapidly rising costs in a domestic manufacturing sector that was running hot as it bounced back from pandemic restrictions.

The expectation was the tax would likely remain in place well into 2022, as it would provide a welcome revenue stream for the Russian treasury. However, maybe bolstered by bumper oil revenues or faced with strong lobbying by Rusal, a recent Reuters report suggests the probability is the tax will be allowed to end in December. As a result, metal supplies to Europe could increase.

Aluminum has already fallen from a high of $3,300 per metric ton to $2,700 in just over a month. The Fast Markets Duty unpaid Rotterdam premium has dropped 20% from $380 per ton in September to $302 today.

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With COP-26 running this week in Glasgow, the environment has been one of the main topics in the news. Rightly so, many of you will say. We are doing a pretty fine job of trashing the planet, so it’s about time we collectively did what we can to reverse the damage.

Unfortunately, the metals industry is one of the worst culprits.

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Metals industry and environmental impacts

mining

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Whether its mining, refining and smelting, processing or the transport needed to move it among so many intermediate stages of the supply chain, the metals industry is a major source of carbon dioxide, not to mention particulate matter, chemical pollutants and other forms of environmental damage.

Mining alone contributes between 4% and 7% of manmade greenhouse gases.

Unfortunately for the world, the metals industry is also part of the solution to achieve a lower-carbon future.

Metals are integral for electric cars, wind turbines and solar panels, both for their construction and continued development. In order to achieve further technological evolution, we cannot do without metals.

So, an intriguing article in Reuters outlines an opportunity for parts of the metal industry to not just reduce their carbon footprint but actually become carbon negative (that is, remove carbon from the atmosphere rather than add it).

Carbon capture and storage was hailed as the savior of the coal industry many years ago, holding out the hope that the carbon dioxide by-products could be captured and buried underground in depleted oil or gas fields. However, the economics have proved hard to overcome. Few projects have lasted more than a few years. Those that have made it have received significant levels of subsidies.

But Reuters outlined a process more akin to nature’s process, albeit sped up – years rather than millennia.

The post explains how rocks dissolved by rainwater flow into rivers, picking up other minerals such as calcium and magnesium along the way before combining with carbon dioxide and settling on the ocean bed as carbonate minerals, such as limestone. Such rock weathering absorbs around one gigatonne of carbon dioxide each year, the post explains, although the process plays out in painfully slow geological time.

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While not alone in seeing ongoing price falls, across the metals sector prices have been in decline for two weeks now. The higher power content of primary aluminum has driven a plunge in prices that have caught many by surprise and still has the potential to go further.

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Aluminum prices fall with falling coal prices

aluminum price

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The aluminum price has been undermined by falling coal prices in China following efforts by regulators to curb excessive speculation, hoarding and profiteering from what remains a tight domestic thermal coal market.

If coal prices continue to fall, the aluminum price is expected, for the time being at least, to follow.

The SHFE price is already down to 19,870/mt according to Shanghai Metal Markets (SMM). At one point it hit 19,200/mt, the lowest level since July.

Just as the SHFE led the LME higher in Q2 and Q3, it is now leading it lower. The LME aluminum price fell to the $2600s by the end of last week.

The situation became self-fulfilling, with inputs such as alumina falling as refined metal prices led the way, undermining price support for ingot.

Meanwhile, all eyes are on coal prices.

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As we predicted last month, the U.S. and E.U. have used the recent G20 summit in Rome to announce an end to hostilities over the steel and aluminum Section 232 tariffs imposed by the previous Trump administration and perpetuated by President Joe Biden.

“We have agreed with the US to pause our steel and aluminium trade dispute and launch cooperation on a Global Arrangement on Sustainable Steel and Aluminium,” Valdis Dombrovskis, EU trade commissioner, tweeted Saturday.

E.U. and U.S. flags

cunaplus/Adobe Stock

The intriguing issue is not the resolution of the tariffs, to be replaced by a quota system. The second part of the sentence — “cooperating on a global arrangement on sustainable steel and aluminum” — is the interesting part.

Stop obsessing about the actual forecasted steel price. It’s more important to spot the trend

US-EU work out details on tariff quota system

The negotiations have come up with a “kill two birds with one stone” solution to a dispute that was doing neither side any good. Indeed, the retaliatory measures promised to cause even more harm from next month if the sides did not reach a solution.

Jake Sullivan, Biden’s national security advisor, told reporters the deal removed “one of the largest bilateral irritants in the US-EU relationship” according to the Financial Times.

The tariffs will be replaced by a quota system, probably adjusted annually. The exact details of the arrangement are still to be worked out.

But as the U.S. only bought 3.2 million tons of steel from Europe pre-pandemic as a percentage of the total market, European supply has always been a fraction.

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