Author Archives: Stuart Burns

Inventory drawdown is the defining narrative at the moment, and nickel is part of the story.

nickel price

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Economic recovery around the world is patchy. Some countries are recovering strongly, while some are still struggling. Inflation is surging and analysts are having trouble agreeing whether 2022 can see anything like 2021’s rate of growth as a result.

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But one area of near universal concern is dwindling exchange and trade inventory stock levels.


Nickel stockpiles fall

Take nickel, for example. Nickel stockpiles on the London Metal Exchange recently fell for the 51st straight day, a Financial Times post reports. Meanwhile, in China, nickel stocks in official warehouses are close to a record low at just 4,859 metric tons. Aluminum inventories are a fraction of levels held two years ago. U.S. crude inventories fell to their lowest levels since October 2018.

While the oil market is broadly in balance, both nickel and aluminum are in deficit.

According to the Financial Times, nickel registered a supply-demand deficit of around 180,000 tons last year. That is equal to approximately 6% of its total market size. Not surprisingly, nickel prices have been driven higher both by industrial metals demand and investor speculation.

Nickel demand in EVs

Stainless demand remains strong but investors are more excited by the long-awaited ramp-up in electric vehicle demand.

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Human and political rights activists have been suffering escalating repression in the former Soviet state of Kazakhstan. The result has been widespread rioting and the reported death of over a hundred protestors this month.

map of Kazakhstan

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The protests kicked off with rises in liquefied petroleum gas (LPG) prices but stem from extreme inequality and corruption in the Central Asian nation. There seems to be a state of calm after Russian forces entered the capital under the auspices of the Collective Security Treaty Organization bloc, consisting of some 2,000 troops and 250 units of military equipment.

Reports last week suggest those troops could be heading home later in the month. However, whether that will result in an end to the unrest or the return of people to the streets is unclear.

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How has Kazakhstan unrest impacted metals prices?

For metals markets, the riots raised anxiety over supply but offered no more than modest support to prices.

The events there have not had a significant impact on mining operations. However, the fact Kazakhstan is such a large ore and refined metal producer, metals prices could react further if the riots spread to become a national strike.

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Nickel, traditionally largely consumed in the stainless steel industry, is enjoying strong support from its role as a lithium-ion battery enhancing metal.

The use of nickel reduces the need for cobalt, significantly battery reducing costs. Not surprisingly car makers are scrambling to lock up supplies as Chinese battery firms get first to market investing in mines and refining.

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BHP signs Tesla supply deal

nickel price

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BHP, for example, signed a deal last year to supply Tesla with nickel from its west Australian mine as demand from the EV market finally — after years of promise but poor uptake — begins to ramp up.

Traditionally, the stainless market has demanded purity and price. However, the battery market is also demanding as low a carbon footprint as possible from all its material suppliers (aluminum, nickel, cobalt, etc.).

That, in part, is what is behind BHP’s investment in a small, London-based nickel miner Kabanga Nickel Ltd.

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Having risen solidly from mid-December, the oil price took a bit of a hit just prior to the new year as worries about the spread of the omicron variant and its possible impact on travel and GDP growth hit prices.

Brent crude oil price chart

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The new year has started more optimistically, though. While significant work days are being lost due to widespread infections, hospitalizations have remained sufficiently acceptable to avoid the widespread lockdowns that proved so damaging following the spread of previous variants.

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Oil prices look bullish

As an newsletter observed this week, there has been a noticeable shift in sentiment in the oil market, with an increasing number of forecasts taking a bullish stance.

Oil demand remained solid in December, essentially trending on par with November levels. Meanwhile, global manufacturing activity strengthened amid easing supply chain bottlenecks.

The supply side remains a mixed bag. OPEC+ agreed at its most recent meeting to extend an increase in February of 400,000 barrels per day. However, as OPEC+ has increased its output target each month, actual production has lagged as some members struggle with capacity constraints.

So, the announcement of a further increase is being taken by the market with a pinch of salt.

OPEC+ producers missed their targets by 730,000 bpd in October and by 650,000 bpd in November, the International Energy Agency said last month.

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As our colleague Fouad Egbaria noted this week, rising power costs in Europe, almost wholly down to the cost of natural gas, resulted in reduced output at Europe’s largest aluminum smelter, Aluminium Dunkerque Industries France. Losses there ballooned to €20 million ($22 million) during November, as natural gas prices quadrupled this year.

aluminum ingot

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Most aluminum smelters operate on long-term power contracts. However, spot prices do impact costs for many mills, either with contracts linked to spot prices or when contracts come up for periodic adjustment when the prevailing spot price comes into play.

So, it is hardly surprising that the Dunkerque smelter is but the tip of the power crunch-induced iceberg.

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Alcoa announces production halt in Spain

In a separate post, Bloomberg reported Alcoa Corp. is set to halt primary aluminum production at its plant in Spain, Europe’s second-largest aluminium plant, for two years, depriving the European market of valuable supplies at a time of near-record demand. Bloomberg reports Alcoa’s advice that the smelter will continue to supply strategic clients in the pharmaceutical and food industries by remelting aluminum, while maximizing billet production of 65,000 tons per year and producing more than 25,000 tons of aluminum slab, but no primary smelting of virgin ingot.

Nor are the aforementioned smelters alone in announcing closures.

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It seems perverse to say that COVID could come to the rescue of the European energy market.

But the reality is the market is in a precarious state. Restrictions hindering businesses and industries’ power consumption could alleviate the energy crunch by reducing power use.

At the height of the 2020 lockdowns, power demand fell by as much is 20% in parts of Europe. Reports earlier this year of sky-high natural gas costs and low natural gas inventories have faded in recent weeks as other issues have hit the headlines.

However, the chronic lack of reserves remains a critical issue. It has been a factor in recent price rises, which have been compounded by related factors.

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Electricity price surge

E.U. flag

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Bloomberg reports prices soared to new records last week because of the impact of unexpected nuclear outages in France and worryingly low stockpiles of natural gas across the continent.

Meanwhile, on Friday natural gas prices plunged as Russia decided to supply the market at the 11th hour. Prices remain at dizzyingly high levels and are super sensitized to the slightest suggestion demand could rise due to a cold snap or further supply disruption.

Metal buyers will recall earlier this year metal prices rose as zinc smelters were forced to close due to power shortages.

Imagine how much more severe that could be in the middle of a prolonged mid-winter cold snap.

Authorities could be forced to make choices between rationing industry and keep the heat on for vulnerable domestic consumers.

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The pandemic certainly created a challenging environment for business in 2021.

Lockdowns hampered operations. Metal scarcity and rising metal prices caused immense cost pressures, loss of profits and, in some cases, bankruptcies.

One, although by no means the only issue, was disruption to global supply chains.

Research into the causes and potential solutions will be the stuff of analysts and pundits for years to come. A thoughtful report by Citi Bank entitled “GLOBAL SUPPLY CHAINS, The Complicated Road Back to ‘Normal’” holds out a feasible road map back to normality that deserves some scrutiny.

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Supply chain issues for metals, mining

supply chain chart

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For MetalMiner readers, a graph on page 37 illustrates the disproportionate impact supply chain issues have had on the metals and mining industry, reports of disruption are a factor of twice more than the next nearest industry and a multiple of several times more widely covered issues, like retail and auto, that tend to dominate the media.

Rather than dwell on the question of how we got here, we would rather explore how these issues unwind.

When do global supply chains get back to normal?

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You cannot turn on the TV or read a news feed without hearing dire warnings of surging inflation.

The U.S. Consumer Price Index rose 6.8% year on year in November, the fastest pace since 1982. Meanwhile, while Eurozone inflation climbed to a record 4.9%.

More than three-quarters of countries analyzed by Pew Research had higher inflation in the third quarter of 2021 than in the same period in 2019, the Financial Times reported.

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

Inflation worries push investors toward government bonds

inflation definition highlighted

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Not surprisingly, investors are positioning themselves for higher inflation. Investors are buying into assets that may profit from or at least hedge them against rising inflation.

Typically, that would be hard assets like gold. However, a leading gold ETF has seen outflows of more than $10 billion so far this month. Investors appear to have preferred inflation-linked paper assets, such as inflation-protected government bonds, commodity funds and real estate investment trusts.

The Financial Times reports this year a record $66.8 billion has flowed into funds holding Treasury Inflation-Protected Securities, U.S. government bonds that are indexed to inflation.

In Britain, demand is also robust. The sale last month of £1.1 billion in inflation-adjusted government gilts maturing in 2073 drew the lowest yield — and highest price — at auction on record.

What about commodities?

So why are we not seeing more interest in commodities?

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Importers of metals and metal components may be seeing a glimmer of light at the end of what has been a very long tunnel of logistics chaos, sky-high freight rates and shipping delays.

Freight rates have eased from peaks per 40ft container in the summer for some shippers of up to $15,000 to $9,000 last month. Rates have fallen further to around $7,000 today, as reported by the the Financial Times.

The number of vessels sitting off the ports of Los Angeles/Long Beach waiting to discharge have declined from 261 in September to 246 in October and 216 last month, the Financial Times reports.

Not a massive decline, but at least the trend appears in the right direction.

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Shipping rates down, but for how long?


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Still, before we break out the Christmas champagne early, not all the news is quite so positive.

Rates have declined. However, this is in part a reflection of the fact that the peak Christmas traffic has now passed. Current shipments will not arrive until into the New Year. As such, the impetus to ship come what may is over.

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It is always a challenge reading markets, whether you look at fundamentals of supply, demand and macro economic developments or whether you are a chartist looking at price trends to see how they compare to previous models, assessing price movement relative to Fibonacci levels and indications from high/low daily pricing data.

One issue we repeatedly see is an overreliance on one metric. The media love a headline and will make a prediction based on just one data point. Stock levels fall — prices must rise, or imports rise – so demand must be strong.

If only life were quite so simple.

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Rising imports, iron ore prices

iron ore

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More seasoned analysts understand that, and a recent Reuters post is a case in point.

Rising imports and a 25% surge in iron ore prices over just three weeks into top consumer China have been taken by many as a sure bet steel demand is strong. China buys some 70% of seaborne iron ore. As such, it is overwhelmingly the main driver of demand.

The post cites Chinese customs data from Dec. 7 that reported November iron ore imports of 104.96 million metric tons. That total is up 14.6% from October and marks the strongest month since July 2020.

That all sounds immensely bullish, and will no doubt support prices that have pulled back marginally but remain near multiweek highs at over $100 per metric ton equivalent on China’s Dalian exchange (up from the mid $80s early last month).

The market also took support from China’s politburo, promising to promote a “healthy development” of the property sector. That comes shortly after China’s central bank announced a cut in banks’ reserve requirement ratio to bolster slowing economic growth.

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