Author Archives: Stuart Burns

We observed last month that the peak had passed in nickel prices and earlier suggestions from some quarters that nickel may hit $20,000 per ton were highly unlikely.

Any stainless consumers taking that on board and living hand to mouth will have seen surcharges come down and should have been able to trim stocks in line with falling input prices. Anyone who committed to bulk buys in Q3 will now be sitting on high-price stock as the nickel price — and with it stainless surcharges — continues to ease.

Keep up to date on everything going on in the world of trade and tariffs via MetalMiner’s Trade Resource Center.

MetalMiner’s Monthly Metal Buying Outlook offers more in-depth advice as to how to react to the nickel price falls and the current market (at least for those who are subscribers).

But the question on many buyers’ minds may be where is it all going from here?

It helps to better understand what has driven the price in recent months.

The LME nickel price has risen 54% since the start of the year, Reuters reported, driven in large part by a perceived supply shock in the form of an accelerated ban on the export of Indonesian nickel ore (a key raw material for Chinese pig iron and stainless-steel makers).

Further support for the nickel price has come in the form of a sustained outflow of refined nickel from LME warehouses, even since September inventory has continued to leave with live warrants down to just 42,000 tons from over 200,000 tons at the start of the year.

The supply-side picture sounds supportive; however, as we wrote last month, the problem is demand.

The market continues to worry about the trade war impacting Chinese manufacturing and, hence, demand, despite the Financial Times reporting this week that Chinese manufacturing expanded at the fastest pace in three years last month. The demand backdrop, though, is one of almost unending doom; reports of high stainless-steel inventory in China are not helping price sentiment.

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The risk remains to the downside, which is not what those holders of high-price stock would want to hear. However, for the time being, the nickel price seems to be following the rest of the metals sector: at best sideways and at worst toward further weakness.

Conventional wisdom has suggested we are headed for a significant oil surplus next year, with some commentators talking about a glut.

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Even respected industry publications like OilPrice.com headlined “IEA Warns Of A Looming Oil Glut Ahead Of OPEC Meeting” this past week, as global oil demand growth has slowed due to weakening economic growth and the continued trade dispute between the United States and China.

The suggestion is OPEC and its partners, principally Russia, are going to have to do more than just rein in a few transgressors of previous quotas like Nigeria and Iraq if they are to keep supply roughly balanced and avoid significant price falls, CNBC reported.

The International Energy Agency’s (IEA) position is premised on projections that non-OPEC supply will rise faster than recovering demand. The IEA sees non-OPEC countries adding another 2.3 million barrels per day (bpd) to their supply in 2020, while global oil demand growth is expected to be around 1.2 million bpd.

Of that amount, the U.S. is predicted by the IEA to add 1.2 million b/d to current levels in 2020.

But is that realistic?

Rig count is a fair measure of likely production growth, although not all wells need to be instantly brought onstream once they have been completed. Cost constraints, however, mean fracking firms rarely plug and store vast numbers of drilled wells.

There is a correlation between rig numbers as a measure of drilling activity and future production – particularly as shale oil wells have a limited life.

Those rig numbers have been falling — see the below graph from Oilprice.com — as we reported earlier this month:

Source: Oilprice.com

That comes partly as the investment market has been turning its back on the fracking industry. In general, the industry is struggling to access credit as easily as it did last year.

In 2018, the shale industry added about 2 million bpd. This year, it has added just a few hundred thousand in the first eight months of this year.

Finance is not expected to improve. Shale is not the hot topic it was – not least because of dire warnings of an oil glut (as demonstrated by the chart above).

In that respect, the U.S. shale industry is remarkably self-regulating. Activity and output, plus demand and supply, move in yearly cycles, rather than the decades of deep ocean or tar sands.

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Front-priced premiums have already begun to increase, suggesting a tightening market.

However, that doesn’t mean we are facing oil price rises. It may mean the price falls some in the industry fear may not be as likely or as deep as the IEA report suggests.

Europe is sometimes — often, even — chided for its slow decision-making, which is seen by many as a product of being a “Club of 27” and the need to gain consensus for coordinated action.

But a recent FT article describes an impressively fast response to Europe’s realization that it is being left behind in the lithium battery industry and, by extension, the wider Electric Vehicle (EV) market.

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The EU car industry had assumed up to a couple years ago that batteries would become a commodity and were low on the list of priorities in developing a competitive domestic EV industry. But although carmakers have invested billions in developing models and technologies around EV automobiles, the European car market remains almost totally reliant on imports for batteries despite the fact that nearly 40% of the vehicle value is said by the FT to be the batteries.

For an industry that is the backbone of European manufacturing, that is a staggeringly exposed position to be in. Even the 3% that are made in Europe are mostly by Asian-owned companies.

Global production is dominated by Japan’s Panasonic, South Korea’s Samsung and CATL and BYD of China, the FT reports, with China by far the largest, as this chart courtesy of the FT illustrates.

But that is all about to change.

With €1 billion of funding from Volkswagen, Goldman Sachs and Ikea, a company called Northvolt will launch its first factory at Vasteras in Sweden as a dress rehearsal for a much larger Gigafactory in Skelleftea, in northern Sweden, where production should start in 2021.

Supported by cheap loans from the European investment bank and state aid from the EU, the Skelleftea plant is projected to cost up to €4 billion, but will be bigger than Tesla’s Nevada Gigafactory producing some 40 gigawatt hours of capacity by 2024, or some 2 billion individual battery cells, the FT reports. That should be enough for some 500,000 to 600,000 electric vehicles a year with the first phase of capacity already sold out to European carmakers.

Some may question the sense in locating the factory just south of the Arctic Circle, far from car plants, but the rationale is it can access cheap hydropower. As a result, the plant’s energy costs will be a quarter to a third of those available to its competitors in China.

To form a truly integrated supply chain, however, the EU’s European Battery Alliance (EBA) will need to develop mine supply and lithium refining. Although potential mining projects in some 10 EU countries have been identified, the upstream end of this supply chain remains the farthest from self-sufficiency.

Europe’s move to EVs is being driven more by legislation than customer demand. Much as it is in the U.S., the public remains deeply skeptical of the technologies’ ability to deliver a seamless replacement for the internal combustion engine.

Yet a combination of ever more stringent emission standards on manufacturers, tax penalties and incentives on consumers will bolster support of ventures like Northvolt bringing battery making closer to home — and the market will shift to EVs during the next decade, whether Joe Public wants it (or even believes it) today.

You could be excused in the U.S. for overlooking the fact that the U.K. is going through a snap election campaign.

Any such coverage of the U.K.’s upcoming election is being drowned out by the U.S. media’s hourly reporting of the varying prospects for the numerous Democratic contenders and the daily tussles between lawmakers and the current incumbent in the White House – all this before the 2020 presidential election year has even started.

British general elections rarely raise much interest outside the country, although Britain’s “first past the post” election system means the country has only experienced one peacetime coalition (2010–2015) since the Lloyd George ministry ended in 1922.

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Yet even with the potential such a system holds for more extremist parties to take power, the Brits have rarely voted in parties radical enough to cause ripples outside their own borders.

Dec. 12, however, may be a different matter.

Read more

In previous downturns, Beijing has taken a range of stimulus measures to keep the economy growing robustly; as a result, it has contributed positively to global GDP and commodity prices.

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But this time around Beijing seems to have a greater tolerance for slowing growth.

While stimulus measures are expected as early as December, the Financial Times reported, they are not expected to be on the scale of those seen in 2008-2009 and 2015-2016.

Freya Beamish, an analyst at Pantheon Macroeconomics, is quoted by the Financial Times as saying China’s stimulus in the 2018-2019 period will be equivalent to about 7% of GDP over the two-year period. Measures taken in 2015 and 2016 were worth 10% of GDP, while the 2008-09 stimulus amounted to 19% of GDP, according to an OECD estimate.

Beijing appears constrained by a number of factors, policy-driven and economic, in what it can do and how far it can go.

Office space is at an all-time high in some Chinese cities, forcing the delay and cancellation to high-profile skyscraper projects and more general office developments, the Financial Times reported.

Following a surge in new residential housing starts earlier this year, growth has since moderated and is expected to slow further in 2020. Beijing seems reluctant to undermine the currency by further monetary easing and is particularly sensitive to avoiding property price rises by stoking demand.

The Financial Times reports that Chinese states and municipalities are already heavily indebted and banks are reluctant to increase bad debts. While infrastructure lending is the most likely form of stimulus, it will probably not be on the same scale as previous measures.

A former Chinese bank official is quoted as saying that due to previous infrastructure investments, “Cities and provinces are having trouble financing new projects as they must spend a significant portion of their cash-paying off debt.” Possibly as a result of this, investment spending grew by only 3.4% in the first three quarters of this year.

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This moderation in appetite for further stimulus coming on top of the cooling housing market undermines the case made in a recent article we reviewed suggesting steel prices could be set for a recovery, extrapolating on the apparent recovery of the Chinese steel sector.

If the Financial Times is correct in its analysis above, any current strength in Chinese — and, by extension, southeast Asian — steel prices could be relatively short-lived.

You could be excused for thinking gold has been eclipsed this year — bought in record amounts by central banks in the first half of this year — as the price rose strongly through the late summer but has since drifted off.

A recent report suggests, at least for some investors, gold has been sidelined in favor of a metal with stronger industrial applications, in addition to demand for jewelry and as an investment product.

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In the World Platinum Investment Council’s (WPIC) latest Platinum Quarterly report, the WPIC states that from a surplus of 345,000 ounces for 2019, investment demand in particular has been so strong that platinum is estimated to come out with a deficit of 30,000 ounces for the full year.

A 12% increase in total demand has been driven by a substantial surge in ETF buying, such that overall consumption is still up despite a 5% fall in automotive demand, a 6% fall in jewelry and a 1% fall in industrial demand.

ETF buying was particularly strong in the first half of 2019, the WIPC reports, but has carried on into the second half with the increase in holdings of nearly 1 million ounces. Much of the buying has been by large institutional investors looking to diversify from negative yielding debt equity increasing their holdings of gold and platinum. Such buyers typically work on a two- to three-year timeframe and, as such, are judging platinum has medium-term strength (despite weaker automotive demand).

Automakers have seen a collapse in diesel car sales, particularly in Europe (diesel cars’ top market). As a result, platinum has and will continue to suffer.

Palladium, on the other hand, is more efficient for petrol engine catalytic converters and has, as a result, done relatively well out of the swing in engine type demand. But at some price point, generally taken when palladium is double that of platinum, the latter can be used in place of palladium – its relative lack of efficiency meaning you have to use more platinum to achieve the same level of gas detoxification as you do with palladium.

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Platinum demand has been strong but prices have not fared as well as the other PGMs, such as palladium and rhodium, which have relatively done much better.

Even the upbeat WPIC recognizes the platinum market will be in surplus next year and above-ground inventory is expected to rise as a result of lower investment demand.

In the near term, that may mean there is a cap to prices at least in 2020, but clearly investors are betting on an upturn in the first few years of the next decade.

Amid the doom and gloom on steel prices – at least for producers, you won’t hear consumers complaining — a couple of Reuters reports suggest some of the relentless pressure on prices may ease early next year.

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Demand in top consumer China remains surprisingly robust, yet inventories are falling — suggesting producers are struggling to keep up with demand.

If that were not enough, Reuters reported new starts are being more vigorously investigated and the approval process reviewed, leading the industry to think supply will be curbed further during the winter heating period this year.

A notice jointly issued by the National Development and Reform Commission, Ministry of Industry and Information Technology (MIIT) and the National Bureau of Statistics urges local governments and the State-owned Assets Supervision and Administration Commission (SASAC) to verify the steel firms’ capacity, production and fixed-asset investments.

Both legal and so-called “illegal” capacity is coming under scrutiny, as some mills achieved capacity utilization rates of 150% in 2019 — raising questions about the accuracy of the original capacity estimation.

Mills can by a number of ways, such as using higher-grade ore, boost utilization rates above capacity for a period of time; however, the margin is usually single digits, not 50%.

This month has seen price rises in China for both finished steel products (like rebar, used in construction, and hot-rolled coil, used in medium manufacturing) and raw material inputs, such as iron ore and coking coal, Reuters reported.

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So far, price rises are modest.

But if strong demand continues, it could reduce the volume Chinese mills have available for export and raise the price of material that is sold into neighboring markets, raising the prospect of a firming in global steel prices next year.

It is too early to tell if the trend will continue, but it has been a sufficiently abrupt turnaround in sentiment from last month and will be worth watching in the coming weeks.

leszekglasner/Adobe Stock

By most accounts, nickel has had a good run this year.

Among a falling commodity market, nickel has been one of only a couple of metals products that have bucked the trend and seen strong gains. Nickel has jumped some 35% this year, largely on the back of supply-side fears.

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The Indonesian minister for mines announcement of the country’s intention to ban nickel ore exports from 2020 and falling LME stocks – maybe as a result of those supply fears, maybe in tandem – further stocked fears of tight supply.

Since 2015, LME nickel stocks have fallen from some 500,000 tons to under 100,000 tons today, without any corresponding run-up in trade or off-warrant stocks.

There seems little argument that the nickel market is in deficit.

According to the International Nickel Study Group, the global nickel supply deficit is expected to ease from 144,000 metric tons in 2018 down to 79,000 tons in 2019. The deficit is expected to ease further still, down to 47,000 tons in 2020.

The easing of the deficit comes in large part because demand is slowing.

According to a post on RecyclingInternational.com, stainless steel production in Europe during the first half of 2019 declined 4.9% compared to the first half of 2018, falling to less than 3.75 million tons. The International Stainless Steel Forum also expects total stainless steel consumption in Europe/Africa to fall 5.7% in 2019 before rebounding by a modest 0.4% in 2020.

Yet at the same time, some analysts are predicting Asian demand will grow.

Macquarie Research is quoted as saying it expects Chinese stainless steel production to rise from 26.7 million tons in 2018 to 29.5 million tons in 2019, then 30.1 million tons in 2020.

All other things being equal, that combination should have seen prices continue to rise — or, at the very least, plateau at the elevated levels reached in September. However, after reaching a peak of $18,000 per ton, prices have since fallen back to below $15,000 per ton.

Is this simply a result of investors getting cold feet faced with an ongoing trade war and fears of continued growth in China?

We wrote back in Q3 that nickel prices appeared unsustainable and, as such, we expected them to fall.

But even we didn’t think we would see them back below $15,000 quite so soon.

If it offers any indication of supply-demand, LME nickel inventory has remained fairly stable during the month of November, with deliveries and load-outs reflecting more of trade demand than significant investor behavior.

Suffice it to say, for the time being the plunge in stock levels has stopped.

Producers are making noise about expected demand, particularly from electric vehicles (EVs) – remember them, the source of unsustainable demand for copper, lithium, cobalt and, yes, nickel?

The Union Bank of Switzerland predicts demand from electric vehicles will jump from 3% to 12% of global nickel demand in just three years, not least because states and governments are mandating zero-emission targets for the automotive industry (for example, California may need 1.5 million EVs in the next five years).

Such predictions, if realized, would spur very significant nickel demand.

But we have had false dawns from EVs before.

States can mandate, but they need to put in charging infrastructure and manufacturers need to achieve technological advances that extend between charge ranges before EVs are taken up by the mainstream.

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Investors seem to agree the focus remains on the balance between ore and scrap supply on the one side and Chinese, if not Asian, stainless steel production on the other.

Ore and scrap supply seem steady; the knowns are known, at least.

The unknown is demand.

As is so often the case in metals markets, the focus remains very much on China and the health of its manufacturing sector in the year ahead.

phonlamaiphoto/Adobe Stock

Judging by the share price of shale oil and gas producers, you would think the industry is one from which to keep well away.

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Goldman Sachs, however, is recommending clients go long on the premise that the fracking industry, while depressed now, is simply going through a down cycle.

In other words, today’s pain is tomorrow’s gain.

Rig counts are indeed down, as this graph from Oilprices.com shows:

Graph courtesy of Oilprices.com

Ample supplies have resulted in falling prices.

Natural gas inventories have surged this year, rising from a low point of 1,155 billion cubic feet (Bcf) in April to 3,724 Bcf at the end of October.

The falling rig count has reverberated down the supply chain.

The cost of consumables, like Permian frack sand, is down about 80% from its peak, Joseph Triepke, president of consultancy Infill Thinking, is quoted as saying.

Prices across the commodity spectrum have been undermined this year by a strong dollar and trade fears creating pessimistic investor sentiment. Oil and natural gas prices, however, have seen short-term support, as supply-side fears have spiked sentiment (only to fall back as fears have proved unfounded).

Having been boosted by the attacks to key Saudi Arabian production infrastructure earlier this summer, global oil prices came under further pressure as Saudi Arabia recovered rapidly in Q3, when output was back up to 10.3 million barrels per day in October.

Meanwhile, Iran announced it had discovered a giant oil field in the country’s south, Oilprices reports. The field may hold as much as 50 billion barrels of oil — almost as big as all of the reserves held in the U.S. (around 61 billion barrels).

If and when oil from Iran’s new field ever reaches world markets, however, is another matter.

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Indeed, Goldman’s advice appears to be for the long term.

Prices are not expected to recover anytime soon, with the bank suggesting it could be a year or two before falling output brings the market back into sufficient balance for prices to rise.

When it comes to the bidding for British Steel, it’s now out with the Turks and in with the Chinese.

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It is all change at the sales counter in the process of hawking British Steel to the highest — or any — bidder.

Ataer Holding, a subsidiary of the Turkish military pension fund Oyak, saw its bid for the British Steel Group collapse last month when its terms were considered uneconomic.

Details are sketchy as to exactly what was the problem, whether it was the price, subsidies or conditions around employment.

But as controversial as a sale to the Turkish military pension fund would have been, a sale to a Chinese steel group is potentially even worse.

Arguably, China has been a part of the demise of the British steel industry for the last two decades and continues to depress global steel prices, perpetuating a marginal state of existence for not just British steel assets but also for much of Europe.

However, the British government — or, at least, the liquidator, no doubt with government approval, — has reached a deal with Chinese steel group Jingye. The Chinese group also operates hotels and real estate, employs 23,500 and has registered capital of 39 billion yuan ($5.58 billion), giving it the financial clout to invest, Reuters reported.

Jingye is no minnow when it comes to steel production, with a capacity of 15 million tons. Although no contractual guarantees have been given, the company has pledged to maintain as many jobs as possible. The amount being paid was not confirmed, but it is reported to be between £50 million and £70 million.

Jingye has pledged to invest £1.2 billion in the business over the next decade, upgrading the plants and machinery, the Daily Mail reported.

The government will be delighted to get British Steel off the books, as it has been costing £1 million a day to keep the group operating since May, when it collapsed and private equity owner Greybull Capital threw in the towel.

The paltry price tag — said to be no more than the operating cash in the company, probably comes with some government aid sweeteners — buys a group that includes steelworks at Scunthorpe and Teesside in northern England, as well as its European units (FN Steel in the Netherlands and British Steel France).

According to Reuters, European trade group Eurofer is looking into the deal from a state aid point of view. French authorities are considering seeking assurances from Jingye that it will guarantee supply to a factory in northeast France as a condition for its approval of the deal. The British Steel works supplies steel used to make specialized high-speed rails for France’s TGV network.

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British Steel represents one-third of the U.K.’s steel output and produces long steel products used in construction and the rail industry in the U.K. and France.

Whether Jingye will see a profit out of the company remains to be seen, but maybe that isn’t even the point.

British Steel gives the group a presence inside the European market and, as such, may give them a seat at the European steel producers table.