Author Archives: Stuart Burns

Aluminum buyers are understandably nervous about the future price direction following the near 9% fall in prices from a high in early January.

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Aluminum on the Shanghai Futures Exchange closed at the lowest level this week in 14 months, particularly unsettling as the industry had become comfortable with a bull narrative for aluminum over the last year predicated on tight global supplies outside of China.

President Trump’s 10% import tariff on aluminum added another dynamic to the domestic U.S. price and considerable uncertainty as to the possible impact on prices in the rest of the world.

Not surprisingly, while the LME price barely reacted to the new tariff, domestic U.S. Midwest delivery premiums nearly doubled from 9.5 cents per pound at the start of January to the current 18.5 cents per pound. Expressed in dollar terms, the jump in premiums by some $200 dollars a ton equates to nearly 10% of the cash LME aluminum price, Reuters reported this week.

Meanwhile, delivery premiums outside of the U.S. had already been on the rise, so there was little surprise when Japanese buyers settled this week at U.S. $129 per metric ton premium for shipments in the second quarter, the highest in three years.

Although last year saw tightness in physical metal availability, the return of the contango on the LME, with cash aluminum falling below the three-month price, suggests there is now greater availability of nearby metal (at least in the rest of the world outside the U.S.).

There is certainly no shortage of metal available in the Chinese market, where Shanghai inventory has been rising for 12 months. Indeed, much of the current weakness is blamed on fears that smelter restarts following the end of the Chinese winter heating season will cause the surplus to balloon further.

Prices in China, though, are below those of the LME and industry sources are suggesting there will only be limited restarts as current prices are not enough to help some smelters break even, according to a Reuters report. Oliver Nugent is quoted by the news source as predicting prices will remain below $2,100 in the first half of the year because of Chinese surpluses, but persistent shortages outside of China would likely see the price rise again in the second half of the year.

Smelter restarts in the U.S. are unlikely to be significant enough to materially impact global supplies ,with Reuters suggesting Century Aluminum’s restart of 150,000 tons at Hawksbill, Kentucky, Magnitude 7 Metals’ restart of two out of the three pot-lines at the 263,000-ton Marstons smelter in Missouri and Alcoa’s already initiated restart of some of its idle capacity at the Warwick smelter Indiana will almost be enough to achieve the administration’s capacity 80% target mentioned in the Section 232 determination.

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The broad consensus appears to be that aluminum remains in a long-term bull trend, but in the short term will operate as a sideways market. Buyers are unlikely to see significant upside to $2,100 in the first half, but should keep the market under close review as, subject to developments, the second quarter may prove a low point for the year; therefore, that time period may represent a buying opportunity.

Cobalt may be a minor constituent of lithium ion batteries, but it is a crucial one.

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Lithium has been the metal in the news this year. Bolstered by rising demand for hybrid and electric cars, however, the supply market has been struggling to keep up with demand.

Not that the world is short of lithium, as we wrote recently — it is widely distributed and relatively abundant. But projects time to ramp up, and while many are on the planning board, not all reach production maturity.

Cobalt, on the other hand, is a much more constrained market — not just constrained, but the vast majority is from politically unstable sources.

According to Reuters, two-thirds of global cobalt comes from just one politically very unstable country – the inappropriately named Democratic Republic of Congo, with some 80,790 tons of the metal sourced from there last year out of a total market of about 119,710 tons.

Worse, the DRC is sliding back into yet another potentially bloody civil war.

Joseph Kabila was elected for a final five-year term in 2011 on a mandate that ran out in 2016, but he clings on even though no more than 10% of Congolese support him, according to the Economist. Ten of 26 provinces are suffering armed conflict, the Economist reports, with dozens of militias once again on the warpath.

Some 2 million Congolese fled their homes last year, bringing the total still displaced to around 4.3 million out of a total population of nearly 80 million. The state is tottering and the president is illegitimate, the Economist says. Ethnic militias are proliferating and one of the world’s richest supplies of minerals is available to loot.

Source: London Metal Exchange

So the rise in the price of cobalt — while it mirrors that of lithium and has so far been driven largely by battery and super alloy demand — is fragile to political unrest in a way that lithium is not.

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Of the two, cobalt represents a bigger supply risk and may yet prove the cause of considerable volatility if the DRC’s neighbors cannot get their act together and seek a solution in the most resource-blessed but politically cursed of African nations.

gui yong nian/Adobe Stock

Li Lizhang, the chairman of state-owned mill Fujian Sangang Group Co Ltd, is quoted in Reuters as saying exports of steel products may continue to fall this year, having plunged by over 30% last year to 75.43 million tons.

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China produced 831.73 million tons of crude steel last year. The country has been trying to eliminate excess capacity, in part to assuage global concerns about excess capacity flooding global markets. But, in reality, it’s more because it realizes overcapacity in its steel industry leaves all domestic producers in a precarious position and sees logic in driving the cleanup in favor of its state-owned producers rather than leaving the market to possibly favor the private sector – not what an increasingly state-centered Beijing wants at all.

Whether Li is promoting the reduction in exports as a counter to allegations abroad that China is harming global steel markets with its exports or whether we should take his ongoing linkage to the fight against pollution at face value is up to the reader. It may be that it is a case of two birds with one stone, but one suspects the timing, straight after President Trump’s 25% tariff on steel imports, is no coincidence.

Li’s comments regarding further production curbs is interesting, though, saying the steelmaking hub of Tangshan in Hebei province will extend production restrictions for another eight months after current curbs expire next week, according to the Reuters report. Production curbs would not be limited to the smog-prone region of Beijing-Tianjin-Hebei, according to Li, who added “other regions will also see restrictions if pollution levels exceed the limits.”

Beijing’s drive to shutter production capacity across a range of environmentally harmful industries has been broadly successful.

But what is clear is that smog reduction was not the only objective.

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State-owned enterprises have benefited at the expense of the private sector with new steel and aluminum capacity coming onstream to partially replace the older shuttered plants. Permits for new plants seem to have favored the state-sector producers over the private sector; contrary to the position 18-24 months ago, the state sector is doing very well at present.

Is it just me or is there a contradiction developing at the heart of President Trump’s linkage of movement on the North American Free Trade Agreement (NAFTA) negotiations to the application of steel and aluminum tariffs on imports from Canada and Mexico?

I have been pondering this since earlier this week when the topic was raised in the MetalMiner office, but it became crystallized after reading an article by Phil Levy in Forbes this week.

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President Trump has made no secret of his dislike of the NAFTA trade agreement. He has repeatedly pointed to large trade deficits with Mexico and Canada, noting the world’s largest free-trade deal has been bad for the U.S., causing the relocation of companies and jobs. Yet at no time has there been a suggestion that close allies Canada and Mexico constitute any kind of security risk to the U.S.

However, Levy makes the very appropriate point that the new steel and aluminum tariffs are being pursued under Section 232 of the Trade Expansion Act of 1962, in which the provision deals with instances where imports threaten the national security of the U.S. It would seem that the Commerce Department has come to the conclusion that steel and aluminum imports do pose a threat to the viability of the U.S.’s steel and aluminum industries.

Fine — whether you personally agree with it or not is not the issue. That is the Commerce Department’s position and, it would seem, President Trump’s too, and therefore justifies some form of action in order to protect U.S. national security.

But this week during the seventh round of the NAFTA renegotiation talks in Mexico City, U.S. Trade Representative Robert Lighthizer presented a tweet from President Trump saying that tariffs on steel and aluminum will only come off if a new and fair NAFTA trade agreement is signed. It would seem as an incentive to strike an early deal.

But where does that leave the rationale of national security, Levy quite rightly asks?

Either sourcing steel and aluminum from Canada and Mexico poses a threat to U.S. national security or it does not. It’s hard to see how the conclusion of a new NAFTA deal would alter the security situation, suggesting the president’s linkage between an exception for Canada and Mexico and the conclusion of a renegotiated NAFTA agreement has little to do with national security and more to do with leverage and protectionism.

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This opens the floodgates for challenges, both domestically and internationally, as the legitimacy of the U.S. position depends heavily on whether the U.S. national security claim is plausible, Levy argues. Whether the pursuit of measures to stem imports of steel and aluminum were originally seen as part and parcel of the NAFTA renegotiations or whether this is an opportunistic melding of otherwise completely separate issues is hard to tell.

Without doubt, however, those opposed to the import duties and inclined to use legal action will see this as an opportunity to undermine the U.S. argument.

stockquest/Adobe Stock

In an effort to curb horrendous atmospheric pollution, particularly during the winter heating season, Beijing’s crackdown on energy-intensive and polluting industries resulted in widespread closures across the Chinese aluminum smelting industry.

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But even as expectations rise that those smelters from Shandong to Shanxi may soon restart, Reuters reports record stockpiles on the SHFE and prices that are down some 10% since last December will weigh heavily on smelters’ decision-making.

Many are already barely profitable and, contrary to expectations six months ago, national Chinese aluminum production has continued running at a high level. December’s output rose to the same level as June when countrywide smelters had been running at capacity to stockpile before the expected clampdown.

The irony is that while Beijing has clamped down on production in some regions closer to major urban areas, producers — many of them state-owned — have been free to build new, lower-cost capacity out in the provinces. Reuters quotes Paul Adkins, managing director of the consultancy AZ China, who estimates that 4.4 million metric tons of new capacity would be completed this year, mostly from state-run companies.

Despite new capacity being based on lower-cost coal and/or alumina supplies, there are question marks whether all this 4.4 million tons will make it to full capacity.

Adkins believes the actual increase may only be some 3 million tons. Even so, incremental increases will be at a cost base lower than older plants and will allow them to operate a break-even price below established plants. If prices remain weak, and the overcapacity issue suggests there is little prospect of a significant rise, then there will be a further shift of production to the state sector, as these new, largely state-owned plants thrive while older, more costly plants struggle.

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Primary metal is restrained from directly impacting the global market by 15% export taxes, but limitations on extrusions, rolled products and forgings are less constrained (in some cases supported with rebates). A lower-priced, amply supplied domestic primary market will enable semi producers to export excess capacity abroad, adding to an already fractious trade situation following the U.S. announcement of its intention to levy a 10% import tariff on semi-finished aluminum products.

natali_mis/Adobe Stock

It wasn’t long after President Donald Trump’s tariffs announcement was made that battle lines started to be drawn.

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President Donald Trump has spoken to world leaders about his planned tariffs on steel and aluminum. According to Reuters, quoting Commerce Secretary Wilbert Ross this weekend, the president is not considering any exemptions to the 25% import duties on steel and 10% import duties on aluminum. Despite concerns being raised that the imposition of the import tariffs will spark tit-for-tat retaliation by America’s trading partners, the president so far seems adamant there will be no special carve-outs by country of origin.

However, Kevin Brady, chairman of the U.S. House of Representatives Ways and Means Committee, while speaking on the sidelines of the latest round of North American Free Trade Agreement (NAFTA) talks among the United States, Canada and Mexico, is quoted by Reuters as saying that all fairly traded steel and aluminum should be excluded from the proposed tariffs. Brady specifically called out materials supplied by NAFTA partners Canada and Mexico, saying material supplied from elsewhere could also qualify for exemptions.

Meanwhile, Bill Pascrell, the senior Democrat on the Ways and Means trade subcommittee, said “We don’t have a major trade deficit with Canada, if you look at all the products that are coming into the United States from Canada and Mexico, this is an ally. If we can’t make an exception there, then how are we going to get a NAFTA deal?”

The answer may be NAFTA could be allowed to fail.

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President Trump’s announcement that the U.S. intends to impose 25% import tariffs on steel and 10% import tariffs on aluminum following the Departments of Commerce’s section 232 review has been met with mixed reactions.

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Steel and aluminum producers in the U.S. applauded the move. Meanwhile, U.S. stock markets reacted negatively with the Dow plunging 586 points at one stage before managing something of a recovery to close more than 400 points down yesterday.

Markets will adjust, but foreign governments have reacted with equal dismay.

Not surprisingly China was the most diplomatic, expressing “grave concern” and according to The Guardian newspaper, adding “China urges the US to exercise self-restraint, not to implement trade protection tools, confront multilateral trading rules and make a contribution to global trade regulations,” quoting Hua Chunying, a foreign ministry spokesperson.

Japan was more specific, saying “The 25% across the board tariff on foreign steel is ill advised and naïve. Rather than saving American jobs it will destroy many tens of thousands of good, well-paying manufacturing jobs from steel consuming industries. It will inevitably invite retaliation from America’s most reliable allies, ultimately hurting American non-manufacturing industries as well.,” according to the Japan Steel Information Centre.

But the strongest criticism came from some of the U.S.’s closest allies.

CNBC quoted Canadian officials who pledged to respond to U.S. tariffs with their own measures. Canadian Trade Minister Francois-Phillippe Champagne called tariffs “unacceptable,” according to the news site, adding a pledge to defend Canadian workers in the steel and aluminum industry.

Chrystia Freeland, Canada’s minister of foreign affairs, is quoted as saying trade restrictions would hurt workers and manufacturers on both sides of the border. She raised a point that came up during the appraisal process by the Department of Commerce, saying it is inappropriate for the U.S. to view any trade with Canada as a national security threat. Both economically and politically, the two countries are such close allies it seems likely a carve-out may yet be made for the northern neighbor’s steel and aluminum industries.

As CNBC observes, Canada would be hit particularly hard by the tariffs. Between 2013 to 2016, Canada was the largest source of steel and aluminum imports to the U.S., with the trade critical to both countries.

Meanwhile Europe has reacted with similar annoyance, feeling it has been caught up in a move against China, where the E.U. is as much a victim as the U.S. from emerging market dumping.

European Commission President Jean-Claude Juncker issued a strongly worded statement, saying the E.U. “will not sit idly” following the U.S. leader’s decision to slap tariffs on all imports. The E.U. had been hoping for a carve-out similar to that expected by Canada. CNBC quotes Juncker saying “we strongly regret this step, which appears to represent a blatant intervention to protect U.S. domestic industry and not to be based on any national security justification.”

Most countries say they will take cases to the World Trade Organization (WTO), but that has always proved to be a long, drawn out affair.

In the meantime, you can be sure there is intense diplomatic activity going on to make special cases of just about everyone.

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The probability is this is far from the end of this story. There will likely be adjustments to the blanket position indicated as an opening gambit, so this is more like the beginning of a much longer  — and possibly increasingly acrimonious — process.

Although my colleagues have written in detail exploring the specifics of the Section 232 investigations in steel and aluminum, recently completed by the U.S. Department of Commerce, it is worth considering the likely outcomes.

This is particularly true for aluminum, because the production market is not as integrated as it is for steel. Often, primary producers and downstream are not vertically integrated, making decision-making more complex.

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One can understand why President Trump is taking his time to make a decision on the twin section 232 investigations.

Although the premise of both investigations is the same — namely that steel and aluminum imports threaten to impair the national security of the United States — the two industries and their respective supply chains differ considerably.

A Background of Decline

The U.S. aluminum industry has a primary smelting sector that has been in decline since the turn of the century, but particularly in the last five years, as this graph from Statista illustrates.

Today, the U.S. has just eight plants with a combined annual production capacity of 1.82 million tons. According to Reuters, actual production last year was 785,000 tons, translating into a capacity utilisation rate of 43.2%.

That’s dire by any industry standards and qualifies the Commerce Department’s argument that at such levels an industry cannot be profitable, cannot invest in the future, and cannot afford research, development or innovation.

Yet to get it to the 80% target espoused in the report would require only 669,000 tons of idled capacity to be brought back onstream. We will come back to that shortly, but not before we take a quick look as to where some 90% of U.S. primary aluminium imports are coming from.

Import Sources

Source: Reuters

As this graph from Reuters shows, Canada, Russia and Brazil are by far the largest suppliers of primary aluminum into the U.S. market. There is no suggestion as to clawing significant chunks of this production back to U.S. shores; 669,000 tons is just the tip of the iceberg.

Sector Snapshot

The major part of the U.S. aluminum industry is made up of downstream suppliers producing semi-finished products, from plate and bar down to sheet, foil, wires, tubular products, and cast and forged parts.

This downstream sector faces a different set of challenges from the primary producers.

Some semis manufacturers rely on competitively priced imports of primary metal or billets in order for them to compete in export markets or domestically against foreign suppliers for the same finished goods. Other semi-finished manufacturers, arguably more at the commodity end of the market, face intense competition from imported semi-finished products depressing domestic U.S. price levels. The supply base for semi-finished products is different from the primary market, as the below graph from Reuters shows.

Source: Reuters

Here China, despite previous anti-dumping actions, remains a major supplier and is likely the main target for the Commerce Department’s actions.

Winners and Losers

A blanket tariff increase across the board would clearly create massive winners and losers because of the complexity of the aluminium market.

The Commerce Department is proposing either an across-the-board import tariff of 7.7% or a quota system limiting imports to 86.7% of  last year’s levels. A third option would be to target five countries with a draconian 23.6 % tariff, with everyone else subject to a quota also set at last year’s imports. Clearly, in the primary market Canada is going to be given an exemption, so rather than across the board, any tariffs or quotas are more likely to be country specific.

Likewise, with semi-finished products China and its intermediary shipping points, such as Vietnam and Hong Kong, are also likely to be the principal targets. Not surprisingly, the prospect of China being partially shut out of the U.S. market is sending shivers through governments in other parts of the world, fearful of where those redirected trade flows will end up.

Of course, it’s entirely possible nothing will be done.

Blocking Russian and Venezuelan imports of primary aluminum will not immediately make U.S. smelters viable again. Smelter closures have more to do with power costs than solely foreign competition. In addition, as my colleagues Lisa Reisman and Irene Martinez wrote this week, to bring an idled smelter back onstream is a medium-term proposition. A decision in April would not see capacity come back onstream this year, so any action has to be timed carefully.

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The LME spiked on the release of the investigation’s findings and CME physical delivery premiums have climbed. For now that’s probably it, but be prepared for further volatility as the decision deadline of April 20 approaches.

The British TV drama “McMafia” may not have reached U.S. shores yet, but viewers in the U.K. have been absorbed in the machinations of a fictional Russian family — with the ironic name of the Godmans — whose mafia past in Moscow catches up with them in their new lives in London.

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All things Russian, and particularly the activities of the richest among them, have therefore taken on a disproportionate interest in the British psyche of late, which may explain the plethora of articles across the British media this week on Russian tycoon Oleg Deripaska, the head of power and aluminium companies En+ Group and Rusal, and his unexpected plans to step down as CEO of the companies he formed.

You might be asking: since when does an oligarch voluntarily relinquish control of his empire? Well, possibly – rather like Vladimir Putin stepping aside in 2008 for his friend and colleague Dmitry Medvedev to take over as president – when you do not really relinquish control at all.

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A while back I was called by a journalist at a prominent paper and asked what I thought about the lithium market. Was it another rare earth metals story – limited supply and rapidly escalating demand? Or, worse, was the world simply going to run out of lithium in the face of surging battery demand and, either way, where did I see prices going?

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My position was the world is not short of lithium. It is abundant as an element — it is, or was at the time, just short of scaled-up extraction projects. So no, I did not see the world running out of lithium but that a healthy run-up in prices would encourage more investment and, hence, increased supply – maybe a less dramatic version of the financing that became available for Mountain Pass after the run-up in REM prices.

Interestingly, the journalist did not print any of my comments — fair enough, as they did not support his position that the world is running out of lithium.

Since then, the prices have indeed doubled. The Financial Times reports the price for lithium carbonate from South America has hit $14,500 a ton over the past two years, quoting Benchmark Minerals Intelligence.

Source: Benchmark Minerals Intelligence via the Financial Times

Much of the excitement is due to the rise in electric vehicles (EVs) and hybrids, and although there is no futures market in Lithium – prices are set in long term contracts – buyers have to contend with a bullish supply market as battery makers scramble to cover forward under long term agreements, as the rise in prices affirms.

Indeed, not only product prices but the share prices of producers is set in large part by predictions on the uptake of electric and hybrid cars.

Back to the main thrust of the Financial Times article, Sociedad Química y Minera de Chile (SQM) is up for sale following regulators enforcement of a sale by parent PotashCorp as a prerequisite of aquiring its Canadian rival Agrium. SQM accounts for more than 20% of the world’s lithium supply, making it one of five companies that dominate the global market alongside China’s Ganfeng, Tianqi Lithium, FMC and Albemarle, while its lithium division accounts for 60% of SQM’s profits – arguably a high price regulators are demanding PotashCorp pay to acquire Agrium. But that depends very much on what price the market puts on SQM, which in turn depends on how bullish bidders feel about the prospects for electric and hybrid transport.

PotashCorp could conceivably be getting out at the peak.

According to the Financial Times, quoting consultancy Wood Mackenzie, if electric vehicles reach 5% of car and light truck sales globally by 2025 from their current level of 2%, then lithium prices will fall to $6,900 a metric ton by 2025. However, if that share, including plug-in hybrids, climbs to 12% by 2025, lithium prices will remain at current levels and then move toward a long-term price of $13,600 a ton, the consultancy forecasts. This suggests lithium prices and the share prices of major lithium producers are highly dependent on a very uncertain metric.

Source: Frost & Sullivan via the Financial Times

Uptake of electric cars has consistently underperformed expectations, so exceeding SQM’s current valuation of about $4.7 billion requires a big and bold bet on EVs and hybrids. The Financial Times quotes Ben Isaacson, an analyst at Scotiabank in Toronto, who said SQM’s share price reflects lithium prices well above the marginal costs of production, “which isn’t realistic.” The lithium price will fall to a long-term average of between $8,000 and $10,000 a ton, he forecasts. “This should be bought at a discount (to the current lithium price) — this should not be bought at a premium,” he said.

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With new projects coming onstream in Australia, the U.S. and elsewhere, supply will increase, but so too, of course, will demand. But at current prices, the money is chasing new resource development and EV uptake appears to be lagging.

As one investor is quoted by the Financial Times as saying, “Why would you buy a $5 billion stake in a resource that is geologically abundant?”

Well, my point exactly.